Lead Opinion
By an order dated June 13, 1940, the Commission prescribed rates based on a valuation of the company’s property of $435,000, on a 5J^% rate of return, and on estimates of receipts and charges which would yield the return. The company claims a higher valuation, a higher rate of return and a higher estimate of charges.
At the outset, the discretionary scope of action upon the appeal as authorized by the statute (P. L., c. 239, s. 18) has been considered. Differing from the laws in many jurisdictions which limit rights of appeal from the orders of administrative tribunals in rate cases to issues of law, the local statute provides that an order or decision of the Commission may be vacated not only for errors of law, but as well if “the court is sаtisfied, by a clear preponderance of the evidence before it, that such order is unjust or unreasonable” (P. L., c. 239, s. 11). Under certain circumstances new evidence in addition to that received by the Commission may be introduced (lb., s. 12). The statute, in the measure of revisory power conferred by it, was construed in Grafton County &c. Co. v. State, 77 N. H. 490, 503-506, and the construction was impliedly adopted by the subsequent revision of the public laws in 1926, in which no change of language in the statute was made. The State’s argument for a review giving more weight to the findings of the Commission than was considered the measure in that case is therefore more properly one to be addressed to the legislature than to the court. “ ... it is the conscience of the appellate tribunal which is invoked.” 75., 505.
As a corollary proposition, the discretion vested in the court in prescribing the scope and terms of a remanding order is its own. The statutory mandate is to furnish directions under which the Commission may do what justice may require. Unfortunately the Commission and the company are here charged by each with a provocative attitude against the other in the proceeding. The Commission asserts that the company has been uncooperative. Its report is alleged to bear internal evidence that impartiality has not been duly observed. It has ignored the company’s requests for findings and requests so far as specific answer to them has not been made. The claim is advanced that the Commission has evolved a value and rate to produce a certain income, contrary to the rule that “the whole theory of rate regulation” bars the rate of profit as a consideration of value. (Grafton County &c. Co. v. State, 77 N. H. 539, 543).
Without analysis of the evidence respecting the charges, it is enough to say that the company, with no attack on the integrity or competency of the Commission, lacks confidence in its sense of fairness in the proceeding, while the Commission, aware of the challenge of its judicial impartiality, may more or less naturally, if unconsciously,
Moreover, “ ‘If rate regulation is to be effective, there must come at some time an end of hearing and a decision of the questions involved.’ ” St. Joseph &c. Co. v. United States,
Upon the issue of value, it is elementary that it is one of fact, and that actual or historical cost and reproduction cost, with due regard for depreciation, are factors bearing importantly on value, neither cost being determinative as matter of law. The test that “The value of property is what it is worth in money, what it will bring in money to the seller or what it will cost the buyer in money to obtain it” (Grafton County &c. Co. v. State, 78 N. H. 330, 334) has not changed as the legal rule.
It is not clear how the Commission arrived at the rate base of $435,000. But it is clear that they misinterpreted the statute relating to depreciation and took a view of the effect of depreciation contrary to law. In their report they advance the propositions, first, that the statute (P. L., c. 240, s. 11) impliedly forbids the use of a depreciation reserve for purposes of dividend declarations, and, second, that the customers may not justly be charged to pay a return on such part of value as has been created or maintained by money furnished by them.
In respect to the statute, its construction by the Commission is utterly indefensible. Its provisions (P. L., c. 240, ss. 9,10,11) require a utility to carry a “proper and adequate” depreciation account as the Commission may require and under its regulations, that the fund may be used for restorations or additions, or invested until such use with the income from it in invested form to be added to the fund, and that no dividends shall be paid “except out of net corporate income,
While the statute requires income from the fund in an invested form to be added to the fund, it is silent as to any other limitation barring the utility from treating the fund like any other capital after its use for restorations or additions. The purpose of the statute is to secure the eventual use of the fund in rehabilitation and development of the plant; it is in the interest of the consuming public that service shall not be impaired, and the establishment of the fund and its use in such manner serves to maintain the plant in its integrity and to permit its enlargement to meet increased demand for its service. The statutory objective is thus accomplished, and the objective is further effected by control confining the source of dividends to net earnings after setting aside a proper reserve. Beyond this the statute in question does not undertake to make regulations affecting rates. It is not intended to operate as a restrictive test in the finding of just and reasonable rates in addition to its express terms. The statute for such rates (P. L., c. 238, s. 5) is under no implied control. The express bar to the payment of dividends from the income of the fund while it is in an invested form implies no bar beyond that. If a result of a bar of any return to the owners from the depreciation account after its use for restorations and additions had been the legislative purpose, it would have been expressed in general and sweeping terms. Clearly a limited bar covers only its limits.
