Cardle v. Indianapolis Water Co 16 19, 1926, 37

CourtUnited States Supreme Court
Citation47 S.Ct. 144,71 L.Ed. 316,272 U.S. 400
Docket NumberNo. 37,37
PartiesMcCARDLE et al. v. INDIANAPOLIS WATER CO. Argued April 16-19, 1926
Decision Date22 November 1926

[Syllabus from pages 400-402 intentionally omitted] Messrs. Arthur L. Gilliom, Atty. Gen., and Edward M. White, Asst. Atty. Gen., both of Indianapolis, Ind., for appellant Public Service Commission of Indiana.

Messrs. James M. Ogden, Corp. Counsel, Taylor E. Groninger, and Clair McTurnan, all of Indianapolis, Ind., for appellant City of Indianapolis.

Messrs. William L. Ransom, of New York City, Joseph J. Daniels, of Indianapolis, Ind., Phillip Barton Warren, of Springfield, Ill., Albert Baker, of Indianapolis, Ind., and W. A. McInerny, of South Bend, Ind., for appellee.

Mr. Justice BUTLER delivered the opinion of the Court.

June 8, 1923, the water company filed with the commission its petition, in which it stated that its rates were too low and proposed a higher schedule. The city of Indianapolis answered, alleging that the rates in force were adequate. After hearing the parties, the commission found that, as of May 31, 1923, the value of the property used was not less than $15,260,400; that the annual return under existing rates would be approximately $800,000; that 7 per cent. was a reasonable rate of return; that the rates in force were insufficient, and that those proposed would be exorbitant and discriminatory; and the commission made an order, effective January 1, 1924, prescribing a schedule increasing some of the rates. In its report it stated that the rates authorized might not produce a 7 per cent. return for the immediate future, but it expressed belief that on the average over a period of approximately three years the schedule would produce an adequate return.

This suit was brought by the company against the members of the commission to enjoin the enforcement of that order, on the ground that the rates prescribed are confiscatory. The members of the commission answered. The city intervened and answered. There was involved the value of the property used, probable earnings, operating expenses, and the amount required to constitute just compensation safeguarded by the Fourteenth Amendment.

The decree states that the court, in an opinion given orally, sustained as proved the material averments of the complaint, and held that the amount as found by the commission was less than the fair value of the property as of January 1, 1924, by more than $3,500,000, and that 'the fair value of complainant's said property at said time was and is not less than $19,000,000, and that the water rates imposed in that order * * * are too low and are confiscatory of complainant's said property,' and it enjoins the enforcement of the order. The members of the commission and the city appeal jointly. Section 238, Judicial Code (Comp. St. § 1215).

Appellants contend that the court adopted as the measure of value the cost of reproduction new less depreciation, estimated on the basis of spot prices as of January 1, 1924, or gave that figure controlling weight. The appellee says that the cost of reproduction less depreciation, estimated at such prices, was shown to be more than $22,500,000, and that the court did not adopt such costs as a measure or give them undue weight as evidence of value.

The record contains three reports of the commission dealing with valuations of the company's property. In case No. 1400, the commission, March 15, 1917, reported that, as of January 1, 1917, the value of the company's property used in the public service was not less than $9,500,000. In case No. 6613, the commission, January 2, 1923, reported that, as of December 31, 1921, the valuation of the company's operative and nonoperative property was $16,455,000. In case No. 7080, the commission, November 28, 1923, made the order attacked in this suit. It reported that, as of May 31, 1923, the value of the company's operative property was not less than $15,260,400.

