89 So. 244 | La. | 1921
The object of this suit was to reduce the assessment of plaintiff’s franchise, as a public utility corporation, from $452,530, as fixed by the board of state affairs, to $67,375. The district court gave judgment reducing the assessment to $89,833; and the 'defendants, board of state affairs, police jury, assessor,, and tax collector, have appealed. Answering the appeal, plaintiff prays for a further reduction as follows: (1) By deducting from the annual earnings of the corporation 4 per cent, of the value of its tangible property, for depreciation, instead of deducting (what the court deducted) the average actual cost per annum of replacements for the last five years, $19,962.38; and (2) by capitalizing the net annual earnings of the franchise at the same rate which was allowed as a return on the
The board assessed the tangible property at $912,446, the correctness or fairness of which assessment is not disputed. In computing the value of the franchise, the board divided it into two franchises, calling them, for convenience, the primary and the secondary franchise. . The so-called primary franchise was declared to be the privilege enjoyed by the corporation of occupying the streets with the street railway and equipment and gas mains, and of conducting the business of operating street cars and the electric light and gas works. The value of the so-called primary franchise was fixed, arbitrarily, at $30,000. The value of the so-called secondary franchise was ascertained by what the board deemed to be the net earnings rule. But the board refused to deduct from the average annual earnings the average annual cost of replacements or renewals or upkeep of the tangible' property. The average annual earnings, as shown by the statement rendered for the last five years, amounted to $98,347, without deducting the average annual cost of replacements or upkeep of the tangible property. The board allowed 8 por cent, as a fair income on the value of the tangible property; that is, S per cent, of $912,446, or $72,995, which the board deducted from the annual earnings, $98,347, leaving as the average net earnings of the franchise $25,352, which, capitalized at 6 per cent., gave, as the value of the so-called secondary franchise, $422,530, to which the board added the valuation put upon the so-called primary franchise, $30,000, and thus assessed the so-called ‘4otal fran■chise” at $452,530.
The district judge made two corrections in the assessment. He struck out the arbitrary assessment ■ of the so-called primary. franchise, $30,000; and he deducted from the average annual earnings- 'the - average annual cost of replacements' or upkeep of the tangible property, which -average cost, according to the statement furnished - for the last five years, amounted to $19,962. Subtracting that sum from the apparent- average earnings, $98,347, left the average, net earnings $78,3S5, from which was deducted, as a fair allowance for return on the investment in tangible property, valued at- $912,446, the 8 per cent, allowed by the board of state affairs, being $72,995, thus leaving as the annual net earnings of the franchise $5,390, which, capitalized at 6 per cent., gave $89,833 as the value of the franchise.
In applying the net earnings rule, of course, the higher the rate allowed as a fair and reasonable, return on the investment in tangible property, the' less will be the resulting annual net earnings of the franchise; and, the higher the rate at. which the annual net earnings of the franchise are capitalized, the less will be the resulting valuation of the franchise. It is universally recognized, in the assessment of public utilities, that the risk of the investment' justifies the allowance of a higher rate as a fair and reasonable -return on the investment in the property of the corporation than could be expected as a return on a well-secured bond.- It is conceded by the defendants in this, case that 8 per cent, is not more than a fair and reasonable rate of return on the tangible property of the corporation. Fundamentally and on"-principle the same rate of return should be allowed on the franchise -of the corporation. The tangible property and the franchise are so interrelated and dependent upon each other that it is impracticable to calculate, in- fact impossible to imagine, a distinction between their earning capacity. The value of the franchise is really more precarious than that of the tangible property, for it has no in-' trinsic value — no value except what its owner has made it worth by demonstrating its earning capacity. It appears to us that the net earnings rule would be fundamentally wrong if the average annual net earnings of the franchise were not to be capitalized at the same rate at which a fair and reasonable return is allowed on the investment in the tangible property of the corporation. Our conclusion, therefore, is that the net earnings of the franchise in this case should be capitalized at 8 per cent., the rate which defendants concede to be a fair and reasonable return to be allowed upon the investment in the tangible property "of the corporation.
The judgment appealed from is amended by reducing the assessment of plaintiff’s franchise from $S9,S33 to $67,375, thereby reducing the total assessment from $1,002,279 to $979,821. As thus amended, the judgment is affirmed.