Appellees Brief — McCardle v. Indianapolis Water Co.

Supreme Court brief1926

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SUBJECTS

Decree and decision below...........................

Summary of the facts.......-.-.-.-. 0-6-0... 0 05.

Standing of the appellants...........................

Standing of the witmesses....-....-.-.-.-..-.-....-..

Court’s minimum valuation less than total of amounts

shown by undisputed testimony for the various ele-

ments of appellee’s property.......................

Court rightly refused to follow appellants’ unsound meth-

ods of computing a present value below the Court's

minimum of $19,000,000 ..........0.000000000...

Commission’s chief engineer’s 1923-24 appraisal ex-

ceeded $19,500,000 for physical property only... ..

Court rightly refused to follow Mr. Bemis’ so-called “‘re-

production cost appraisal,” based on unit prices which

gave no weight whatever to wages or prices in 1923

DUC at eeu beac d sce CSuU kL ee dL ewaakb un ees

Commission’s unexplained decrease from its valuation

DE cca cesbhdadecebatheanedesbxcanas

Court’s minimum of $19,000,000 gave no undue weight

to “construction costs, conditions, wages and prices af-

fecting value” at the time of valuation ............

Commission's rates clearly confiscatory......-.....---.

Reply to miscellaneous matters in appellants’ brief... . .

22-73

73-93

93-96

96-99

99-106

106-116

117-131

131-142

Pere nee ONG A NP eet a ty Ree Se Re i eon FRR en ENN oR Bi

SUBJECT INDEX

PAGE

NIE 8.45 sax ah cad Raa Be KAT Ci Saad Le 15-18

RE Ea eee Rin ene ae EE EE 8 ose Ae 81-86

Se III 3.0.9.5 0-5 o'o's Ga ah ndlndadiea Pada geneous 15-18

Depreciation ---.......... 28, 29, 57-68, 80-81, 87, 97-99, 126-127

Sieh bn tdas hope coe cie esate eee ee 136-140

SERS ee eee eee: 12-14, 112-123, 136-140

NE MII Sh 69 a's 040 Soddc koe ohd ce reea va eaee 123-129

SERIALS Lo eine eb tle Neary oa 35-48, 91, 97-99

RSS EE A ARAL y PE ing REBORN re mile ehNe Se 30

My ME NE as sca e dn saeauieces hee 90-91, 97-99

REPENS R IE Donk is gman cpt ened HAT 90

EME Sivas escaue ok vel cabtaer ies 111-113, 134-140

MIE Sdnoass Sandee erences eee ee 92-93, 97-99

SE i huG.c05da0wdae sic one unt. 14-15, 77-79, 87-90, 134-142

Rate litigation expense .............................. 124-125

Rate of return ................... 3, 4, 11-14, 117-123, 136-140

NIN GID «ce ce cn csccdannivndsdesss ieee 126-127

Structural Ae ee 10-11, 28-30

Stee be CUvhd ais dese hckdeoeeenal 128-129

Undistributed costs ...................-000. 31-35, 74-77, 97-99

Useful QORUNEY 62a s ce ccccccncccsesencavccsssvesssces 87-90

NMI das idk dcaxcseudeansezeder. 35-36, 52-57, 91, 97-99

Ms oe cle oon a uate eee ete 89-90

EE OR a er go Re et A One CR UR Abe RAG 19-22

Working capital ....................... 35-36, 48-52, 92, 97-99

iii

INDEX-DIGEST

PAGE

EE cool ea veniierchycten oy ae ys rete ty 1-22

Me I hi eh og WN cer eancase apa ean aden aa dan 1

ee ere ey Ee rr Cre Tee eee er rere 2

BE ANS Skee keen ween kakSkGans so Ae eke 2

| RR Pre pa see e Pa ea eee Pee ree 2-6

Fundamental fallacy of the appellants’ brief ........ 4

Summary of the issues of fact:

ME acdc coca rev uca nwa tanks oust a see ead ke 8-11

ee Ge ee IE Gh need ceee en seen seansbas sands 11-12

AERP eta Pee tire ge ire 12-13

Net return which would be allowed under the Com-

EE EE Go elauheel veka Ken ak owaeemee dA 13-14

The Commission’s January determination as to the

appellee and its well-maintained and efficient prop-

GN rennet ee ee rrr rey ee ee re eee 14-15

Standing of the appellants:

We Gy GE BUI wo on occa ccncccsnscises: 15

te MEI as S609 oo cana hos kde Rina wen dencd es 16

The City’s statement of its reasons for intervention. . 17

The City seeks collateral review of the Commission’s

eR APE PA a an a a 17-18

Standing of the witnesses:

For the City of Indianapolis :

Messrs. Edward W. Bemis, Walter S. Bemis, and

SHAAPAAEAC SE SAKBDAKCCASAREAD EHS DOD

For the Commission:

Its engineer (Mr. Carter) and its accountant (Mr.

NE a the haves aac a vuk peanticn dn os aera ees 20-21

For the company:

Messrs. Hagenah, Elmes, Metcalf, McCloskey and

Jirgal

: Benjamin Perk 19-20

recs. |

| ae DP. NEY

PAGE

SEEDS Re Peer 22-142

I. The Trial Court’s valuation of not less than

$19,000,000 was on a minimum and most conser-

a Ng Pe se ra EKG ee eke oe 22-73

The decisions pertinent to present value........ 23-26

(A) The Court’s finding is less than the sums

shown by the uncontradicted evidence as to

the various elements of the property ........ 26-68

Ch) DORMCEEE POOMETEY 6 i. ccc cies cess 28-30

ee ere 28

At averaged unit prices ................ 29-30

(2) Bem CumtTOVed) 2... cc ccc cc ccees 30

(3) Undistributed structural costs (over-

Ca ewe tay pa saeat anees ohn ee 31-35

IK biodata reaches nanwndnne 32-35

The allowance of fifteen per cent. shown

by the undisputed testimony would have

IN ecb cr ak Pe ae aA bee eee es 33-35

(4) Going value, working capital, and water

Ta aea eke ner shia a acne eek yo es 35-57

Oe OE lds Sax ewaep wae anne 36.48

BOG GOI 6 6 ao ice eens 36-41, 42-45, 47-48

The Indiana statutes and decisions re-

quire the Commission to make an

adequate allowance for going value,

under the definition of the Des

MO ke aa xi chs aan aes 39-40

The appellant Commission has hither-

to recognized the appellee’s posses-

sion of going value................ 40-41

The evidence and findings as to going

I I ND once vended cnn dee’ 41-42

Allowance of at least ten per cent.

for going value has become the min-

ney terre re bre rire pe 42-44

Vil

PAGE

The uncontradicted evidence here

called for a going value allowance of

at least $2,000,000 20... ccc cc ccnce 45-47

Immaterial that the cost of some of

the elements of going value was

charged to operating expenses ...... 47-48

(ii) Working capital .................. 48-52

Se 50

Se MON on vcs ssccnednenci sce. 52-57

MPOOMIOMS GEE ooo occ cccccsccncs 52-54

The law and policy of Indiana have

settled that the appellee is entitled to

an allowance for water rights ...... 53-56

The appellee’s water rights described 55-57

The valuation proved for water rights

WOE GI oo ccc ccccccccce 57

Se I GU 6 i se bncsneesydeek vases 57-68

The facts proved in this case.......... 57-60

The decialons cited ........ 0006. ccceuce 58-66

(i) The testimony for the appellee and

the Commission, and the Trial Court's

finding of $19,000,000, were on a con-

servative basis, as to depreciation ... 66

(ii) The provisions of the Indiana statute

do not change the facts or the rules

of law, as to the depreciation and

present value of the appellee’s prop-

cn EEE A ee 66-68

(B) The Court’s valuation did not give dominant,

much less exclusive, weight to “spot” repro-

ee | ae 68-73

(1) The only three estimates of reproduction

cost new (depreciated) as of January 1,

1924, before the Court, averaged $23,-

WE ced bees bcheNsvisiasciceccescns 68-69

(2) Judge Geiger said that although he

thought “spot reproduction” for the phy-

sical property alone was at least $23,-

000,000, he was “not confronted with the

problem of fixing a valuation within the

° ao |

> lec aeee

(3)

(4)

Vill

range of dispute upon spot reproduc-

tion”; so he fixed $19,000,000 instead of

$21,000,000 to $25,500,000 ..............

Judge Geiger’s clearly expressed views on

the valuation of the property of a water

company in the Ashland Water Company

case, permit of no inference that he de-

cided this case on any basis of giving ex-

clusive weight to “spot reproduction”

PPPOE TT Ee eC CT Tere TOC e eT ET Tee

The origin of the $19,000,000 figure and

the explanation of the way in which it

was put together, for the purposes of this

case, was with Mr. Hagenah, and he both

said and showed that he did not “give

major weight to the present levels” ....

pellee to his minimum figure of $19,000,000. .

II. The Trial Court was fully warranted in refusing

to follow the methods by which counsel for the

appellants seek to compute a present value of less

than $19,000,000 ..................0...02005,

(1)

(2)

(3)

Deduction of so-called “excess over-

heads” (undistributed costs) ...........

SUR CIE occ oes nn scene

Review of the testimony ..............

Deduction of $1,167,018 on the theory

that $583,509 of the appellee's property

had been “paid for through operating ex-

OO oa cadevwssnsscass staedusenadne

SON GOR boas hah cc see ea deta nes

Deduction of $1,289,498, from Mr.

Hagenah’s 1923 replacement value of

$25,404,026, on the ground that $1,289,498

of such sum represented “property pur-

chased with depreciation reserve money

($644,749) appreciated in appraisal over

See GS avecadeesan dees dantaneks

ROCOINOIS COO 5s 5 bc a gown kas see

PAGE

69-70

70-72

72-73

73-93

74-77

75-76

74-77

77-79

78-79

80-81

(4) Deduction of $1,232,913 from Mr.

Hagenah’s appraisal, for the replacement

cost of the canal (exclusive of the land

but with 15 per cent. eliminated for con-

tractor’s expense and profit) ...........

Appellants’ contentions replied to......

The Commission’s own previous rulings

settee comics, ROE ye i feed

(5) Deduction of $1,878,705 for “additional

accrued depreciation allowance” not

claimed to have been collected from the

appellee’s consumers ..................

(6) Deduction of $500,000 for “non-oper-

ative” property, “over Mr. Hagenah’s al-

WON Linda cediuasare eee cek ols, oe

The testimony and exhibits reviewed ....

fe a RO PR rel Wt Rt torte

(ii) Miscellaneous property ............

(iii) The office building ................

(7) Deduction for the additional cost of lay-

ing mains in congested areas

(8) Elimination of all allowance for going

value and water rights ................

(9) Deduction of all working capital

(10) Deduction for an “adjustment” sug-

gested by the younger Bemis as to cast-

OE BD UII, Fons npc aks ete.

Ill. The Trial Court was fully justified in concluding

that the testimony of the Commission’s own Chief

Engineer (Mr. Carter), in conjunction with the

other appraisals, warranted a valuation of not less

than $19,000,000 ............................

The Trial Court heard and observed the witnesses

PAGE

81-86

82-85

85-86

87-90

87-88

89-90

90-91

92-93

93-96

witacn Suis |

IV.

The rule that where the judgment of the Trial

Court is based upon evidence that clearly pre-

ponderates in favor of the conclusion reached, it

will be affirmed by this Court, is applicable to rate

GUE WRMIGUON THGOTION 221 cc ccc ccc cccccscnccces

Mr. Carter’s testimony for the Commission re-

MEE Se RaNdAG Cae COs dObh Kok uccdbdscsaczese

Anomalous position of the appellants in seeking to

“impeach” and “discredit” the Commission's en-

ee ee Sa dee sk wadsssevadencsciose

The Trial Court was fully justified in refusing to

accept, or to attach importance to, the City’s so-

called “reproduction cost appraisal”............

Young Mr. Bemis offered the only alternative to

acceptance of the appraisals of Messrs. Hagenah,

SE ca Ged dacseudsdecceccessseces

Method in which the Bemis estimate was prepared

—deduction, subtraction, elimination, and depre-

tet Ae teele elses esihwatebsieeanceses

. The Commission’s decrease of $1,194,600 in its

valuation of the company’s property, from January

to November of 1923, was arbitrary and unex-

OI sais nendensencssscncasacccsssesens

Decisions cited as to arbitrary and unsupported

SEES rrr Teer reer ere rerErere

The January valuation in Case No. 6613........

The November valuation in Case No. 7080......

Lack of explanation of such arbitrary decrease ...

(A) Wages and prices had increased rather than

declined from October 31, 192Z, to May 1,

ME SNGkv Sea tah Seen e eRKehsOC des edReees

(B) Ten-year and five-year averages as of a later

date in 1923 would not be lower ...........

eliminating any claimed not to be used and

useful in the water business, does not explain

the reduction in the valuation ..............

PAGE

94-96

96-99

99-106

99-101

101-103

103-104

104-106

105

Vi.

Vil.

(D) Any claim that the Indiana law recognizes

two different kinds of “value” of utility prop-

erty, is unsound and unsupported ..........

SI OE kad oS abos cca dacce ed,

The Trial Court’s minimum valuation did not give

undue weight, as a matter of law or as a matter of

fact, to “construction costs, conditions, wages and

prices affecting value” at the time of the valuation;

the Trial Court correctly found that, on the other

hand, the Commission’s rates had been based upon

a “valuation” which “considered” present costs

only by ignoring them..........................

The independent judgment of the Trial Court,

in reaching a valuation of $19,000,000, cannot

be said to have given too much weight to

costs as of the time of the inquiry .........

(A) Recent decisions of the State and Federal

Courts uniformly sustain such a determina-

tion as the Trial Court made, upon the facts

of this case, and as uniformly reject a valua-

tion based on any such formula as this Com-

mission palpably used .....................

(B) The Commission's valuation of November 28.

1923, allowed virtually nothing in excess of

the original cost of the property (including

gf ge ea iis

1923, must be deemed to have made no allow-

ance whatever for any increase since 1917 in

wages, prices or conditions affecting the con-

struction cost or present value of the appel-

lee’s structural property ...................

The Trial Court’s conclusion that the rates are con-

fiscatory is plainly ESS. tal viv'ecaadwoa'eke bak cn

(A) Commission’s rates intended to yield less than

Seven per cent. upon its rate base..........

ND cael ed dine bd anncess odes

(B) Eight per cent. upon present value required

for adequate return .............0.00..0000.

PAGE

106-107

107

106-116

106

107-111

111-113

113-116

117-123

117

i17

Rew ae ia

SP PN bccn nccnatanddcsdacsncbasanass<

Differences between the estimates of reve-

nues, expenses, and net earnings analyzed ...

Increase in gross revenues assumed by appel-

MD na cnccdeccadaseeceeeasdacsadassndnsac

Expense items omitted by appellants........

(1) Expenses of rate and valuation proceed-

OD nnn cnaseanwneenenshdnncseedses

(2) Retirement expenses (provision for de-

SE GAccaedsccducnraceseunsnaka

GED hbk dd ccc ccadnencnn sans

(3) Increase in 1924 taxes .................

(4) Amount allowed by the Commission’s

order to amortize its own erroneous esti-

mate of the appellee’s taxes ............

Net earnings under Commission’s rates un-

GOMER TOOTCMIE ooo ac ccaccsccccsaccces

VIII. Reply to miscellaneous matters in the appellants’

brief (not elsewhere dealt with) .-...-..-.-.---.

(A) The City’s unsound bases, on the law and the

BME Aucdccdsasebanecsasecheubna tenn caxdeas

(B) The original cost of appellee’s property .....

(D) War-time valuations not reviewed by the

GE shin x Sb deb ec bh us tecacdenccadesaaanses

IX. Decree of the District Court should be affirmed. .-

123

123-129

124-125

126

127

128

129

130

131-143

131-134

134-136

136-140

140-142

143

ACT

INDEX TO APPENDIX

approved January 19, 1850 (General Laws of

Indiana; pages 21 and 22) authorizing the sale

by the State of the Northern Division of the

IEE NEE hak ns caneuhudhie awed cwacunne anes

approved January 21, 1850 (General Laws of

Indiana; pages 22 and 23), as to the same sub-

SUP, 054s Shah andee Kh4nd 4b b ORS RREEAR AKA

JOINT RESOLUTION approved February 7, 1851

ACT

(General Laws of Indiana; page 200), approv-

ing the sale by the State of the Northern Divi-

sion of the Central Canal......................

approved February 13 1851 (Local Laws of

Indiana; pages 358-360), to incorporate the Cen-

tral Canal Manufacturing Hydraulic and Water

I eiasa cant Ade che ci hed eh woe xh

approved March 6, 1865 (Indiana Session Laws

of 1865; pages 103 and 104), under which the

appellee’s predecessor, the Water Works Com-

pany of Indianapolis, was organized............

Xili

PAGE

145-146

146-147

148

148-150

151

a Lae |

Lo OLRM AE AN Nese Be DT Ba Ne

oo La a SR A aa

TABLE OF CASES

PAGE

Adirondack Power and Light Co. v. Publie Service

Commission (211 App. Div. [N. Y.] 272).....109, 118

Alpha Portland Cement Co. v. Lehigh Nav. El. Co.

(P. U. R. 1924E, 737; Pennsylvania Publie Ser-

Se EIN <a o.o's d's od'cdeaeeeSsvoes tea 124

Alton Water Co. v. Commerce Commission (279 Fed.

ENO Sdsescabasdénaneacesssuséuencexcded sea 118

Ashland Water Co. v. Railroad Commission of Wis-

consin (7 Fed. [2nd] 924; 25 Rate Research,

SUE \asenectvcdveseeuscesassevesessasunss 6, 69, 110

Banton v. Belt Line Railway Corporation (268 U. 8.

SP CS cdveevasdungeaunab evan dceeaeusoancuews 100

Bluefield Water Works and Improvement Co. v.

Publie Service Commission of West Virginia

Se Wis Oe Sah xhgaewecatucusedétaessede 24, 37,42

108, 117, 119

Boise Artesian Water Co. v. Publie Utilities Com-

mission (40 Idaho 690; 236 Pae. 525)......... 76, 79

Bonbright v. Geary (210 Fed. 44)............... 61, 76, 80

Bronx Gas and Electrie Company, Re (6 State Dept.

Repts. 76, 94) (New York Public Service Com-

EE a te scdedsacdsablsthusaveusduucoina: 33

Bronx Gas and Electrie Co. v. Public Service Com-

mission (P. U. R. 1923A, 255; 28 N. Y. St. Dept.

