Court Opinion

ID: 8820189
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:31:08.597534+00
Date Added: 2024-06-11T17:04:36.434686
License: Public Domain

On Motion for Rehearing.
Complainants have filed a petition for rehearing, seeking to secure a reversal of certain of the positions taken by the court in the former opinion. The matters stressed in the motion are the court’s treatment *167of the items of grade raising, brokerage, depreciation, going concern, value, operating expenses, and maintenance. On these points counsel for the complainant and the city have filed interesting and able briefs.
I have concluded that the motion is well taken on the matter of grade raising, and that that item should be allowed.
As to brokerage and going concern value, I adhere to my former ruling, and as to annual depreciation I find, after consulting the briefs of both parties, that 1 erred in the treatment of it in the main opinion, but that the error was as much against the city as against complainant.
Grade Raising.
[10] In the original opinion in this case I stated:
“On tlie oral argument of this case, not correctly apprehending the nature ot this allowance, and thinking it occupied the position of a iilf or ordinary embankment, it was my impression that the master was correct.”
I have returned to the opinion which I entertained on the oral argument, and will allow this item; it having been made to conclusively appear to me that this expense has nowhere been allowed here, nor does it appear in any other place in the valuation of the company’s property.
I am also clearly of the opinion that there is nothing in tlie reproduction theory which, properly applied, requires the disallowance, nor is this in any true sense a case of property lost, demolished, or destroyed by storm.
There will therefore be added to the valuation of the property $142,-000 heretofore deducted by me on this score.
Going Concern.
[11] Nothing in the briefs or arguments of the parties has caused me in any manner to change by opinion on this point; but, while a re-reading of my opinion on this feature leaves me in no doubt or uncertainty as to what was meant thereby, it is evident from the brief of complainant that the views of the court on this score have been misapprehended, since complainant treats the action of the court as a refusal to allow anything for going value. A few words on this score, in the light of the agreement of the engineers of the parties, may serve to make clear what the court intended to hold.
On October 11, 1920, the two engineers representing the litigants made an agreement in which they stated:
“Tlie estimated undepreciated cost of reproduction of the railway property of said company on the historical basis, exclusive of franchise value, going concern value (development cost), bond discount, and brokerage fee, is §1,720,000 as of June SO, 1920. This estimate is made as nearly as possible on the basis of the prices which were in effect at tlie time of construction of the component elements of the property, except for lands and right of way, which are estimated at their present value.
“The above-stated estimate of $1,720,000 includes a total of §202,000 of overhead charges to cover the following items: Engineering and superintendence, law expenses, interest during construction, injuries and damages due to construction work, general expense and organization costs, but exclusive of bond discount and brokerage fee.”
*168The master, in his disposition of the matter, headed his allowance ■“Development Cost.” The court in the former opinion did not hold that the plant should not be valued differently because of its being a going concern, but, on the contrary, declared that there should be an allowance made for that fact. What the court did refuse to allow was the addition made to the plant’s value by the master on the score of “development cost”; it being apparent from their stipulation that the engineers of the parties, in fixing the value which they did fix, had valued the plant as an operating, going entity, and had merely excluded from it that kind of going concern value which was expressed by the terms which they placed in parenthesis for definition, “development cost.”
Depreciation.
[12] In this «matter it is plain, from the briefs of both sides, that the court has fallen into errors, both mathematical and otherwise, the first of which was in the failure, through oversight, to add to the de-preciable items the $131,000 of depreciable property which have been added to the system since 1914. This amount should, of course, have been added to the total of the depreciables for the purpose of arriving at the annual amount.
In addition to this oversight, the court has erred in figuring the overheads into the amount on. which the annual rate of depreciation should be allowed. The master, in appreciating the historical reproduction cost by 33% per cent., declined to allow any appreciation upon the overhead items other than engineering cost. This action was excepted to by complainants, and not only was this exception by the court sustained, but when the value of the depreciables was set up, for the purpose of arriving, at the proper amount as depreciable annuity, the sum of the •overheads was added in. ■
In its reply brief to the petition for rehearing the city vigorously attacks the action of the court as erroneous in both these particulars, and I have reached the conclusion that its position in part is well taken. I still adhere to the original views expressed, that in appreciating the property the amount of the overhead items should also be appreciated; but I think it entirely clear that the sum of the overheads should not appear at all in the depreciable property on which an annuity rate is figured. That the paradox involved in this statement is apparent, and not real, will, I think, appear upon the slightest reflection. .
The record shows that the overheads, such as interest during construction, engineering, law expenses, etc., were arrived at by the parties by taking a certain percentage upon the estimated cost of the physical properties. It must necessarily follow, then, that, if the physical properties entering into the cost of the property are appreciated, the overhead items will be correspondingly increased, as the necessary result of applying the same percentage figures to the increased amount of money involved. Or, putting it otherwise, for the purpose of this calculation, the synthetic process is employed, and the overheads are not treated as distinct items, but as parts of a complete whole, and while I do not find that the items of overhead, such as interest during *169construction, have appreciated in cost, or that, viewed as items apart from the physical property, there should be any appreciation applied to them, I do find that, when the base which is used to find the amount of these items by the application of percentage is increased, the sum of these items must necessarily itself increase.
