Opinion
April 17, 1928.
Frank Bergen, of Newark, N.J., for plaintiff.
John O. Bigelow, of Newark, N.J., for defendant.
In Equity. Bill by the Plainfield-Union Water Company against the Board of Public Utility Commissioners of New Jersey, to enjoin them from putting in force certain proposed water rates. Decree for complainant.
Decree modified 30 F.2d 859.
The report of the special master was as follows:
To the Honorable the Judges of the District Court of the United States for the District of New Jersey:
The report of Charles F. Lynch, special master, appointed in the above cause on November 10, 1926, whereby he was directed to "find and report the facts to this honorable court with his recommendations," is hereby submitted with the testimony taken stenographically, which has been transcribed, together with the exhibits offered by the parties.
At the outset I desire to state that this cause of action is quite similar to the suit brought by the Middlesex Water Company against the same defendant, which resulted in a decree affirming the special master's report. (D.C.) 10 F.2d 519. The Middlesex Case will frequently be referred to during the course of this report. In fact, I have decided to arrange the form of this report somewhat in line with the form adopted by Special Master Dawes. This, I believe, may assist your honors, if comparison becomes desirable.
The plaintiff in this case was created by a consolidation agreement dated September 21, 1906, made by and between the following two corporations: The Plainfield Water Supply Company and the Union Water Company.
The Plainfield Water Supply Company was created by a special act of the Legislature of the state of New Jersey, passed April 2, 1869 (chapter 244 of the Pamphlet Laws of 1869, p. 1318); the charter authorizing the company to construct works and supply water in Plainfield and adjoining towns.
The Union Water Company was created by a special act of the Legislature passed March 17, 1870 (chapter 380 of the Pamphlet Laws of 1870, p. 788). This company was authorized to supply water throughout Union county.
The testimony is to the effect that neither of these companies really did anything prior to 1890 except meet, organize, and make tentative efforts to construct waterworks — simply preliminary investigations and inspections.
There was a third company, known as the Plainfield Waterworks Company, formed early in 1890, under the General Water Company Act of 1876 (P.L. 1876, p. 318), which company purchased land at Netherwood, N.J., drove 20 wells thereon, and began the construction of the present pumping station. This company running short of funds did not finish the undertaking. On August 4, 1890, the Plainfield Water Supply Company bought the property of the Plainfield Waterworks Company and proceeded to complete the waterworks which had been started by the Plainfield Waterworks Company. The Plainfield Water Supply Company constructed waterworks in the city of Plainfield and, extending its mains over into North Plainfield, began supplying water for domestic use in August, 1891, using the 20 wells at Netherwood which had been driven by the Plainfield Waterworks Company.
Mr. Frank Bergen became president of the Plainfield Water Supply Company on August 4, 1890, and continued as such until the consolidation agreement of September, 1906, hereinbefore referred to.
In 1891 Mr. Bergen acquired control of the Union Water Company, which company in 1892 laid a main from the Netherwood pumping station to Elmora, a distance of about 10 or 11 miles, and constructed lateral systems of mains in the towns intervening between Elizabeth and Plainfield. The Union Water Company began to supply water in 1892, establishing the same rates that the Plainfield Water Supply Company had established, which rates, so established, continued and remained in effect until the year 1924.
The plaintiff owns and operates waterworks in the cities of Plainfield, Elizabeth, and Linden, in the townships of Fanwood, Cranford, and Clark; the town of Westfield; the boroughs of Fanwood, Garwood, Kenilworth, Roselle, and Roselle Park; and in that part of the city of Elizabeth known as Elmora, in the county of Union; the borough of North Plainfield and township of North Plainfield, in the county of Somerset; and the township of Piscataway in the county of Middlesex.
The 16 municipalities served contain a population of about 85,000 at present, and it is not denied that they are increasing very rapidly in population, probably at the rate of 4,000 a year.
The source of water supply of the plaintiff is at a place called Netherwood, a local name for the eastern part of the city of Plainfield, where the plaintiff owns about 30 acres of land upon which wells were driven in 1890 which have been used continuously ever since. Netherwood is located about in the midst of 30 municipalities. The wells there yield about 8,000,000 gallons of water a day which is conveyed by mains of the company to the various municipalities supplied. In 1890 the population of this same territory was about 18,000 and the value of the property at that period, according to the assessments made by taxing officers, was about $13,451,687. In 1926, the assessed valuation of property was approximately $184,201,266.
The mains of the plaintiff, the Middlesex Water Company, and the Elizabethtown Water Company are all connected. Mr. Frank Bergen is president of the Middlesex Water Company and of the plaintiff, and is counsel for the Elizabethtown Water Company.
About 15 years ago the Middlesex Company and the Elizabethtown Company and the plaintiff selected an additional source of water supply at the junction of the Millstone and Raritan rivers in Somerset county, the estimated cost of which would be about $5,000,000. This project, however, has not been proceeded with. In the first column of page 520 of 10 F.2d, in the Middlesex Case, Special Master Dawes refers to this proposed project more in detail. The plaintiff's proportionate share of the cost of this development would be about $1,500,000.
The 16 municipalities mentioned are solely dependent on the water supplied to them by the plaintiff from its wells, which, by the way, are now very severely taxed. There will undoubtedly come a time, perhaps in the very near future, when the company and its associated companies will not be able to furnish, from their present sources of supply, water to meet the needs of the growing communities. It would seem under all conditions advisable to encourage the water companies to develop the new source proposed at the junction of the Raritan and Millstone rivers, which, so far as it appears from the evidence before me, is the only new source now available.
In 1891, when the original rates were established, they were fixed at $18 a year, for supplying fixtures commonly used in cottages, which was slightly less than the average charged for the same service by water companies in the neighboring cities or municipalities. These same rates remained from their establishment until 1923, when on November 19th of that year, the plaintiff filed with the defendant a schedule increasing its rates to take effect January 1, 1924. This schedule was suspended by the defendant on December 12, 1923, and hearings ensued.
The defendant is a commission of the state of New Jersey possessing regulatory powers over the services rendered and rates charged by the public utilities of the state.