Repts., 329, 364; affd. 208 App. Div. 780, 806) 33, 50, 58

Brooklyn Union Gas Co. v. Nixon (2 Fed. [2nd] 118) 50,79

Brooklyn Union Gas Company v. Prendergast (7

Fed. [2nd] 628; P. U. R. 1926A, 412). ..34, 58, 86, 118

Brooks-Seanlon Corporation v. United States (265

We EE oie cd ebascaderiodsekvebdebic dee 24, 106

EERE STRIPE IY ON Engi 8AM 5 AHN TT NRT AT Ie RA NEN SS

PAGE

Brush Electric Co. v. Galveston (258 U. S. 388).... = 118

Capital City Gas Light Co. v. Des Moines (72 Fed.

Nag ene a heh Ae ile hE Late ay ae ots Seen ane 86

Central Trust Co. v. MeGeorge (151 U.S. 129)..... 18

Chesapeake and Potomac Telephone Co., Re (P. U.

ee ag SE, POE yo cada den head cesatansenys 32

Citizens’ Gas Co. of Hannibal v. Publie Service

Commission of Missouri (8 Fed. [2nd] 632)... 25,38

43, 100, 108

City of Charleston v. Public Service Commission (95

Ws WE EE eureeknGueins haces 4aeunaswaneeas 80

City of Cincinnati v. Ohio Publie Utilities Commis-

sion (—Ohio—; 148 N. E. 817)............... 61,7

City of Council Bluffs v. Omaha and C. B. St. Ry.

Ce i RIED SUD a hs ceddancewasdaradsas 142

City of Edwardsville v. Illinois Bell Telephone Co.

roe fof ge ee Oe i Perr eTT Teer rere 22

City of Elizabeth v. Board of Publie Utility Com-

missioners of New Jersey (123 Atl. 358)...... 120

City of Erie v. Publie Service Commission of Penn-

sylvania (278 Pa. St. 512; 123 Atl. 471) 25, 79, 100, 108

City of Fort Smith, Ark., v. Southwestern Bell Tele-

phone Co. (294 Fed. 102; U. 8. ; 46

Sup. Ct. Repr. 206; 70 L. Ed. 236; affirmance by

this Court on January 25, 1926)............ 25, 36, 42

61, 63, 118, 127

City of Knoxville v. Knoxville Water Co. (212 U.S.

| Serr Ser Oy Teeny TT Teer eT Pere re re 23

City of Minneapolis v. Rand (285 Fed. 818)....... 48

City of Mt. Vernon v. New York Interurban Water

Co. (115 App. Div. [N. Y.] 658).............. 16

City of New York v. New York Edison Co. (196 App.

Sls. Che Wal GOP cae dnarcesedcsnsnnansanns 16

XVli

PAGE

City of New York v. New York Telephone Co. (261

se RAAT KARAM S eAAaD USS EEAL REE EER 16

City of Winona v. Wisconsin-Minnesota Lt. & P. Co.

ee Ee Gadd Anaia dune eorkeaveKns oueds 61

Columbus Gas Light Co. v. Publie Service Commis-

sion of Indiana (193 Ind. 399; 140 N. E. 538).. 25,38

39, 41, 79, 89, 106, 108, 119, 129

Consolidated Gas Company of New York v. Newton

(256 Fed. 238; affd. 260 Fed. 1022; remanded

for dismissal, 253 U. S. 219; intervention of City

ST PE Advis eudsoe aves Conc atelueeeael. 16

Consolidated Gas Co. v. Newton (267 Fed. 231; affd.

Be Sis ae IE Ta oh 000 dkcakaavak 25, 58, 86, 89, 125

Consolidated Gas Co. v. Prendergast (6 Fed. [2nd]

DES, “bucanccedakenackkawks 38, 43, 118, 119, 120, 124

Consolidated Gas, Electric Light & Power Co. of

Baltimore, Re (P. U. R. 1924D, 177 [Maryland

Public Service Commission]) ................ 124

Coplay Cement Mfg. Co. v. Publie Service Commis-

sion of Pennsylvania (271 Pa. 58; 114 Atl. 649) 22

Denver v. Denver Union Water Co. (246 U. S. 178) 25, 37

Des Moines Gas Co. v. City of Des Moines (238 U.

MCS Fad ae thls co doe iadeaneaiiaeke 36, 45, 46, 47, 91

Elizabethtown Gas Light Co. v. Board of Public

Utility Commissioners of New Jersey (111 Atl.

ME > accuracies eksbeekesndd ocandetakeeaeuiwe 25, 110

Englehard and Sons Co., Re (231 U. S. | re 15

Galveston Electric Co. v. City of Galveston (258 U.

ok, SECT LOTT T OO TEEN PTO ES 37, 45, 79, 120

Garden City v. Garden City Telephone Co. (236

PN Ths 68s bars cost ncanekeds yi touts suka 79

Grafton County Electric Light and Power Co. v.

State (78 N. H. 330; 100 Atl. 668)............ 48

RT iL a ant |

Paces i ead

XVlil

PAGE

Greensburg Water Co. v. Indiana Publie Service

Commission (decided February 19, 1926; not

WOE DORTUIED h0 dsc icnshedencelcantss ete 43, 109

Havre de Grace & P. Bridge Co. v. Towers as Chair-

man (132 Md. 16; 103 Atl. 319).............. 61, 100

Houston v. Southwestern Bell Telephone Co. (259

Nie Se Sey EE aha dae weneWusaxseueeos eae 45, 93

Hoyne v. Chicago Electrie Ry. Co. (294 Ill. 413)... 16

Idaho Power Co., Re (P. U. R. 1923B, 52)......... 33

Illinois Bell Telephone Co. v. Commerce Commission

(304 Ill. 357; 1386 N. E. 676; 306 Tl. 109; 137 N.

Ms GD hiss ¥ iGo 8 ca da nae ee aerate 22

Indiana Bell Telephone Co. v. Public Service Com-

mission of Indiana (300 Fed. 190)............ 119

Indianapolis Water Co., Re (P. U. R. 1917K, 556). .115, 141

Indianapolis Water Co., Re (P. U. R. 1923D, 449).. 6,101

Indianapolis Water Co., Re (P. U. R. 1924B, 306).. 7, 104

Interstate Commerce Commission v. Louisville and

Nashville R. R. Co. (227 U. S. 88)............ 101

Kansas City Southern Railway Co. v. United States

Pee 8 es es ave ee Ked akan aacad es 64

IKXansas v. Southwestern Bell Tel. Co. (115 Kans.

oe 8 es) | Err eer ere 100

Kennebee Water District v. City of Waterville (97

Bee, Womk De Wilke Gi kc ficaccaceecwsecveseuses 85

Kings County Lighting Co., Re (2 P. S. C. R., Ist

ae a error rr ts rrr ye 34

Kings County Lighting Co. v. Prendergast (7 Fed.

[2nd], 192; P. U. R. 1925E, 5 [Spee. Stat. Ct.];

confirming report of Special Master: P. U. R.

RENE FURR owns bean emake 38, 50, 58, 100, 118

Landon v. Court of Industrial Relations of Kansas

Cae Gy SN goes oe kek oes kee etiee 61

——— APS AP a aE NOEL > Le

xix

PAGE

Lincoln Gas Co. v. Lincoln (250 U. S. 256, 267) . .37, 48, 118

Los Angeles and Salt Lake Railroad Co. v. United

Utilities Comn. (292 Fed. 139 [Spee. Stat. Ct.J;

Fed.

; decided February 27, 1926). .24, 37, 43, 61

69, 70, 72, 75, 79, 120, 125

Morrell v. Brooklyn Borough Gas Co. (231 N. Y. ;

ae) PERCE ECR En Pires eh ee aR Ne ninlT Sik cian 16 :

States (8 Fed. [2nd] 747)............... 52,100,106

Louisiana Water Co. v. Public Service Commission

of Missouri (294 Fed. 954).................. 23 :

Love v. Atchison, Topeka and S. F. Ry. Co. (185 :

OE SoU SAG Nein Hak Camere Ce, 142 .

McAlester Gas and Coke Co. v. Corporation Com- t

mission of Oklahoma (227 Pae. 83)........... 118 2

Menendez v. Holt (128 U. S. 514)................ 142 |

Metropolitan Railway Receivership, Re (208 U. S. .

i, EE PET PET Pru bee | uel alent 18 eg

Michigan Public Utilities Commission v. Michigan .

State Telephone Co. (228 Mich. 658; 200 N. W. t

ee tn ORE My sella hoi ee nt a AS 37, 48, 80, 118 f

Middlesex Water Co. v. Board of Publie Utility F

Commissioners of New Jersey (10 Fed. [2nd] 5

919; 28 Rate Research, 89) .................. 111 é

| Milton v. McGowan W. Lt. & P. Co. (P. U. R. 19234, |

: EE” SaaS Ns Mabe eeuR RES ag oe fae sds 33

Mobile Gas Co. v. Patterson as Chairman (293 Fed.

oa ET 43,125 0 |

Monroe Gas Light and Fuel Co. v. Michigan Public :

ruling reaffirmed on further hearing:

[2nd]

Municipal Gas Company of Albany v. Public Service ;

Commission of New York (225 N. Y. 89, 99)... 79 é

Murray v. Public Utilities Commission (27 Idaho

at te | ae 61

g LEME | LOLS a HR

PAGE

Nashville, C. & St. L. Ry. Co. v. United States (269

a ee a) rrr 59, 61, 65, 7

National Water Works Co. v. Kansas City (62 Fed.

Ree OM R a nden Ka wae enka sana kas kas 37, 86

Newton v. Consolidated Gas Co. (258 U. S. 165;

SL EE Siac sa a cakc dane isauss 79, 118, 138

New York and Queens Gas Co. v. Newton (269 Fed.

Bey Ae ee Os Se akc ccsnavcccsnccisse, BE

New York and Queens Gas Co. v. Prendergast (1

Fed. [2nd] 351; appeal dismissed 268 U. S.

DOE Wie EC Rkwa CoA WES DER RE REA SAK OH 50, 118, 124

New York and Richmond Gas Co. v. Nixon (203 App.

Div. 860; 204 App. Div. 838)........... 34, 46, 59, 124

New York and Richmond Gas Co. v. Prendergast (10

Fed. [2nd] 167 [Spee. Stat. Ct.J; P. U. R.

1925, 19; decided November 24, 1925).....32, 33,42

48, 50, 51, 58, 76, 86, 100, 125

New York Telephone Co. v. Board of Utility Com-

missioners of New Jersey (5 Fed. [2nd] 245).. 79,80

New York Telephone Co. v. Prendergast (300 Fed.

822 [Spee. Stat. Ct.]; 8. C. on further hearing:

Fed. [2nd] ——; decided March 10, 1926) 25, 37

61, 62, 109, 121

Northside Canal Co., Ltd. v. State Board of Equal-

Matiod (5 Fed. [dnd], Tae)... 0. . 5c ccnccncee 52

Northern Pacific Ry. Co. v. Department of Public

Works of Washington (268 U. S. 39)......... 100

Ohio Utilities Co. v. Public Utilities Commission of

a RR 23, 24, 26

32, 44, 75, 100

Oklahoma Natural Gas Co. v. Corporation Commis-

sion of Oklahoma (216 Pac. 917)............. 101

Okmulgee Gas Co. v. Corporation Commission of

Oklahoma (95 Okla. 213; 220 Pac. 33)........

xxi

PAGE

Omaha v. Omaha Water Co. (218 U. S. 180)........ 37

Ottinger v. New York and Queens Gas Co. (268 U. S.

708; dismissing 1 Fed. [2nd] 351)............ 58

Pacific Gas and Electric Co. v. San Francisco (273

NE ono 5 oss cs OG sob kkk Kos oon co 118, 121

Pacific Gas and Electric Co. v. San Francisco (265

ie Bik oy Og ne os oe cn una 61, 62

Pennsylvania Gas Co. v. Public Service Commission

of New York (204 App. Div. [N. Y.] WR eae es 80

People ex rel. Delaware and Hudson Co. v. Stevens,

as Chairman (197 N. Y. 1).................. 100

People’s Gas and Electric Co. of Oswego v. Public

Service Commission of New York (214 App.

_ = 32 aaa 24,37,110,118 ©

Petersburg Gas Co. v. Petersburg (132 Va. $2).... 25

Pioneer Telephone and Telegraph Co. v. Westen-

haver (29 Okl. 429; 118 Pac. 354)............. 118

Public Service Commission of New York v. Pavilion

Natural Gas Co. (232 N. Y. 146; 133 N. E. 427) 22

Roanoke Waterworks Co. v. Commonwealth of Vir-

gimia (124 S. E. 652 [Va.]) .................. ys! k

San Joaquin Water Co. v. Stanislaus County (233 :

RAE eee een 52,82 §

Southern Bell Telephone and Telegraph Co. v. Rail- F

road Commission of South Carolina (5 Fed. P

IN Sn en 38,42,62 ©

Standard Oil Co. v. Southern Pacifie Co. (268 U. §. A

oh Ta IR ie a 24, 61 E

State of Kansas ex rel. Hopkins v. Southwestern

Bell Tel. Co. (115 Kan. 236; 223 Pac. 749) ..... 61 F

State of Missouri ex rel. Southwestern Bell Tele- :

phone Co. v. Publie Service Commission of Mis- FE

souri (262 U.S. 276) .................... 24, 89, 100 q

108, 118 :

Xxili

PAGE

State Public Utilities Commission v. Springfield Gas

and Electric Co. (291 Ill. 209) ............. 37, 38, 89

Streator Aqueduct Co. v. Smith, as Chairman (295

OES SUE 9.5 205sd aha cneoben bake neseaeeniue 22, 37, 43

100, 124

Town of Milton v. Railroad Commission of Wiscon-

sin (185 Wisc. 294; 201 N. W. 381) ........... 37

United States v. Boston, ete., Canal Co. (271 Fed.

EE 6 ocean acd a mdvuae deck cat en whew 86

Van Wert Gas Light Co. v. Public Utilities Commis-

sion of Ohio (299 Fed. 670) .................. 25

Venner v. Urbana Water Co. (174 Fed. 348) ....... 37

Wakeman v. Wheeler and Wilson Co. (101 N. Y.

WE ccc akaea kee s MNS WERE Sis ake eeancarabaus 38

Walker Brothers Catering Co. v. Detroit City Gas

Ch Cr I ND ak as hiss Va ecamauascanan 22

Western Oklahoma Gas and Fuel Co. v. State (239

MN I co kee oe Ea ee aa ora eo ES 79

Westinghouse Electric and Mfg. Co. v. Denver

Tramway Co. (3 Fed. [2nd] 285) ........ 19, 37, 44, 61

Willcox v. Consolidated Gas Co. (212 U.S. 19) .... 58

Wichita Railroad and Light Co. v. Publie Utilities

Commesnn (508 UB. GB) aon ccs kccda sss 22

—OO [SRP OGRA ARATE DRS

TABLE OF STATUTES

PAGE

Indiana Publie Service Act

NES ic water oe aa kee ee es 39, 101, 105, 106

PNR osu taco secur aria con cee apuae 57

UNE id ac hse ee ea eee ne 39, 105, 106

Bovna* &. G. 2014: Boe, 1062 7 ows ose ec cenaas 39, 101

Burns’ R. S. 1914; See. 10052 el .............. 39, 105, 106

perme’ he. &. 1914; Bee. 10GG2 y 2... cceckccsanccss 66, 67

General Laws of Indiana; pages 21-22 (approved

January 19, 1850) (quoted on pages 145, 146,

Ft Pr Pia ee eer y Bar meantime LP 56, 145, 146

General Laws of Indiana; pages 22-23 (approved

January 21, 1850) (quoted on pages 146, 147,

QUORE Nc dab co senna taednyedeensa tee erees 56, 146, 147

General Laws of Indiana; page 200 (approved Feb-

ruary 7, 1851) (quoted on page 148, post) ..... 56, 148

Local Laws of Indiana; pages 358-360 (approved

February 13, 1851) (quoted on pages 148-150,

| TP COPE Lee Oe re erg ere pts 56, 83, 148-150

Session Laws of 1865 (Indiana); pages 103-104

(quoted on page 151, post) ................ 56, 83, 151

xxiil

ee ree

Bei

EE eet

LL ELE OPO Le ee eM tee

Ue SAAS,

LIAL ENTREE AS INIT OATS eh

eaestascesy

a aera

Bey ae

Supreme Court of the United States

OCTOBER TERM, 1925

Joux W. McCarpie, Maurice Dove-

Lass, Oscar Rarrs, Frank WAMPLER,

and Samuet ArTMAN, as Members

of the Pusiic Service CoMMIssION

ov INDIANA,

Appellants,

and No. 249

Crry or IypiaNnapo.is,

Intervening Appellant,

Vs.

InpIANAPOLIS Water CoMPany,

Appellee.

BRIEF FOR APPELLEE

This case is here on appeal by the intervenor (the City

of Indianapolis) and by the Public Service Commission of

the State of Indiana (the defendants below), from a final

decree (R. 56) of the United States District Court for the

District of Indiana, in favor of the Indianapolis Water

Company (the plaintiff below), entered on October 3, 1924,

by Geiger, D.J., after he had heard the testimony.

va oS a

Sea Ries

EE ig

SVE We OR ee ee eee TST ree

PE ee ny

Statement

The action was brought by the Indianapolis Water Com-

pany (the present appellee) against the defendant mem-

bers of the Public Service Commission of Indiana, to enjoin

the enforcement of a schedule of water rates prescribed by

the Commission, by an order dated November 28, 1923, in

its Case No. 7080; such schedule having been prescribed

by the Commission to take the place of rates promulgated

by the company (R. 1-5).

The decree appealed from (R. 56) determined and ad-

judged that the Commission’s schedule of rates were clearly

confiseatory of the appellee’s property (R. 56).

The decision of the District Court: In forming his inde-

pendent judgment as to the consequences of the rates com-

plained of, Judge Geiger found and determined that the

value of the appellee’s property, during the period litigated

before the Commission and as of January 1, 1924, ‘‘was

and is not less than $19,000,000’? (R. 56).

The appellee had indicated $19,000,000 ($18,650,000

plus net additions) as a minimum figure for present value,

on incontestible bases, although the complaint had also

alleged (R. 5) that if wages and prices during the year 1923

‘*should be applied in determining the fair value of

its property owned throughout that year, and used

and useful in its public service business, the fair

value of such property was and is in excess of $22,-

000,000, as was established by the evidence before

the Commission’’ (R. 5).

The District Court found and stated, in its decree (R.

56), that this and other ‘‘material averments of the com-

plainant’s bill of complaint’? had been proved and sus-

tained (R. 56). In fact, the Court found that the com-

FR LTE

pany’s proofs of present replacement value showed ap-

proximately $25,000,000 (after deducting depreciation),

and indicated that on no theory could this figure be reduced

below $23,000,000 for the physical property only (R. 63),

exclusive of going value, working capital, and water rights,

for each of which elements of property the law of Indiana

and the decisions of the appellant Commission require that

an allowance shall be made, at present value. The chief

engineer of the Commission estimated the 1923-1924 re-

placement value of the physical property only (less depre-

ciation but exclusive of going value, working capital other

than materials and supplies, and water rights) at $19,500,-

000 (R. 132).

