Opinion ID: 1150958
Heading Depth: 1
Heading Rank: 5

Heading: Original Cost Valuation.

Text: The Commission has broad discretion in ascertaining the value of public utility assets and is not required to use any particular kind of valuation method. See NRS 704.440. [4] The Commission's use of an original cost method of valuation received approval from this court in Public Serv. Comm'n v. Ely L. & P., 80 Nev. 312, 321-22, 393 P.2d 305, 309-310 (1964). Silver Lake contends that Ely L. & P. stands for the proposition that the Commission could utilize reproduction cost (replacement cost) as a means of valuating assets in the rate base. Certainly, the Commission has the discretion to do so. However, in Ely L. & P., we overruled the trial court's attempt to force the Commission to utilize a reproduction cost method. Ely L. & P., 80 Nev. at 322, 393 P.2d at 310. Therefore, any decision by this court directing the Commission to use one acceptable method of valuation over another would amount to the substitution of our judgment over the Commission's in violation of NRS 703.373(6). Original cost represents a utility's investment in developing an asset, such as water rights. The burden of proving the costs associated with the investment falls on the shoulders of the utility, because the costs necessitate an increase in customer rates. [5] Original cost and value may be synonymous under circumstances where a utility's cost is what it actually paid for the asset in an arm's-length transaction. For example, had Silver Lake purchased the water rights through an arm's-length transaction for $732,000.00, then its original cost would be $732,000.00. Here, however, the water rights were under Mr. Lear's control from the beginning. The record reveals that as of May, 1980, Silver Lake had inadequate documentation as to Mr. Lear's actual investment into developing the water rights. Consequently, Silver Lake accepted an unsupported appraisal, in the form of a letter, dated July 30, 1980, sent by attorney Ross E. deLipkau, estimating a value of $1,000.00 an acre foot for the rights. This figure was placed on the books of Silver Lake in August of 1980. In 1985, the Lear estate began negotiations with the IRS to determine the estate's value for tax purposes, relying on the $732,000.00 figure as the value for the Silver Lake water rights. The record reflects that the Internal Revenue Service stipulated to Silver Lake's stated value for the water rights solely in an effort to establish a bottom line figure for the Lear estate and did not perform a separate valuation. When Silver Lake appeared before the Commission, its own expert admitted that the $732,000.00 figure was an estimate, founded on Mr. deLipkau's letter and the Internal Revenue Service stipulation with the Lear estate. We agree with the Commission's conclusion that: A chain is only as strong as its weakest link. The `chain' developed by Silver Lake to establish a value of $1,000.00 an acre foot must break because the initial link is flawed. Clearly, accepting Silver Lake's figure of $732,000.00 based entirely on Mr. deLipkau's letter would open the door to abuse. The Commission is obligated to make its determinations based on actual data; it may not rely on mere assumptions. Public Serv. Comm'n v. Ely L. & P., 80 Nev. 312, 329, 393 P.2d 305, 314 (1964). In the applications to the State Engineer, Mr. Lear estimated that the costs of developing the water rights would exceed $50,000.00. We do not doubt that Mr. Lear invested more than $75.00 to develop the Silver Lake water rights. Costs of drilling wells, engaging engineers, legal expenses, etc., are all expenditures which may be included in an original cost valuation. However, those costs must be proven. The Commission was given no means by which to determine the cost of Silver Lake's water rights at anything other than $732,000.00. In essence, Silver Lake has gambled on its $732,000.00 figure, wagering that this court would find the $75.00 award unconscionable and send this case back to the Commission. However, by remanding this case, we would be endorsing a gambling mentality where  if the gamble fails  a utility company could then return to the Commission and provide responsible evidence. This we will not do. Silver Lake has had sufficient opportunity to demonstrate its costs in developing the water rights. Silver Lake's all or nothing proposition has left the Commission, the district court and this court with no choice but to conclude that the original cost of its water rights is $75.00. The result of the Commission's decision was to make a downward adjustment of $731,925.00 in Silver Lake's capital structure. Silver Lake will still receive a 14.337 percent rate of return on its revised capital structure. Consequently, we conclude that Silver Lake is receiving a reasonable return. See Bell Tel. Co. v. Pub. Ser. Comm., 70 Nev. 25, 30-31, 253 P.2d 602, 604 (1953). Accordingly, we conclude that there was no error below and affirm the decision of the district court to uphold the Commission's opinion.