This 1923 schedule of rates so filed was based on a valuation of plaintiff's property of $3,800,000 exclusive of the plaintiff's source of water supply, the value created by the consolidation agreement made in 1906 and the value of the favorable location of the plaintiff's property in 16 rapidly growing municipalities. The plaintiff reserved the right to claim the full value of its property if and when deemed advisable. After hearings the defendant board, on May 22, 1924, filed its report or decision fixing the value of the plaintiff's property for rate making purposes at $3,337,000 and prescribed a schedule of rates which, it asserted, would yield to the plaintiff 7½ per cent. on that sum, if paid in full. A 10 per cent. reduction for inadequacy of service was also ordered as will be observed by reading the conclusions of the defendant which follow:
"1. That the value of the property of this company for the purpose of determining rates, as of December 31, 1923, is $3,337,000.
"2. That a fair gross return for this company to receive on said valuation, subject to the provision that the service rendered by it shall be safe, adequate and proper, is $250,000.
"3. That the rates filed by the petitioner are unjust, unreasonable, and are disapproved.
"4. That the petitioner shall be afforded relief by increased rates.
"5. That the service has not been up to the standard of being reasonable, sufficient, and adequate and that the value of the existing service is best reflected by deducting 10 per cent. from the schedule of rates hereinafter set forth, which schedule as indicated, is based upon normal service.
"6. That the following schedule of rates is just and reasonable: [Schedule not copied.]"
The plaintiff protested but operated under this schedule of rates, so filed by the defendant, for a period of about two years. It now alleges that in 1924 it was not able to earn more than 5.06 per cent. and in 1925 not more than 5.04 per cent. on the valuation of the property so fixed by the defendant on May 22, 1924.
On May 24, 1926, the plaintiff filed a petition with the defendant asking the right to charge the full schedule of rates allowed by the board, to eliminate the 10 per cent. discount for water service charges referred to in paragraph 5 of conclusions hereinbefore recited, and also to amortize the deficits occasioned since the decision of the board of May 22, 1924, by the 10 per cent. reduction of rates and by other deficiencies in rate, together with the cost of the rate case.
After hearings, the defendant, on June 10, 1926, ordered that the rates prescribed by the order of May 22, 1924, be charged by the plaintiff without deduction of the discount referred to in paragraph 5 of the conclusions hereinbefore recited.
On August 26, 1926, the board issued a second or supplemental order holding as follows:
"1. That the petition of the Plainfield-Union Water Company to amortize 1924 and 1925 deficits and rate case expenses aggregating $205,961.63 by an increase in rates for a two-year period beginning with October, 1926, quarterly billing, be and the same is hereby dismissed.
"2. That the said Plainfield-Union Water Company be and is hereby authorized to recoup from rates an amount of $91,189 representing the deficits below a reasonable return during 1924 and 1925, by reason of the rates heretofore prescribed by this board and for the expenses of its 1924 rate case.
"3. That said amount of $91,189 may be amortized by a surcharge of 5 per cent. to be added to the existing schedule of all rates of the Plainfield-Union Water Company until such time as the excess revenue produced by such surcharge shall have equaled said sum of $91,189.
"4. That the said Plainfield-Union Water Company shall impose said surcharge on bills for water beginning with the quarter following July 1, 1926, and continue the same until such time as said amount of $91,189 shall have been amortized by excess revenue produced by said surcharge of 5 per cent. and no longer.
"5. That the said Plainfield-Union Water Company shall make quarterly reports with respect to the amount received by it from the said surcharge of 5 per cent. in the manner more particularly set forth in the decision on which this order is based.
"6. That no part of the $35,691 of rate case expenses provided for in said sum of $91,189 shall be charged to expenses but shall be charged directly to the company's corporate surplus account.
"This order shall become effective September 1, 1926."
Thereafter, on October 1, 1926, the plaintiff filed its bill in this court alleging that the order of May 22, 1924, even as modified by the order of June 10, 1926, and also the order of August 22, 1926, worked and work a confiscation of the plaintiff's property, in that they are based on an inadequate valuation of the plaintiff's property, and under the existing schedule of rates, the plaintiff is unable to earn more than 3½ per cent. of the value of its property used and useful in its business.
Value.
The issue is practically the same as the issue presented by the Middlesex Case and the vital question is one of value. I do not propose to restate the numerous decisions quoted by Special Master Dawes under this heading. A reference to them, I believe, is all that is required here. Judge Rellstab in his opinion affirming the report of Special Master Dawes at page 534 of 10 F.2d, in next to the last paragraph, recognized the right of a utility company to be afforded an opportunity through reasonable rates to earn, not only enough to produce a fair return on the value of its property, useful and used in the public service, but enough more to enable it to secure the capital necessary to install facilities adequately to care for the increasing demands of a constantly growing population.
I quote only from the later case of McCardle et al. v. Indianapolis Water Co., 272 U.S. page 400, 47 S. Ct. 144, 71 L. Ed. 316, as follows:
"Undoubtedly, the reasonable cost of a system of waterworks, well-planned and efficient for the public service, is good evidence of its value at the time of construction, and such actual cost will continue fairly well to measure the amount to be attributed to the physical elements of the property so long as there is no change in the level of applicable prices, and, as indicated by the report of the commission, it is true that, if the tendency or trend of prices is not definitely upward or downward and it does not appear probable that there will be a substantial change of prices, then the present value of lands plus the present cost of constructing the plant, less depreciation, if any, is a fair measure of the value of the physical elements of the property. The validity of the rates in question depends on property value January 1, 1924, and for a reasonable time following. While the values of such properties do not vary with frequent minor fluctuations in the prices of material and labor required to produce them, they are affected by and generally follow the relatively permanent levels and trends of such prices." Page 411 of 272 U.S. ( 47 S. Ct. 149). "* * * Moreover, there is nothing in the record to indicate that the prices prevailing at the effective date of the rate order were likely to decline within a reasonable time — one, two or three years — to the level of the average in the ten years ending with 1923. And we may take judicial notice of the fact that there has been no substantial general decline in the prices of labor and materials since that time. The trend has been upward rather than downward." Page 412 of 272 U.S. ( 47 S. Ct. 149).
In determining the questions involved many elements will be considered.
Original Cost.