Judge Geiger accordingly said that (R. 64):

‘“‘T am not confronted with the problem of fixing

a valuation within the range of dispute upon spot

reproduction. I say I am not confronted with that

problem, because the complainant comes into this

Court and offers to accept $19,000,000 as a fair basis

of valuation, even though, as it says, and I think has

reason to say, and could support it, it could, upon the

record, sustain a higher valuation”’ (R. 64).

He added that on any rational basis of valuation and re-

turn, “‘provided it be above five per cent.,’’ the rates are

clearly confiseatory, saying (R. 64):

“*Tt follows, I think without dispute—I think with-

out the possibility of serious dispute—that, that being

so, the rates or tariffs or charges that have been

promulgated by the respondent Commission, no mat-

ter what figure of measuring it, what rate of measur-

ing it, we adopt, providing it be above five per cent.,

that schedule will not satisfy the constitutional re-

quirements of the plaintiff in this case’? (R. 64).

NAR E REE TR ORE SOS LIONEL RY BE

Fundamental fallacy of the appellants’ brief.

The brief of the appellants in this Court is based funda-

mentally on the unfounded assumption that the District

Court ‘‘aecepted a spot reproduction of January 1, 1924

(the time of the inquiry), as the exclusive measure of fair

value’’ (Brief, page 48). At other points in their brief, the

‘*straw man’’ set up and attacked by the appellants is that

Judge Geiger accepted ‘‘spot reproduction cost’’ as the

**dominant and exclusive measure of value’’ (See pages 50,

40, 37).

Although Judge Geiger discussed and analyzed recent

decisions of this and other Courts, as indicating that sub-

stantial, and perhaps dominant, weight should be given to

costs, wages and conditions at the time of the inquiry (R.

59-64), nevertheless, when he came to make his determina-

tion of value for the purposes of the case, he found that, as

above quoted and hereinafter shown in detail, he ‘* was not

confronted with the problem of fixing a valuation within

the range of dispute upon spot reproduction’’ (R. 64).

The inadequate sum on which the Commission proposed

to allow a seven percent. return.

The appellant Commission had formulated its rate

schedule to yield a return upon $15,260,400 (R. 32), and

had ruled that seven per cent. was the ‘‘reasonable rate of

return’’ (R. 31) upon such value. The Commission frankly

stated its realization, however, that

‘“*the schedule of rates herein authorized may,

for the immediate future, produce a rate of return

below seven per cent.’’ (R. 31);

but expressed the belief that this condition might be re-

lieved by ‘‘the continued rapid growth’’ of the company’s

business.

The District Court found that if, in fixing a valuation

of $15,260,400, the Commission had ‘‘considered’’ ‘‘con-

struction costs, conditions, wages and prices affecting

value’’ as of 1923 and 1924, ‘‘its consideration has led it to

ignore it’’ (R. 62).

The past practices and the present opinion of the Com-

mission (R. 23-25) were deemed by Judge Geiger (R. 62)

to contain considerable evidence that the figure of $15,260,-

400 had actually been reached by applying, to its inventory,

prices averaged over a ten-year period, and then deducting

“accrued depreciation’? and whatever further sum the

Commission thought necessary, in order to bring the value

down to the desired figure. The lowest estimate, however,

that was presented by any witness in the District Court, on

the basis of prices and wages averaged over a ten-year

period which included the year 1923, was that of the Com-

mission’s own chief engineer (Mr. Carter), and on this

basis his figure (depreciated) was in excess of $17,000,000

(R. 132), exclusive of going value, water rights, and eash

working capital. So even as to replacement costs based on

prices and wages averaged over a ten-year period which

included the time of inquiry, the District Court was bound

to and did conclude that the Commission could not have

reached the minimum figure of $15,260,400

*“*except conjecturally, as I see it, in one of two ways:

either the Commission cut down, beyond any limit

that was possible upon the evidence, the valuation as

indicated upon a ten-year price level, or it substan-

tially ignored every other element of value, such as

going-concern value”’ (R. 63).

The way in which the Commission’s figure was evidently

reached, in such a manner as virtually to exclude the possi-

bility that any weight was given to unit prices and wages in

1922, 1923, or 1924, is described and discussed on pages

% to 99 and 111 to 113, post. The unit prices used by the

Commission were evidently obtained from averages which

excluded those years and gave dominant weight to pre-war

costs,

+ wetietNae esa 4 6 “ .

—e <n

Evidently because the rate schedule complained of seemed

so clearly confiscatory, Judge Geiger did not prepare a writ-

ten opinion, and his oral opinion in this ease (R. 56-64) has

not been officially reported. In Ashland Water Co. v. Rail-

road Commission of Wisconsin (7 Fed. [2nd] 924; 25 Rate

Research, 275), decided by the Special Statutory Court, his

views as to the valuation of the property of a water com-

pany were set out with some care. They are quoted on

pages 69 and 70, post, and give no support to the claim that

he holds that **spot’’ reproduction cost should be given ex-

clusive weight, in ascertaining present value.

The Commission’s January and November valuations of the

appellee’s property in 1923.

On January 2, 1923, the Indiana Commission (Re Jn-

dianapolis Water Co., P. U. R. 1923D, page 449), after

**six months of hard and painstaking work’’ by its staff

(R. 240) and after hearing evidence presented by the com-

pany and by the City of Indianapolis, fixed the value of

the property of the present appellee at $16,455,000, made

up as follows:

Tangible property (fixed capital) $14,904,000

Going value and water rights 1,416,000

Working capital 135,000

Total fixed by order of January 2, 1923,

in Case No. 6613 $16,455,000

The valuation thus fixed by the Commission, on January

2, 1923, was $5,727,193 below the reproduction cost (less

depreciation) figure presented in that case in behalf

of the company (R. 224, 225), this total of $22,182,193 having

been based on construction costs, wages and prices affect-

ing value as of October 1, 1922. Concerning its valuation

of $16,455,000 in January of 1923, the Commission said (R.

239) :

aan

‘*There is no doubt that the element of original

cost has been recognized sufficiently. There is doubt

as to whether the element of reproduction cost new

today has been given sufficient weight’’ (Italics ours).

Eleven months later, on November 28, 1923 (Re Indian-

apolis Water Co., P. U. R. 1924B, page 306), the Com-

mission fixed the value of the company’s property at $15,-

260,400 (R. 32), made up as follows:

Tangible property (fixed capital) $14,280,400

Going value, working capital and water

rights (R. 22 980,000

Total fixed by order of November 28,

1923, in Case No. 7080 (R. 32) $15,260,400

From January to November, in 1923, the Commission

itself admitted, ‘‘the general trend of commodity and labor

prices has been slightly upward’’ (R. 25). The Commis-

sion’s valuation of all the property by order of November

28, 1923, was $4,371,883 less than the reproduction value

(less depreciation) proved before it as of May 1, 1923, for

the physical property alone, exclusive of going value, water

rights, and cash working capital (R. 25). Not only this,

but the Commission’s valuation by order of November 28,

1923, was actually $1,194,600 less than its valuation by

order of January 2, 1923, although additions and better-

ments had been made since October 31, 1922 (the valua-

tion date under the January order). Giving no effect to

net additions or to immediately projected expenditures (R.

4-5), the tangible property was taken at $623,600 less, and

the going value, working capital and water rights were

merged into a sum $571,000 less, in November as compared

with January.

On the basis of this valuation, so sharply diminished

without explanation, the Commission fixed the rates which

Pe Rey we Sees

PES IE TRIE TET ONE LLY OTE IN RY INES AEST TE HN A i ym

ERIN A Reese Serie cee enero Nests e:

were duly adjudged confiscatory by the District Court, on

the basis of Judge Geiger’s independent judgment that the

property was worth at least $19,000,000 on any rational

theory of valuation and that the rates would not yield more

than five per cent. thereon.

Summary of the issues of fact

For possible convenience, we present preliminarily a

‘*birdseye view’’ of the issues to be discussed in detail:

As to value:

Judge Geiger’s finding of a reproduction value (less

depreciation) of $23,000,000 to $25,000,000 at 1923-24

‘*spot’’ prices, and his determination that the present

value ‘‘was and is not less than $19,000,000”’ for the pur-

poses of this case, may be compared with the following,

which comprise all of the estimates before the Court which

had been based on unit prices which gave any weight what-

ever to costs in 1923 or 1924:

Mr. Hagenah’s estimate of reproduction value

(less depreciation) at wages and prices as

of January 1, 1924 (R. 180; fol. 218)..... $25,404,026.

Mr. Elmes’ (Sanderson and Porter’s) estimate

of reproduction value (less depreciation)

at wages and prices as of January 1, 1924

CE BONED Sawada eke aun veeeeeeReenes ke 25,357,907.

Mr. Carter’s estimate, as chief Engineer for

the appellant Commission, of the reproduc-

tion value (less depreciation) at wages and

prices as of January 1, 1924 (R. 132) (add-

ing going value, cash working capital and

water rights at only the Commission’s al-

lowance in Case No. 6613)............... 21,051,000."

Average 1923-24 reproduction value (less de-

—_ (obtained by averaging the

1 This figure, as shown on page 30, post, included the land at substantially

feec than tha tmdiennted tactemany ae ta tte market walne.

only three estimates presented to the Dis-

SE ED <a 6'e nau poe eka hesan ah os $23,937,644.

Mr. Hagenah’s estimate of reproduction value

(less depreciation) at wages and prices

averaged for three-year period ended De-

cember 31, 1923 (R. 180; fol. 218)........

Mr. Elmes’ estimate of reproduction value (less

depreciation) at wages and prices aver-

aged for three-year period ended Decem-

OE es SOE CO SRD is oe we veka cada nade

Average of above uncontradicted estimates of

reproduction value (less depreciation) at

wages and prices averaged for three-year

period ended December 31, 1923..........

Mr. Hagenah’s estimate of reproduction value

(less depreciation) at wages and prices

averaged for five-year period ended De-

cember 31, 1923 (R. 180; fol. 218)........

Mr. Elmes’ estimate of reproduction value

(less depreciation) at wages and prices

averaged for five-year period ended De-

eember ZL, 1925 (i. 194)... 0. ces

Average of above uncontradicted estimates of

reproduction value (less depreciation) at

wages and prices averaged for five-year

period ended December 31, 1923..........

Mr. Hagenah’s estimate of reproduction value

(less depreciation) at wages and prices

averaged for ten-year period ended De-

cember 31, 1923 (R. 180; fol. 218)........

Mr. Elmes’ estimate of reproduction value

(less depreciation) at wages and prices

24,360,358.

23,927,372.

24,143,865.

25,387,799.

24,823,103.

25,105,451.

29,359,354.

a a

averaged for ten-year period ended De-

commer G1, 2925 (Hi. 198)... 2. ccc ease $21,891,224,

Mr. Carter’s estimate, as chief engineer of the

appellant Commission, of the reproduction

value (less depreciation) at wages and

prices averaged for ten-year period ended

December 31, 1923 (R. 132) (adding going

value, cash working capital and water

rights at only the Commission’s allowance

OR a A yy cn oes cack vealed ss 18,557,370."

Average of above estimates of reproduction

value (less depreciation) at wages and

prices averaged for ten-year period ended

ONE OE. SU a dike ceca ac ana cle dws 20,935,983.

Average of all of the above estimates of the re-

production value (less depreciation) of the

appellee’s property, at the various price

levels indicated (the above being all of the

estimates presented which gave any weight

or effect to the unit prices, wages or con-

struction costs prevailing at any time dur-

ing 1922, 1923, or 1924) ..........ccecee0. 23,311,951.

The physical property only (less depreciation) was es-

timated by Mr. Hagenah at $22,669,026 (R. 180; fol. 218),

and by Mr. Elmes at $22,526,601 ($23,202.951 less $233,306

for cash working capital and also less $443,044 as Mr.

Elmes’ estimated cost of restoration) (R. 194). Adding for |

working capital, going value, and water rights the lowest

estimates supported by the uncontradicted opinion testi-

mony of any witness (viz., $2,000,000 for going value, $500,-

000 for water rights, and $235,000 for working capital), the

estimates of 1923-24 replacement value (depreciated) be-

come $25,404,026 and $25,261,601. Adding instead for these

1 As shown on page 29, post, Mr. Carter’s ten-year average did not include

or give effect to the “peak” prices prevailing in 1917 or 1920 (R. 132).

three items the appellant Commission’s inadequate Janu-

ary (1923) figure of $1,551,000 (R. 219), these appraisals

become $24,220,026 and $24,077,601, respectively.

The Commission’s own chief engineer (Mr. Carter) val-

ued the physical property ouly (less depreciation), at 1923

prices, at $19,500,000 (R. 132). If we add to this the Com-

mission’s own January allowance for going value, work- ‘

ing capital and water rights, Mr. Carter’s valuation be-

comes $21,051,000, as the lowest estimate before the Court

as to the 1923 value of the appellee’s property (depreci-

ated). If instead we add for these three elements the lowest

figures supported by opinion testimony, the $19,500,000

figure for the physical property becomes $22,235,000 for

all the property, after deducting Mr. Carter’s estimate of

depreciation, consisting of both the actual physical deteri-

oration and his estimate of depreciation for age (R. 130).

Even on the lowest basis possible that would give any

weight whatever to 1922, 1923 or 1924 wages, prices and

costs (viz., using Mr. Carter’s ten-year average prices end-

ing December 31, 1923, and deducting his estimate of de-

preciation), Mr. Carter’s value was $17,006,370 for the

physical property (R. 132), and $18,557,370 if going value,

working capital and water rights are added at even the

Commission’s own meager figure for these elements, in

January of 1923. If to Mr. Carter’s figure for the physi-

cal property only, at ten-year averaged wages and prices,

there were added for going value, working capital and water

rights the lowest estimates supported by the opinion testi-

mony, Mr. Carter’s figure would become approximately

$19,741,370.

As to rate of return:

The Commission ruled that seven per cent. was suffi- yi

cient (R. 31), and then proceeded to fix rates which it ad-

PRALINE ert

mitted would yield less than seven per cent. ‘‘for the im-

mediate future’’ (R. 31), figured upon its meager ‘‘rate

base.’’

The proofs, as reviewed on pages 117 to 123, post,

showed the reasonable need for a return of eight per cent.

upon present value.

As to earnings:

The difference between the parties as to 1924 operating

expenses was $95,791.27. Mr. Metcalf, the consulting en-

gineer for the company, estimated operating costs for

1924 (based closely upon actual costs to the time of trial

in 1924) at $1,198,000 (Exhibit No. 23; R. 248; fol. 301).

Mr. Perk’s estimate for the City (Exhibit No. 59; R. 333-

334) was $1,102,208.73.

The difference between the parties as to the 1924 gross

revenues was $67,758.92. As to the income, Mr. Perk as-

sumed, without warrant in the record or outside it, an in-

crease of $357,256.56 (R. 333) in the appellee’s gross reve-

nues. His estimate for 1924 (Exhibit No. 59; R. 333) was

therefore $2,223,758.92. The reliable estimate of Mr. Met-

ealf (Exhibit No. 26; R. 254), from his long familiarity

with the company’s business, was $2,156,000 ($2,127,000

plus $29,000 of non-operating revenue; R. 254). Mr. Jir-

gal’s analysis of the company’s accounts sustained Mr.

Metealf’s figure (Exhibit No. 17; R. 245).

The net difference between the parties as to net earn-

ings for 1924 was $163,550. Mr. Metealf’s estimate of net

earnings for 1924 was $958,000 (Exhibit No. 26; R. 254).

By assuming too great an increase in the company’s

revenues and by omitting various items of operating ex-

penses, Mr. Perk estimated the 1924 net earnings at $1,121,

590 (Exhibit No. 59; R. 334-335).

Mr. Perk’s estimate of 1924 operating expenses did not

include (1) the $25,000 of annual provision, or any provi-

sion, for the expense of Commission and Court hearings;

or (2) the $17,800 of tax amortization, authorized by the

Commission’s own order. Mr. Perk also cut the annual

provision for depreciation (retirement expense) from

$135,000, the amount apparently sanctioned by the Com-

mission (R. 31) and by its accountant (Mr. Boggs; R. 308),

to $107,619.41—a decrease of $27,380.59. The remaining

difference represents decreased allowance for 1924 taxes.

The few items in controversy as to operating expenses

and revenues are discussed on pages 123 to 129, post.

Net return which would be allowed under the Commission’s

TEER STRANGE Tae ONE TO mena Rema

rates. :

A return of eight per cent. upon the minimum valuation a

of $19,000,000 found by the District Court would amount E

to $1,520,000. To net the appellee this amount, by provid- *

ing for the additional Federal income tax at 121% per cent.

on that amount of annual return (only $77,538 having been

included for Federal income tax in Mr. Metealf’s 1924 Ex-

hibit), the’ appellee’s net earnings would have to amount

to approximately $1,576,747., over and above all operating

expenses and taxes. g

As esusnated by Mr. Metealf at $958,000 (R. 254), the

appellee’s net earnings for 1924 would fail by $618,747, or

to the extent of approximately 39 per cent., to yield the

appellee an eight per cent. return.

Even as miscalculated by Mr. Perk, for the City, at

$1,121,550 (R. 334-335), the appellee’s net earnings for 1924

would fail by $455,197, or to the extent of nearly 30 per

cent., to yield the appellee an eight per cent. return.

On the minimum valuation found by the District Court,

the net earnings for 1924, as shown by the company’s wit-

nesses (almost exactly the actual), would amount to no

more than 5.04 per cent. (R. 254). Those net earnings

would amount to an eight per cent. return upon no more

than $12,000,000 of property, or a seven per cent. return

upon no more than $13,690,000, which is $1,570,400 less

than the Commission’s ‘*valuation.’’

The exhibit and calculations of the Commission’s ae-

countant showed exactly the same gross income figures as

were presented by the company (R. 146); but even by

swelling absurdly the gross revenues, as imagined by Mr.

Perk for the City, and by cutting from operating expenses

various sums allowed by the Commission itself, the appel-

lants’ brief cannot figure net earnings in excess of $1,121,-

530, which would amount to a return of no more than 5.9

per cent. on the minimum value fixed by the District Court.

Upon a sum in any way representative of the full value

of the appellee’s property as indicated by the District Court

(say $23,000,000), the rates complained of would not yield

more than 4.2 per cent.

The Commission’s January determination as to the ap-

pellee and its well-maintained and efficient prop-

erties.

The Commission, in its opinion and order in Case No.