The language in the statute prohibiting dividends except from net earnings and after setting aside the depreciation reserve means that the reserve shall be deducted from the gross earnings as an item chargeable against them before the net earnings are ascertained. This is understoоd to accord with the accounting system everywhere adopted in the bookkeeping of utilities.
To sustain the Commission’s construction would be to hold that a utility’s system could earn money for its owners only on its depreciated value, which would become less as depreciation increased, with an eventual depreciation equal to the actual value. The confiscatory result of a system without earning value to the owners would thus ensue.
In respect to the effect of depreciation in arriving at a proper rate base, aside from statutory regulation, the Commission’s report states that “unless the accrued reserve is deducted the real investment or equity of the owners will be overstated,” and that “ ... it is difficult if not impossible, to justify any treatment which would force the customers to pay a return on the moneys which these cus
This position is considered to be in conflict with the statutory enactment that rates shall be just and reasonable. While the issue of what is just and reasonable is one of fact, the requirement of balanced adjustment of the respective interests of owners and consumers as the test of what is just and reasonable is matter of law. A proper rate is one of yield from property without loss of investment. Carrying the Commission’s position to its logical conclusion, an eventual entire loss of value for rate making purposes would occur, as already pointed out. The quoted statement suggests no qualification in avoidance of such a result. The Commission has found the depreciation charge proper and adequate. No inquiry has been made to analyze the use of the fund betweеn restorations and additions.
The view that a proper and adequate depreciation reserve is an addition to capital seems contrary to fact. In definition, “Broadly speaking, depreciation is the loss, not restored by current'maintenance, which is due to all the factors causing the ultimate retirement of the property. These factors embrace wear and tear, decay, inadequacy and obsolescence. Annual depreciation is the loss which takes place in a year. In determining reasonable rates for supplying public service, it is proper to include in the operating expenses, that is, in the cost of producing the service, an allowance for consumption of capital in order to maintain the integrity of the investment in the service rendered.” Lindheimer v. Company,
The depreciation fund, if used for the purposes thus stated, adds nothing to capital investment, but only maintains it. The original plant continues intact, and at the end of any given period is in the same condition as at the commencement of the period, if the fund has been used to keep it thus maintained. In a fair, if not strictly accurate, distinction, the expense of ordinary repairs is charged to operating costs, while that of extraordinary repairs, inсluding renewals, replacements and restorations, is met from the depreciation
Whatever the difficulties of determining proper and adequate depreciation, whatever the difference in the methods of observed and pragmatic depreciation, whatever the merits between arithmetical and progressive depreciation, justice and reasonableness do not impose upon the owner any burden leading towards ultimate loss of value in respect to profitable use.
No question is presented here of excessive depreciation. The Commission has found the amount charged to be proper and adequate. While the statute permits the use of the fund for additions as well as for restorations, the finding implies that it has all been needed to avoid actual depreciation. So far as a reserve has proved excessive, the question is not presented. But even if it were, no good reason is perceived why it is not just that the utility investment should not receive treatment similar to an enterprise not subject to the utility law. The utility rates, and hence the earnings, are under control, but rates are fair if, without being excessive, they correspond with charges of enterprises having similar features. The owner of an apartment building is expected to charge rentals which will include some estimate for depreciation. The utility does not seem to stand differently in this aspect of comparison. The landlord’s rent charge would not be found unreasonable on account of the depreciation item as one of its elements, if the item were not excessive. It is not unfair to the public that a utility enterprise should be in a parallel position.
The Commission’s theory confuses cost and value. Value depends upon many factors. Even a physically well maintained plant may suffer loss in value, for reasons such as loss of business and mismanagement. A fair return is then not on cost or “net continuing investment,” but only on the actual value at the time.
The continued use of property for a given purpose involves its continued adaptation for it. To keep it adapted is аn essential element of furnishing service. It is a department of operation, and the charge for it, from the constitutional standpoint of ownership, is as proper an expense of operation as that of labor or taxes.