In No. 1400, the commission stated: The accounting of complainant and its predecessor was defective, in that there was not a careful division of expenditures between capital account and operating expenses. The plant account of the predecessor company owning and operating the plant from 1869 to 1881, was $1,574,840.04, but it expended more than $200,000 that is not included in that figure. According to complainant's books it expended between April 23, 1881, and January 1, 1917, for construction $6,112,320.86. The amount of moneys actually invested in the plant exceeded $8,000,000, and real estate value had appreciated more than $1,500,000. The commission did not definitely state the original cost of construction or the total expenditures for permanent improvements. It found the cost of reproduction new-including $328,000 for going value and $75,000 for working capital-to be $10,406,431, and that less depreciation $9,670,191. The estimate was based on pre-war prices-those prevailing in 1916 and prior years. It reported that the property could not be duplicated 'today (January 1, 1917) for less than $12,500,000.' This figure covered only the physical operative property. Nevertheless the commission fixed the 'value of all the property * * * that is used and useful for the convenience of the public at not less than $9,500,000.' This is the sum of $8,000,000, stated as the minimum amount of money expended to produce the plant, and $1,500,000, the increase in the value of the company's land. It is apparent that the enhancement in the value of the plant other than land was not taken into account, and that nothing was included for cash working capital, or intangible elements of value.

In case No. 6613, the commission reported that, between January 1, 1917, and November 31, 1922, capital additions amounted to $1,639,146, which, added to $12,500,000, cost of duplication (as erported in case No. 1400), made.$14,139,146. It said the company 'would be entitled to have added to this sum reasonable allowances for working cash, going value, water rights, and such other elements as may not have been included in the original figure, and also the value of the nonoperative property which apparently was not included in the original figure. The value on this basis would exceed $16,000,000 for the whole property, without giving any consideration to the enormous enhancement of value of all good property in Indianapolis which has occurred since January 1, 1917.' And the commission set out a number of estimates, based on different price levels, made by its own engineering staff, of which Mr. Earl L. Carter was the head. There is shown, as to physical property only, the cost of reproduction less depreciation estimated on different price bases. Some of these estimates were on quoted market prices of cast iron pipe, and some were on prices approximately 10 per cent. less. This made a difference of about $375,000. The estimates on the lower basis follow:

                     Average prices 10 years ending with 1920. $13,979,744
                      10 years ending with 1921................ 14,689,078
                      10 years ending with 1922................ 15,232,676
                      5 years ending with 1922................. 18,335,974
                     Prices prevailing October 1, 1922......... 17,328,259
                      These include $102,997 to cover materials and supplies

The company submitted various estimates made by valuation engineers Hagenah and Erickson. There is shown below, in respect of physical property only, cost of reproduction less depreciation.

                     Average prices 10 years ending with 1920. $16,020,456
                      5 years ending with 1921................. 20,535,543
                     Prices prevailing October 1, 1922......... 19,447,193

There were added for materials and supplies $100,000, for working capital $135,000, for water rights $500,000, and for going value $2,000,000.

The company also submitted estimates and appraisals made by valuation engineers, Sanderson and Porter. They estimated cost of reproduction of the 'bare physical property' on prices as of October 1, 1922, at $19,087,560, and on average of prices for ten years ending with 1920 at $16,169,257. Neither of these included anything on account of working capital, water rights, or going value. To cover working capital $267,312 was added, and for water rights and going value $2,355,050.

By its order the commission fixed the value of the property at $16,455,000. Its report shows that figure to have been made up as follows:

                    Commission's engineering staff's appraisal
                    cost of reproduction less depreciation
                    on basis of average level of labor
                    and material prices for the 10-year period
                    ending December 31, 1921, including
                    materials and supplies..............................$14,689,0001
                    Capital additions form April 1, 1922, to
                    October 31, 1922, at actual cost......................  215,000
                     Total physical property........................... $14,904,000
                    Going value and water rights, 9 1/2 [p]er cent......  1,416,000
                    Working cash capital                                    135,000
                     Total value....................................... $16,455,000

In case No. 7080, the commission's valuation of the company's properties used in the public service, as of May 31, 1923, is $1,194,600 less than the amount found by the commission to be the value of all its property-operative and nonoperative, as of October 1, 1922. The total of working capital, water rights and going value was reduced $571,000, and the value of the tangible property $623,600.

At the trial in the lower court, the company introduced estimates of the cost of reproduction less depreciation, made by Hagenah and Erickson, as follows:

                     Prices prevailing December 31,

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