As to the historical or book cost, the testimony is to the effect that the original cost as of January 1, 1927, was $2,653,576, exclusive of the item for good will amounting to $281,000, which was written into the books and stock issued therefor at the time of the consolidation agreement creating the plaintiff. Upwards of $1,000,000 of this book cost was expended between 1916 and 1926 — a period of high prices. These figures represent the actual cost new without depreciation.
Stock and Bonds.
Return Computed on Stock and Bonds of Plaintiff as Shown in Report to Defendant, 1926.
The total bonds outstanding ...................... $1,591,800 And a floating indebtedness of ................... 190,000 __________ $1,781,800 Stock issue is ................................... 1,144,600 __________ $2,926,400 Interest on bonds is ................... $ 95,508 Interest on floating debt .............. 11,400 ________ $106,908
The gross revenue is ................... $554,090 Operating expenses, taxes and allowances for depreciation is .................. 272,905 ________ $281,185 Bond interest and interest on floating indebtedness ......................... 106,908 ________ Leaving for dividends .................. $174,277
Inventory and Appraisals Showing Cost of Reproduction at Present Prices.
The plaintiff submitted an inventory, prepared by Hagenah Ericson, of Chicago. It is not asserted that this inventory is not a substantially accurate list of the physical property of the plaintiff. Mr. Dorsey, of the firm of Hagenah Ericson, spot checked it, and, finding the parts checked to be correct, assumed that the whole inventory was correct. Dorsey, and men working under him, then collected information with respect to the costs and value of the various items which went to make up this inventory as of January 1, 1927. Dorsey, after accumulating this information, turned it over to Mr. Hagenah, who ascertained or formed an opinion of the other elements of value to be added to the cost of reproduction of the physical property, for the purpose of determining the value of the entire property and testifying with respect thereto. Hagenah, who, by the way, was a witness in the Indianapolis Water Co. Case, just referred to, is a man of very wide experience in appraising the value of utilities. He has been connected with a number of important cases in the past, and has been employed by both cities and Boards of Public Utilities Commissioners throughout the country, as well as by banks and insurance companies, for the purpose of passing upon the value of securities offered for sale by utilities. Hagenah inspected the property of the plaintiff, after the preliminary work had been done by Mr. Dorsey and the subordinates, and fixed his opinion of the value of the property at $5,407,350, after deducting $299,246, for depreciation, but not including the value of the source of water supply.The plaintiff also called Mr. Cornelius C. Vermeule, a consulting engineer with almost 40 years' experience in hydraulic engineering, who has constructed waterworks at various places in New Jersey and other Eastern states. He is at present advising the city of New York concerning a supply from driven wells on Long Island. Vermeule has examined the property of the plaintiff from time to time during the last few years. He testified that the value of the property of the plaintiff, without depreciation and not including the value of the source of water supply, was $6,107,316. He fixed the value of the source of the water supply at between $1,000,000 and $1,125,000, and he found the actual observed depreciation to be the total of $40,493.06; no theoretical depreciation allowance being considered by him.
Mr. Fred G. Gordon, a consulting engineer of Chicago, who has had considerable experience in appraising waterworks property, including reservoirs, pumping stations, wells, dams, etc., as well as other utilities, was called by the defendant. He submitted an appraisal, based on the inventory of Hagenah Ericson, and gave his opinion that the reproduction cost, exclusive of going value, amounted to $4,240,232, and that the present value, exclusive of going value, amounted to $3,778,536.
There was also produced, by the defendant, Professor Weston E. Fuller, formerly of the firm of Hazen Whipple, consulting engineers of New York City, and now professor of civil engineering at Swarthmore College, who has had considerable experience as general supervisor of waterworks at a great many places, and who has, at one time or another, valued most of the large water companies located in the state of New Jersey. He, like Mr. Vermeule, was probably more familiar with local conditions than his associate expert from Chicago. Professor Fuller took the Hagenah inventory, and, using substantially all, if not all, of it, placed the cost of reproduction value, including working capital, materials, and supplies, at the amount of $4,263,619. He deducted depreciation, amounting to a total of $890,770, making the cost of reproduction, less depreciation, the sum of $3,243,677.
These four expert appraisers, in making up their valuations, adopted some building and land values furnished by other witnesses, who testified regarding local values.
In the Middlesex Case, Special Master Dawes had two appraisals before him, which were not very far apart. Mr. Dawes adopted one of the two appraisals submitted to him. But there are four distinct valuations before me, with very wide differences, as will be observed by a reading of the following summary:
==================================================================== Summary of Four Experts Not Including Value of Water Rights. -------------------------------------------------------------------- | | | Present | Present | | Cost | Cost | Depreciation. | after | New. | | Depreciation. ----------------|----------------|---------------|------------------ Hagenah ....... | $5,706,596 | $299,246.00 | $5,407,350 Vermeule ...... | 6,107,316 | 40,493.06 | 6,066,823 Gordon ........ | 4,240,232 | 461,696.00 | 3,778,536fn_ Fuller ........ | 4,263,619 | 890,770.00 | 3,243,677 --------------------------------------------------------------------
Exclusive of going value.
It therefore becomes necessary for me to analyze and consider the appraisals submitted, item by item, in order to reach a conclusion as to the present value which I must fix and determine from all of the evidence. A further illustration of the very wide difference between these appraisers, or some of them, appears in the very first item in respect to wells. The following is a summary:
============================================================== | Reproduction | Depreciation. | Present | Cost. | | Value. ----------------------|--------------|---------------|-------- Hagenah ............. | $47,862 | $4,787 | $43,075 Vermeule ............ | 51,717 | ...... | 51,717 Gordon .............. | 46,258 | 10,177 | 36,081 Fuller .............. | 46,550 | 17,628 | 28,922 --------------------------------------------------------------
The wells have been faithful for many years, are functioning very satisfactorily, supplying the community with its needs, and, so far as the future is concerned, there is nothing to indicate that they will not function efficiently under present conditions for a long time to come. It is true that before long there will have to be an additional supply to provide for the growing population which is bound to come, but, considering the present and future, these wells are just as good and valuable for their purposes as they ever were.
