Vincennes Water Supply Co. v. Public Service Commission

• Decision Date: 04 September 1929
• Docket Number: No. 4113.,4113.
• Citation: 34 F.2d 5
• Parties: VINCENNES WATER SUPPLY CO. v. PUBLIC SERVICE COMMISSION OF INDIANA et al.
• Court: U.S. Court of Appeals — Seventh Circuit

34 F.2d 5 (1929)

VINCENNES WATER SUPPLY CO. v. PUBLIC SERVICE COMMISSION OF INDIANA et al.^*

No. 4113.

Circuit Court of Appeals, Seventh Circuit.

April 17, 1929.

Rehearing Denied May 14, 1929.

Supplemental Opinion September 4, 1929.

Clyde H. Jones, of Indianapolis, Ind., for appellant.

Samuel R. Artman and Arthur L. Gillion, both of Indianapolis, Ind., for appellees.

Before PAGE and ANDERSON, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

On July 19, 1927, appellant, a public utility, located at Vincennes, Ind., petitioned the Public Service Commission of Indiana for authority to institute a schedule of increased rates, alleging that the fair value of its property was $1,500,000. The Commission refused to approve the relief prayed but ordered placed in effect as of May 1, 1928, a schedule based upon a rate base valuation of $725,000. Immediately thereafter appellant filed its bill of complaint in the District Court alleging that the fair value of its property is not less than $1,400,000; that for its rates to be fixed upon a valuation of $725,000 amounts to the taking of its property without due process of law. Appellees filed answers joining issue upon these allegations. Upon hearing the court dismissed the bill for want of equity.

The basic question with which this court is concerned is whether the valuation fixed upon the appellant's property for rate purposes is so low that the resulting rates fixed by the Commission will amount to confiscation. "Judicial interference should never occur unless the case presents, clearly and beyond all doubt, such a flagrant attack upon the rights of property under the guise of regulations as to compel the court to say that the rates prescribed will necessarily have the effect to deny just compensation for private property taken for the public use." San Diego Land & Town Co. v. National City, 174 U. S. 739, 754, 19 S. Ct. 804, 810 (43 L. Ed. 1154).

In determining the value the Commission apparently adopted the estimate of its then engineer, Earl Carter, made about September 1, 1927, of the cost to reproduce the property as depreciated of that date, adding to such estimate $54,089 for going value, $6,000 for cash working capital in addition to material on hand and including certain property classed by Carter as not used in normal operation.

At the outset two obvious errors in Mr. Carter's estimate and in the Commission's order should be observed. In arriving at his estimate Mr. Carter deducted the sum of $18,328 from the cost of reproduction of the transmission and distribution system because of the presence of that amount of money deposited with appellant by the owners of real estate for whose benefit surface lines had been laid and installed before the property owners began to consume water. These deposits must be returned to the individual depositors as they later become users. Clearly deposits of such character are a liability, not an asset, and no part of invested capital, and should have received no consideration whatsoever in determining the value of appellant's property.

Furthermore, Mr. Carter's estimate was of September 1, 1927, and the Commission's order accepted his figures as of that date. Between that time and May 1, 1928, when the order became effective, additions and betterments were added to the plant of appellant amounting in the aggregate to $33,830.10. Clearly this became a part of appellant's property which should have been taken into consideration in determining a rate base valuation effective May 1, 1928.

Various witnesses testified and there was before the court evidence upon substantially all facts proper to be considered in determining a proper rate basis. That basis is admittedly the value of the property as of the time of the order. There was evidence as to the original cost of the property, cost of reproduction, historical cost, present day value of construction units, present cash value, and reproduction cost depreciated as of the date of the order. In addition, the appellee offered returns for tax assessments and prior orders of the Commission fixing rates at prior dates. Clearly the latter evidence, if at all competent, is of no material weight in determining the facts. Values determined in former years will not aid in determining present values. Furthermore, the valuation of 1921 introduced by the appellant was clearly based upon a prior valuation determined in 1914. Yet there is no evidence as to appreciation of costs or of the decrease in the purchasing price of a dollar since said dates. It is common knowledge that such appreciation since 1914 has been tremendous. Then, too, if the tax assessment schedule is admissible as an admission of the appellant, it is sufficient to say it cannot furnish a safe guide for determining the rate base value, for too many elements enter into an assessment for real estate taxation which have no place in the determination of the value of property.

Appellees contend that the price paid for stock of appellant at private sale furnishes an adequate test of the value of the property. The stock is quoted upon no exchange, and the only purchases shown in the record were at private sale prior to filing the application. The language of the Utah Public Utilities Commission in the case of Re J. H. Perry, Public Utilities Reports 1925E, 161, at 185, is pertinent in this connection: "Such questions as capitalization and the amount and kind of securities and the market value of the same, can have, in any event, only remote evidential value. In many instances, capitalization bears no particular relation to invested or present value, and the market price of securities depends upon the rates charged for service. If rates are lowered by regulatory bodies, the market value of securities will fall. If rates are raised, within reasonable limits, the value of securities will rise. As pointed out by some commissions, to determine the value of a public utility for rate-making purposes, the using of the market value for securities to make such determination, would involve reasoning in a circle. It is usually now held to be not a legal basis for determining present value, as is pointed out in the case of Monroe Gaslight & Fuel Co. v. Michigan Pub. Utilities Com. (D. C.) 292 F. 139, at 150."

If the purchaser paid too much for his stock, the public should not as a result be imposed upon by rates to fix a reasonable return upon such purchase price. If the purchaser paid too little, he is entitled to the benefit of his bargain. To determine value from the purchase price of stock at private sales is, as indicated above, to reason in a circle, for if rates charged be unreasonably low, the value of the property upon that basis is depressed; if unusually high, it is inflated. The test always is the present fair value of the property. As the Supreme Court says in the case of McCardle v. Indianapolis Water Co., 272 U. S. 400, at page 410, 47 S. Ct. 144, 148 (71 L. Ed. 316): "It is well established that values of utility properties fluctuate, and that owners must bear the decline and are entitled to the increase."

Various witnesses testified as to the cost of reproduction less depreciation. The appraisement compiled by Carter was, as we have said, substantially adopted by the Commission. His estimate of —

                  The reproduction cost of all of the property
                    including that which he said was
                    not used in normal operation, but which
                    was included by the Commission, less
                    only the land, was ......................... $830,087 00
                  If we add to this the two items omitted
                    by obvious errors, deposits of .............   18,328 00
                  And additions and betterments after August
                    1, and prior to April 30, 1928, of .........   33,830 00
                                                                 ___________
                  We find that his testimony as to the cost
                    of reproduction of the tangible property
                    of appellant, except the real estate, is ... $882,245 00
                

From this he made a deduction of approximately 27 per cent. for depreciation, and added 15 per cent. for organization and construction expenses. Wenger, chief engineer of the Commission, succeeding Carter, testified that the cost of reproduction of the tangible property, other than the real estate, was $778,769. To this he added approximately $211,000 for construction costs. He estimated that these figures should be depreciated 27 per cent. Wenger allowed nothing for going value. Carter testified that the going value allowed by the Commission of $54,089 was approximately correct. Stone & Webster appraised the cost of reproduction of the tangible property, less the real estate, at $964,265, and estimated the depreciation at approximately $60,000. To this was added incidental costs of $143,000 and organization expenses, including items as follows: Organization $50,000; cost of financing $65,000; and...