Court Opinion

ID: 8179327
Source: CourtListenerOpinion
Date Created: 2022-09-09 22:25:28.052867+00
Date Added: 2024-06-11T16:27:48.637645
License: Public Domain

Poffenbarger, Judge,

concurring-.

Insufficiency of the existing rates to yield a fair return on the investment of the Huntington Water Corporation is per- • *730fectly obvious. Although the dividends paid within the past twenty-two years aggregate in round figures, the sum of $371,000.00, the equivalent of 318% of the capital stock, the depreciation for the same period, estimated by the expert employed by the City of Huntington, the Federal Audit Company, amounts, in round figures, to $328,000.00. Until 1917, no depreciation reserve was set apart. Upon the assumption that $8,000.00 per year has been set aside for that purpose, for the past four years, making $32,000.00, and adding this to the dividends paid, we have $403,000.00, less $328,000.00 depreciation, or $75,000.00, which would pay about $3,400.00 per year, or 1.5%. Of course, repairs and replacements have been made, from time to time, out of earnings and new capital, but depreciation begins on the new work as soon as it is put in. In the absence of anything better or more accurate, it is necessary to rely to some extent, upon the principles, rules and theories of expert accountants and engineers in cases of this kind.
Applying their theory of depreciation which seems to be reasonable and well founded in some respects, we find that the amount taken out in dividends and reserves, off-set by the depreciation, leaves a clearly inadequate sum for profit on the investment.
Upon all of the facts stated in the Federal Audit Company’s report, it is possible to see a return of about 8.7%. For a period of about seven years, next preceding the date thereof, the average annual net earnings, interest charge and surplus were, respectively, about $75,000.00, $40,000.00 and $35,000.00. But in these figures no provision has been made for depreciation. The annual depreciation on the present value given in that report, about $757,000.00, would be about $15,140.00 which deducted from the $35,000.00, would leave $19,860.00 available for dividends, or 8.7%. But the commission has found the operating expenses for the year 1921 will be necessarily increased to the extent of $7,000.00. Taking that off, we have $12,860.00, or about 5.6% on the par value of the stock, $227,000.00.
But, although based upon actual investment as shown by the company’s books and the depreciation rule, the valua*731tion given in that report is largely theoretical. All of the property does not depreciate at the rate of 2% per year. On the contrary, the real estate and no doubt other factors appreciate from year to year. There is also the obvious probability that some of the more important materials used will endure beyond the estimated period of fifty years. The power plant and the water mains are the larger subjects of investment. The former may be good for only fifteen years and the latter for fifty or one hundred. Much depends too upon the care of machinery and appliances in the use thereof. Besides, the result obtain on the basis of actual investment and depreciation is limited to material value. It is only a circumstance to be considered in arriving at the utilitarian and market values. A twenty year old main will no doubt carry as much water and perform its functions as well as a new one of the same size and kind. When first put in many of the mains are no doubt capable of supplying twice or three times the actual demands made upon them. As population increases, calling for larger or full capacity utilization, they yield much greater returns, and value depends much upon the pecuniary returns of the use of property. The same thing is true of the power plant and all other general equipment. Huntington is á city of rapid growth and development. Hence, every foot of water main in its principal streets has an immensely increased utilitarian and commercial value, notwithstanding the depreciation from age and use.
An estimate of value made by Mr. J. K. Anderson, as of Jany. 1, 1915, for the Public Service Commission, and extended to 1920, for the Huntington Water Power Company, is founded upon reproduction new, at prices determined by the average for five years preceding 1915, and amounts to $1,260,000.00. But this includes two questionable items, $110,000.00 for cost of money, .rejected by the'Commission, and $100,000.00 and better for going concern value. These two items eliminated, the Anderson valuation is likely as good evidence of the real value as that of the Federal Audit Company. The authorities seem to hold that present value is legally preferred to past value in the fixing of rates. Both *732cost and estimated market value are clearly probative of actual material value.
In view of all the facts and circumstances, it cannot be said that tbe value fixed by the commission is too high. It exceeds the taxation value by only $250,000.00 and the bonded indebtedness by only $350,000.00. This excess of value over and above the indebtedness seems to be a very fair indication of the value of the outstanding capital stock.
The average five year surplus of $35,000.00, less $15,140.00 for depreciation, would yield only 5.36% on this valuation. If the estimated increase of $7,000.00 in operating expenses be deducted, also, it will yield only about 3.6%. The allowance of rate increases so as to produce an additional income of $30,000.00 would swell these percentages to 14.2 and 12.2, respectively. For the year ending June 30, 1920, the surplus was a little less than $33,000.00. Hence, the calculations of returns based on it would lower all of these percentages slightly.
For the calendar year 1920, the total operating revenue was $162,952.68 and the operating expense, less an allowance for depreciation, was $88,064.14, making the net earnings $74,-888.54. Deducting from this the average amount of interest paid annually, over a period of seven years, $40,060.35, we have $34,828.19. If, from this, we take $23,000.00 for depreciation, 2% of the value, and then add $30,000.00, the allowed increase, we have $41,828.19 for net profit for that year, or 11.95% on the value of the stock. -The forecast for the year 1921, at present rates, makes the income $167,389.32 and the expense $96,429.92. The estimated net earnings amount to $70,959.40. Deducting the interest, we have $30,-899.05. Adding the increase of $30,000.00 and deducting the depreciation, we have for dividends $37,899.05, or nearly 10.83%.
As all taxes, interest and depreciation are deducted and the surplus is strictly net, the increases allowed will produce an annual dividend far in excess of what the use money is usually deemed to be worth in this state. Ordinarily, it is loaned at a rate not above 8%. Until within the past three or four years, the rate was below that, and no doubt the pres*733ent high, rate will gradually decrease. But, money loaned at 8% or 9% bears its taxes. Here the taxes are deducted in the- ascertainment of the surplus, and' they amount to about 3%. In this connection, it is to be observed that the business of the company is not particularly hazardous. It is monopolistic in character with a special protection in the power of the Public Service Commission to allow increases of rates in case of necessity.