I have carefully read the testimony of Professor Fuller with respect to the depreciation which he deducted on account of these wells (page 1378 to page 1393 both inclusive), but I cannot agree with the conclusion of Professor Fuller that the arbitrary sum of $17,628, or any such sum, should be deducted from his reproduction cost of these wells, which are adequately serving present requirements. Mr. Vermeule, as familiar with local conditions as Professor Fuller, fixed the reproduction cost of these wells at the sum of $51,717, and deducted nothing for depreciation. His entire appraisal included as and for depreciation only what he actually observed in inspecting the property — how much money should be expended to render the property just as good as new. There is no present necessity of spending anything on the wells, so far as I can find from the testimony. Notwithstanding this, Hagenah deducts 10 per cent. for depreciation (which seems to be his average throughout the list), Gordon deducts more than 20 per cent., and Fuller almost 40 per cent. So in fixing my present cost of reproduction I shall first find the cost of reproduction new, and later discuss the question of depreciation.
In this connection it would be well to refer to the fact that the plaintiff also called as a witness Mr. Morris R. Sherrerd, a well-known engineer of Newark, N.J., who has been in charge of the development of the water supply for the city of Newark since 1895, and who has also been in charge of the huge water development for Northern New Jersey under the North Jersey district water supply commission and other commissions of the state for many years. Mr. Sherrerd testified that he has been familiar with the property of the plaintiff for many years, intimately for 20 years, and more or less for 32 years. He testified, as did Mr. Vermeule and other witnesses, that the property of the plaintiff, speaking generally, is in excellent condition and functioning efficiently. I had occasion to visit the property in November, 1926, and again in September, 1927, and on both occasions I was impressed by the manner in which all of the property has been kept up. My views, in harmony with the weight of the evidence, are that the machinery is adequate, in fine condition, and operates efficiently and smoothly. There seems to be no inadequacy present, except the conceded fact that the company will need an additional water supply.
In fixing the value of the wells, therefore, I shall take the sum of $46,550 supplied by Professor Fuller, and, as already stated, will later consider what depreciation, if any, should be deducted.
The collecting reservoirs are appraised as high as $60,340 by Mr. Vermeule, and as low as $41,313 by Professor Fuller. Mr. Gordon appraised them at $44,188, which amount I shall adopt.
As to the intakes and supply mains, three of the experts fixed $26,670 or upwards, which amount I shall adopt.
There is a wide difference between the appraisers as to the pumping station structures. I shall fix the sum of $124,000, which is about splitting the difference between the two extremes.
As to the three items, boiler plant, steam power pumping equipment, and miscellaneous pumping equipment, Mr. Dorsey estimates the value of these items at $242,541; Mr. Gordon, at $259,372; Mr. Fuller, at $233,474; and Mr. Vermeule, at $246,423. There is not such a wide difference between the four appraisers as to these. Two of them place a higher value than Mr. Dorsey, who fixes $242,541. At least $242,541 is in accord with the weight of the evidence, so I shall adopt that amount as my value.
As to the storage reservoir, I am inclined to believe that the estimates submitted by Professor Fuller and Mr. Gordon are too low. Adopting the estimate of Mr. Dorsey, we have it at $188,079.
As regards service pipes, meters, fire hydrants, etc., it strikes me that Professor Fuller has calculated more extensively the costs of these particular items. Service pipe, $200,916; meters, $273,313; fire hydrants, $136,437.
I, too, shall adopt as the valuations of general structures, $59,850; general office equipment, $5,799; transportation equipment, $11,100; and general equipment, $6,438.
Regarding cast iron pipe, which is by far the largest single element, the bill of complaint alleges that the price per ton of 6-inch pipe and upwards in 1913 was $25.25, in 1920 was $74.30, and in 1925 was $53.35; an increase of 111 per cent. in 1925 over the year 1913. The testimony clearly indicates that cast iron pipe has dropped since 1925, and the trend seems to be downward, although this is not certain, because of slack conditions appearing to exist in the industry in the winter time of 1927-1928. There is a single transaction referred to where cast iron pipe has been sold as low as $31.50 per ton at Phillipsburg — the equivalent of $33.10 at Plainfield. An isolated transaction, of course, should not determine market prices.
The taking of the testimony before me started on December 31, 1926, and continued at intervals during the year 1927, ending on November 4, 1927. Thereafter briefs were submitted to me. Early during the hearings Mr. Dorsey testified that he had fixed the price of $48.60 for cast iron pipe per ton as of January 1, 1927. His total as to this item was $2,620,983. Mr. Gordon later, testifying for the defendant and using a basis of $43 per ton for cast iron pipe, fixed the total valuation of that item at $2,176,356. Mr. Fuller's valuation of cast iron pipe, $2,281,889, is at the rate of $46 per ton. Mr. Vermeule's estimate for this item was higher than the others, $2,912,035. There is uncontradicted evidence that cast iron pipe, 6 inches and over was obtainable in September, 1927, f.o.b. Plainfield in the neighborhood of $40 per ton. I shall adopt $40 per ton as my figure. Professor Fuller's estimate of $2,281,889 was based on $46 per ton. Revising the estimate of Professor Fuller, I fix the reproduction value of the mains, hydrants, and valves at $2,101,889.
I find, therefore, the cost of reproducing new the items which I have so far enumerated to be $3,467,770.
Depreciation.
In the Middlesex Case, Special Master Dawes accepted the testimony of Expert Hill, who personally examined the property there under consideration, observed the condition of it, and then estimated what he thought was a fair allowance for actual and probable deterioration, based upon his observation and his judgment of the probabilities of diminishing service, due to yearage and other causes. The amount of depreciation accepted was $304,473.
The four experts in the instant case submit vastly different theories and results. There is a difference of about $850,000 between the two extremes. No two are within $160,000 of each other. Necessarily arbitrary amounts are fixed. There is no exact formula to be followed in such cases. I suppose it is to be expected that an appraiser will lean somewhat toward the side which employs him. Various elements enter into the problem. It is argued in behalf of the defendant that there is always obsolescence and deterioration, even though not observable to the eye of the layman; that no machinery or other property used for a considerable length of time is precisely the same as when it was installed new; that there is in all properties, particularly where the same includes machinery, what may be called functional depreciation; that there is always wear and tear, which, even though very difficult of computation, must be considered; and that there must also be considered the advance in science and art. There are various ways of determining depreciation. The appraisers, using different theories, arrived at different results. Adopting the theory and result of Professor Fuller, I should be forced to find and report that there is no confiscation in this case. But I cannot join Professor Fuller in the view that this property is so antiquated, or obsolete, or inadequate, or whatnot, that there should be deducted, as and for depreciation, about $900,000.
