Virginia Electric and Power Company v. United States

• Decision Date: 20 June 1969
• Docket Number: No. 109-66.,109-66.
• Citation: 411 F.2d 1314
• Parties: VIRGINIA ELECTRIC AND POWER COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

411 F.2d 1314 (1969)

VIRGINIA ELECTRIC AND POWER COMPANY v. The UNITED STATES.

No. 109-66.

United States Court of Claims.

June 20, 1969.

H. Brice Graves, Richmond, Va., attorney of record, for plaintiff, E. Milton Farley, III, and Hunton, Williams, Gay, Powell & Gibson, Richmond, Va., of counsel.

Michael H. Singer, U. S. Dept. of Justice, Washington, D. C., with whom was Asst. Atty. Gen. Johnnie M. Walters, for defendant, Philip R. Miller and Joseph Kovner, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

OPINION

PER CURIAM:^*

The issues in this Federal income tax case (involving the calendar years 1959, 1960, and 1961) are: (1) whether the plaintiff-taxpayer, Virginia Electric and Power Company (Vepco), is entitled to depreciation deductions on its costs incurred for initial clearing of easements acquired and used for construction, maintenance, and operation of its transmission and distribution lines, and if so entitled, whether such costs qualify for the double declining balance method of depreciation; (2) whether Vepco is entitled to depreciation deductions on its costs of acquisition of such easements; and (3) if Vepco is entitled to depreciation deductions with respect to the assets described, what are their estimated useful lives?¹

With one exception, identical issues are presented to the court in Pennsylvania Power & Light Company and Subsidiary Companies v. United States, Ct. Cl., 411 F.2d 1300. In that case, decided today, we held that Pennsylvania Power & Light Company's transmission and distribution easements, and its initial clearing costs thereof, were depreciable items, the useful lives of which could be estimated with reasonable accuracy.

Upon a careful study of that exhaustive opinion and the numerous authorities cited and analyzed therein, it is our judgment that the conclusion on this point in favor of the taxpayer is entirely correct for the reasons stated in that opinion. Merely to reiterate here that careful analysis of the basic issue would seem redundant and pretentious.² Therefore, since the main issue of whether the assets involved are depreciable items is identical in both cases, judgment is entered in favor of the taxpayer-utility.

The foregoing disposes of issues (1) and (2) above, except for the question of the applicable depreciation method which is discussed below. Consideration must now be given to issue (3), namely, a determination of the useful lives of the assets in question.

At the outset, we note the very important fact that the proof as to useful lives in the present case differs from that adduced in Pennsylvania Power & Light Company. In the latter case, as fully described in the opinion, the experts in property life analyses based their estimates of useful life on historical statistical studies using the "annual rate" and "geometric mean" methods in conjunction with the so-called "Iowa type survivor curves."³

Vepco's expert witnesses took a different approach. The statistical method above described was not ignored by Vepco, however. Indeed, in this respect the same expert, John J. Reilly, testified in behalf of both Vepco and Pennsylvania Power and Light Co. His studies of Vepco's plant and accounts resulted in an opinion that Vepco's transmission easement and initial clearing costs had useful lives of 100 years and that its distribution easements and initial clearing costs had useful lives of 50 years. However, Mr. Reilly qualified his opinion as to the above estimated service lives by stating that they were primarily ceiling figures to indicate an upper level of estimated lives. He testified that his "estimates would be too long" if, as he thought probable, Vepco's future retirement experience turned out to be more rapid than in the past, due both to technological improvements in underground cable construction and to the trend towards replacement of steam power plants by nuclear energy plants.

With this qualification in mind, Vepco produced expert testimony with respect to what may reasonably be expected in the area of future technological improvements and changes in operational techniques employed by electric utilities, in general, and by Vepco, in particular.