I am in serious doubt as to' whether depreciation at the rate of 2% should be allowed upon the entire value of the plant. If the material value is only about $800,000.00, as indicated by the Federal Audit Company report, and the remaining $350,000.00 is the utilitarian, commercial or market value, it is an obvious proposition, that the latter will not depreciate at all, but, on the contrary, will appreciate with the continued growth of the city. It seems to me, therefore, that the 2%" should be calculated and allowed only upon the sum of $800,-000.00, making the deduction $16,000.00 instead of $23,-000.00. Upon that basis the rate of profit would be 2% higher, or 12.83% approximately. The Anderson valuation, subject to the two deductions therefrom above mentioned, is based upon the theory of material value only, but it is a mere estimate, and the average net earnings through the seven year period, shown by the Federal Audit Company report, sufficient to pay about 8% on $350,000.00, indicate that it is about the entire value of the plant.
In the tests I have applied in the determination of reasonableness of rates, the value of the property has not been ignored, but, in view of all the circumstances, it is deemed unfair and unreasonable to provide for income upon it alone, at a fixed and arbitrary rate so high as to make the stock yield an abnormal dividend rate. It is an estimated not a definitely known value. It fluctuates as other values do. The value of a plant depends in large measure upon what it produces as profit. To take the value ‘alone and put out of view the manner in which the capital has been provided, opens the door to the making of an incidental profit on borrowed money put into the business, rather than out of the business itself. That $800,000.00 of the money representing the value *734of the plant is borrowed at 5%, imposing an annual interest charge of $40,000.00, is a circumstance that should be considered. Allowance of an additional 3% on it, or $24,000.00 of income, is an allowance of that much more than the service rendered the public actually costs the company. Instances are readily conceivable, in which such an allowance would amount annually to 100% or more upon the capital actually paid into the treasury of a company by its stockholders.
I do not interpret the decisions as having fixed the meaning of the terms “value of property used or employed in the business, ’ ’ in their dispositions of rate cases. Of course, the company is the legal owner of property purchased by it, with borrowed money, and used in the business; but, strictly speaking, the borrowed money is not capital. It represents a debt, not capital stock. In a sense, it is hired capital and costs the borrower only the interest paid on it. Viewed in a .practical rather than a legal or technical, sense, it is not capital owned and devoted to the public use by the company, nor need the property represented by it be so treated. What an individual or corporation is worth or actually owns, in the ordinary sense of the words, is what remains after setting off the debts against the value of the assets. The practical, rather than the legal, sense of the words may well be adopted in their use for rate purposes, when there is a substantial difference between them; because the determination of the basis of a rate and the fixing of the rate are practical functions. The questions involved in them are practical ones into which legal principles enter incidentally to some extent. Hence, what constitutes capital or property in the ascertainment of the basis of the rate does not necessarily depend upon the legal or technical meaning of the terms. What of its own property a company engaged in public service actually devotes to the service may be the value of the capital stock, as determined by the value of all property legally owned by it, less its indebtedness. In California, a statute expressly makes the value of the property,' in the legal sense of the terms, the basis of the rate, and some of the decisions of the Supreme Court of the United States, adopting that basis, are *735founded upon that statute. In others, the value of the property was adopted apparently because the stock and bonds did not represent the actual investment, or represented property not used in the public service, along with the property that was so used, making it difficult or impossible to say what part of the stock and bond value was devoted to public service. These and other cases are sometimes treated as having adopted an arbitrary and inflexible rule forbidding the adoption of any other basis or qualification of the operation of the rule, when peculiar circumstances require variation to make it work out just and equitable results. Oshkosh Water Works Co. v. Railroad Com., 161 Wis. 122; Pioneer Tel. & Tel. Co. v. Westenhaver, 29 Okla. 429; Home Tel. Co. v. Carthage, 235 Mo. 644; Public Service Co. v. Public Utility Board, 84 N. J. L. 463. In these cases, the question is not reexamined. In each of them, the rule seems to have been accepted by both sides, without inquiry as to its soundness under all circumstances.
In the assertion that reasonable and fair rates of return upon capital invested in public utilities depend upon practical elements and considerations and not upon legal formulae, we are sustained by Wilcox v. Consolidated Gas Co., 212 U. S. 19 and Northern Pacific R. Co. v. North Dakota, 216 U. S. 579, as interpreted in Public Service Co. v. Public Utility Board, cited. As value depends upon earnings as well as upon the investment and is generally indicated by dividends paid on the stock, such dividends cannot be ignored in the fixing of the rate. As a practical proposition, a return large enough to provide for depreciation, interest on money borrowed and put into the business and five, six, seven or eight per cent, on the value of the stock, as shown by the difference between the estimated value of the property and the indebtedness, is reasonable and fair, but an allowance beyond that is unreasonable and unjust to the consumer. All the circumstances considered, I think an increase of rates so as to make them yield $15,000.00 or $20,000.00 of additional income could have been sustained but I think an allowance of $30,000.00 of additional income was clearly unreasonable. An excess of $10,000.00 per year in the return of *736upon a $1,000,000.00 property is relatively small, but tbe test is not tbe extent of unreasonableness in tbe rates. Any at all, provided it is substantial, vitiates tbe rate.

Order of Public Service Commission suspended.