6613, found and stated inter alia:

(i) The appraisals submitted by the Com-

mission’s staff *‘represented six months of hard and

painstaking work’’ (R. 240);

(ii) The engineering firms employed by the Com-

pany ‘‘are each of national reputation and unques-

tioned standing’’ (R. 240);

“ SON RN ORR AAT RE DER eR SNL Nd Ft

eS aoa

(iii) The whole plant ‘‘has been planned and con-

structed with an ingenuity and economy and fore-

sight for the future needs of the city that is un-

equalled under any similar circumstances anywhere

in the country’’ (R. 237);

(iv) Indianapolis is probably the ‘‘most unfor-

tunately situated of any large city so far as the nat-

ural available water is concerned, yet the possibili-

ties of an insignificant stream flowing through a

thickly populated country-side have been so

thoroughly developed that Indianapolis now has,

and if it doubles in population will have, an ample

supply of potent (potable) water at a cost much

below the cost in many other cities more favorably

located’’ (R. 237);

(v) This ‘‘development of its water rights, which

has been accomplished by the Water Company, at

times with extreme difficulty, does actually largely

increase the value of the property’’ (R. 237);

(vi) *‘It is a matter of common knowledge that

the Indianapolis Water Company is one of the best

public utilities in the United States. Its operating

efficiency and maintenance is practically 100 per cent.

—its capacity is amply sufficient for the needs of the

city—it has 53,000 consumers and 475 miles of mains.

There are practically no complaints from private

consumers or from the City as to the purity of the

water, its sufficiency or pressure’’ (R. 239).

Standing of the appellants

Although the City of Indianapolis has no power or duty

as to the fixation of the appellee’s rates (Re Englehard and

Sons Co., 231 U. S. 646) and no relief is in any way sought

against the municipality, the latter injected itself as an in-

tervenor (R. 36-41) into this action, to which it was not a

necessary party, and hardly a proper party.

aay

POE RARER

raerer tt ec

age

City of New York v. New York Telephone Co.,

261 U. S. 312;

Consolidated Gas Co. of New York v. Newton,

256 Fed. 238; affd. 260 Fed. 1022; remanded

for dismissal, 253 U.S. 219;

City of Mt. Vernon v. New York Interurban

Water Co., 115 App. Div. (N. Y.) 658;

Hoyne vy. Chicago Electric Ry. Co., 294 Ill. 413;

Morrell v. Brooklyn Borough Gas Co., 231 N. Y.

405 ;

City of New York v. New York Edison Co., 196

App. Div. (N. Y.) 644;

Federal Equity Rule No. 37.

The City of Indianapolis has participated actively in the

various proceedings before the Indiana Public Service Com-

mission, including both the hearings which led to the Com-

mission’s valuation order of January 2, 1923, and the hear-

ings which eventuated in the rates here complained of (R.

13). The municipality presented what it moderately de-

scribes as ‘‘a voluminous mass of evidence”’ as to the prop

erty (R. 38) and ‘‘a large mass of evidence’’ as to the earn.

ings (R. 39).

Having been defeated in many of its contentions on the

facts and the law, by the Commission, the City announced

its intention to contest and review in the State Courts the

Commission’s November findings and order (R. 39). The

City instituted an action for this purpose, early in 1924,

but has not prosecuted any such action, as to either the

January valuation or the November valuations; it seeks in-

stead to review such orders and valuations collaterally, as

an intervenor in this action.

The City’s statement of its reasons for intervention

The City’s reasons for intervention here were accurately

but rather startlingly stated by it (italics ours):

‘‘Your petitioner is informed and believes * * *

that such evidence as it is prepared to produce ona

hearing of this cause, can be presented without em-

barrassment only by the City or by some party not

estopped or embarrassed by the order of the Public

Service Commission’’ (R. 40).

“Tt is believed, and therefore averred, that said

Public Service Commission, because of such facts and

its knowledge of them and because of its order, would

be embarrassed by and would be estopped from mak-

ing full defense in this cause and would be embar-

rassed by and estopped from introducing certain im-

portant evidence in defense’”’ (R. 39).

‘

Bed

‘‘That said Commission is a body exercising

| quasi-judicial, legislative and administrative func-

tions, charged with equal duties of protecting the

utility and the public in controversies between them,

and as such has, under the law creating and con-

trolling it, no financial or other interest of a material

character in defending against the injunction sought

| by the complainant water company’’ (R. 39).

SAE LSI TR MR THERM EIR BONER Nee Pee a SET AE

The City seeks collateral review of the Commission’s order |

and valuation *

On its own motion the City came into this cause as a de-

fendant, and it is therefore clearly bound by the testimony

of the defense witnesses. As an intervenor, under Rule 37,

its attitude in this action must be subordinate to and con-

sistent with the defense of the order and findings made by

the real defendant. (See cases cited, supra.)

The City may not intervene and then appeal for the

FMS

avowed purpose of asserting attitudes which the real defen-

dant would be both embarrassed and estopped in contend.

ing herein. The City may not rove about in this record

as a ‘“‘free lance,’’ siding with the Commission on the

points decided against the company, repudiating the

Commission’s findings on other points, accepting some of

the Commission’s witnesses, impeaching others, and at-

tempting in this manner to attack and review collaterally

the Commission’s findings and order. Cf. Central Trust

Co. v. McGeorge, 151 U. 8. 129; Re Metropolitan Railway

Receivership, 208 U.S. 90, and other cases cited, supra.

Under the various subdivisions of this brief, we shall

show that although the only real, necessary or proper de-

fendant herein is the Public Service Commission, the only

real appellant here is the City of Indianapolis, which seeks

to divert attention from the Commission’s flagrant errors

of determination against the company by renewing in this

Court the contentions as to which the Commission ruled

against the City, and as to many of which the Indiana Su-

preme Court had previously ruled against both the Com-

mission and various municipalities of the State.

The appellants’ brief, although filed ostensibly in the

name of both the City and the Commission, proceeds almost

exclusively along lines as to which the Commission would

be both embarrassed and estopped, should it try to make

any such contentions.

We submit that the Commission is estopped as to these |

matters, as the City has alleged it to be (R. 39-40), and that

the City, as an intervenor, may not here attack or review

the Commission’s findings, along lines reviewable at its in-

stance only in the State Court (R. 39).

’

PE PA FRE

Standing of the witnesses

The identity and experience of the witnesses called by

the respective parties furnish a reliable guide to the merits

of the issues.

For the City of Indianapolis:

On valuation and rate of return (R. 31), the Commis-

sion must have disregarded the facts presented by its own

chief engineer (Mr. Carter) and accepted the guidance of the

Bemis’s, son and father. Even on rate of return, Professor

Edward W. Bemis was heralded by the Commission as ‘‘a

competent witness on the subject’’ and his estimate of seven

per cent. was accepted exactly (R. 31).

Professor Bemis and his son Walter were the only wit-

nesses called by the City as to the appellee’s property.

Walter has had experience only in appraisal work for his

father (R. 156) ; aside possibly from Professor Bemis’ con-

nection with the Cleveland water department (which ended

in 1909), neither has had operating experience entitling

him to speak from knowledge, judgment or experi-

ence (R. 156, 162). Their testimony was only in support of

their theories that the ‘trate base’? should be a grossly-

abbreviated ‘‘original cost’’; neither of them gave testi-

mony that constitutes ‘‘a useful guide’’ to the present prop-

erty, its condition, or its value. Their whole testimony

came fairly within the disqualification so trenchantly pro-

nounced by Circuit Judge Lewis in

Westinghouse Electric and Mfg. Co. v. Denver

Tramway Co., 3 Fed. (2nd), 285.

The only witness called by the City as to the appellee’s

operations, to give support to the City’s conjectured in-

crease of the appellee’s revenues and decimation of its ac-

2 TPE ei SV RY

Ae ge II ON

pRSera ETT WO TP AEE Ce

tual expenses, was Benjamin Perk (R. 146), whose only

qualification was that he had been ‘‘on the accounting staff

of the Commission from 1917 to 1919, with the exception of

ten months,’’ and that he has since been employed by

others to do similar work (R. 146).

For the Commission:

The only witness of practical experience called by either

of the present appellants was the Commission’s chief en-

gineer, Mr. Earl Carter, who had been with the Commission

since 1917 (R. 125). Necessarily, the brief now filed in the

name of the Commission and the City is mainly devoted to

**diserediting’’ Mr. Carter’s testimony and to challenging it

as ‘‘self-impeaching’’ (R. 63).

As already shown, the testimony of Mr. Carter showed

for the appellee’s physical property alone a valuation of

$19,500,000, based on 1923 construction costs, wages and

prices (R. 132), or a valuation of $21,051,000,’ if to Mr.

Carter’s ‘‘bare-bones’’ figure were added even the Com-

mission’s meeger allowance for working capital, going

value, water rights, ete. (R. 242).

In finding a value of no more than $15,260,400, and lim-

iting the appellee’s rates accordingly, the Commission

plainly ignored both the law and the testimony of its own

chief engineer, whom it sponsored before the District Court

as a competent and trustworthy witness (R. 125).

In this Court, counsel for the Commission and the City

try to justify their repudiation of Mr. Carter’s figure by de-

ducting therefrom numerous theoretical and arbitrary de-

ductions urged by the Bemis’s, father and son, unrelated

to present value, and rejected even by the Commission in

its quasi-judicial capacity.

1 As shown on page 30, post. these figures do not include land at present

market value.

>! £3

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rate taatin Le EEE RAEN LIL AE LEA DE OT HeAI,

The only other witness called by the Commission was

its accountant, Mr. Boggs (R. 145), who presented data as

to the early corporate history of the appellee, and also an

audit of operations from January 1, 1923, to March 31, 1924

(R. 145, 146, 308).

The exhibit embodying this audit was stated by him to

show *‘the identical gross income figures for 1922, 1923, and

1924 that are shown by Mr. Jirgal’s audit in behalf of the 4

company”’ (R. 146).

For the company:

The engineering firms presenting testimony in behalf of ;

the company were admitted by the Commission to be ‘each $

of national reputation and unquestioned standing”’ (R. 240), :

based on many years of practical experience. The witnesses ;

included :

Mr. William J. Hagenah, whose appraisal work is so

well-known for its conservatism and reliability that he fre-

quently is employed by municipal ies and commissions

(R. 70).

Mr. Cecil F. Elmes, Middle Western manager of the well-

known firm of Sanderson & Porter, consulting engineers

and utility operators, himself an engineer of international

experience (R. 91).

nite,

REIT ERLE IEEE GION R RS

Mr, Leonard Metcalf, a distinguished engineer (now de-

ceased) who long had specialized in water works and sani-

tary engineering, and had been familiar with the appellee

and its operations and costs, as its consulting engineer

since 1907 (R. 114).

Mr, John C. McCloskey, who had been in the real estate

business in Indianapolis for thirty years, and has acted as

appraiser for the State (R. 124). He wes the only witness

called by any one to testify as to the present market value

of the land, and it cannot be claimed that the Commission’s

valuation, or even the $19,500,000 figure presented by the

Commission’s engineer for the physical property (depre-

ciated), gave effect to, or took into account, the market

value of the company’s land. (See page 30, post).

Mr. John Jirgal, a certified public accountant, who pre-

sented various accounting tabulations from the books, as to

expenses, revenues, taxes, and the like (R. 110, 248, 244,

245).

ARGUMENT

THE TRIAL COURT’S VALUATION OF NOT LESS THAN

$19,000,000 WAS ON A MINIMUM AND MOST CONSERVA-

TIVE BASIS.

In refusing to allow the appellee to put in force the

rate schedule which the owners and managers of the prop-

erty had formulated in the exercise of their sound business

judgment, the Commission disregarded at least two con-

stitutional restraints upon its regulatory jurisdiction:

(1) The Commission had no power or authority

to interfere with the rates promulgated by the com-

pany, unless and until the Commission found and

determined, from ihe evidence, that the proposed

rates would be unreasonable and excessive’; and

a Cea

Walker Brothers Catering Co. v. Detroit City Gas Co., 230 Mich. 564;

Coplay Cement Mfg. Co. v. Public Service Commission, 271 Pa. 58; 114

Atl. 649; Illinois Bell Telephone Co. v. Commerce Commission, 304 Ill. 357;

136 N. I. 676; 306 Ill. 109; 137 N. E. 449; Wichita R. R. and Light Co. v.

Public Utilities Commission, 260 U. S. 48; Streator Aqueduct Co. v. Smith,

295 Fed. 385; Public Service Commission v. Pavilion Natural Gas Co., 232

N. Y. 140; 133 N. FE. 427; City of Edwardsville v. Illinois Bell Telephone

Co., 310 Ill. 618; 142 N. E. 197.

EP ER tie os

(2) In exercising ‘‘the delicate and dangerous

function’’’ of fixing new rates to be substituted for

those representing the business judgment of the

owners of the property, the Commission could not

make them such as to yield less than an adequate

return upon the value of the property at and after

the taking effect of the new rates.

In adopting the sum of $19,000,000 as a minimum valu-

ation for the purpose of testing the confiseatory character

of the rate limitations in controversy, the learned District

Judge did not fix what he regarded as the full present

value of the appellee’s property, but accepted a figure

which the appellee had recognized as below the realm of

fair controversy but sufficient to demonstrate the inade-

quacy of the Commission’s rates. The proofs called for,

and would clearly have sustained, a figure substantially in

excess of $23,000,000, as Judge Geiger indicated and as

we will proceed to show.

The rule of present value

The value of utility property, at the time of its use in

the publie service, is not controlled by any artificial rules

or formulas; any facts relevant to its ascertainment

in the particular case must be given reasoned, rea-

sonable and actual consideration; but value at the time

of inquiry is not measured or determined by cost at the

time of original purchase or construction. ‘*Reproduction

value is not a matter of outlay, but of estimate,and * * *

proof of actual expenditures originally made, while it

would be helpful, is not indispensable®.”’ If much time has

elapsed since original purchase or construction, original

cost is “‘not a useful guide’’ to present value.

1 City of Knoxville v. Knoxville Water Co., 212 U. S. 1, 18; Louisiana Hater

Co. v. Public Service Commission, 294 Fed. 954, 957.

? Ohio Utilities Co. v. Public Utilities Cominission of Ohio, 267 U. S. 359.

‘

Tea yap.

CARTS Bay

DSRRA NOS

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Although the historic rule of value is embodied in the

maxim, recently quoted by this Court, that ‘‘the worth of

a thing is the price it will bring,’’ both the common law

and our statute law have, in many relationships, recognized

that if the property has not an ascertainable market value

(a contemporaneous sale price established under cireum-

stances which make it a fair criterion of the present worth

of the property), ‘‘other evidence is resorted to’’; and

‘‘cost of reproduction at the date of valuation’’ has come

to be recognized as the starting-point and the most influen-

tial factor in giving ‘‘due regard to construction costs, con-

ditions, wages and prices affecting value’’ at the date of the

inquiry.

Standard Oil Co. v. Southern Pacific Co., 268

U. S. 146;

State of Missouri ex rel. Southwestern Bell Tele-

phone Co. v. Public Service Commission of

Missouri, 262 U. S. 276;

Ohio Utilities Co. v. Public Utilities Commission

of Ohio, 267 U.S. 359;

Brooks-Scanlon Corporation v. United States,

265 U. S. 106, 125;

Bluefield Water Works and Improvement Co.

v. Public Service Commission of West Vir-

ginia, 262 U. S. 679;

Monre Gas Light and Fuel Co. v. Michigan

Pub.uc Utilities Commission, 292 Fed. 139;

(Spee. Stat. Ct.) ; ruling reaffirmed on further

hearing: Fed. (2nd) ——; decided Feb-

ruary 27, 1926;

Matter of Peoples’ Gas and Electric Co. of Os-

wego v. Public Service Commission, 214 App.

Div. (N. Y.) 108;

a ™ PEL SIA en ennerenaneats

oy aaa

The Van Wert Gas Light Co. v. Public Utilities

Commission of Ohio, 299 Fed. 670;

Roanoke Waterworks Co. v. Commonwealth of

Virginia, 124 8. E. 652 (Va.);

New York Telephone Co. v. Prendergast, 300

Fed. 822 (Spee. Stat. Ct.); S. C. on further

hearing: Fed. (2nd) ; decided

March 10, 1926;

Petersburg Gas Co. v. Petersburg, 132 Va. 82;

Consolidated Gas Co. v. Newton, 267 Fed. 231,

236; 258 U. S. 165;

City of Erie v. Public Service Commission, 278

Pa. St. 512; 123 Atl. 471;

Citizens’ Gas Co. of Hannibal v. Public Service

Commission of Missouri, 8 Fed. (2nd) 632;

"Yzabethtown Gas Light Co. v. Board of Pub-

lic Utility Commissioners of New Jersey, 111

Atl. 729;

City of Fort Smith, Ark. v. Southwestern Bell

Telephone Co., 294 Fed. 102; —— U.S.

46 Sup. Ct. Repr. 206; 70 L. Ed. 236; affirm-

ance by this Court on January 25, 1926.

The law of the State of Indiana, which should control

both of its creatures (the City and the Commission), is in

accord with the prevailing State and Federal rule on this

subject, 4s above summarized.

Columbus Gas Light Co. v. Public Service Com-

mission of Indiana, 193 Ind. 399; 140 N. E.

538.

As to the property of water companies, the law as to the

basis of its valuation was settled by this Court in the Den-

ver Water Company case (246 U.S. 178):

EGS TSP T a Ae AG CONE Radin OS BI

PR RIE AR RGN RI

‘*What we have said establishes the propriety of

estimating complainant’s property on the basis of

present market value as to land and reproduction

cost, less depreciation, as to structures.”’

(A) The Trial Court’s minimum valuation of not less than

$19,000,000 is less than the sums shown by the un-

contradicted evidence as to the various elements of

the property:

This Court has held, in the Ohio Utilities Company case,

and the appellants’ brief admits (page 55), that reproduc-

tion cost at present wages and prices must be given not

only dominance, but controlling and exclusive weight, where

there was before the fact-finding tribunal no other evi-

dence pertaining to present value. Even the appellants ad-

mit that uncontradicted evidence ‘‘cannot be capriciously

disregarded.’’ The proofs before Judge Geiger may ap-

propriately be analyzed, in first instance, according to

this test:

The facts

The proofs submitted to the District Court, in relation

to the 1923-24 value of the company’s property, were of two

kinds:

(1) Appraisals based on ‘‘construction costs,

conditions, wages and prices affecting valye,’’ as of

1923 and early 1924; and

(2) Appraisals based on the application, to the

December 31, 1923, inventory, of unit prices averaged

over some period of time, either a period averaging

the present price level or a period giving substantial

or even dominant weight to pre-war rather than pres-

ent costs.

All of the various estimates which gave any weight

whatever to wages, prices and construction costs during

Pera YEPEEETeIREre:

1922, 1928, or 1924, were summarized on pages 8 to 11, ante;

and $19,000,000 was shown to be a most conservative and

minimum figure.

