Court Opinion

ID: 8179326
Source: CourtListenerOpinion
Date Created: 2022-09-09 22:25:28.049177+00
Date Added: 2024-06-11T16:27:48.629350
License: Public Domain

Ritz, President,
(concurring) :
Some statement of the reasons- which impel me to the conclusion to suspend the rate involved in this case is not inappropriate as it does not seem that any of my brethren concur in all of the views which I entertain.
In every case where the validity of a rate is involved it is, of course, necessary, in order to reach a conclusion, to determine as a basis therefor the value of the thing upon which the return is to be based. I quite agree that a public service corporation is entitled to a fair and reasonable return upon the value of the property devoted by it to the public service. Entertaining this view, the first question then presented is, how is that value to be ascertained? In the early history of rate making almost exclusive consideration was given to the amount of bonds and capital stock outstanding. It was soon found that such a method was manifestly unjust, for in many instances all of the capital stock was given as a bonus to the bondholders, and in others the bonds sold at a much depreciated price, and in still others inordinate sums of money *721squandered for promotion expenses. The books are full of eases repudiating this method- as an exclusive one for arriving at the value of the property of a public service corporation for tbe purpose of rate making. ■ It was then thought that while the par value of the bonds and the stock was not a sound basis, the market value, where the same could be ascertained, of these securities, would furnish a reasonably safe point from which a start could be made. It was argued that the value of the bonds and • stocks of- the corporation in the market ought to represent with reasonable accuracy the value of its properties, and this would seem to be so as an abstract proposition, but actual. experience soon taught that market values of stocks and bonds depended upon many elements besides the actual value of the property upon which they were based, so that this method could not be considered as an exclusive method of determining the property value for the purpose of making a rate. The actual cost of the property, where it could be ascertained, has often been considered as the most reliable basis for rate making. If it can be ascertained what it actually cost to construct a given plant, and it is shown that the work was economically done, there would seem to be no reason why this would not be the most "satisfactory basis for arriving at the value of the plant for rate making purposes. Of course, this leaves out the element of the increase in property values because of increased population, or other contingencies, which may result in a substantial advance in the value of the investment, which it is conceded a public service corporation should have the benefit of, as well as any other property owner. Because of the'fact, however, that many such corporations had no data from which the actual value could be ascertained, and because of the unreliability of the other methods above pointed out, various rate making authorities resorted to the theory known as reproduction new less depreciation, which consists in having experts make an inventory of the properties to determine what it would cost to reconstruct such a plant under existing conditions, and at existing prices, deducting from this result an arbitrary amount for the depreciation of the plant during the time it had been in existence. *722While this method was resorted to originally, because of the paucity of information as to the actual cost of the plant, it is now very generally insisted upon, particularly in these times of high prices, by public service corporations as the exclusive method for determining the value of their properties for rate making purposes. My own view is that it is the most unreliable of any of the methods which may be employed to that end. In the last analysis it is no more than'the estimate of an engineer as to what it would cost to reproduce a certain plant, and anyone who has ever had experience with construction work will readily testify as to the unreliability of such estimates when they come to be compared with actual costs. Then, too, such method does not take account of what to me seems a very important element, and that is that of two plants which it would cost exactly the same to reproduce one may have been maintained so as to render highly efficient service, while the other allowed to run down so as to be in no way capable of performing satisfactorily the functions for which it was designed, yet under this theory of reproduction less an arbitrary deduction for what is called depreciation both, if of the same age, would be valued for rate making purposes at exactly the same amount.
My own judgment is that there is no exclusive method for arriving at the value of a public service plant for rate making purposes. Those charged with the duty must take into consideration every element available. There is no reason why a public service commission or other authority seeking to ascertain this fact should not make its inquiry just as broad as the evidence available will permit, just as in arriving at any other fact which is made the subject of judicial or quasi judicial inquiry. The cost of producing a plant originally when it can be shown is certainly entitled to consideration", and even though it may be that the properties have increased in value because of the general increase of property in the community, this rate of increase can ordinarly be shown with as much certainty, if not with much more certainty, than the actual value of the plant can be ascertained by attempting to estimate what it would take to reproduce it. I *723would not refuse to give consideration to tbe amount of stocks and bonds outstanding. If it be shown that the bonds were sold in the market honestly and at a fair price, and all of the money derived therefrom devoted to the construction of the utility, and the same be true of the outstanding stock, why is not the amount of such securities outstanding some evidence of the value of the property which was created from the proceeds derived from their sale? The market value of such securities should also be considered for if, as argued, the rate to be allowed to a public service corporation depends in a measure upon the risk taken by the investors, this risk would be largely reflected in the market value of the company ’s securities. I would not treat anyone of these methods as exclusive, or as being the sole method to be used, but would make their weight depend upon the degree of certainty which the evidence produced would attach to each of them. For instance, if the actual cost of the plant is shown with certainty, I would give to this evidence peculiar weight. If it were shown that all of the money derived from the sale of stocks and bonds fairly sold was honestly invested in the plant, I would give to this evidence more weight than if it did not appear what disposition was made of the proceeds of such bonds, or whether in the expenditure thereof the company acted with honesty and fairness. Nor would I exclude from consideration the evidence of reproduction cost, but I would not make it an exclusive method for determining the value of such a property any more than it can be said to be an exclusive method for determining the value of any other property where it'is material to make an inquiry in regard thereto.
