# Appellees Brief — McCardle v. Indianapolis Water Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_0538%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Appellees Brief - **Published:** January 1, 1926 - **Citation:** 272 U.S. 400 ## Text = Tee gem, SO FUL OUT Pe Pea LPO OO FUP er OR MR OND RAN Oe ° la a a a a | 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 ue 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 vi 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” .... (C) Judge Geiger need not have limited the ap- 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 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 81-86 82-85 85-86 87 87-90 87-88 89-90 89-90 90 90 90-91 91 92 92-93 93-96 93 witacn Suis | ts 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 ........... (C) Changes in the classification of property, by eliminating any claimed not to be used and useful in the water business, does not explain the reduction in the valuation .............. PAGE 93 94 94-96 96-99 99-106 99-101 101-103 103-104 104-106 105 105 Vi. Vil. xi (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 (C) The Commission's valuation of November 28, 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 (C) Not more than 5.04 per cent. actually available SP PN bccn nccnatanddcsdacsncbasanass 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 XX 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 ii bo 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. ea 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 ! £3 eee rate taatin Le EEE RAEN LIL AE LEA DE OT HeAI, 21 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: a 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). a 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 22 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 23 (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 rae pera ERS ERR R ON eC Naess Boye 24 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 pe . 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 26 ‘*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: 27 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 “ys 2 bon intr: ct SF 7 pai So a LDU I Raat PEEIITY ELE PAIR EM PETERS Breer AERIALS RTE ER Dies 28 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+ 29 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 30 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). 4 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 31 (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 32 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 33 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). 34 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 39 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 ia e ee ee * & g gs e % 36 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; 37 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 38 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 39 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 40 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,”’ 41 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 42 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 43 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 4H 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). 45 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 . ah 46 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 47 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 48 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 49 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 50 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 - _ dl 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 | 52 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 us ‘iio. 53 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- o4 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 ~_- v0 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 06 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 oi 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: 58 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 60 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- 61 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. 62 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, 63 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 64 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. 69 351; 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 | 66 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 67 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 68 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), 69 “Tam not confronted with the problem of fixing a valuation within the range of dispute upon spot — reproduction’* (R. 64). £ A 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 3 (3) Judge Geiger’s clearly expressed views on the value © 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 70 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, 71 000, 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 “> _ - “7 114 fatled utterly to give proper consideration to ‘‘construction costs, conditions, wages and prices affecting value’’ as of 1923, and that the District Court was right in coneluding that the Commission had ‘‘considered’’ those factors only by ignoring them (R. 62). In the paragraph numbered 3, on page 41 of the appel- lants’ brief, it is said that ‘*the Commission did not disregard the engineers’ estimate of spot reproduction cost. No less than $3,626,833.41 was allowed for appreciation in value accrued after March 21, 1921, and the estimates of spot reproduction was the only evidence in which the allowance for appreciation could rest.’’ Something of the same import is carried on pages 59 and 60 of the appellants’ brief; and on pages 61 and 62, appellants undertake to demonstrate that some substantial allowance was made by the Commission’s valuation of No- vember 28, 1923. All of these computations are fallacious and misleading, and fail to show that proper weight was given to ‘‘constrve- tion costs, conditions, wages and prices affecting value”’ at the date of the valuation. Each of these computations is based on the unproved and false premise of the adequacy of early ‘‘valuations” made by the Commission, to reflect ‘‘present value’’ as of those earlier dates. The fact is that nearly all of those prior ‘‘valuations,’’ before 1923, were made on a basis amounting virtually to estimated original or historical cost less accrued theoretical depreciation and various other de- ductions. To add net additions at book cost to these ab- breviated estimates of original cost less a theoretical de- preciation, could not give present value in 1923. Naturally, such a fallacious selection of starting point produces some ' ' pretext of support for a claim that the November (1923) valuation allowed for some appreciation. Any such method of harking back to inadequate ‘‘valu- at [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_0538%3A3. Public record. Not legal advice.