The decree of the District Court in fact found (R. 56)

that the appellee had sustained and proved the material

averments of its complaint, which included an allegation

that (R. 5)

‘* if the ‘spot’ value of labor and material during the

year 1923 should be applied in determining the fair

value of its property owned throughout that year,

and used and useful in its public service business the

fair value of such property was and is in excess of

$22,000,000’’ (R. 5).

As reviewed on pages 8 to 11, ante, this allegation was

abundantly supported, by the appellee’s evidence and even

by the testimony of the Commission’s own chief engineer.

Mr. Hagenah’s Exhibit No. 2 (R. 180; fol. 218) showed

$26,521,615 as the reproduction cost new of the property

at prices as of December 31, 1923. Less all depreciation,

this figure became $25,404,026. The same exhibit also gives

a comparison of his appraisal results at prices averaged

over three-year, five-year and ten-year periods, ended De-

cember 31, 1923. These figures, for the property depreci-

ated, range from $25,387,799 to $22,359.354 (R. 180; fol.

218).

Mr. Elmes’ Exhibit No. 10 (R. 194) gives his estimates

on similar bases, his figure as of December 31, 1923, being

$23,202,951 for the physical property plus $2,598,000 for

going value and water rights, less $443,044 of restoration

cost—a value of $25,357,907 for the total property as of

that date (R. 194).

We will proceed to show that acceptance of the lowest

figures shown by the uncontradicted testimony as to the

;

EDI LPS ELE ENO SY ON EEE EY A REN

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PEEIITY ELE PAIR EM

PETERS

Breer AERIALS RTE ER Dies

various elements of the property, would inescapably pro-

duce a total substantially in excess of $19,000,000 and

closely approximating $23,000,000.

(1) The structural property

The District Court’s minimum figure of $19,000,000 was

less than the undisputed testimony as to the value of the

physical property only, at 1923-24 prices, after deducting

depreciation but before making any allowance for going

value, for working capital other than materials and sup-

plies, or for water rights.

The following table shows the estimates given by the

only witnesses who testified as to present value:

Valuation of physical property only, at 1923-24 prices

Witness Present value

Replacement new (depreciated)

Mr. Hagenah for

I ian nacass $23,786,615 $22,669,026 (R. 180)

Mr. Elmes for

Company........... 22,341,706 21,898,662 (R. 194)

Mr. Carter for

Commission ........ 19,500,000 (R. 132)

Average ......... $23,064,160 $21,355,896

Messrs. Elmes, Hagenah and Carter also presented

various informative and corroborative estimates of the re-

placement cost of the December 31, 1923, inventory of phy-

sical property, priced on the basis of averages which gave

diminished weight and effect to the wages and prices pre-

vailing as of 1923. These estimates, at averaged unit prices,

were:

A RNIN Sot

SPCR e+

Valuation of physical property only, at averaged unit

prices

Five-year average ending 1923:

Present value

Replacement new (depreciated)

Hagenah for Company. . .$23,769,443 $22,652,799 (R. 180)

Elmes for Company..... 22,306,902 21,863,858 (R. 194)

Three-year average ending 1923:

Present value

Replacement new (depreciated)

Hagenah for Company. . .$22,682,204 $21,625,358 (R. 180)

Elmes for Company ..... 21,411,171 20,968,127 (R. 194)

Ten-year average ending 1923:

Present value

Replacement new (depreciated)

Hagenah for Company. . .$20,564,739 $19,624,354 (R. 180)

Elmes for Company ..... 19,375,023 18,931,979 (R. 194)

Carter for Commission .. 17,006,370 (R. 132)

On no basis which gave any weight whatever to 1923

wages and prices, did any witness present any estimate of

value which appraised the appellee’s physical property

only (less depreciation) at less than $17,006,370 (R. 132),

exclusive of going value, water rights, and working capital

other than materials and supplies. Even this figure was

testified to by the Chief Engineer of the appellant Com-

mission and was derived by him from a ten-year average,

beginning with January 1, 1914, which thereby gave pre-

dominant weight to prices before the post-war period.’

Yet even this minimum figure for the physical property

was nearly $2,000,000 above the total value which the Com-

mission placed upon all of the property.

_ In fact, as to the years 1917 and 1920, Mr. Carter did not prepare

his ten-y ar average by accepting the “peak” prices for those years

(R. 132), but included them at the average between the year preceding

and the year following (R. 132).

STRAIT aA TRIN LE NAT NI AE TAPES

Any reasonable allowance for going value, working

capital, and water rights, based on the testimony in this

case, would bring even this partly pre-war figure to ap-

proximately $20,000,000.

The District Court was clearly right in indicating that

the present value of the appellee’s property was fully $23,-

000,000, instead of the $19,000,000 adopted by it as sufficient

for the purposes of this case.

(2) Value of land (unimproved)

The appellee’s testimony as to the value of its land

(unimproved) as of the time of the hearing, was uncon-

tradicted in the District Court. The only testimony on

this subject was given by Mr. John McCloskey, a real estate

man of long experience, who has done appraisal work for

the State of Indiana (R. 124).

Mr. McCloskey’s land valuation was not attackeil and

stands uncontradicted, the only evidence of the market

value of the appellee’s land as of 1923 or January 1, 1924.

His total land values amounted to $3,014,647 (RR. 124, 261).

Mr. Carter’s figure of $19,500,000 for the physical property

included the land at $2,949,488 (R. 181), or $65,209 less.

Mr. McCloskey included no item for accumulation of right

of way of canal, made no allowance for the company’s ease-

ment over overflow lands above the dams, and included no

overhead upon the lands (R. 124 and 261). These elements

of the land Mr. Carter had valued at $280,000 (R. 128).

The figure used by Mr. Carter for land (R. 131) was,

therefore, $345,209 less than the uncontradicted testimony

as to the value of the land as of the date of the trial in the

District Court. Correcting Mr. Carter’s reproduction

value of $19,500,000 by adding the $345,209 which he left

out of the land value, we have $19,845,209 as the Commis-

sion’s chief engineer’s corrected appraisal of physical

property only (depreciated), at 1923 wages and prices.

ee eee a han ten tenst eettn nl Ie

(3) Undistributed structural costs (overheads)

There was no conflict of testimony in this case as to

the reasonable and proper allowance for the undistributed

structural costs (overheads). Chief engineer Carter, for the

Commission, testified to and used 15 per cent. (R. 126, 128,

133), and Messrs. Hagenah and Elmes testified to no higher

figure, although they showed that at least 15 per cent.

would reasonably be required for actual needs (R. 72, 81).

Mr. Elmes testified that he thought 15 per cent. was

‘dangerously low,’’ and that his company used twenty-five

per cent. for construction work (R. 93). Mr. Carter figured

his 15 per cent. upon all of the physical property except

materials and supplies (R. 133), and indicated that a higher

percentage would be necessary if the percentage was not

applied to a sum which included the land. In testifying

a to and using the allowance of 15 per cent., Mr. Carter

only followed common Commission practice and was sup-

porting the figure which the appellant Commission had

itself approved and deemed applicable to the appellee

(R. 229).

Although the witnesses and the Commission had agreed

upon a 15 per cent. allowance, which would amount to

about $2,500,000 (figured upon Mr. Carter’s minimum value

of physical property at 1923 prices), it is impossible to find

any trace of or allowance for these undistributed costs at

all, in the Commission’s valuation of $15,260,400 for all

the property.

TSAR RSG te ae a arenes

DEST TERETE SLE E NOE LIE PLE IRAE IIE OTITIS RMR:

Moreover, in view of the facts set out on pages 28 to 30,

ante, as to the testimony as to the 1923 value of the physical

property alone (the minimum figure, given by Mr. Carter, is

totalling $19,500,000), it would be difficult to find any fifteen /

per cent. included for these undistributed but actual costs,

in the $19,000,000 figure suggested by the Company, and

found by the Court, as sufficient for the purposes of this i

case,

Th aiePaeres

ee nn tel al

‘iui ta

It is now well established that the exclusion of these

items, or their reduction to amounts below what the evi-

dence justifies, is a serious error, on the part of a Com-

mission or Court.

In Ohio Utilities Co. v. Public Utilities Commission of

Ohio (267 U. S. 359), this Court reversed the Ohio Com-

mission for ignoring undisputed estimates of allowances

for undistributed costs, and said:

‘**Reproduction value, however, is not a matter of

outlay, but of estimate, and should include a reason-

able allowance for organization and other overhead

charges that necessarily would be incurred in re-

producing the utility.’’

In New York and Richmond Gas Co. v. Prendergast

(10 Fed. [2nd] 167; P. U. R. 1925 E, page 19), decided on

November 24, 1925, the Special Statutory Court took simi-

lar action, by way of increasing an inadequate allowance

by the Special Master and said:

**These costs are for actual expenditures. They

are inescapable outlays of money. They were prin-

cipally construction overhead charges but they were

actual costs and go into the fair value as would any

labor or material costs.’’

The nature of these elements of actual cost were ex-

cellently explained by Chairman Towers of the Maryland

Commission in Re Chesapeake and Potomac Telephone Co.,

P. U. R. 1916C, pages 925, 951. In faet, even the opinion

of the appellant Commission in the present ease (R. 17-19)

is a refutation of what the appellant did as to ‘‘strue-

tural overheads’’; it answers persuasively the arguments

now advanced by counsel for the Commission and the Ci‘y.

5 a ea

The allowance of fifteen per cent. shown by the undisputed

testimony would have been low

In fact, if the Commission and the District Court had

followed the undisputed testimony and allowed 15 per cent.

for these undistributed costs, that allowance would have

been on a most conservative basis.

In New York and Richmond Gas Company v. Prender-

gast (supra) the Special Master cut the allowance for these

items to 19 per cent., but the Special Statutory Court unan-

imously increased the allowance to 31 per cent.

In Milton v. McGowan W. Lt. & P. Co. (P. U. R. 1923A,

page 795), the Wisconsin Railroad Commission allowed 25

per cent. for these items.

In Re Idaho Power Company (P. U. R. 1923B, p. 52),

the Idaho Commission allowed for these items 31 per cent.

In The Bronx Gas and Electric Company ease, in

the New York State Supreme Court, the allowance for

undistributed structural costs amounted to 31 per cent. of

the cost of the tangible property, and the Appellate Divi-

sion, on February 21, 1924, unanimously affirmed these

findings (28 N. Y. State Dept. Repts., page 329; P. U. R.

1923 A, page 255; 208 App. Div. 780).

The New York State Public Service Commission, in

The Bronx Gas and Electric Company case, before it in

1915, appears to have allowed 34 per cent. for these items

(6 State Dept. Repts., pages 76, 94). The Commission re-

viewed various decisions in which allowances had been in-

eluded in appraisals of amounts aggregating from 20 to

2114 per cent. for contractors’ profits, engineering, supervi-

sion, administration, contingencies, ete., and from 10 to 20

per cent. for preliminary and development expenses, or-

ganization, interest and taxes (/d. pages 102-103).

In Okmulgee Gas Co. v. Corporation Commission (95

Okla. 213; 220 Pac. 33), the allowance for ‘‘overheads”’

was 20 per cent.

In Brooklyn Union Gas Company v. Prendergast (7 Fed.

[2nd], 628, 659), Judge Campbell allowed a little more than

20 per cent. for these undistributed structural costs.

In the valuation by the Great Britain Railway and

Canal Commission of the property of the National Tele-

phone Company, the Commission added 31.4 per cent. of

the reproduction cost of over ten million pounds sterling.

The ease is reported in 16 4A. T. € T. Co., Com. L. 491.

In the Kings County Lighting Company gas-rate case

(2 P.8. C. R., Ist Dist., N. Y. 659), years before the war,

the New York Commission allowed for these items 218

per cent.

Mr. L. R. Nash, in a pamphlet published in Stone &

Webster’s Public Service Journal, in October of 1912, en-

titled ‘* Valuation of Public Service Properties,’’ records

that:

**A special commission in Massachusetts used 23

per cent. in its valuation of the electric railway prop-

erties of the New York, New Haven & Hartford

Railroad. The Washington Commission has used 28

per cent. in an electric railway rate case. The Trac-

tion Valuation Commission used 25 per cent. in ap-

praising the Chicago surface railways. The Boston

Transit Commission found the actual cost of its

work of designing and constructing the Boston sub-

ways was 23.6 per cent. of the physical costs, not

including brokerage and some other costs encoun-

tered in private work.’’

In New York and Richmond Gas Co. v. Nixon (203 App.

Div. 860; 204 App. Div. 838, 894), decided in January of

1921, Ex-Justice Albert H. Sewell, formerly of the New York

~ ee ce ees Let CS AM mae 0 9

oe nitert S862 7

Appellate Division for the Third Department, allowed fif-

teen per cent. for these ‘‘overheads,”’ and the distinguished

official referee did so upon Mr. Hagenah’s testimony.

On pages 73 to 76, post, we will discuss briefly the un-

sound grounds on which the appellant Commission and the

appellant intervenor try to eliminate altogether the 15 per

cent. to which even the Commission had heid the appellee

to be entitled (R. 229).

(4) Going value, working capital, and water rights

For these three classes of the appellee’s property, the

Commission’s order of November 28, 1923, allowed only

$980,000 (R. 22). As we shall proceed to show, $980,000

would have been a conservative allowance for working cap-

ital and water rights alone, wholly apart from going value,

or would have been an inadequate and meager allowance

for going value alone, with no inclusion whatever for work-

ing capital or water rights.

The lowest estimate of going value, embodied in coi.

petent testimony, was $2,000,000 (R. 73). The lowest

estimate of working capital, on any basis, was $235,000 (R.

72), including materials and supplies; as shown on pages

48 to 52, post, the lowest, on a basis conforming to the

recent decisions, was $361,245 (R. 194). The lowest esti-

mate for water rights was a minimum of $500,000, palpably

a fraction of their real worth (R. 72, 73, 95-98, 195-201).

Therefore the learned District J udge was fully justified

in finding, from the evidence before him, that the Commis-

sion had not made a prover allowance for these items. As

& matter of fact, however, the $19,000,000 minimum figure

adopted by the District Court seems to have been made

up on the basis of including no more than $1,416,000 for

going value and water rights (instead of the undisputed es-

SNES AAT I ARLE TSA TIN RET mat

timate of $2,500,000) and $135,000 for cash working capital

(instead of Mr. Elmes’ estimate of $233,306). So it seems

to us clear that the District Court’s $19,000,000 is in itself

a conservative and minimum figure, even though sufficient

for the purposes of the present case.

We will proceed with discussion of these three items of

property seriatim:

(i) Going value:

In the Des Moines Gas Company ease (238 U.S. 158, at

165), this Court defined going value as being ‘‘the value

which inheres in a plant where its business is established

as distinguished from one which has yet to establish its

business.’’ It also there said that in such a plant that ele-

ment of value is ‘‘self-evident,’’ and ‘‘should be considered

in determining the value of the property upon which the

owner has the right to make a fair return.’’

This Court has never refused to uphold an allowance

for going value, when its existence has been demonstrated

under this definition and competent proof has been offered

from which the present worth of this element of property

may reasonably be appraised. The propriety of such an al-

lowance has long been recognized as to water companies. It

is now the consensus of opinion and authority, in both the

Federal and the State Courts, that an adequate allowance

for the going value of a utility property must be made, ac-

cording to the proofs, in a rate or confiscation case as in

any other.

City of Fort Smith v. Southwestern Bell Tele-

phone Co., 294 Fed. 102; U.S. ; 46

Sup. Ct. Repr. 206; 70 L. Ed. 236; affirmance

by this Court on January 25, 1926;

Bluefield Water Works and Improvement Co.

v. Public Service Commission of West Vir-

ginia, 262 U. S. 679;

Galveston Electric Co. v. City of Galveston, 258

U. S. 388;

Westinghouse Electric and Manufacturing Co.

v. Denver Tramway Co., 3 Fed. (2nd), 285;

Monroe Gas Light and Fuel Co. v. Michigan Pub-

lic Utilities Commission, Fed. (2nd)

(Special Stat. Ct.); decided February 27,

1926; S. C. on preliminary injunction: 292

Fed. 139;

Matter of People’s Gas and Electric Co. of Os-

wego Vv. Public Service Commission, 214 App.

Div. (N. Y.) 108;

New York Telephone Co. v. Prendergast, 300

Fed. 822 (Spec. Stat. Ct.); S. C. on further

hearing: Fed. (2nd) ; decided

March 10, 1926;

Denver v. Denver Union Water Co., 246 U. S.

178;

Omaha v. Omaha Water Co., 218 U. 8. 180;

National Water Works Co. v. Kansas City, 62

Fed. 853, 865;

State Public Utilities Commission vy. Springfield

Gas and Electric Co., 291 Ml. 209;

Streator Aqueduct Co. v. Smith, 295 Fed. 385;

Lincoln Gas Co. v. Lincoln, 250 U.S. 256, 267;

Venner v. Urbana Water C 0., 174 Fed. 348:

Michigan Public Utilities Commission v. Michi-

gan State Telephone Co., 228 Mich. 658: 200

N. W. 749;

Town of Milton v. Railroad Commission of Wis-

consin, 185 Wise. 294; 201 N. W. 381:

ST ema mire nemneneae mR

Consolidated Gas Co. y. Prendergast, 6 Fed,

(2nd) 243;

Southern Bell Telephone and T. Co. vy. Rail-

road Commission of South Carolina, 5 Fed,

(2nd) 77, 87;

Citizens’ Gas Co. of Hannibal v. Public Service

Commission of Missouri, 8 Fed. (2nd) 632;

Kings County Lighting Co. v. Prendergast, 7

Fed. (2nd), 192;

Columbus Gas Light Co. v. Public Service Com-

mission of Indiana, 193 Ind. 399; 140 N. E.

538.

An appraisal of going value must be the product of an

informed judgment. To the practical mind, going value is

an existing property, in the same sense that buildings,

lands and equipment are property. The potentiality of the

service supplied by the going business is the property of

the owner just the same as the potentiality of the physical

property. The enumeration of the elements of that poten-

tiality, although difficult, is inclusive of myriad items. To

the man of experience, judgment and reason, the value is

apparent and capable of being fixed. The fact that diffi-

culty is experienced in reaching an exact, mathematical de-

termination, does not deter a legal ascertainment of value,

for tangible or intangible elements.

Wakeman v. Wheeler and Wilson Co., 101 N. Y.

205.

lor failure to allow going value, the Supreme Court of

Illinois (Springfield Gas Company case, supra) reversed

the Iflinois Commission, notwithstanding the latter’s ex-

press declaration it had considered going value, the Court

saying (pages 223, 231):

**From the nature of this element of value, it can

not be arrived at with mathematical accuracy, but

must necessarily be considered in the light of the

facts of each particular case.’’

