Opinion ID: 1224268
Heading Depth: 1
Heading Rank: 3

Heading: The Weighting of Replacement Cost

Text: For the reason stated more fully in Utilities Commission v. Duke Power Co., N.C., 206 S.E.2d 269, decided this day, we find no reversible error in the Commission's determination that the fair value of the properties, exclusive of the allowance for working capital, should be determined by giving a weighting of one-third to replacement cost, depreciated, and two-thirds weighting to original cost, depreciated. The Commission found the replacement cost of the properties allocable to retail electric service in North Carolina was $91,020,210. This figure was derived by applying allocation factors developed by the Commission staff to the figure computed by Vepco's witness, Mr. Reilly, as the replacement cost of Vepco's entire plant. Thus, the Commission accepted Vepco's figure for replacement cost of its entire plant. Vepco does not take exception to the allocation factors or to the figure so derived by the Commission for the replacement cost of the property allocable to retail service in North Carolina, nor does it except to the Commission's finding that the original cost, depreciated, of such properties was $66,223,192. Its sole contention, as to this point, is that the Commission should have given greater weight to replacement cost in its computation of the fair value of the properties as of the end of the test period, Mr. Reilly having testified that, in his opinion, the weighting should be exactly reversed, i. e., two-thirds weighting to replacement cost and one-third weighting to original cost. G.S. § 62-133(b)(1) provides that the Commission shall ascertain the fair value of the properties considering the reasonable original cost, depreciated, and the replacement cost and other factors relevant to the present fair value of the property. As we have said many times, the credibility of the evidence and the weight to be given it in the determination of the fair value of the properties are for the Commission, not for this Court, to determine. Utilities Commission v. Duke Power Co., supra; Utilities Commission v. Telephone Co., 281 N.C. 318, 358, 360, 189 S.E.2d 705; Utilities Commission v. Telephone Co., 266 N.C. 450, 454, 146 S.E.2d 787; Utilities Commission v. Public Service Co., 257 N.C. 233, 237, 125 S.E.2d 457; Utilities Commission v. State and Utilities Commission v. Telegraph Co., 239 N.C. 333, 80 S.E.2d 133. The Commission is not required to accept Mr. Reilly's opinion as to the weight to be given to each of these indicators of fair value, even though there be no contrary expert testimony. As Mr. Reilly testified, the determination of the weighting to be given the indicators is a matter of subjective judgment. The Commission may and should exercise its own expert judgment in this determination. In explanation of its weighting of original cost, depreciated, and replacement cost, the Commission said that it considered the condition of the property and the outmoded design of some of the older plant. It noted that, in his computation of replacement cost, While Mr. Reilly did account for advances in the art of construction, he made no attempt to determine the value of the utility plant as if the entire plant were designed in accordance with the present state of the art for the design and operation of electric systems including modern technologies and efficiencies. Mr. Reilly's own testimony gives support to this conclusion. He testified as follows: In arriving at my opinion    I have considered all of the causes of depreciation which are mentioned in my definition of depreciation.    Obsolescence is taken care of through depreciation and not through the trending process.    I did not make a separate determination of the amount of depreciation due to each of the causes which I included in my definition of depreciation, for as a practical matter it is not possible, because electrical property is retired from service due to a combination of one or more of the causes mentioned.    A weighting of one-third original cost depreciated and two-thirds trended original cost depreciated was used to determine the fair value of the property [which Mr. Reilly computed as $86,317,000].    This weighting was made on my judgment.    The determination of the fair value of utility property for rate making purposes is not an exact science ; and such determination is not based on the application of a precise mathematical formula.    (Emphasis added.) I would not describe what I did to arrive at an estimate of fair value as a replacement cost study envisioning replacing the utility plant in accordance with modern design and technique and the most up-to-date changes in the state of the art. What I did was to trend the original cost of the study up to the present day, this June 30, 1972, price level. That was restating the cost of the plant as it existed at June 30, 1972, and making allowance for any factors of obsolescence, inadequacy or whatever in the depreciation that was applied to that trended cost. (Emphasis added.)    This [ weighting ] is a subjective judgment, really, in the final analysis, based on experience within reasonable limits.  (Emphasis added.) We think it evident that what Mr. Reilly did was to trend the original cost of each of the great number of items in the Vepco electric system to the present day price level and to subtract from each of the several components of the system an amount which, in his expert opinion, was the proper deduction for the physical wear and tear and obsolescence of that component. Obsolescence of a large plant is not necessarily limited to the sum of the allowances for obsolescence of its component parts. For example, a steam locomotive or an ocean-going sailing vessel may be in excellent physical condition and its several component parts may not be obsolete, provided one wishes to build a steam locomotive or an ocean-going sailing vessel. Nevertheless, both are obsolete because a wholly new type of motive power has been developed. One cannot be said to have acted arbitrarily and capriciously merely because he concludes that the present fair value of such a locomotive, or sailing ship, is much less than its replacement cost diminished by an allowance for physical depreciation and obsolescence of its several component parts, considered separately, or even less than its original cost so depreciated. This Court may not reverse the order of the Commission because of its weighting of the respective indicators of fair value, unless we find such weighting to have been arbitrary and lacking support in the evidence, in view of the entire record, or otherwise affected by error of law. G.S. § 62-94. In this record, Vepco, through the testimony of its executive officers, asserts that it has an immediate need to attract huge quantities of capital for the construction of new generating facilities and that these facilities will be designed for the use of nuclear power, a wholly new concept in generation of electric power. Through the testimony of another witness, Mr. Reilly, Vepco asserts that its present generating plants have a fair value much nearer to the present cost of replacing them than to their original cost. It is not for this Court to determine whether there is any inconsistency in this evidence, but it is for the Commission to make such determination. It has done so and we are unable to conclude from the record before us that its determination is arbitrary or unsupported by substantial evidence in the entire record. Neither original cost, depreciated, nor replacement cost, depreciated, is the measure of fair value, as that term is used in G.S. § 62-133(b) (1). They are indicators of fair value and their respective weights are to be determined by the Commission in its expert judgment. We must not overlook the fact that the Commission, unlike the typical jury, accumulates, through its own experience in supervising the public utilities serving in this State, a substantial general knowledge of their properties and service. The statute contemplates that the Commission will use this general knowledge and its own expert judgment in weighing the indicators of fair value.