Moreover, from the constitutional standpoint, the “prudent in
If the system were acquired by some municipality under eminent domain, it would pay the owners the fair value of the system, and the rate base ought to be no less. “When the property itself is taken by the exertion of the power of eminent domain, just compensation is its value at the time of the taking. So, where by legislation prescribing rates or charges the use of the property is taken, just compensation assured by these constitutional provisions [the fifth and fourteenth amendments of the federal Constitution] is a reasonable rate of return upon that value,” West v. Company,
The company’s accrued depreciation reserve, as a book-keeping entry, is to be treated as an asset inuring to its benefit, by force of the state and federal constitutions. When property is taken for public use, fair payment for what is taken must be made, whether the property is taken over outright or whether its product in the form of service is taken. Any effect of excessive depreciation on rates is produced in determining a fair and reasonable rate of return not less than a non-confiscatory level, without reduction of the rate base.
The company’s claim of value for the intangible element of goodwill or standing as a going concern in addition to property value is disallowed. The property value, whether based on actual cost or reproductive cost net, or with both costs given weight, assumes a demand for the use of the property, without which it would have only salvage value. As the Commission’s report sets forth: “Attempts to justify going concern value as a separate item run into a maze of contradictions between theory and practice, between the grоwth of the actual plant and the dedication of the hypothetical plant to actual use.” “The value of appellant’s property used in stockyard services is single in substance. . . . While it may be considered as made up of tangible and intangible elements, it is not necessarily to be appraised by adding to cost figures attributable to mere physical plant something to cover the value of the business. . . . Value depends upon use and is measured, or at least significantly indicated, by the profitableness of present and prospective service rendered at rates that are just and reasonable as between the owner of and those served by the property. . . . [Citations omitted] It is elementary that value of a going concern may be less than, equal to, or more than, present cost of plant less depreciation plus necessary supplies and working capital.” Denver &c. Co. v. United States,
In respect to actual costs and depreciation, the evidence proves a cost of about $485,000 and a depreciation of about $103,000 found by the Commission to be proper and adequate and amounting to 21% of the cost.
In respect to reproduction cost, its purpose is to aid in throwing
It is said in Grafton County &c. Co. v. State, 78 N. H. 330, 334: “What a new plant would cost would be of great importance to one proposing to purchase one in operation.” No rule of law was thereby declared, and it was no more than an opinion dealing with the facts of the case. It was regarded in discretion as the best evidence. The difficulties and uncertainties in ascertaining reproduction costs of course vary in different cases. Many factors cannot be resolved by mathematical computation. Length of service, life of different component parts of the system, obsolescence resulting in doubtful availability of identical replacements, and changes in adaptability, may be mentioned as presenting problems of opinion. And experts may employ different methods of computation affecting their estimates. But it does not appear that the company’s plant might not be reproduced with substantially the same type of construction and equipment which it now has. The different elements in the plant of a water utility, of water supply, pumping stations, rights of way, pipe lines, hydrants, service connections and equipment, and other structures, are more standardized through length of time than are some of the elements which go to make up the plant of an electric utility. If the estimates of experts vary, they are nevertheless to be considered, their relative weights passed upon, and a finding deduced in the same manner as opinion evidence in general is examined and appraised.
In some comparison of the experts’ estimates, the cost estimate of Mr. Lord was $682,000. Thereafter the company incurred a capital expenditure of about $65,000, which would increase the estimate when brought to date and in line with the others, to $747,000. Mr. Morrison, the other expert hired by the Commission, estimated a reproduction cost of $675,000, while Mr. Newsom, the company’s expert, arrived at a figure of $895,000. This figure included $50,000 as an item for intangible value, or value as a going concern, and over $100,000 as an item fоr “miscellaneous construction and equipment expense,” understood to be largely an estimate for contractors’ overlay and for overhead expense upon the basis of a newly constructed system as a unit, rather than of applying present prices to the existing system. If these two items, amounting to $150,000, are deducted, the result of $745,000 is in surprisingly close accord with the Lord adjusted estimate of $747,000. This virtual agreement not only strengthens the force of each of the two estimates but tends to lessen the value of the Morrison estimate. Aside from the two special items of the Newsom appraisal which have been mentioned and for which Morrison made no allowance, the chief difference in their esti
There are thus the adjusted figures of $675,000 for the Morrison appraisal, $745,000 for Newsom’s, and $747,000 for Lord’s. Their allowances for depreciation are at wide variance. It would seem that the company’s actual depreciation reserve, found by the Commission to be adequate and proper, should be applied in proportion to reproduction costs. The company has an allowed depreciation of 21% of actual cost. Applying this percentage to the foregoing figures for reproduction costs, the depreciations amount respectively and roundly to $142,000, $156,500 and $157,000, producing the reproduction cost net figures respectively and roundly of $533,000, $588,000 and $590,000.