The Indiana statutes and decisions require the Commission

to make an adequate allowance for going value, under

the definition of the Des Moines case.

There is no question in this case as to whether going

value should have been determined and included as a part

of the appellee’s property. The Indiana statute and the

Indiana Supreme Court have so directed, and the appellant

Commission has so determined.

In Section 9 of the Indiana Public Service Act, it

is provided: ‘‘As one of the elements of such valuation,

the Commission shall give weight to the reasonable cost

of bringing the property to its then state of efficieney’’

(Burns’ R. 8. 1914; See. 10052, 1). In Section 31 of the

same Act (Burns’ R. 8. 1914; Section 10052, e 1), the Com-

mission is required to recognize the value of the intangible,

as well as the tangible, property of each utility.

In setting aside, in June of 1923, a valuation made by

the appellant Commission without adequate allowance for

going value (R. 25-27), the Supreme Court of Indiana ex-

pressly ruled that the company was entitled to have its —

going value included as a part of its ‘‘rate base’’ and

quoted and adopted the definition given in the Des Moines

case, as the basis on which the Commission must determine

and allow it.

Columbus Gas Light Co. v. Public Service Com-

mission, 193 Ind. 399; 140 N. E. 538.

The statutes of Indiana thus expressly directed the ap-

pellant Commission to make an allowance for going value,

as a part of the properties on which utility rates must yield

CT BTRE Sete ee Rg

— PRD Seria

a fair return, and the highest Court of law in the State

has directed this duty and its actual performance, by the

appellant Commission. Neither of the present appellants

could be heard to make their present contentions in the

State Courts.

The Commission found that the appellee has going value

The appellant Commission has itself found and deter-

mined that the appellee possesses going value, which

should be included in its ‘trate base."* In its order (No.

6613) of January 2, 1923, it said (R. 235):

**Any reasonable man with a knowledge of this

property and the local conditions would unhesitat-

ingly affirm that it had a value far in excess of the

value of the pipe, buildings, grounds and machinery.

Consider its earning power with low rates, the busi-

ness it has attached, its fine publie relations, its

credit, the nature of the city and the certainty of

large future growth, the way the property is planned

and is being extended with the future needs of the

city in View, its operating efficiency and standard of

maintenance, its desirability as compared with simi-

lar properties in other cities and with other utilities

of comparable size in this city. These things make

up an element of value that is actual and not specu

lative.”’

The Commission then fixed such value, in conjunction

with water rights, at $1,416,000 (R. 242). Even in the order

(No. 7080) here complained of, entered on November 238,

1923, the Commission said (R.19):

‘‘further citation of authorities is deemed un-

necessary as such a value attaching to such a utility

as the one under consideration is generally accepted,

as it is admitted by all parties that this utility func-

tions efficiently and renders good service and is 4

profitable institution,”’

yet its total allowance for going value, water rights and

working capital was only $980,000 (R. 22) or $571,000 less

than it had previously allowed for these three items.

In its opinion in the present case, the Commission ad-

mitted that although it still recognized the existence of

going value in the appellee’s property (especially in view

of its recent reversal by the Indiana Supreme Court in the

Columbus Gas Light case, supra), the percentage allowed

for going value was *‘smaller than is usual in such cases”’

(R. 22), and unexrplainedly much smaller, both in dollars

and in percentage, than the Commission itself had allowed

when the appellee’s property and business was smaller.

Before this Court, counsel for the Commission under-

takes to argue that the District Court should have included

no allowance whatever for going value, despite the Com-

mission’s finding that the appellee possesses going value

and should be allowed for it!

The evidence and findings as to going value in this case

What part, if any, of the $980,000 allowed by the Com-

mission for going value, working capital, and water rights,

represented going value, no one can say, as the Commission

did not.

For these three items, the Commission allowed only 6.4

per cent. of its own valuation, and only five per cent. of its

own chief engineer’s 1923 valuation of the physical property

depreciated. A reasonable allowance for working capital

and water rights, upon this record, would absorb the whole

$980,000, leaving nothing for going value (which is probably

what the Commission really did). Viewing the whole $980,-

000 as an allowance for going value alone, the above-stated

percentages are absurdly low.

‘wan eR a |

yr reer art

Th RAIN PY RRL IA NTT IF, Ha WS

IY OTT aorta ye yee

The lowest estimate of going value that was presented by

any witness was $2,000,000 (R. 73, 84, 85, 95). The same evi-

dence cf going value was presented to the Commission and

the District Court. Judge Geiger fixed for all of the ap-

pellee’s property a value of not less than $19,000,000—a

figure which was apparently reached by including not more

than $1,416,000 for both going value and water rights (R.

86). This sum for both items represented only 7.4 per cent.

of the District Court’s valuation. The uncontradicted tes-

timony as to the water rights valued them at the minimum

sum of $500,000, which would ieave only $916,000 for going

value. This sum last-named is only 4.8 per cent. of the

Commission’s valuation.

An allowance of at least ten per cent. for going value is

a minimum.

Each of these percentages demonstrates the utter inade-

quacy of the allowance made for going value. In the City of

Fort Smith ease, affirmed by this Court on January 25, 1926,

the finding for going value amounted to approximately 1514

per cent. of the reproduction cost new of the tangible prop-

erty. In the Bluefield case, the allowance for going value

exceeded ten per cent. In New York and Richmond Gas

Company v. Prendergast, supra, the Special Statutory

Court made findings which allowed for going value more

than fifteen per cent. of the reproduction cost new

of the tangible property (exeluding working capital

but including undistributed costs) or about sirteen

per cent. of the total present value of such _ prop-

erty as found by the Court. In Southern Bell Tele-

phone Co. v. Railroad Commission of South Carolina (5

Fed. [2nd], 77), the allowance for going value was in ex-

cess of eleven per cent. of the physical property. In Citt-

zens’ Gas Co. of Hannibal v. Public Service Commission of

Missouri (8 Fed. [2nd] 632, 634), the allowance by Judge

Reeves for going value was 14 per cent. of the value fixed

by him for the tangible property.

Many Federal and State determinations might be cited

in which more than ten per cent. has been allowed for going

value; but an examination of the decisions discloses that

where conflicting and contested proofs have been presented,

‘‘the Courts have generally found an amount approximating

ten per cent. of the sum found as the value of the tangible

property, as fairly representing the going value.’’

Streator Aqueduct Co. v. Smith, 295 Fed. 385;

Consolidated Gas Co. v. Prendergast, 6 Fed.

(2nd) 243;

Greensburg Water Co. v. Indiana Public Service

Commission (decided February 19, 1926;

Charles Martindale, Master in Chancery) ; not

yet officially reported ;

Mobile Gas Co. v. Patterson, 293 Fed. 208;

Monroe Gas Light and Fuel Co. v. Michigan Pub-

lic Utilities Commission, supra;

Citizens’ Gas Company of Indianapolis vy. Public

Service Commission of Indiana (report of

William P. Kappes, Special Master; filed May

15, 1922; confirmed by Anderson, C.J.; not

officially reported).

In the Monroe Gas Light Company case, before Deni-

son, C.J., and Tuttle and Simons, D.JJ., the per curiam

opinion filed on February 27, 1926, said, as to going value:

‘*Reported decisions show estimates as high as

25 per cent. or 30 per cent. of the cost of the tangi-

bles. These may be extravagant. Seemingly there

is no definite percentage relation. At the same time,

the proposition that a plant of this kind and in this

business and in successful operation, with customers

somewhat permanently attached for its capacity out-

put, is worth 10 per cent. more than the skeleton

would cost, seems not unreasonable—no circum-

stances contra appearing.’’

Usually, as in several of the cases above cited, the Com-

tet at a ahah ee 4

missions do not seriously contest an aliowance which does

not exceed ten per cent. Any adherence to the ten per cent.

rule as a minimum, however, is subject to the qualification

that the Commission and the District Court must follow the

evidence. It may not make an allowance so low as ten per

cent. unless the evidence warrants it.

Westinghouse Electric € Manufacturing Co. vy.

Denver Tramway Co., supra;

Ohio Utilities Co. v. Public Utilities Commission

of Ohio, supra;

New York and Richmond Gas Co. v. Prendergast,

10 Fed. (2nd.) 167.

In the Denver Tramway case, Circuit Judge Lewis held

that the Special Master was not in any event justified in,

reducing the allowance for going value below the lowest es-

timate which was supported by the testimony.

‘**There remains to be added an amount for going

concern value. On this subject the City declined to

offer any proof. The lowest amount named by a wit-

ness for the receiver was $2,900,000 and the highest

$4,500,000. The Master allowed $1,500,000. The re-

ceiver says he does not know where the Master got

this amount, and there is no evidence to support it.

The question thus raised is not without difficulty. I

confess I have no personal opinion or judgment at

all on the subject; every-day knowledge of ordinary

affairs does not inform me and is no guide. * * * Iam

firmly of the notion that each of these witnesses

know much more about what it would probably cost

to put a skeleton street railway plant in successful

operation than I do. I know nothing on the subject.

I am sure they each knew a great deal; and I see ne

escape from accepting the lowest amount named in

the testimony.”’

The uncontradicted evidence here called for a going value

allowance of $2,000,000

Mr. Elmes appraised the appellee’s going value at $2,-

098,000. He showed that this was based essentially on the

business and the property today—elements and advantages

not attaching to a physical property completed and ready

to operate (R. 95). He submitted an exhibit confirming

his opinion and judgment by computations based on a va-

riety of methods commonly used in checking and cor-

roborating estimates of going value (R. 195-201).

Ve GE mar

Development cost alone, as an element in going value,

was estimated by Mr. Hagenah at approximately $2,000,-

000 as of December 31, 1923 (R. 72, 73, 85). In putting to-

gether the minimum figure of $19,000,000 adopted by the

Court as sufficient, on an incontestible basis, for the pur-

poses of this case (R. 87, 88), Mr. Hagenah included going

value (and water rights) at the $1,416,000 figure found by

the Commission in its January order of 1923, but this was

by way of computation and hypothesis.

Mr. Hagenah’s testimony shows conclusively that in

arriving at his judgment of going value, at the sum of

$2,000,000, he confined himself to the factors defined and

approved in the Des Moines Gas ease, supra, and included

none that has been disallowed by this Court in any case

where it discussed going value. Mr. Hagenah took into

consideration the financial history of the Company as sug-

gested in Houston v. Southwestern Bell Telephone Co.

(259 U.S. 318, at 325). He rejected the element of pioneer

losses and past deficits (R. 85), diseussed in the Galves-

ton Electric Company case. He took into consideration

the time and expenses involved in the develep- ;

ment of the business, the necessity for rearrangement

of original plans, the inevitable cost of tuning up and coor-

BML INO EIR: Te

wer

Ste .

dinating the properties, the organization of the operating

staff and the harmonizing of operation, and the faet that

the company has approximately fifty-six thousand eustom.

ers (R. 73). These are the factors which create an **as-

sembled and established plant doing business and earning

money’? as distinguished from one which has **vet

to establish its business’ as announced in the Des

Moines Gas ease.

In New York and Richmond Gas Company v. Nixon

(204 App. Div. 838, 894) Ex-Justice Albert H. Sewell, for-

merly of the Appellate Division for the Third Department,

allowed approximately ten per cent. for going value, upon

the sole support of Mr. Hagenah’s testimony, along lines

similar to his presentation in this case.

Notwithstanding the fact that the appellant Commis-

sion, in its January (1923) determination, allowed approx-

imately 914 per cent. for the appellee’s going value and

water rights (R. 242), and the fact ¢h» in the order attacked

in the Court below the Commission expressly recognized

the existence of going value in the appellee's property and

admitted that the percentage which it allowed therefor **is

smaller than is usually allowed in sueh eases” (R. 22), ap-

pellants on this appeal contend that if the cost of acquiring

the elements of going value was charged to operating ex-

penses, or if it appears that a substantial allowance has

been made for undistributed struetural costs or overheads, |

going value will not be given further consideration. They

cite the Des Moines ease in support of such a contention.

In that case, this Court was apparently of the opinion that

the Master had sufficiently allowed for the cost of bringing

the plant to the stage of successful commercial operation,

and that therefore it could not be said that he had not

thereby given suflicient consideration to going value. There

was, however, nothing in the decision that lends support to

the notion that the cost of reproduction of the physical

plant and property would, as a matter of law, include the

element of going value. ‘Overheads’? were referred to in

the Des Moines Gas case because this Court apparently in-

terpreted certain language of the Master, quoted in the

opinion, as meaning that his allowance for **overheads”’

embraced some expense of development. The decision

seems to have gone no further than to determine that it was

not satisfzetorily and affirmatively made to appear to the

Court that in fixing a figure based upon the actual and

successtul operation of the plant, there had not in fact been

a sufficient allowance for going value in the Court below

and in the particular case. This is a wholly different

proposition from the contention that the *‘overheads” eon-

tained in Mr. Hagenah’s reproduction costs of the physical

units embrace the element of going value or any part of

such clement. An estimate of the cost to build or replace

an existing plant or system necessarily includes both the

distributed unit costs and the undistributable structural

costs, Which are an essential part of the total cost of eom-

pleting the physical property. Such an estimate does not,

however, credit the property with the cost of tuning up

and coordinating the plant or personnel or the cost of ob-

taining its established business. The reproduction cost of

the physical property assumes only that the plant has been

brought to the point of physical readiness to begin opera-

tion, so that it may thereafter attach consumers and de-

velop and establish a business,

The amount allowed for going value should not be decreased

because partly paid for through operating expenses

It seems well settled now, by many decisions of the

State and Federal Courts, that in estimating the amount

and present value of the property of a utility, neither the

SNe ein, FRCS

amount nor the value of the useful property should be

diminished by the fact that any part of such property was

paid for out of net earnings or even that, in earlier years

before regulatory accounting, some part of such property

may have been charged directly to operating expenses.

This applies to going value as well as to physical property.

Lincoln Gas Co. v. Lincoln, 250 U. S. 256, 267;

Michigan Public Utilities Commission v. Michi-

gan State Telephone Co., 228 Mich. 658; 200

N. W. 749;

City of Minneapolis v. Rand, 285 Fed. 818, 830;

New York and Richmond Gas Co. v. Prender-

gast, 10 Fed. (2nd) 167;

Grafton County E. L. and P. Co. v. State, 78

N. H. 330; 100 Atl. 668.

(ii) Working capital:

The evidence as to the amount needed and used by the

appellee for cash working capital and for materials and

supplies consisted solely of the testimony of Messrs. E]mes

and Hagenah, and the Commission certainly gave a most

meager and inadequate allowance for this indispensable

and actual element of property.

Mr. Elmes testified to the need for $233,306 for cash

and $127,939 for materials and supplies—a total of $361,245

for working capital (R. 94, 194). Mr. Carter, the chief engi-

neer of the Commission, included $102,997 of materials

and supplies in his inventory of the actual physical prop-

erty (R. 262). Mr. Hagenah, because of special circum-

stances, the legal effect of which we believe he unsoundly

conceived, reduced his estimate for cash and materials and

supplies to $235,000 (R. 72, 84). In its order of January 2,

1923 (Case No. 6613), the Commission had allowed $135,000

for cash working capital alone, in addition to the inven-

toried materials and supplies (R. 242) of which Mr. Car-

ter’s figure of $102,997 (R. 262) may be taken as repre-

HIT (

sentative, making at least $237.997 as a meager minimum

for both the elements of working capital.

The lowest estimate of going value, supported in any

way by the testimony, was $2,000,000 and of water rights

was $900,000, yet this $2,500,000 uf undisputed actual prop-

erty the Commission eut down to $980,000 (R. 22), and

threw into the $980,000 figure at least $235,000 of working

capital (cash and materials and supplies) for good measure.

The Commission itself recognized the necessity of an al-

lowance for both working capital and materials and sup-

plies in Order No. 7080 and in Order No. 6613 (R. 22 and

236), but it is apparently the contention of appellants here

that there should be no allowance for either working capi-

tal or materials and supplies, as they propose to deduct the

amounts fixed by Mr. Carter for materials and supplies and

by Mr. Hagenah for working capital, from their respective

appraisals (Brief, pages 81, 83, 87). On page 92, post,

we refer further to the impropriety of such an elimination.

Here it may be noted that the appellants assign no rea-

son whatever for making the elimination of the actual ma-

terials and supplies found and inventoried by the Commis-

sion’s engineer. They base their deduction of Mr. Hage-

nah’s estimate on the fact that Mr. Hagenah found, during

the year 1923, that some $831,945 of the revenues had been

paid in advance by consumers (R. 84). Mr. Hagenah tes-

tified that he took this fact into consideration, and that is

why he allowed no more than $235,000 for both working

capital and materials and supplies (R. 84).

In point of fact, the appellee was and is constitution-

ally entitled to have the Commission include in its “rate

| 2g

base’’ an adequate allowance for working capital—‘‘an

amount such as reasonable business men of experience

would require in the conduct of this kind of a business.”

New York and Queens Gas Co. v. Newton, 269

Fed. 277, 284; affd. 258 U. S. 165;

The Bronx Gas and Electric Co. v. Public Ser-

vice Commission, P. U. R. 1923A, 255; 28

N. Y. St. Dept. Repts., 329, 364; affd. 208 App.

Div. 780, 806;

Brooklyn Union Gas Co. v. Nixon, 2 Fed. (2nd),

118;

New York and Richmond Gas Co. v. Prender-

gast, 10 Fed. (2nd) 167 (Spee. Stat. Ct.);

P. U. R. 1925E, 19;

New York and Queens Gas Co. v. Prendergast,

1 Fed. (2nd), 351; appeal dismissed 268 U. S.

708 ;

Kings County Lighting Co. v. Prendergast, 7

Fed. (2nd), 192, 198, 217.

The figure of $361,245 estimated by Mr. Elmes corres-

ponds conservatively to the basis on which working capital

has commonly been allowed by the Federal and State Courts

in rate cases. In none of the cases above cited has the allow-

ance been reduced to a basis comparable with Mr. Hagenah’s

minimum figure of $235,000, nor has such a reduction been

made for any such reasons. At least the first five cases

above cited definitely rejected a reduction sought on sim-

ilar grounds.

The appellee is entitled to earn a return upon all of the

property, including materials, supplies, and cash, which it

actually possesses and uses in the public service. That

amount may not be decreased by any incident of the source

from which it obtained any of such property, or by the fact

nap oe ae a aacaameallal

| Sates - _

that some of it may not yet have been paid for (see cases

cited, supra).