In this ease it does not appear that -the Public Service Commission adopted any exclusive method of arriving at its conclusion that the company’s property was worth eleven hundred and fifty thousand dollars. It is true, as contended by the city of Huntington, that great weight is given to the theory of reproduction new less depreciation, but this is attempted to be excused upon the ground that what the Commission calls the analytical historical cost was not available, or at least, if available, was not made to appear upon *724the hearing before it. As the ease was presented to the Commission, I do not know that any fairer method could have been nsed in arriving at a result than was used, nor does it appear that the result arrived at is far from the correct valuation testing it by all of the evidence offered in the record.
There is, however, an element entering into this valuation which it occurs to me is without justification, and that is an item of approximately one hundred thousand dollars for the value of the plant as a going concern. It must be borne in mind in considering this case that the Huntington Water Company has a monopoly in the business in which it is engaged. This item of going concern value is'said to be the difference between the value of a business fully equipped and ready to start and one actually started. It is argued thafi however fully equipped and ready for business a plant may be, it is not as valuable as a plant which is not only fully equipped but is enjoying a substantial business. This would be true with the ordinary concern engaged in private business where competition is met with. The expert in this case in his testimony illustrates what he means by this going concern value by taking an example of a coal company owning a lease fully equipped for business and comparing it with one like fully equipped, but which has already secured a number of valuable customers. In such a case the difference is apparent. The owners must go into the markets and secure the business -if their plants are to be of any value, and of course the plant which had already secured it to a large extent is worth more than one just starting without any business. But can this have any application to a water company which enjoys an absolute monopoly? It does not have to go out and secure business; it locates its plant in a community where the. exigencies of modern life call for the exercise of the agencies which it commands. It enjoys in that community a monopoly in the business in which it is engaged, and to my mind its plant is just as valuable when it is fully equipped and ready to turn on its water as it is one year or ten.years afterward, assuming that there is no increase in the population in the meantime to add value to *725its franchises. In view of the fact, however, that the valuation arrived at is at best only an estimate, I am not prepared to say that the inclusion of this item of one hundred thousand dollars gives to the Water Company any greater property value than it is entitled to even though the guise under which it is given cannot be justified.
After arriving at the value of the property involved, the next inquiry is, what is the Company entitled to receive as a proper and reasonable return thereon? It is stated that this reasonable return depends in a measure upon the risks attending the business, on the cost of money to the company, and to some extent upon what profits are ordinarly made in the community from like investments. The Commission in this case found that the Company was entitled to receive nine per cent, upon the value of the property as found by it, of which two per cent, is for the purpose of so-called depreciation, and the other seven per cent, is the fair return upon the investment.
The allowance which is made under the name of depreciation as applied to the ordinary public service corporation is really not depreciation at all in the ordinary sense of that term. It is an estimated amount which it is expected will be required to replace from time to time such parts of the plant as become either worn out or obsolete. The larger part of the Water Company’s plant, as shown by the inventories filed in this case, is its pipes laid under the ground for the purpose of delivering the water to its customers. The life of such pipes as are used for this purpose under any particular, condition has never been definitely ascertained. It is a matter of history that within recent years such pipes have been excavated in at least one of the larger cities of the country after being in use for a century, and have been found to be in a perfect state of preservation. But this allowance which is called depreciation is more properly devoted to the purpose of replacing equipment which becomes obsolete. It is apparent that in a growing community mains which are entirely adequate today may in the course of a few years, because of the increased demand for water, be insufficient to meet the needs of the community, and- it is *726necessary to replace such, mains with larger ones. Of course, the pipes so removed may be and are used in making other extensions, but the cost of removing them and replacing them with other pipe has to be borne by the company, and it is largely for the purpose of taking cafe of such contingencies that the allowance is made for depreciation. Prom this it will readily appear that this allowance must depend largely upon the conditions shown to exist in the particular community served by the utility under investigation. If it is apparent that the community has reached its maximum growth, and no replacements are likely to be necessary except in those eases where the material is actually worn out, the allowance for depreciation, it is quite apparent, ought not to be as large as in a community which is only passing through its age of adolesence, and in which it may be expected that the company will be called upon to replace much of its system in order to meet the demands upon it from the increase in population. There is some showing in this record that the city of Pluntington is such a growing community. The increase in population in recent years has been substantial, and there is no reason to doubt from the facts appearing in the record that the same rate of increase will be maintained, at least for some years to come. In fact, it is shown that because of this increased demand for service upon .the Company it is now necessary for it to replace many of its mains with mains of larger size, and to add additional units to its pumping and filtering stations. While the evidence upon which this allowance of two per cent, is based is not verj^ satisfactory, consisting principally of the statements of experts that two per cent, is a proper allowance under the circumstances, it does not appear that if may not be necessary for the company to spend, approximately the amount to be derived from this source for the purpose of replacing such parts of its plant as may become obsolescent or worn out.