It does not appear to me that the wells of the plaintiff will sooner or later be abandoned in favor of some newly developed water supply located elsewhere. It is the only water supply now available, and the pipes making up the mains are, for their purposes, as good as new. There was an attempt made to show that the mains and pipes had deteriorated, but it was and is clear to me that these mains are just as sound and serviceable, so far as supplying water is concerned, as they ever were, and in all probability they will continue to render the same service for many years to come.
But Professor Fuller depreciates the distribution system as follows:
Storage reservoir ........... $ 39,603 Distribution mains .......... 496,543 Service pipes ............... 32,146 Meters ...................... 53,187 Hydrants .................... 55,329 ________ Total .................... $676,808
In the case of the Brooklyn Union Gas Co. v. Prendergast (D.C.) 7 F.2d 628, at page 645, the master said: "No allowance is here made for depreciation. The evidence was substantially to the effect that the life of these mains is unknown, and that whatever depreciation takes place is so slight that it is a negligible factor. For the guidance of the court, the plaintiff produced a piece of cast iron pipe which had been installed approximately 50 years ago. Experts testified, upon examination of this exhibit, that it showed no substantial deterioration, and, for the purpose of a gas main, was as good as new. This evidence was not controverted." This case was affirmed by the United States Supreme Court. 272 U.S. 579, 47 S. Ct. 199, 71 L. Ed. 421.
In the instant case there is convincing evidence of the very same nature. Pieces of pipe installed many years ago were produced. Experts examined these exhibits and testified that they showed no deterioration whatever, and, for the purpose of water mains, were as good as new. They so appeared to me.
In the case of Kings County Lighting Co. v. Prendergast (D.C.) 7 F.2d 192, the master deducted $18,543.42 for the cost of repairs, etc., and made no further deduction for depreciation for the reason that the property by reason of adequate current maintenance was as good as new and therefore able to perform fully the functions for which the items of the property were intended. The report of the master was approved by Judges Manton, Campbell, and Inch. In the opinion, referring to the matter of depreciation, the court said, at page 216 of 7 F.2d, that the master had "found from the evidence that the property had been well maintained and was in an efficient state of repair and operating condition, and that it would require an expenditure of only $18,413.43 to put it in condition which was substantially as good as new." The opinion of the District Court was also affirmed by 272 U.S. 579, 47 S. Ct. 199, 71 L. Ed. 421.
See, also, Consolidated Gas Co. v. Prendergast (D.C.) 6 F.2d 243 at page 271, where the master said: "As I have already stated, I have made no deduction from or in the amounts found by me for the reproduction cost of the property or its value, for the purposes of this case, for any so-called 'accrued depreciation,' but I have deducted the amounts shown by the uncontroverted evidence to be required to be expended to put the properties used by the plaintiff in a condition equivalent to new. My reasons for these conclusions I have set forth in my opinion in New York Queens Gas Co. v. Prendergast et al. (D.C.) 1 F.2d 351, 365, which has been confirmed by Judge Winslow in the final decree entered by him in that case, as quoted in P.U.R. 1924E, at page 59." See, also, N.Y. Queens Gas Co. v. Prendergast, 1 F.2d at page 371.
As I understand the testimony in this case, replacements in this system have been made from time to time whenever and wherever necessary or required. Meters and hydrants, as well as other component parts making up this water system, have been replaced from time to time.
My conclusion is that there appears no justification for arbitrarily fixing and then deducting huge amounts as and for theoretical depreciation for or on account of these items. Mr. Vermeule testified that in his opinion it would take about $40,493.06 to render the properties of the plaintiff just as good as new, and when that had been done there would be no reason for deducting any amounts for theoretical depreciation. Actual observed depreciation will therefore be allowed in the sum of $40,493.06.
There are, however, some other things for and on account of which I think it is proper to allow depreciation. The automobiles, although still serviceable, are very old and out of date. It is questionable whether they possess any present value. Some of the buildings, while still in fairly good condition, are not what they used to be. Mr. Gordon, for the defendant, has deducted depreciation as to these matters as follows:
Miscellaneous properties ............. $19,355 General office equipment ............. 870 Transportation equipment ............. 6,660 Miscellaneous equipment .............. 2,575 Pumping station structures ........... 22,605 Boiler plant equipment ............... 14,259 Miscellaneous pumping equipment ...... 324 _______ Total ............................. $66,648
These amounts appearing to be reasonable will be adopted.
Again we strike a wide difference in respect of the steam power pumping equipment:
======================================================== Expert. | Reproduction | Present | Depreciation. | Cost. | Value. | ---------------|--------------|----------|-------------- Gordon ....... | $200,210 | $ 93,977 | $ 106,233 Hagenah ...... | 177,838 | 159,791 | 18,047 Fuller ....... | 175,465 | 102,145 | 73,320 --------------------------------------------------------
If we depreciate this item to the extent of $50,000, we will have a total depreciation so far of about $157,000. This, I believe, covers all of the actual observable depreciation. Not desiring to draw the line too finely, I shall take the sum of $200,000 as and for depreciation, which brings the following result:
Cost new .............. $3,467,770 Depreciation .......... 200,000 __________ Present value ......... $3,267,770
Overheads.
Under the title of "Overheads During Construction," Special Master Dawes, in the Middlesex Case, fixed 15 per cent. to be added to the depreciable physical assets of the company. The defendant board had previously fixed 15 per cent. In that case Expert Shaw estimated 13 per cent., while Expert Hill estimated 17½ per cent. In the instant case Expert Vermeule fixes 20 per cent. as and for overheads amounting to $901,219. Expert Hagenah fixes 18 per cent. for overheads during construction, sometimes called "miscellaneous construction expenses." Expert Gordon fixes 16 per cent., while Expert Fuller has adopted 14½ per cent. as his estimate. The defendant board, in its order of May 22, 1924, already referred to, allowed overhead charges of 15 per cent. Under the evidence in this case an addition of 15 per cent. for overheads would be conservative and as 15 per cent. has already received the approval of this court in the Middlesex Case, where the facts were quite similar, that percentage will be adopted by me.Lands.