The appellants’ misapprehension regarding working

capital represents a fallacy which has survived from the

‘‘investors’ sacrifice’’ theory of the ‘trate base.’’ A public

utility is entitled to earn a return upon all of the cash, mate-

rials and supplies, accounts receivable, ete., it actually and

reasonably has and uses in the public service, and not

merely upon the portion thereof which may have been con-

tributed directly by the investors. Some of the cash may

have been borrowed from the banks; some of the alum or

coal may have been obtained on credit and not yet paid for;

some or most of the cash may have been paid in by the

consumers, under the tariff rates. None of these incidents

can operate to deny the utility a return upon all of the

working capital it actually and reasonably possesses and

uses.

Generally the allowance for working capital runs from

three to eight per cent. of the value of the total property,

which would mean more than $500,000 for working capital

im this case.

In the New York and Richmond Gas Company case,

supra, the Special Master had fixed the present value of all

of the company’s property at $4,750,000, in which he had

included $275,000 for working capital—about 5.8 per cent.

of the total property. The Special Statutory Court, on De-

cember 28, 1925, held this allowance insufficient under the

evidence and increased it to $344,144, which was about 6.5

per cent. of the present value of the total property as found

by the final decree of the Special Statutory Court.

On a comparable basis, the appellee’s allowance for

working capital would exceed $1,000,000.

Se eR et |

The $19,000,000 minimum figure, as made up by Mr.

Hagenah for the purposes of this case, included only $135,.

000 for cash working capital (R. 86, 88), that being the

amount allowed by the Commission in its January order in

Case No. 6613.

The appellee challenges anyone to compute and demon-

strate any way in which the Commission allowed even as

much as $100,000 for working capital, in making the finding

and order here complained of. It was the most meager

allowance on record, and the appellants’ brief is at least

consistent in demanding that the appellee be allowed a re-

turn on no cash working capital or materials and supplies

whatsoever, not even upon the amounts found and inven-

toried by the appellant Commission’s own chief engineer.

(iii) Water rights:

The appellee owns valuable rights on White River and

Fall Creek, viz., to dam and restrain the water of the

streams, to divert the water through the canal from White

River to the filter plant, and to withdraw the water for gen-

eral use. These rights are property (see Northside Canal

Co., Ltd. v. State Board of Equalization, 8 Fed. [2nd], 739,

and cases therein reviewed), and their true and actual value

must be included in determining the amount upon which the

corporate owner has a right to have its rates such as to

yield a fair return (Los Angeles and Salt Lake R. R. Co. v.

United States, 8 Fed. [2nd] 747, 757, and cases cited: San

Joaquin Water Co. v. Stanislaus County, 233 U.S. 454).

These rights were set out in detail in an exhibit pre-

pared by the witness Elmes (R. 195-201). The sum of

$500,000 proved by the appellee as the value of these

rights was by no means their full worth (R. 72, 95-98,

195-201), but would have been sufficient for the purposes

‘iio.

of this ease, if the District Court had in fact allowed this

sum shown by the uncontradicted evidence.

There is present in this case no question as to whether

or not these water rights of the appellee are used and use-

ful property, to be valued for rate purposes. The law and

policy of Indiana have settled that question, and the ap-

pellant Commission has so ruled (R. 211, 236). The only

question here is as to whether less than $500,000 should

have been allowed for these water rights.

The Commission has determined that an allowance should

be made for these valuable water rights

In its Order No. 1400, made in 1917, the appellant Com-

mission said, concerning these rights (R. 211):

‘The Company has valuable water rights on both

Fall Creek and White River. It is also a large

riparian owner. If this city should grow as its citi-

zens hope it will, it does not require a prophet to

forecast the time when it will be required to take

its water much farther up the stream than Broad

Ripple. As the sources of contamination multiply

the care and diligence of the Company will be taxed

more and more to provide a source of pure and whole-

some water for those whom it serves. Nor is there

any denial by anybody in this proceeding that these

are water rights that are valuable and should be

taken into consideration. * * * To fix the value of wa-

ter rights is not more uncertain or indefinite than to

fix any other items of value. These rights are not

even intangible. They are real, permanent, and both

used and useful.’’

In its order (No. 6613) of January 2, 1923, the appellant

Commission said (R. 236) :

“This right is an extraordinarily valuable part of

the whole value of this property. The right to use

the water of White River has saved the Water Com-

pany and likewise the citizens of Indianapolis mil.

lions of dollars over what it would have cost to

secure sufficient water for the needs of the city in

any other possible way.* * * The Water Company

is entitled to share in the benefit of this valuable

possession by reason of the fact that by its foresight,

ingenuity and initiative it has taken this stream of

uncertain flow of impure water and has converted it

into an immense asset both to itself and to the pub-

lic. * * * Indianapolis is probably the most un-

fortunately situated of any large city so far as the

natural available water is concerned, yet the possi-

bilities of an insignificant stream flowing through a

thickly populated countryside have been so

thoroughly developed that Indianapolis now has, and

if it doubles in population, will have an ample supply

of potent (sic., potable) water at a cost much below

the cost in many other cities more favorably located.

This development of its water rights, which has been

accomplished by the Water Company at times with

extreme difficulty, does actually largely increase the

value of the property.’’

Nevertheless, in the face of the above-quoted findings,

the appellant Commission permits its solicitor to say to

this Court, on page 74 of the appellant’s brief, that al-

though ‘the Commission in Order 7080 allowed something

for water rights,’’ ‘‘anything it allowed was, however,

a gratuity to the appellee.’’ In alleging, in its petition for

intervention, that the Commission’s knowledge of the facts

and the Commission’s own decisions would ‘‘embarrass and

estop’’ the Commission (R. 39, 40) in making ‘‘full de-

fense’’ to this action in the Courts, the solicitor for the

City evidently spoke only in a legal sense. No embarrass-

ment or constraint whatever is revealed by the appellants’

brief, filed jointly in the name of the City and the Commis-

sion.

ees $F

~_-

Extent of the water rights and the statutory basis for them

As part of its property characterized as water rights,

appellee includes the right to overflow approximately 1,300

acres of land lying above its dams on White River and

Fall Creek. The Commission’s engineer allowed a valua-

tion on these rights of $100 per acre. These overflow rights

were acquired, either through condemnation or prescrip-

tion, more than fifty years ago, and if the same rights were

to be sought today by condemnation the damages payable

by the condemnor would be very substantial—for this item

alone, probably more than the company’s total claim here

for water rights.

These water rights further include, among other things,

the right to divert water from White River into the appel-

lee’s canal, which extends for more than eight miles before

rejoining the stream of White River. A map of the canal

(R. 268; fol. 322) shows about twelve miles of White River

which is affected by the diversion of the natural flow of the

stream into the canal. Without this diversion there would

be no adequate supply of water to meet the requirements of

the City of Indianapolis. The possibility of a substitute

supply is so remote and so expensive as never to have been

advocated by any one. If the right to divert the water from

White River had not been preserved during all these years

by the present company and its predecessors in title, and

if an attempt were made today to procure such rights

through condemnation, the cost of acquiring the property

would be entirely prohibitive.

The excerpts from the appellant Commission’s orders,

given above, show its keen appreciation, hitherto, of the

importance and value of these rights. There is no fair-

hess in, or foundation for, the seeming claim of appellants

that the appellee’s predecessor, the old Water Works Com-

a idee teed |

Bremre

pany, acquired the canal by gift or in some way as a geo.

graphical incident to the ownership of land in the same way

that the purchaser of a farm having a brook runmng

through it acquires the brook because he buys the farm.

As matter of fact when the State, in 1851, sold the canal

in order to be relieved of the burden of carrying it, the

Legislature almost concurrently and before the purchase

money was paid, passed a separate Act authorizing the

purchasers of the canal and their successors in title to op-

erate the canal as a part of a water works system for the

City of Indianapolis (Appendix, pages 148 to 150).

The Act of Indiana of 1865 (Appendix, page 151), under

which the old Water Works Company was incorporated, in-

vited the City to determine, first, whether it needed water

works and, secondly, whether it would supply such works

itself or would bring into existence a private corporation to

supply the need. The appellant City elected not to supply

the water works itself, but to have such a private corpora.

tion formed. The appellee and its predecessor, the old

Water Works Company, are a result of that election. The

City could have purchased the canal and preserved it as a

part of its own water works system. It did not do so. The

appellee’s predecessor did so, in 1869 (Appendix, page

151).

The burden assumed by the original purchasers of the

eanal property from the State of Indiana, the further bur-

den of proper maintenance of the canal property, its taxes,

ete., undoubtedly contributed to the long history of lean

carnings of the Indianapolis Water Company’s operations.

With the splendid growth of the City, the time finally came

when it was economically possible, in 1905, to put the eanal

io all of the water works uses foreshadowed by the Legis-

lature in the Act of 1851. Proper compensation for the

Company’s expenditure of time and money in preserving

these important rights, now so vitally essential to the

industrial and community life of the City of Indianapolis

and its environs, should be included in the appellee’s rate

hase; and the company’s Witnesses were unduly conserva-

tive in estimating, for the purposes of this case, a minimum

valuation of $000,000 on these actually invaluable water

rights.

The only appraisals of the value of the water rights, be-

fore the Commission and District Court, were those of

Messrs. Hagenah and Elmes. Each fixed that value at the

minimum sum of $500,000 and this valuation was naturally

undisputed (R. 72; 85, 95-98; 169; 180, fols. 218; 195-201).

Despite the uncontradicted evidence, the $19,000,000 figure

adopted by the District,Court must have included much less

than $500,000 for water rights.

(5) Depreciation

Virtually no controversial issue, under the decisions, is

presented on this subject, by the record here at bar.

The facts

Mr. Elmes, for the company, made a competent, detailed

inspection and engineering estimate of all of the actual

depreciation (R. 93, 94). He found the full extent of the

deterioration of any parts of the property from its con-

dition when first installed and placed in practical operation.

He then estimated and reported the amount of money which

would have to he spent in restoring the property to that

condition, as of the appraisal date. That amount he found

to total $443,044 (R. 93, 94, 98, 99, 193). He testified that

this estimate had been prepared according to “the method

T use in reporting to bankers and prospective purchasers of

property’? (R. 94). Mr. Elmes’ report and estimate of

Hy ORNS AREEa ae eee |

Bere eee:

restoration cost was not contradicted, and he deducted its

amount from his estimates of replacement cost new (R.

194).

There have been several decisions that such an engineer-

ing estimate of cost to restore the property to condition

new, Measures its depreciation and represents all that needs

be deducted from its replacement cost new.

Ottinger v. New York and Queens Gas Co.,1

Fed. (2nd), 351; 268 U. S. 708;

Kings County Lighting Co. v. Prendergast, 7

Fed. (2nd) 192, 202, 217; P. U. R. 1925 EF, page

5 (Spee. Stat. Ct.) ; confirming report of Spe-

cial Master (P. U. R. 1925 C, page 705) ;

Brooklyn Union Gas Co. vy. Public Service Com-

mission, 7 Fed. (2nd), 628;

New York and Richmond Gas Co. v. Prender-

gast, 10 Fed. (2nd), 167 (Spee. Stat. Ct);

P. U. R. 1925 E, page 19;

Willcox v. Consolidated Gas Co., 212 U.S. 19.

Some State and Federal Courts have held, on economic

grounds, that even the amount of the restoration cost should

not be deducted, in ascertaining the present value of a

utility property which has suffered no loss of capacity or

operating efficiency.

The Bronx Gas and Electric Co. v. Public Ser-

vice Commission, P. U. R. 1923 A, page 255;

28 N. Y. St. Dept. Repts., page 329; affd. 208

App. Div. 780;

Consolidated Gas Co. v. Newton, 267 Fed. 231;

258 U. S. 165;

New York and Queens Gas Co. v. Newton, 269

Fed. 277; 258 U. S. 165;

New York and Richmond Gas Co. y. Nizon, 203

App. Div. 860; 204 App. Div. 838.

See, also, Nashville, Chatlanooga and St. L. Ry.

Co. v. United States, 269 Fed. 351; certio-

rart denied, 255 U. S. 569,

That question does not arise here, however, because the

appellee admitted that the actual depreciation in its prop-

erty, as ascertained by competent inspection and estimate,

should be Geducted from reproduction cost new; and from

all of such appraisals, deductions were made to reflect the

full amount of the actual, existent depreciation (see tables

on pages 28 to 30, ante).

Mr. Carter, engineer for the Commission, made an ac-

tual inspection of all of the appellee’s property, and esti-

mated its ‘* percentage condition’’ by giving effeet both to

the results of such examination and to the supposed effects

of age, as disclosed by *‘life-tables”’ (R. 130). Mr. Carter

found the depreciable property to be in 94 per cent. condi-

tion (R. 130); and his ‘‘acerued depreciation,’ giving

effect both to age and actual deterioration, amounted to

$850,000 (R. 130). This sum he deducted from replace-

lent cost new, in reaching present value,

Mr. Hagenah, for the Company, made an estimate of

the existent depreciation, based on the results of actual

inspection of the properties, ‘‘with consideration of the

probable future life as indicated by the physical condi-

tions noted in the examination” (R. 77). On this basis,

he reached conclusions corresponding closely wiih those

of Mr. Carter for the Commission (R. 77-78). On this

basis of age and condition, Mr. Hagenah figured the depre-

ciation, as of the time of inquiry, at $1,117,589 (R. 180:

fol. 218).

Mr. Bemis, the younger, essayed no embarrassing ex-

> TEES SONS 5 ery

amination of the appellee’s property. He had no engineer-

ing experience and qualification to form a worth-while

opinion about it, if he had inspected it. So he made a

purely theoretical, hypothetical calculation, on a *‘straight-

line’’ basis, wholly unrelated to the property itself. This

enabled him to suggest that no less than $3,200,000 of the

appellee’s existent and efficiently-operating property

should be denied any return whatever (R. 157, 337).

Mr. Perk, the accountant for the City, likewise made

no examination of the properties, but one of the *‘adjust-

ments’’ or ‘‘decimations’’ made by him, to reduce further

his incomplete record of original cost, was the deduction

of $644,749.22 of ‘‘depreciation reserve’’ (R. 317).

Even these extravagant and theoretical deductions

proved insufficient for the appellants’ brief, so their table

(page 86) doubles the ‘‘depreciation reserve’’ before de-

dueting it and then also deducts $1,878,705 as representing

an ‘‘additional accrued depreciation allowance’’ which the

appellee might have collected (by using young Bemis’ fan-

tastic tables) but never did collect from its consumers. Be-

cause the company did not earn and collect it, the appel-

lants deduct this sum. Had the company collected it, the

appellants would evidently have deducted it twice!

The law

Under the numerous decisions which have been rendered

since this case was tried, it appears that Messrs. Hagenah

and Carter were in error in giving effect to “life-table”

estimates of age, over and above the actual depreciation

shown by competent engineering examination. Only actual,

physical depreciation as shown by inspection should in any

event be deducted from reproduction cost new—‘*de-

preciation just as actual as the present value, and the ex-

tent of that depreciation must be ascertained by the same

kind of evidence.”*

Pacific Gas and Electric Co. v. San Francisco,

265 U.S. 403;

City of Fort Smith v. Southwestern Bell Tele-

phone Co., 294 Fed. 102; U.S. ; 46

Sup. Ct. Repr. 206; 70 L. Ed. 236: aflirmanee

by this Court on January 25, 1926;

New York Telephone Co. v. Prendergast, 300

Fed. S22 [Spec. Stat. Ct}: S.C. on further

hearing: led. (2nd) > decided March

10, 1926;

Nashville, C. & St. L. Ry. Co. v. United States,

269 Fed. 351; 255 U. S. 569;

State of Kansas ex rel. Hopkins v. Southwestern

Bell Tel. Co., 115 Kan. 236; 223 Pae. 749:

Westinghouse Electric and Manufacturing Co.

v. Denver Tramway Co., 3 Fed. (2nd), 285;

Monroe Gas Light and Fuel Co. vy, Michigan

Public Utilities Commission, 292 Fed. 139;

ruling reaffirmed on further hearing; Fed.

(2nd) ; decided February 27, 1926;

Landon vy. Court of Industrial Relations, 269

led. 433, 445;

Havre de Grace & P. Bridge Co. v. Towers, 132

Md. 16; 103 Atl. 319;

Bonbright v. Geary, 210 Fed. 44 (Spee. Stat.

Ct.):

Standard Oil Co. v. Southern Pacific Co., 268

U. S. 146;

Murray v. Public Utilities Commission, 27 Idaho

603; 150 Pae. 47;

City of Winona v. Wisconsin-Minnesota Light

and Power Co., 276 Fed. 996;

City of Cincinnati v. Ohio Public Utilities Com-

mission, Ohio ; 148 N. FE. 817;

gers eee |

SEL SOR i Pe

NERA BGI Ring

A te ec aaa at

[Se

Southern Bell Telephone Co. v. Railroad Com- |

mission of S. C., 5 Fed. (2nd) 77.

Under the above decisions, it is likewise well settled

that, contrary to the contentions of the City in this case,

the balance in a ‘‘depreciation’’ or ‘‘retirement’’ reserve

account should not be deducted, as a measure of the existent

depreciation or otherwise.

In the Pacific Gas and Electric Company case, supra,

this Court said, as to the ‘‘modified sinking fund’’ method

based on ‘“‘life tables’’: |

‘‘Appellant objects to the application of this

method, and insists that depreciation should have

been ascertained upon full consideration of the defi-

nite testimony given by competent experts who ex-

amined the structural units, spoke concerning ob-

served conditions, and made estimates therefrom.

As these examinations were made subsequent to the

alleged depreciation, for the definite purpose of as-

certaining existing facts, we think the criticism is not

without merit. Facts shown by reliable evidence

were preferable to averages based upon assumed

probabilities. When a plant has been conducted with

unusual skill, the owner may justly claim the conse-

quent benefits.’’

Consonant with the above declaration of this Court was

the language of the Special Statutory Court for the South-

ern District of New York in the New York Telephone Com-

pany case:

‘“‘The legal error (of the Commission) is in not

recognizing that the law requires deductions only

for actual depreciation, just as actual as the present

value, and the extent of that depreciation must be,

ascertained by the same kind of evidence; in the

last analysis, opinion based on contemporary inves-

tigation.’’

TFV,

The decision in the City of Fort Smith case

In the City of Fort Smith case, as here, the company

and the municipality had admitted that a deduction should

be made from reproduction cost new, for depreciation, to

reach the present value of the property.’ The propriety of

such a deduction was not litigated; the contest was as to

what should be deducted. The District Court held that

only actual depreciation, determined by inspection, need

be taken into account in fixing present value, and that inad-

equacy and obsolescence are the principal causes of prop-

erty retirements.

The engineering witnesses for the telephone company

submitted estimates as to the actual deterioration or de-

preciation, disclosed by competent inspection. The wit-

nesses for the City of Fort Smith claimed there was a fur-

ther and “‘hidden’’ depreciation, due to the age ot the

property. The issue was stated as follows in the brief for

the company before this Court (Telephone Company’s

brief, page 12):

‘the witnesses for the City considered the age, or

elapsed life of the property as the basis for making

a deduction in addition to the actual depreciation.