The Commission has undertaken in extensive and elaborate analysis to show that the estimates of reproduction costs are too high. While avoiding any conclusion of a definite figure, they find, by necessary inference, that the lowest estimate of $675,000 is excessive. They havе suggested various tests and checks pointing to that conclusion. Survey of the evidence and study of the Commission’s report make it clear that the report is unduly critical. It is not deemed expedient that the various points and methods of bearing should here receive specific and detailed treatment. Many of them are based in measurable degree on opinion evidence, and the value of the evidence upon the items considered separately is differently appraised by the members of the court.
Without statement of the manner in which we have reached our conclusions, all of us are in agreement that while taking the findings of the Commission as prima facie correct, “it plainly appears ‘beyond reasonable controversy’ ” (Grafton County &c. Co. v. State, 77 N. H. 490, 509) that the reproduction cost of the company’s system is at least $660,000. Assuming a depreciation of 21%, it results in a reproduction сost net of $521,400. But since, as already appears, the depreciation reserve is to be treated as an asset of the utility, a value of $660,000 remains if reproductive cost were to measure actual value. The actual cost of $485,000 is admitted. The present value, as the base rate, is $560,000, taking into account actual and reproductive costs, depreciation and other relevant evidence.
In respect to rate of return, “it is manifest that just compensation for a utility, requiring for efficient public service skillful and prudent management as well as use of the plant, and whose rates are subject to public regulation, is more than current interest on mere invest
In Los Angeles &c. Corp. v. Commission,
Involved in the finding of a just rate of return is the effect of the different securities in the capital structure of the company. By economic principles and experience, income yield lessens with increasing security of capital. When there are, as here, mortgage bonds, preferred and common stocks, the amount of the mortgage lien represents an interest in the property equal to the amount. While not full ownership, yet the equity or interest of the stocks is measured in value by deducting the mortgage debt from the full value of the property mortgaged. In any enterprise whose property is encumbered with a morgtage debt, the interest on the debt is classified as an operating expense. In the case of a utility, good management requires reasonable economy in operation, and hence the hiring of money at no greater rates than the market offers. A reduction in interest rates, reducing the charges against receipts, would seem in justice and аt least in some measure to inure to the benefit of the customers of the company. If the holders of common stock receive all the gain in net earnings resulting from the reduction, the consumers lose all benefit from the saving. Under the principle that fair rates are a balance of interest between owners and ratepayer, a less expensive service should spell a lower charge for it. While in technique the mortgage is but a lien on the property, and while, as usually phrased, the owners are entitled to a fair return from the use of the property, in reality there is an equity ownership, and not a full ownership, when the property is under lien. If the property were taken under eminent domain proceedings, the owners would be paid only the value of the equity interest. If the owners paid the mortgage debt, there would then be no interest charge, and they would thеn be entitled to a rate of return based on their full ownership. If, without any debt, a utility issued preferred and common stocks in equal amounts and sharing equally in liquidation, a low dividend rate for the preferred stock would not justify the holders of common stock to any claim of return based on the low rate for the preferred stock. Rates are established in social protection for the general welfare, and in keeping expense at its lowest point consistent with efficiency with a fair return on actual ownership interest, no confiscatory action is perceived.
“ . . . each utility presents an individual problem. The answer
With due weight given to the foregoing and other points of pertinence, the rate of found by the Commission as just and reasonable is not so clearly too low as to require the finding to be set aside. In analysis, the common stock, representing the equity ownership of all the surplus and of less than one-seventh in the remaining value of the plant, or a 423^% ownership of the entire value, will receive over one-half of the expected net return, at a rate of 7% on such ownership.
The result imposes on the Commission the duty to recalculate the charges for water. In their estimate of receipts and expenses they should have the benefit of the company’s report showing their actual amount in 1940.