The other seven per cent, which the Commission found the company was entitled to earn upon the value of its property, is awarded to it as a return upon its investment, and it appears that the Commission arrived at this amount without *727giving any consideration to the character of the investment, or any part of it. The result sought in eases of this character is one that will not produce hardship on any of the interested parties, either the public of the utility. As before stated, this result must be arrived at from a consideration of a number of matters, among which is the cost at which the utility procures money, if it is found to be necessary to borrow money for its purposes. The risk which it runs in constructing a plant in a particular community is also to be considered, and, this risk, of course, depends upon whether or not the community is of that permanent and settled nature which may reasonably be expected to endure, or is without any past history, and without future prospects of a certain and definite nature. Of course, this risk will be largely reflected in the amount the company has to pay for the money that it borrows, and it may be said generally that where such a public utility can borrow money at a low rate of interest, or at the rate of interest usually prevailing in the community for perfectly safe loans, the risk incurred by the investor above that which is ordinarily incurred in an investment is negligible. The reasonable return such a utility is entitled to receive must be tested by the effect produced upon those to whom it ultimately goes, to-wit, the bondholders and stockholders. When we find a return which produces a sufficient income to meet all of the actual expenses of the company, to pay all of its taxes, provide a fund which is classed by the Commission as depreciation, pay the interest on the bonds, the proceeds of which it is shown in this case were properly expended, and then yield to the stockholders a rate upon the value of their stock — not upon the par value, but the actual value — largely in excess of what may be expected from a stable investment of the same character, it cannot be-said that such a return is reasonable from the standpoint of the public. It is argued that the stockholders are entitled to more than the ordinary rate of interest because of the risk they incur, but as before stated this risk, if indeed there is any such element in this case, is reflected in the rate at which it is enabled to borrow money. If it can borrow money, as appears to be the case, at the same rate as other perfectly *728solvent and stable corporations which are considered a sound investment, then how can it be said that the investor incurs any risk warranting an exercise of tenderness in his behalf upon the part of those charged with determining the rates to which the utility is entitled? It is insisted that a public utility is entitled to a reasonable return upon the value of its property devoted to the public service, and to this I readily agree, but what is that reasonable return? How must it be arrived at? Every one concedes that the rate of interest which the utility is required to pay for money that it borrows is in a large sense a measure of the return to which it is entitled. I cannot agree that a rate is reasonable which will produce to the stockholders, after paying all expenses, all fixed charges and taxes, a return largely in excess of what other people receive upon their money in investments no less stable and reliable. - In this case the estimated gross receipts of. the company for the year 1921, based upon the actual receipts for 1920, are fixed at $167,889.32. The operating expenses for the same period, arrived at in the same way, are $96,429.92. Included in this item of operating expenses is all taxes charged, or chargeable, against the plant, so that upon the figures produced by the company itself there remains the sum of $70,959.40 with which to pay a return upon the property devoted by it to the public service. Is this return adequate? It may be assumed I think, for. the purpose of this case, that two per cent, is not unreasonable for what is termed by the Commission depreciation, and if we fix the value-of the property at eleven hundred and fifty thousand dollars, twenty-three thousand dollars would be required for this purpose. This would leave $47,959.40 available to pay the investors a return upon their money. Is it sufficient for the purpose? According to the statement of the company’s counsel the amount required for the payment of interest on the money borrowed is $47,234.00, which would. leave only $727.40 with which to compensate the stockholders for the investment they have in the property. If the property is worth eleven hundred and fifty thousand dollars, and the bonded debt is eight hundred thousand dollars, as appears in this case, then the investment of the stockholders *729is worth three hundred and fifty thousand dollars. -A great deal of argument has been indulged in to the effect that the return to be received does not depend upon the amount of stock issued and outstanding. This is quite true, but it does depend in a large measure upon the actual value of the stock issued and outstanding, regardless of the par value thereof. The Commission found that in order to give to the company a reasonable return it would be necessary to add thirty thousand dollars to its receipts and increase the rates so as to accomplish that purpose. This would give to the stockholders practically nine per cent, interest on the actual value of their stock after all tases are paid for them and suitable allowance made for keeping their property in a perfect state of repair, or about twelve per cent, if we exclude from the .valuation of the property the item of one hundred thousand dollars for its value as a going concern. This result to me is inequitable and bizarre. I cannot find anything in the record which justifies the belief that there is any such risk in the investment as warrants granting a return largely in excess of that received by other investors. The rate of interest allowed by law in this state is six per cent., and when one loans his money on real estate mortgages he can only legally receive six per cent., and out of this he must pay taxes, while this company, with an investment as certain as the future of one of the principal cities of the state, is allowed from nine to twelve per cent, after the payment of all taxes; It is quite clear that the old rates do not yield a sufficient return upon the company’s investment, and that it is entitled to some increase, but my own judgment is that any allowance beyond twenty thousand dollars in addition to the old rates is unreasonable and unjust, and should not be allowed, and for that reason I would suspend the rates allowed with leave to the "Water Company to make application to the Commission, either in this case, or in a new proceeding, for such reasonable allowance.