The Company employed the inspection method, the

City the theoretical ‘age-life’ method.”

Upon the trial in the District Court, counsel for the

City of Fort Smith stated (Record, page 318):

“‘Mr. Miles: In order to save time, we are per-

fectly willing to stipulate that if you don’t take age

into consideration we are willing to agree on their

per cent. condition. I want to qualify that to this

extent: if the element covering the length of time

each piece of property has been in service is not

considered, then we are ready to say that their esti-

eet i |

NE PIR RGB er tec

mate of it is correct; that our other reduction of it

is due to the length of time it has been in service.”

The witnesses for the City of Fort Smith then presented

testimony that, over and above the actual deterioration, the

property had depreciated to the extent of about ten per

cent. of its value because of the expiration of time since it

was first installed. This stipulation and this proof seemed

to present the issue very squarely as to the propriety of a

further deduction based on age or ‘‘expired life.’’

The District Court nevertheless refused to give any

effect to the ‘‘age-life’’ method or to any *‘hidden’’ depre-

ciation based on age. The District Court found and de-

ducted only the actual depreciation determined by compe-

tent engineering inspection. This Court, on January 25,

1926, did not modify or disturb the result so reached (——

U.S. ——; 46 Sup. Ct. Repr. 206; 70 L. Ed. 236).

The decisions relied upon by the appellants as to depreciation

The two decisions cited and relied upon by the appel-

lants (Brief, page 45) do not support their contentions as

to depreciation. The Nansas City Southern Railway case

(231 U.S. 423, 451) involved technical questions as to the

proper accounting treatment of the cost of railroad prop-

erty retired in order to make way for an improved and

shortened road-bed, which would enable more traffic to be

handled in the future, at lowered unit costs of operation.

This Court said, inter alia:

‘*Abandonments occasioned by changes of this

character are therefore chargeable to future earn-

. te |

Ings.

In Nashville, C. and St. L. Ry. Co. v. U. S. (269 Fed.

351; certiorari denied, 255 U. S. 569), before Circuit J udges

Knappen, Denison and Donahue, as the Cireuit Court of

Appeals for the Sixth Circuit, the question was as to the

amount which the carrier might deduct, from its gross reve-

nues, for ‘‘depreciation”’ of its property, in computing its

earnings taxable under the Corporation Tax Act. The case

had been tried before Sanford, D.J., who had sustained the

contention of the government that the property of the car-

rier had sustained no depreciation, beyond that made good

in the regular course. The Court was of the opinion that the

amounts expended by the railroad for repairs, maintenance,

renewals and replacements, fully counteracted the wearing

out of parts and the various effects of use, supersessions be-

ing made as needed, and that as a result the railway and

structures *‘as a whole’’ were in fully as good condition and

of **tully as great intrinsic value’’ as they were at the be-

ginning of the years in which the expenditure had been

made. This continuing process of repair and supersession

was found to have prevented any loss of capacity or effi-

cleney in operation, and so to have maintained the value un-

impaired. Judge Sanford had stated it to be his opinion

from the evidence that ‘*there is no reasonable deduction

for depreciation established.’

The Circuit Court of Appeals agreed unanimously with

the District Court. The Court said {page 355):

‘*To say that property ean depreciate without im-

pairment of either intrinsic value or efficiency is to

our minds a solecism.”’

The ‘‘chief reliance’? of the railroad company in that

suit was the elaim, advanced here by Dr. Bemis, that over

and above, and in spite of, all that is done by way of re-

pairs, maintenance, renewals and replacements, in a com-

posite modern utility or railroad property, there is ‘‘inev-

itable annual depreciation * * * not entirely renewed and

replaced”? in each year.

ia kee |

This theory was rejected by the distinguished Court.

Its opinion said (italics ours):

‘‘Defendant [the railroad company] did not di-

rectly controvert the situation so shown. Its chief,

if not its only, reliance seems to have been on the

proposition that, in spite of it all, there was inevita-

ble annual depreciation in some of the perishable ele-

ments not entirely renewed or replaced, so justifying

the contention that for this reason there was depre-

ciation within the meaning of the act, even though

the roadway as a whole had not decreased in value.

To this argument, as already said, we cannot assent.”

(i) The testimony for the appellee and the Commission,

and the Trial Court’s finding of $19,000,000, were on a con-

servative basis, as to depreciation.

Mr. Carter’s 1923-24 value figure of $19,500,000 for the

appellee’s physical property only, was after deductions for

both the actual depreciation and for age or expired life,

based on the ‘‘life-tables’’ (R. 130, 262, 263).

Mr. Hagenah’s depreciation figure (R. 78, 180) was

slightly higher than that of the Commission’s engineer,

and allowed both for all the actual depreciation and for

‘*life-table’’ caleulations based on age.

~~ As shown in the tables on pages 28 to 30, ante, all of the

various estimates of present value were arrived at by mak-

ing what have now been held to be excessive deductions for

depreciation. Jn any event, there could be no claim that too

little was deducted, on the facts shown in this record.

(ii) The provisions of the Indiana statute do not change

the facts or the rules of law, as to the depreciation and pres-

ent value of the appellee’s property.

If the section of the Indiana Public Service Commission

Act (quoted below), relating to depreciation reserve, must

be construed to preclude a return on property purchased

out of moneys paid the company in reimbursement of prop-

erty used up in the service rendered, as contended by ap-

pellants (Brief, page 80), then it is in violation of the Fed-

eral Constitution. However, the statute clearly should not

be construed to mean that all of the property of the ap-

pellee may not earn a rate of return calculated upon its

present condition and present worth. The inhibition is

simply against the capitalization of moneys obtained for

the purpose of providing for depreciation.

The section referred to (Burns’ R. S. 1914; 10052y)

reads m part as follows:

‘But in no event shall the moneys expended from

the fund for new construction, extensions or addi-

tions to the property be credited to or considered a

part of the capital account of any public utility, but

shall always be charged against the depreciation

fund.’’

In the same section of the statute, it is expressly pro-

vided that :

‘“‘The moneys in this fund may be expended for

new construction, extensions or additions to the

property of such public utility or invested.”’

It is very evident that if depreciation reserve money

shall merely take the place of ‘used up’’ property, then

When it is reinvested in the property, if capitalized, there

would result a constantly increasing capitalization in excess

of the actual investment. It was to prevent this possibility

that the safeguard of the above section was written into

law. There is nothing in the Legislature’s treatment of the

subject which remotely indicates that such investment in

physical property should be denied a rate of return. The

statute expressly permits the investment of the deprecia-

~RRROEE eSRER R

AOR ER ear REN Remo

Beet oy ha oe

tion fund in the property, but expressly inhibits the issu-

ance of stock based on such investment. The appellants do

not claim, and the evidence would not warrant a claim if it

were made, that any stock was ever issued by the appellee

as the representative of reserve fund money reinvested

in the property.

(B) The Trial Court’s valuation of not less than $19,-

000,000 did not give dominant, much less exclusive,

weight to “spot reproduction” prices of 1923

The appellants have built their brief on their hypothesis

that Judge Geiger

‘faccepted a spot reproduction of January 1, 1924

(the time of the inquiry), as the exclusive measure

of fair value’’ (Brief, page 48).

This assumption appears at many points in the appellants’

brief (see, for example, pages 50, 40, 37).

This assumption is wholly unfounded, for many rea-

sons:

(1) The only three estimates of reproduction cost new

(depreciated) as of January 1, 1924, before the Court, were

as follows:

Mr. Hagenah $25,404,026

Mr. Klmes 95,357 907

Mr. Carter (including going value,

working capital and water rights at

the Commission’s allowance in

Case No. 6613) 91,051,000

Average 1923-24 reproduction cost

(less depreciation) $23,937,644

This does not look as though Judge Geiger’s $19,000,000 :

total gave either exclusive or dominant weight to ‘spot

reproduction’’ prices as of January 1, 1924. Moreover, as

shown in the summary tables on pages 8 to 11, ante, the

estimates of these three witnesses, based on averaged prices _

for the ten-year period ended December 31, 1923. them.

selves averaged $20,935,983 (R. 180, fol. 218: R. 194; R.

132).

(2) Judge Geiger said that although he thought ‘* spot

reproduction’ for the physical property alone was at least

$23,000,000 (R. 62),

“Tam not confronted with the problem of fixing a

valuation within the range of dispute upon spot —

reproduction’* (R. 64). £

That problem would have coufined him within a range of .

from $21,000,000 to $25,500,000. He fixed $19,000,000 for i

all of the property. F

ation of the property of a water company, permit of no s

inference that he decided this case on any basis of giving E

exclusive weight to ‘‘ spot reproduction”? prices. &

In Ashland Water Co. v. Railroad Commission (7 Fed.

[2nd], 924), Judge Geiger said: é

“We need not at this time consider whether the

estimate above placed upon the three decisions is

correct. Whether, as suggested in the Monroe Gas

Company case (D. C.), 292 Fed. 139, present repro-

duction costs must be dominantly reflected in a find-

ing, it would seem that, if the rule of the three cases

was worth while promulgating, it contemplated that —

at least due or substantial consideration of the evi. _

dence of present reproduction costs be reflected in F

the finding. The rule, if of any value, does not con- —

template that Commissions or Courts may play with

percentages in such a manner that—as I propose

to show in the present case—the whole situation js

not only left to guesswork, but most persuasively

suggests an unwillingness clearly to give substan.

tial, or due, or even reasonable recognition to the

rule’’ (page 927).

**Now of these Supreme Court cases this may be |

said: That coming as they did at the end of a decade

of enormous advanece—of costs—they have been ae-

cepted by the bench and bar as enunciating a definite

change in the pre-existing rules for the considera-

tion of evidence bearing pertinently upon valuation

of utility properties. They do not pretend to an-

nounce (1) that current reproduction costs must be

respected as the sole determiner of value; nor (2)

that triers of valuation issues have the right (which

they may exercise or not at their option) to take

such evidence into consideration. If either such

were their purport, then the former would have left

the commission here without a defense, and_ the

latter the plaintiff without a case. But what is an.

nounced is this: That dominant or econtrolling—or,

in any event, due, or substantial, reasonable, or fair

—consideration must be given to the evidence of

reproduction costs at the time of hearing. What-

ever debate may be indulged respecting the adjee-

tive to be imported into the rule deducible from the

decisions, it seems difficult to eseape the conclusion

reached in the Monroe Gas ease (D. C.) 292 Fed. 139,

that dominant consideration must be given; that

such is the ‘necessary implication’ found in the re-

sults in those eases. This, however, will be referred

to later’? (pages 929-930).

(4) The origin of the $19,000,000 figure and the ex-

planation of the way in which it was put together, for the

purposes of this case, was with Mr, Hagenah, and he both

said and showed that (R. 87):

‘‘In reaching the judgment figure of $19,000,

000, after having before me the reproduction value

of $26,500,000, 1 do not give major weight to the

present levels.’’

Mr. Hagenah tried to formulate a figure which would

be below any possibility of fair challenge. How drastically

he took virtually everything against the company is shown

by his explanation (R. 87):

ee |

AE hema enae

**T have before me the appraisal of this property

on seven different price levels. In reaching the judg-

ment figure of $19,000,000, after having the reproduc-

tion value of $26,500,000, I do not give major weight

to the present levels. In the first place I take off exist-

ing depreciation from all my appraisals, which is

about $1,500,000. TI first find the physical property

alone. My appraisals of this property as of this date

ranged from $17,052,000 for the physical property

alone, based on one price level, to $22,682,000 on an-

other price level. For the reasons that I have al-

ready stated, my concession to the original cost of the

property and arriving at my fair value figures I re-

ject in such compromise the high price levels because

they are not permanent. The lowest price level—the

ten-year level, in which high and low price levels are

taken into consideration and weighted—is $17,052,-

000. That is the lowest possible figure I could get

without going back to the pre-war days. But even in

that figure I go from 1911 to 1920, I think I should

add something to that because of changed conditions

since 1920, and I increase that figure to $17,500,000

by adding $448,000 as my concession to all the eco-

nomic conditions affecting labor prices, interest and

taxes that have transp ed since the end of 1920.

That gives me $17,500,000, which is the minimum

value of the physical property alone and is as low as

it is because of concession to the original cost or ac-

tual investment. TI further add $1,416,000 allowed

by the Commission for going concern value and water

rights. In round numbers after adding these three

items I get $19,000,000” (R. 87-88).

ROLLE IESE IES NT ELIE IP MOL I 9.

Be: RVR

“><

It was upon such a range of testimony as the preceding

pages have outlined that the District Judge was compelled

to exercise an independent judgment as to whether a valua-

tion of $15,260,400 had given sufficient consideration to re-

production cost at present-day prices. It cannot be said

that a $19,000,000 figure gave exclusive weight ‘‘to spot re-

production”’ prices as of January 1, 1924.

We invite anyone to take the undisputed testimony for

land at market value, structural property at prices which

give any weight to 1923-24 costs, undistributed structural

costs at 15 per cent., going value, water rights, and work-

ing capital, and add them up on any ratioual basis to pro-

duce a total valuation lower than $19,000,000.

minimum figure of $19,000,000.

The conservative character of Judge Geiger’s determi-

nation is further emphasized that although he felt that the

appellee’s physical property alone, at 1923-1924 prices,

amounted to $23,000,000 (R. 63), he felt constrained to

limit his valuation to the $19,000,000 minimum figure which

the present appellee had offered to accept as ‘*a fair basis”

for the present determination (R. 64).

His action in this respeet may fairly be contrasted with

that of Denison, C./., and Tuttle and Simons, D.JJ., in the

Special Statutory Court for the Michigan District, in the

Monroe Gas Light Company ease, on February 27, 1926.

In the latter case, the Company’s bill of complaint had

alleged a value of **$400,000 and upwards’’ (here the alle-

gation is *‘not less than’? $19,000,000). The Special Statu-

tory Court found that, on a conservative basis, the value

of the gas company’s property was $425,000, and so al-

lowed this amount, saying:

ce acs

“We do not overlook that the amended bill al-

leges a fair value of *$400,000 and upwards.’ Under

some circumstances, it would be right to hold the

plaintiff to that definite figure as a maximum; but

to do so now would only lead to a request for an

amendment which we should grant. We should grant

it because, upon plaintiff’s theories, more than $400,-

000 was immaterial and hence sufficiently alleged by

‘upwards.’ ”’

In contrast, Judge Geiger limited the present appellee

to its figure of **not less than $19,000,000" (R. 54).

THE TRIAL COURT WAS FULLY WARRANTED IN REFUS-

ING TO FOLLOW THE METHODS BY WHICH COUNSEL FOR

THE APPELLANTS SEEK TO COMPUTE A PRESENT VALUE

OF LESS THAN $19,000,000.

Confronted with the proofs which we have reviewed, in-

dicating a present value of at least $23,000,000 for the ap-

pellee’s useful property, counsel for the City and the

Commission endeavored, in the Court below, to eut and

slash this sum, by devious expedients urged by the Messrs.

Bemis, so as to furnish some pretext of support for the

Commission’s figure of $15,260,400. In this Court, these

same contentions are renewed in behalf of the appellants,

and are summarized at pages 86 and 87 of their brief, in

connection with Mr. Hagenah’s estimate of 1923-24 repro-

duction value.

We shall proceed to diseuss seriatim these deductions

and eliminations, by way of demonstrating that they were

so unsound and fallacious that the District Court was fully

justified in refusing to accept and follow them. In fact,

PRT, IRR eR wera

the minimum figure of $19,000,000 may be regarded as

having given to them really more weight than was war-

ranted.

(1) Deduction of so-called ‘excess overheads” (undistrib-

uted costs)

Although the appellee’s witnesses, the Commission’s

engineer, and the Commission’s own prior determination

(R. 229), agreed that fifteen per cent. was a reasonable

allowance for undistributed structural costs, and although

the decisions and the testimony, as reviewed on pages 31 to

do, ante, show that 15 per cent. was a minimum and most

conservative figure, the appellants had the temerity to

demand the elimination of $2,462,497 from Mr. Hagenah’s

appraisal, representing 12.4 per cent. out of the moderate

15 per cent.

The wrdisputed testimony is sought to be ignored or

evaded, because the appellants claim that the 15 per cent.

allowed by these witnesses does not appear to have been

actually expended by the company and charged to ‘‘over-

head’’ accounts.

As to this claim, it must be said:

(a) It is based on false assumptions of fact.

It is true that Mr. Perk in his study (which arbitrarily

omitted the first eleven years of the property’s history)

found only 5.8 per cent. expended for overheads and

charged to accounts which he recognized as such; therefore

he argued that no more should be allowed as the present

value of these items. (Appellants’ brief, pages 22, 81). Mr.

Hagenah’s testimony is uncontradicted that since the begin-

ning of the enterprise, the books show 934 per cent. for over-

heads, but the books did not capitalize taxes or interest

during construction, which would amount to at least 6 per

cent. mere (R. 80). We think that members of this Court

will recognize that if the cost to the company of these

elements is shown by the books to have heen as much as

934 per cent. of the property, their present replacement

cost will exceed 15 per cent.

(b) lt is based on false assumptions of law.

Appellants’ first error is in confusing the present value

of these elements of property with their original cost and

with the accounting treatment of that cost. In the Ohio

Utilities Company ease this Court said:

“Reproduction value, however, is not a matter

of outlay, but of estimate, and should include a rea-

sonable allowance for organization and other over-

head charges that necessarily would be ineurred in

reproducing the utility. In estimating what reason-

ably would be required for such purposes, proof of

actual expenditures originally made, while it would

be helpful, is not indispensable.”’

To the same effect is the following ruling of the Special

Statutory Court in Monroe Gas Light and Fuel Co. vy.

Michigan Public Utilities Commission (292 Fed. 139):

**Such overheads as were involved, viz., interest

and taxes during construction, contractor’s profits,

and items which all the witnesses classify as ‘un-

distributed costs,’ are as much a part of the fair

value of the plant, considered on any basis, as are

the iron and the bricks. The only evidence before

the Commission was the report of its own engineers,

who, both as to reproduction cost and original cost,

made this estimate of about 14 per cent. The only

additional evidence before the court is that of the

utility’s engineers, who testify that the proper

allowance is about 20 per cent.* * * Obvi-

ously these overhead costs would not appear

SLIDE Sk SIRS iter A pea et a |

‘upon any records of the plaintiff or anybody

else.’ There was no reason why they should,

The utility’s books did not purport to go back

and show total actual disbursements for con-

struction. The engineers arrived at their prudent

investment cost by computing what labor and mate-

rial should have cost at the respective dates involved,

and there was nothing to indicate that they made

the mistake of counting these overheads in again

after they had originally estimated for the same

things. Therefore we conclude that, at least, that

estimate of over

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