In respect to rate case expense, the Commission recognizes it as a proper operating expense, but has declined to amortize it over a term of years. Also, it has made no charge for its own expenses in the case. This is a clear disregard of the statute (Laws 1931, c. 127, s. 1) which provides that its expense involved in an investigation “shall” be paid by the utility to an amount not over one-half of one per cent of the utility’s existing valuation, to be charged to the utility’s operating expenses and amortized over such period as the Commission shall fix. Upon the valuation as found, the utility is to be charged for such expense to an amount not over $2,800.
With reference to the company’s own rate-case expense, the Commission assigns various reasons for denying its amortizаtion. Among the reasons, excessive costs, some allocation to other matters, ability to pay and payment of all or a large part out of operating expense, and difficulty in determining a reasonable allowance, are given. These reasons are insufficient for the denial. Difficulty in performing the duty to determine what is just and reasonable is no relief from the duty. Excessive and improper charges may be found in amount as well as a fact. If unreasonably incurred, if undue in amount, if chargeable to other accounts, they may be to that extent reduced.
The present case was instituted in 1939, and is still pending. The company’s expenses reasonably incurred in connection with it, in-
Amortization for the expense is a demand of justice, to satisfy the principle of equalization. The company would be justified in spreading the expense over a reasonable term of years, instead of paying all of it in a part of the term, to the saving of operating expenses for the balance of the term. The effect of present payment is to reduce operating expenses in later years below a fair and proper level. The payment is for a service from which benefit in later years is derived. Fairly the customers are not entitled to the service without paying for it on a basis of adjustment which amortization is necessary to produce. A special operating expense ought not to be disregarded in the estimate of the receipts adequate over expenses to lеave the amount of return called for by the rate. And its distribution through a reasonable term is as fair to customer as to owner.
The rate term is not over two years (P. L., c. 238, s. 23), but investigations oftener than once in five years are not required (Laws 1931, c. 127, s. 2). In the lack of substantial evidence that another investigation will transpire within the quinquennial period, it should be employed as the only reasonable one to take for the amortization.
It is thought that the foregoing views of legal and factual issues are adequate in action upon the appeal. Specific treatment of the grounds of appeal beyond that given appears unnecessary. Many of the grounds become moot by reason of the discretion adopted in the extent of revision of the Commission’s orders. The refusal of the Commission to discharge its duty “to find all facts which either party may request essential to thе presentation of all questions of law raised by any decision or order made by them” (Grafton County &c. Co. v. State, 77 N. H. 490, 498) may be noted. Answer to such requests is of benefit in the exercise of the revisory authority provided by the statute. Any fact taken into account, or which should be taken, in reaching the decision or order is essential, and performance of the duty is not excused on the ground that it is burdensome. It is evident that with such findings the exercise of the revisory power is facilitated and may, in discretion, be substantially narrowed.
The case is remanded for further proceedings pursuant to and consistent with this opinion.
Remanded.
Rehearing
Frank R. Kenison, Attorney-General, for the motion.
The motion erroneously assumes that the finding of a value of $560,000 is based on actual and reproductive costs with no allowance for deprеciation and with no consideration of other factors affecting value. While such costs, with proper depreciation allowances, are important evidence on the issue of value, they are not its sole criterion. The nature of the enterprise, the demand for its product, the development and stability of the business, the efficiency of management, the steadiness of income, the comparison with other forms of invested capital, and the State’s regulatory control of the utility are among the considerations of varying weight in determining value. In measurable degree these factors, so far as found to produce strength and soundness of investment, were found to create an increase of value over value tested only by investment costs with due adjustment for price changes in costs. It may be noted that the opinion finds the reproductive сost to be, not $660,000, but not less than that figure.
It is a misconstruction of the opinion to say that it does not recognize depreciation as an element depreciating value. It is true that the depreciation reserve is required to maintain actual investment. It is also true that in the estimate of a cost of a reproduced plant or of the cost of the present plant on the basis of present day prices, a depreciation allowance for present condition of the plant must be made to equalize the difference between old and new. And the conclusion of a value of $560,000 in no wise ignored the bearing of depreciation both in maintaining condition of the plant and in limiting value. The statement in the opinion that the depreciation reserve inures to the benefit of the utility was made to combat the commission’s erroneous theory that it belongs to the customers. If, by its use in maintenance, it adds to actual value, the addition inures to the benefit of the owners of the utility.
Motion denied.