On the other hand, when the matter of establishing the depreciation annuity is considered, the analytic process is employed, and the sum total of the value of the plant is resolved into its constituent items, so as to select those items making up the whole which are susceptible to depreciation. Under the influence of this process it is clear that the overhead items must be discarded in arriving at the annual depreci-, ation allowance. ,
That this disposition is sound as to such items as interest during' construction, organization expense, law expense, etc., admits of no doubt, because under no kind of theory could they be supposed to be subject to depreciation, and what doubt might arise with reference to the propriety of including engineering charges in these figures is-at once dissipated when it is considered that the property will not be constructed again as an entirety, but is to be kept up by annual renewals from time to time made, so that engineering, and other such ove-r-heads caused by the assembling of the plant, will not have to be pre ■ vided against, because they will not be again incurred.
In short, while, if the object of the depreciation annuity were to provide a fund sufficient at the end of a period of years to replace the plant as an entirety, the percentage ought to be figured on the entire cost of the plant, including the overheads necessarily incurred in assembling it, since the object is otherwise, and merely contemplates the provision of a fund out of which annual renewals and replacements can be made, none of these items ought to be considered in arriving at the annuity rate, for the same organization which runs the plant, tho expense of which is provided for in the annual operating expenses, looks after, provides for, and takes care of the renewals.
The result of these views requires the complete rejection by the court of the figure of $1,300,000, taken in the original opinion as the basis for the 4 per cent, depreciation annuity, and the substitution; therefor of the correct figure, $1 000,000, which is arrived at in accordance with these views, to which must be added $131,000 of new physical items overlooked by the court in the former opinion, making a total figure for the basis of depreciation allowance of $1,131,000.
Maintenance.
[13] In the original opinion the excessive increases in maintenance over the year 1918 were disallowed by the court, and it was stated that an allowance of $70,000 on that score would be liberal. The arguments on the motion for rehearing have not changed, but have confirmed, that view.
While the data before the court did not permit of the absolute deduction, the court was of the opinion that the excessive advances in maintenance were explained by the fact that maintenance had been *170confused with depreciation or replacement account, and that the shadowy difference between depreciation and maintenance, which exists in some classes of expenditure, had disappeared, with the result that the company was charging to maintenance items which ought to have been taken care of in replacement or depreciation account. I was led to this conclusion by the fact that, while maintenance costs were mounting higher and higher, the operating costs did not correspondingly increase.
Counsel for complainant lay the difficulty at the door of what they call “deferred maintenance,” and claim that, unless they are now allowed a sufficient return to take care of this deferred maintenance, it must come out of the stockholders, which they claim is unjust. To this position the answer suggests itself that, as to maintenance and depreciation, in paraphrase of John Dryden, it may be said:
“Maintenance is sure to depreciation near allied,
And thin partition walls tlieir bounds divide,”
and that if this maintenance has been deferred as much and as long as they claim, it has by this time become depreciation, and the total of the sums of deferred maintenance might with propriety be subtracted from the valuation of the property, because the money represented in those figures is either in the property or is not in it, and this valuation has assumed that the company’s property was in proper repair.
T am inclined, however, to the view that the disposition of this item hy deducting these sums from the capital value would not be accurate or just, and that the proper disposition of it is to treat it as what the company in fact claims it is, deferred maintenance, at least until such time as the company has had an opportunity to restore the property to its-proper operative condition, by putting into it the “deferred” maintenance called for by their own figures.
Upon no view of it should the public be required to pay such rates as would permit the company, at the public’s expense, to re-establish its property in the condition it ought to have been maintained in. The language of the Supreme Court in the Knoxville Water Co. Case has application here:
“If however, a company fails to perform this plain duty, and to exact sufficient returns to keep the investment unimpaired, whether this is the result of unwarranted dividends upon overissues of securities, or of omission to exact proper prices for the output, the fault is its own.”
For there can be no difference between the effort to increase the value of the property through a recital of past failures to make replacements, and the effort to increase the rate of return in order to put back into, the treasury, moneys to take care of deferred maintenance. I am convinced, therefore, that, whether this excess maintenance is due to confusing maintenance with replacement cost, or to a condition of “deferred maintenance,” the so-called “actual” maintenance expenditure cannot be allowed in determining whether the rate is confiscatory, but there should be taken an annual sum, arrived at upon a consideration of all the factors which enter into the problem, in the light of'the history of the company, and in that light I have al*171lowed $70,000, which seems to me to be at present ample, and which, if prices continue to fall, will soon become itself excessive.
Conclusion.
The effect of the altered views as above expressed requires the court to add to the actual figures of my first opinion, $1,483,780, which a rechecking of my calculations shows me is correct, $142,281 deducted for grade raising, giving a figure for the rate basis of $1,626,061, instead of $1,500,000 as used in 'the former opinion. It also requires that, instead of $1,300,000 taken in the former opinion as the value of the depreciables, there he taken for the basis of the depreciable annuity $1,131,000.
Neither these changes, however, nor any other matters called to my attention in connection with the motion, for rehearing, require a change of view as to the disposition of the case, and the motion for rehearing will therefore, except as otherwise indicated herein, be overruled.