Vepco's assistant vice president, a well-qualified electrical engineer who has spent his entire career working on the problems of Vepco's transmission and distribution system, testified that there is substantial public concern over the appearance of overhead power lines, and this aesthetics problem is under active consideration. In his opinion, this public concern will force Vepco to replace its overhead facilities with underground cable in the foreseeable future.⁴ Apart from the cost of such conversion to underground cable, the major problem confronting the industry today is the lack of suitable insulation for such cable. However, extensive research and experimentation in this area is underway both here and abroad, and in his opinion the problem of insulation will be solved with the result that transmission and distribution facilities will be placed underground in the predictable future. Such a development means that Vepco's easements for overhead facilities have a limited useful life because the easement agreements make no provision for any underground installations, and thus the conversion to underground cable would necessitate the acquisition of new easements and abandonment of the old. In his opinion, all Vepco's distribution lines will be underground somewhere between the years 1990-2000, and all its transmission lines will be underground somewhere between the years 2020-2030.

Another expert witness for Vepco was Dr. Alexander Kusko, an eminent consulting engineer with very extensive academic, research, and industrial experience in the study of electric power system problems. He testified that, at the time of the years here involved, it was possible to make rational predictions with respect to the future development of the electric power systems in the heavily populated region of the Atlantic Seaboard, including that of Vepco. He made his predictions by decades for the period 1960 to 2000 and for the period 2000 to 2030.

The decade 1960 to 1970 he described as a decade of mine-mouth coal burning plants built close to coal mines in order to reduce the cost of fuel transportation. Their power output is transported by long extra high voltage overhead transmission lines. By the end of this decade, nuclear power generation will probably have become less expensive than fossil-fuel power generation, and, with the exception of some new hydroelectric generating stations constructed primarily in Canada, substantially all new generating plants should be operating on nuclear fuel after 1970.⁵ Because of radiological dangers, these plants will be located away from cities, but near cooling water for volume cooling of their condensers. This will require massive overhead transmission lines to carry increased voltages of up to 1,000,000 volts.

In Dr. Kusko's opinion, Vepco's power system will probably change also by reason of other technological developments. With the expected increase in population will also come an increase in energy requirements. Voltages in the range of 1,000,000 to 2,000,000 volts, which is probably what will be necessary within the next 30 to 40 years, are difficult to handle by the present air insulation overhead lines. The development of a better insulation for both overhead and underground transmission will be necessary by the turn of the century. Such a development is under active research and experimentation.

Dr. Kusko further believes that, as atomic generation of electricity is proved to be safe, generating plants will no longer be constructed in isolated areas, but will be built in the heart of cities and near other load centers. This power system change will begin to take place in the decade of 1990 to 2000. No new overhead transmission lines will be constructed after 1990 because they would no longer have any function. The tremendous loads will require that generating plants be located in populated areas. It will probably be impractical to bring that type of power into such areas by overhead transmission lines. Plants will have to be brought to the load centers. In this same time period, heavy water and breeder type reactors, which reproduce their own fuel, will begin to replace the light water reactor plants constructed previously in order to conserve nuclear fuel.

On the basis of the above analysis, Dr. Kusko concluded that after 1970 it is reasonable to believe that electric distribution systems in cities and in surrounding populated areas will be constructed in underground cable. Furthermore, by the year 1990, all distribution circuits in densely populated areas will have been converted to underground cable, and by the year 2000, substantially all the distribution facilities of Vepco, wherever located, will be in underground cable.

As for the transmission system, Dr. Kusko concluded that all new transmission will be constructed in underground cable by the year 2000. Overhead lines built after 1970 carrying 500,000 to 1,000,000 volts will remain in operation, although portions of them will be replaced by cable as population grows into areas in which those lines are located. As stated previously, any new construction during this period will be close to load areas, not requiring extensive overhead transmission lines of the type earlier built. He concluded that by the year 2030 the last of the overhead lines built in the 1970 to 2000 period will have been retired.

In the Government's view, the foregoing constitutes merely some interesting crystal-ball gazing and does not rise to the stature of a "reasonable approximation" as required by the United States Supreme Court. Burnet v. Niagara Falls Brewing Co., 282 U.S. 648, 655, 51 S.Ct. 262, 75 L.Ed. 594 (1931). It will simply not do,...