Opinion ID: 2391146
Heading Depth: 1
Heading Rank: 7

Heading: Reproduction Cost Evidence.

Text: It is true that the Board must determine the rate base at the fair value of the property of the public utility that is used and useful in the public service at the time of its employment therein, by viewing the plant as an integral and unitary whole, considering all the elements properly entering into the ascertainment of a reasonable return for supplying the public need. In re New Jersey Power & Light Co., supra (9 N.J., at p. 509); Public Service Coordinated Transport v. State, supra (5 N.J., at p. 217); Atlantic City Sewerage Company v. Bd. Pub. Utility Com'rs., supra (128 N.J.L., at pp. 365, 366). However, there is no requirement that the rate base be coupled directly to cost of living indices or current costs in material and labor markets. The pertinent standards in this respect have been detailed by this court in the matter of In re New Jersey Power & Light Co., supra (9 N.J., at pp. 516-517). It is evident from the record that at the time of the rate decision in the present case over 60% of the Company's gross plant investment had been made during the period 1946-1951 and therefore reflected post-war price and labor levels. Cf. In re New Jersey Power & Light Co., supra (9 N.J., at p. 524). While this is not a controlling feature it is a factor which was properly considered by the Board. Cost of reproduction is a guide, but not a measure. Dayton P. & L. Co. v. Public Utilities Commission, 292 U.S. 290, 311, 54 S.Ct. 647, 78 L.Ed. 1267, 1281 (1934). There are features of the case which are adverted to by the parties to the appeal as indicia of the weight to be accorded the reproduction cost evidence. The Company introduced evidence that the value of its land separate from its buildings ( i.e., as unimproved land) was $2,097,352, whereas book (original cost) value, as included in the rate base determined by the Board, was $4,566,545, which was in favor of the Company. With respect to mass items such as poles, cables and stations, the Company asserts that its proofs of reproduction cost were uncontradicted. The proofs consisted of the taking of book quantities and multiplying these by current unit costs of labor and materials for wholesale construction consistent with the Company's own experience and the experience of other utilities. Although the Company's account records are not to be accepted at face value with respect to evaluation, Public Service Coordinated Transport v. State, supra (5 N.J., at p. 218), property records seem to be the only practical source of information as to inventory of a statewide utility other than annual reports filed with the Board. Both the continuing property count of the Company as to these mass items and its annual filed reports were introduced in evidence in this case and seem adequate to prove the quantities in use of this category of plant in service under either rate base evaluation formula. Cf. In re New Jersey Power & Light Co., supra (9 N.J., at pp. 524-525). However, as was held in that case (9 N.J., at pp. 518-519), there is a danger and injustice to the public in basing a fair value determination on reproduction cost new of obsolete or obsolescent facilities by adjusting actual cost to the current purchasing power of the dollar. The net result of the Company's evaluation procedure with respect to these mass items appears to have been properly subjected to criticism by the Board in this respect. With respect to buildings and central office equipment the Company repeats its assertion that its evidence was uncontradicted and should have been accepted by the Board. These categories of property were valued by the Company's witnesses with the aid of special index numbers based on the results of computations by experts in part derived from relative costs prevailing in Newark, Trenton, Camden and Atlantic City. The Company also introduced testimony to the effect that a substantial part of the cost of additions to plant was excluded to eliminate increased cost due to piecemeal construction and that one-fourth of major post-war construction was excluded to allow for contractors' inefficiencies. The opinion evidence submitted by the Company as to buildings and central office equipment was in itself contradictory in that the experts were not in accord in several respects. This was commented upon by the Board in rendering its decision. The Company urges that the controlling principle in this respect is that mere differences in opinion evidence are insufficient to warrant complete rejection thereof. Illinois Bell Tel. Co. v. Illinois Commerce Commission, 414 Ill. 275, 111 N.E. 2 d 329, 337 ( Sup. Ct. 1953). While this may be true, it is settled that mathematical calculations in appraisals, though made in the best of faith, can lead to divergent results and should be closely scrutinized. Aetna Life Insurance Co. v. City of Newark, 10 N.J. 99, 106 (1952). Much of the opinion evidence in the present case included hypothetical factors derived by mathematical calculations based upon other experts' hypothetical conclusions. The reproduction cost evidence in this case was studied carefully by the Board, as is demonstrated by the detail with which it expressed itself in its decision. The Company placed its principal emphasis on appeal upon the fair value estimates of Mr. Maynard A. Cook, member of a Chicago firm of consulting engineers. The Board found Mr. Cook's testimony and his charts and other prepared data of little weight. Mr. Cook was the principal witness for the Company with respect to depreciation. It is his studies of fair value, i.e., reproduction cost new less depreciation, that constitute the keystone of the Company's case. As an example of the deficiencies of the evidence thus adduced, the Board in its decision observed that Mr. Cook excluded a review of ratings applied to the Company's poles installed prior to 1930, 22.9% of the total, admitted by the Company to be the oldest in the system. The Board also observed that Mr. Cook admitted that he was not familiar with the Company's specifications for pole lines. The Board further pointed out that Mr. Cook relied on studies prepared by Mr. Damon G. Douglas, a Newark construction engineer, as to building depreciation. Mr. Douglas estimated the life of each component of the buildings he appraised only as to physical deterioration, and not as to functional obsolescence. His calculations included many variables and resulted in the application of different factors to component parts of buildings, for example: skeleton  400 years (steel or reinforced concrete) or 200 years (wall-bearing structures); exterior masonry  200 years; interior masonry and partitions  200 years; roofing  100 years; plumbing and electrical work  80 years; heating and ventilating equipment  60 years; elevators  50 years. The Douglas estimates were themselves dissected by the Board and found unreliable. As for obsolescence, Mr. Cook appears to have made no independent study but to have relied upon information given him by the Company. The Company does not attack these findings and they are grounded in the evidence. Other minor criticisms of Company experts made by the Board are objected to by the Company. These minor criticisms are supported by the evidence. Even so, they do not have the controlling effect attributed thereto by the Company. In respect to depreciation it is observed that upon the original cost basis the Board used the depreciation reserve as a factor in reaching its rate base determination. This was not raised by the Company as a question involved, and at oral argument was admitted by the Company to be unobjectionable to it. Further, the evidence indicates that the Company had cooperated in the formulation of the depreciation rates which had been approved by the Board. It is to be noted (in comparison with the Douglas estimates hereinabove adverted to) that included in the schedule of depreciation rates approved by the Board are annual depreciation rates as to buildings, based upon an average service life of 35 years. Although reproduction cost is evidential, the proofs in support thereof must be clear enough to establish the opinion beyond mere conjecture. See Colorado Interstate Gas Co. v. Federal Power Comm., 324 U.S. 581, 604, 64 S.Ct. 829, 89 L.Ed. 1206, 1224 (1945). We are unable to agree with the Company that the Board has applied a reproduction of service test to the Company's reproduction cost testimony. Cf. In re New Jersey Power & Light Co., supra . A forecast as to the reasonableness of rates necessarily involves a forecast relating to the usefulness of the Company's property in the public service, and such was given consideration by the Board.