Besides the wells, reservoirs, mains, structures, pipes, meters, and other equipment, which have already been discussed, there is also to be considered about 30 acres of land located around the pumping station at Netherwood and also land surrounding the North Plainfield and Fanwood reservoirs. Is this land used or useful for the public service? It has been held that patrons of a utility ought not to be compelled to pay rates on excessive investments or unnecessary facilities including lands. San Diego Land Co. v. Jasper, 189 U.S. 439, 23 S. Ct. 571, 47 L. Ed. 892. See, also, Long Branch v. Tintern Manor Water Co., 70 N.J. Eq. 71, 62 A. 474.
The defendant produced an appraiser who valued all of the land owned by plaintiff, and then classified it under two headings, one "used and useful," with a valuation of $91,791, and the other "not used and useful," with a valuation of $81,333.80 — a total valuation of $173,124.80. Appraisers selected by the plaintiff fixed the valuation of both classes considerably higher than the $173,124 testified to by the witness Hadden for the defendant. Hadden, in fixing his valuation, took into consideration zoning ordinances. He seemed to be quite familiar with these ordinances, as well as with recent sales in and about the territory.
It is the contention of the defendant that only a portion of the land which the plaintiff owns is necessary for the supply of water for the protection of the wells and reservoirs, and that there should not be taken into consideration in fixing value for rate making purposes any of the lands which are not used and useful. Opposed to this testimony there is evidence on behalf of the plaintiff to the effect that all of the lands are used and useful.
So far as I am concerned, I am content to adopt the view of Mr. Sherrerd, an engineer, who, in my opinion, is more familiar with conditions in New Jersey with respect to water supply and protection than any other individual produced. His opinion is that the plaintiff does not own sufficient land to give full protection to its water supply; that it is advisable for the plaintiff, to prevent possible pollution, particularly in a section where houses are likely to be built, to own as much land as possible; that the ownership of land should be extensive. About 13 acres of the plaintiff's land are located near the Plainfield standpipe. This was purchased a long time ago, and plans were prepared for the construction of a reservoir similar to the one at Fanwood, which plans, however, were never carried out. In the opinion of Mr. Sherrerd, this reservoir should be built, and Mr. Vermeule, another practical man, affirms the opinion of Mr. Sherrerd as to the usefulness of the present land owned by the company and the desirability of acquiring additional surrounding territory. In view of this convincing evidence, I find that all the lands now owned by the plaintiff are used and useful. It will be considered as an entirety, and the value of $173,124 fixed by Mr. Hadden will be adopted by me.
Working Capital.
A water company, as well as any other company, must have working capital for the operation and maintenance of its property, as well as reasonable cash provision for meeting normal operating expenses as they become due. The experts furnished the following estimates as and for working capital:
Hagenah ....................... $115,000 Vermeule ...................... 100,000 Gordon ........................ 70,000 Fuller ........................ 70,000
In the Middlesex Case, Special Master Dawes considered $70,000 as a fair amount for working capital of the plaintiff in that case. In comparing the companies, I should say that the Plainfield-Union Water Company is a much larger concern than the Middlesex Water Company, and therefore requires a greater working capital. In the Middlesex Case, the defendant fixed a valuation of $1,738,200, while the master found a valuation of at least $2,500,000. In the instant case, the board fixed the valuation of $3,337,000, and the plaintiff asks a valuation of more than $5,000,000. So far as the plaintiff is concerned, I do not think it would be fair to fix less than $100,000 as and for working capital. This amount I shall fix.
Water Rights.
On pages 252, 256, and 257, Special Master Dawes, in the Middlesex Case, discussed this subject. No conclusion was reached, because it did not seem to be necessary there. I do not deem it necessary for the purpose of deciding the instant case.
Going Value.
Going value was allowed by the defendant board in its order of May 22, 1924, amounting to 10 per cent. The board used this language: "Going concern value has been defined as being the difference between a plant without attached business and one with the business developed," etc. Expert Hagenah fixed the going value of the plaintiff's property at $508,300, 10 per cent. of his estimate of $5,083,296 as the cost to reproduce the physical property of the plaintiff before depreciation. Mr. Vermeule takes the arbitrary sum of $600,000 as his estimate of the going value of this property. No separate estimate for going value is submitted by either Mr. Gordon or Prof. Fuller, as I understand their testimony. An allowance for going value was approved in the Middlesex Case. My conclusion is that 10 per cent. is just and reasonable.
Organization.
The experts of the defendant do not furnish any estimate as to organization, although the board itself, in its order of May 22, 1924, allowed the sum of $50,000 for organization and cost of franchises. The evidence in the instant case on the subject of organization is not clear, so that item will not now be considered. A summary of the items which I have already discussed is as follows:
Summary.
Wells ...................................... $ 46,550 Reservoirs ................................. 44,188 Intakes and supply mains ................... 26,670 Pumping station structures ................. 124,000 Boiler plant, steam power pumping equipment, and miscellaneous equipment .............. 242,541 Storage reservoirs ......................... 188,079 Service pipe ............................... 200,916 Meters ..................................... 273,313 Fire hydrants .............................. 136,437 General structures ......................... 59,850 General office equipment ................... 5,799 Transportation equipment ................... 11,100 General equipment .......................... 6,438 Mains, hydrants, and valves ................ 2,101,889 __________ $3,467,770 Depreciation ............................... 200,000 __________ $3,267,770 Overheads .................................. 490,165 Lands ...................................... 173,124 Working capital ............................ 100,000 Going value ................................ 393,105 __________ $4,424,164
And I have not taken into consideration, because I believe it unnecessary in the disposition of this case, the value, if any, of plaintiff's source of water supply, or the value of the favorable location of the plaintiff's property, and I have not added to the land value of $173,124 anything for overheads.
Fair Value.
Under this heading I do not find it necessary or advisable to copy what was said by Special Master Dawes beginning at page 528 of 10 F.2d, in the Middlesex Case. Taking all of the evidence as an entirety, considering it pro and con, weighing this and weighing that, my conclusion is that under all of the circumstances the property of the plaintiff, or, as Special Master Dawes put it, the "value of the plant," is worth $4,400,000.
Fair Return.
7½ per cent. was fixed by the board in this case when a finding of a valuation of $3,338,000 was made on May 22, 1924. 7¼ per cent. was fixed by the board in the Middlesex Case. 7½ per cent. was fixed by Special Master Dawes in the Middlesex Case and approved by the court.
In passing, it may be well to note what the board thought of the urgency of the situation with respect to the future. $275,000, or 7.25 per cent. on the value of $3,800,000, was requested by the company, and the board concluded that a return of approximately $250,000 was just and reasonable, and reflected the fair return allowed by law on the fair value of the property. In this connection the board took occasion to say that it was considering the extensive construction plan which the company must take up in the near future. Remarks along this line were (I am now quoting from the order of May 22, 1924): "The necessity for an increased supply of water has been apparent since as early as 1910. * * * It is absolutely essential that the development of the Raritan or some similar comprehensive plan be proceeded with at once, as it is probable that it will take at least two construction seasons before additional supplies from the Raritan can be made available. The additional supply will involve a considerable investment. In order to finance the additional expenditures, it will be necessary to assure a fair return on the value of the property devoted to the public use, as otherwise it will be difficult to secure the additional capital required for the new project."
In the Middlesex Case, Special Master Dawes estimated that the plaintiff there was entitled to a return of 7½ per cent. on a valuation of $2,500,000, or approximately $187,000. The net revenue in that case for the year 1923 amounted to $96,000, and in 1924 $74,000. See page 529 of 10 F.2d. In the instant case, my conclusion is that the plaintiff is entitled to a return of 7½ per cent. on a valuation of $4,400,000 or $330,000. Do the revenues received by the company result in the confiscation of its property? According to Exhibit P-30, the net revenues of this plaintiff for 1924 were $132,237; 1925, $132,686; and 1926, $173,806. It appears, from a consideration of these figures, that the returns are clearly confiscatory. And the constitutional rights of the plaintiff have therefore been violated by the defendant board.
After thorough inquiry and consideration, the result reached demonstrates that the rates are of the character alleged by the plaintiff, and it is therefore recommended that a decree be entered, adjudging that the valuations of the plaintiff's properties made by the defendant Board of Public Utility Commissioners, and mentioned in the pleadings in this cause, are far below their true value for rate-making purposes, and that the schedule of rates be annulled as confiscatory, and in violation of the Fourteenth Amendment of the Constitution of the United States, and otherwise illegal. And it is further recommended that the jurisdiction of the cause be retained, to the end that either party may apply for such further and other relief as may be necessary.
Valuation fixed as of December 31, 1926.
The plaintiff, Plainfield-Union Water Company, a New Jersey corporation, was created September 21, 1906. It is a consolidation of a number of old water companies supplying Plainfield and neighboring towns with water.
The defendant is a rate-making body created under chapter 195 of the Laws of the state of New Jersey, approved April 21, 1911.
In 1890, when the Plainfield Water Supply Company and Union Water Company, the predecessors of plaintiff, began to construct their waterworks, the population of the territory serviced was 18,516. By the last census (1920), the population of the same territory was 65,688, and probably exceeds 85,000 at present, and is increasing at the rate of about 5 per cent. a year.
The increased cost of service is shown by the following table:
=================================================================== | | | | Increase | 1913 | 1920 | 1925 | in 1925 | 2,000 lbs. | 2,000 lbs. | 2,000 lbs. | over 1913 -----------------|------------|------------|------------|---------- Cost of 4" pipe | $26.25 | $78.30 | $57.35 | 118% Cost of 6" pipe | 25.25 | 74.30 | 53.35 | 111% Cost of 8" pipe | 25.25 | 74.30 | 53.35 | 111% Cost of 10" pipe | 25.25 | 74.30 | 53.35 | 111% Cost of 12" pipe | 25.25 | 72.30 | 53.35 | 111% Cost of 16" pipe | 25.25 | 72.30 | 52.85 | 109% Cost of 20" pipe | 24.75 | 71.30 | 52.85 | 113% -------------------------------------------------------------------
The increase in wages paid by the company since 1913 ranges from 105 to 216 per cent.
================================================================== | 1913 | 1920 | 1925 -------------------|---------------|---------------|-------------- Cost of Coal ..... | $3.10 pr. gr. | $7.50 pr. net | $5.94 pr. net | ton of 2,240 | ton of 2,000 | ton of 2,000 | lbs. | lbs. | lbs. ------------------------------------------------------------------
2,240 pounds of coal now cost $6.66 as against $3.10 in 1913, an increase of 115 per cent. Besides, since that year taxes have increased enormously. Nineteen and fourteenths per cent. of the company's gross receipts were paid out in taxes in 1924 and 1925.
Plaintiff obtains its supply of water from 16 wells, from 200 to 500 feet deep, at Netherwood, in the easterly part of the city of Plainfield, and obtains supplemental supplies from the Elizabethtown and Middlesex Water Companies. All of its sources of supply are taxed to the limit, and there is no other source from which an adequate supply of water fit for domestic use and manufacturing purposes can be obtained by plaintiff, except at the point where the Raritan and Millstone rivers join in Somerset county, about three miles southwest of the borough of Bound Brook, and the cost of obtaining a supply of water from that source would be approximately $5,000,000, estimated by the present cost of construction, in addition to the amount already expended on the work. $1,500,000 of this cost would be borne by the plaintiff, as found by this court in Middlesex Water Co. v. Public Utility Commissioners, 10 F.2d 519.
On the 19th of November, 1923, plaintiff filed a schedule of increased rates with defendant, based on an elaborate and accurate inventory of its property, and a valuation of $3,800,000, made by one of the most competent and reliable hydraulic engineers in the country. This valuation was less than the full value of the property, and was purposely so made in the hope of obtaining prompt and favorable action on the schedules; the plaintiff reserving the right to claim the full value of its property when it deemed advisable. Nothing was included in the valuation for plaintiff's source of water supply; nothing for the value created by the advantageous and valuable consolidation agreement made in 1906; and nothing for the favorable location of plaintiff's property in 16 rapidly growing municipalities; and in the estimate of the value of its physical property the engineer, employed by the plaintiff, used prices less than those prevailing at the time. Moreover, plaintiff, filing its schedule of increased rates, claimed income of only 7½ per cent. per annum on the value of its property in order to avoid controversy, delay, and litigation, although 8 per cent. is considered necessary for utilities generally, and defendant itself had allowed a return of 8 per cent. to other water companies shortly before.
On November 19, 1923, the defendant suspended the schedule of increased rates, without inquiry, to ascertain whether it should have been suspended or not, and hearings ensued as to the value of plaintiff's property.
On May 22, 1924, defendant filed its report or decision and order following the hearings, and asserted therein that the property of plaintiff was worth $3,337,000 for rate-making purposes, and prescribed a schedule of rates which defendant declared would yield to plaintiff 7½ per cent. on that sum, if paid in full, and at the same time made an order requiring plaintiff to deduct 10 per cent. from all of its bills rendered, for alleged inadequacy of service, which, in fact, did not exist, and has not occurred since the date of said order.
By operating under such schedule of rates, which remained in force until the 1st day of July last, plaintiff was not able to earn more than 5.06 per cent. in 1924, and 5.04 per cent. in 1925, on the inadequate valuation of its property made by defendant, and is not able now, under the schedule of rates, to earn more than 3½ per cent. on the value of its property used and useful in business.
On June 10, 1926, the defendant ordered that the rates prescribed by the order of May 22, 1924, be charged by the plaintiff, without deduction of the discount charged for inadequate service.
On August 26, 1926, the defendant issued a supplemental order holding as follows:
"1. That the petition of the Plainfield Union Water Company to amortize 1924 and 1925 deficits and rate case expenses, aggregating $205,961.63, by an increase in rates for a two-year period beginning with October, 1926, quarterly billing, be and the same is hereby dismissed.
"2. That the said Plainfield-Union Water Company be and is hereby authorized to recoup from rates an amount of $91,189, representing the deficits below a reasonable return during 1924 and 1925, by reason of the rates heretofore prescribed by this board and for the expenses of its 1924 rate case.
"3. That said amount of $91,189 may be amortized by a surcharge of 5 per cent. to be added to the existing schedule of all rates of the Plainfield-Union Water Company until such time as the excess revenue produced by such surcharge shall have equaled said sum of $91,189.
"4. That the said Plainfield-Union Water Company shall impose said surcharge on bills for water beginning with the quarter following July 1, 1926, and continue the same until such time as said amount of $91,189 shall have been amortized by excess revenue produced by said surcharge of 5 per cent. and no longer.
"5. That the said Plainfield-Union Water Company shall make quarterly reports with respect to the amount received by it from the said surcharge of 5 per cent. in the manner more particularly set forth in the decision on which this order is based.
"6. That no part of the $35,691 of rate case expenses provided for in said sum of $91,189 shall be charged to expenses, but shall be charged directly to the company's corporate surplus account."
Thereafter the plaintiff filed its bill, alleging that the order of May 22, 1924, even as modified by the order of June 10, 1926, and the order of August 22, 1926, worked and work a confiscation of the plaintiff's property, in that they are based on an inadequate valuation of the plaintiff's property and, under the existing schedule of rates, the plaintiff is unable to earn more than 3½ per cent. of the value of its property used and useful in its business.
The master first found the value of the plant to be $4,400,000. A reading of his exhaustive report indicates that he not only properly considered the rules of law established by the Supreme Court, but properly applied those rules to the testimony adduced before him. The conclusions from the testimony are properly drawn, and we cannot take seriously the minute criticisms of this and that finding supported, in our judgment, not only by the evidence, but by the clear weight of evidence.
The next question determined by the master is that 7½ per cent. is a fair return upon fair valuation. In the Middlesex Water Case, the special master found 7½ per cent. to be a fair return. His finding was approved by this court. Seven and one-quarter per cent. was fixed by the Board of Public Utility Commissioners in the Middlesex Case. Obviously, 7½ per cent. is but a reasonable return upon a utility investment. (D.C.) 10 F.2d 529. The revenue received by the plaintiff company under the order and schedules were as follows:
1924 ........................... $132,237 1925 ........................... 132,686 1926 ........................... 173,806
Obviously, these returns were not adequate upon the valuation fixed either by the utility board or by the special master, and were confiscatory.
The exceptions filed by the defendant are general. However, some will be noted here. No. 7 is as follows:
"The master found a valuation of $4,400,000, although it appeared that the plaintiff had represented to the defendant as the value of its property on which its rates should be fixed as of January 1, 1924, the sum of $3,800,000, and that the cost or value of net additions to the plaintiff's plant since that date are much less than $600,000, and that the plaintiff has not since that date presented to the defendant as a rate base, any greater valuation."
The figures of valuation submitted by the plaintiff in 1924, were, as previously noted, only partial and for the particular purpose of securing some immediate relief. Obviously the relief was necessary as the cost of everything purchased by the plaintiff to perform its work had vastly increased in cost. Since the valuations were tentative, there is no estoppel which prevents the plaintiff from showing true value. The master's findings are supported by the clear weight of evidence.
Exception No. 8 is as follows:
"The master adopted a figure of $40 per ton as the basis for his calculation of the value of cast iron pipe constituting part of the plaintiff's property, whereas it appeared from the testimony that the value of cast iron pipe was not more than $33.10 per ton."
An examination of the record shows that there was testimony that cast iron pipe was worth $40 a ton. In fixing the value of cast iron pipe a single sale on a given day of an undisclosed quantity of pipe at $33.10 a ton is not conclusive upon the subject-matter. Certainly not where there is testimony from several credible sources that the average cost during the given year was some $40 a ton.
The ninth exception is as follows:
"The master included in the rate base or valuation of the plaintiff's property, extensions constructed by funds amounting to approximately $115,000 advanced to the plaintiff by its customers for such extensions and still retained by the plaintiff."
The moneys which the defendant refer to in this exception are deposited when the plaintiff is importuned to extend mains before they can be operated at a profit, in order to assist in the development of a community. Such deposits are merely a guaranty fund, and are returned as soon as the main becomes a profitable operation. Certainly the water company is entitled to include, in its property account, mains constructed without deducting such funds, since as soon as the main becomes profitable these deposits must be returned to the depositor.
As to the tenth exception, it need only be noted that there was testimony that the going value of the property was nearly twice as great as the master found it to be.
There is testimony throughout to support the conclusions of the master, and his findings will be affirmed, and a decree may be entered accordingly, which shall carry the costs.