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Board of Public Utility Com'rs of New Jersey v. Elizabethtown Water Co.

September 22, 1930

BOARD OF PUBLIC UTILITY COM'RS OF NEW JERSEY
v.
ELIZABETHTOWN WATER CO., CONSOLIDATED



Appeal from the District Court of the United States for the District of New Jersey; Wm. N. Runyon, Judge.

Author: Woolley

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

WOOLLEY, Circuit Judge.

The District Court, finding rates which the Board of Public Utility Commissioners of New Jersey had prescribed for the Elizabethtown Water Company, either on the master's valuation of its property or on the court's valuation, confiscatory and violative of the due process clause of the Fourteenth Amendment to the Constitution, restrained the Board from enforcing an order by which it set aside rates which the company had filed and substituted rates based on its own valuation of the company's property. The Board of Public Utility Commissioners appealed.

As the water company has challenged the Board's valuation and as the Board now challenges the valuations made by both master and court, it becomes necessary first to find the rule of law which will govern the fact issues in this case. We are not concerned with the growth of the law or the various rules for determining base values for rate making purposes which have from time to time been promulgated under varying conditions, for the rule which is applicable to this case, though not new, is the last pronouncement of the Supreme Court on the subject, made in United Railway & Electric Company of Baltimore v. Public Service Commission of Maryland, 280 U.S. 234, 50 S. Ct. 123, 125, 74 L. Ed. 390, handed down after the argument in the instant case. It appears from the opinion that that case, like this one, is the ordinary instance where a utility company attacked a commission's rate order as confiscatory. Although the value of the property which was used in the public service was there fixed by the Commission and accepted by the utility company, the matters in dispute concerned the lawful method of computing an allowance for depreciation, whether upon costs or present value of the property. This question, though arising where otherwise the value of the property had been agreed upon, differs in no legal respect from the question here as to the method of computing, in the first instance, the value of property in the public service as a rate base -- whether at cost or present value.

In answering the question as to the method of computing depreciation -- one element in determining a base for rate making purposes -- the Supreme Court pointed out that "the fundamental principle to be observed is that the property of a public utility, although devoted to the public service and impressed with a public interest, is still private property, and neither the corpus of that property nor the use thereof constitutionally can be taken for a compulsory price which falls below the measure of just compensation." The court also pointed out that "a fair return within this principle" is to be "tested primarily by present-day conditions"; and that no rule can be laid down which will apply uniformly to all sorts of utilities. "What may be a fair return for one may be inadequate for another, depending upon circumstances, locality and risk." It further said that "what will constitute a fair return in a given case is not capable of exact mathematical demonstration. It is a matter more or less of approximation, about which conclusions may differ," and a "court in the discharge of its constitutional duty on the issue of confiscation must determine the amount to the best of its ability in the exercise of a fair, enlightened, and 'independent judgment as to both law and facts,'" holding that anything less than a return of 7.44% sought by the utility would, in that case, be confiscatory and in violation of the due process clause of the Fourteenth Amendment. That is the trend of the opinion. But the point which touches and rules the instant case has to do with the method of valuing a company's property, used and useful in the public service, brought into view, in the case cited, on a contest as to the proper allowance for annual depreciation, which the Commission had based upon cost. The court recognized the propriety of such an allowance in order to restore property worn out or impaired and the necessity continuously to maintain it as nearly as practicable in the same level of efficiency for public service. This, of course, calls for expenditures equal to the "cost" of worn out equipment, the question being, whether cost at the time of purchase or cost at the time of replacement, the latter meaning present value. The court said -- and this is where that decision rules this case -- "It is the settled rule of this court that the rate base is present value. * * *" We shall therefore dispose of the fact issues of this case by determining the present value of the property of the utility as a base for rates. Incidentally, there is a dispute between the parties as to the period at which the "present" value is to be determined, whether at the time the bill was filed or at the time the decree was entered, as the Board contends. We hold, as the issue arose with the bill, or, rather, from the order which the bill attacked, that the time at which to compute values is primarily the time of the Board's order fixing the alleged confiscatory rates and also the time of the inquiry, Willcox v. Consolidated Gas Co., 212 U.S. 19, 29 S. Ct. 192, 53 L. Ed. 382, 48 L.R.A. (N.S.) 1134, 15 Ann. Cas. 1034; McCardle v. Indianapolis Water Co., 272 U.S. 400, 47 S. Ct. 144, 71 L. Ed. 316, when the testimony bears upon that period, rather than the time of entry of the decree which was two years later, during which period many variables as to costs and values inevitably entered in respect to some of which there is no satisfactory testimony. It would be impossible precisely, or approximately, to determine the value of the property at the time of the decree on evidence which was directed, and limited, to values at the time of the order and at various times pending the taking of testimony. For these reasons we shall pass on the evidence as it came to the master and eventually reached the trial court. Naturally much of it related to values prior to the order and brought down to the date of giving testimony.

Exercising that "independent judgment" on the facts which the Supreme Court said should be exercised, we shall approach the question of base valuation of property in the public service and ultimately of returns thereon at the rates prescribed by the Board and rates filed by the company by disposing of all the substantial issues the parties have raised and see where the case stands.

We have before us the new Equity Rule No. 70 1/2 (28 USCA ยง 723), not yet effective, requiring the "three judges" of a "court of first instance" "to find facts specially and state separately its conclusions of law thereon" in cases of this kind, and we have in mind the institence of the Supreme Court, last made in Railroad Commission of Wisconsin v. Maxcy, 281 U.S. 82, 50 S. Ct. 228, 74 L. Ed. 717, that in cases of this character district courts shall state the grounds for their decisions. Although a reviewing court, we shall, nevertheless, observe the spirit of these pronouncements by separately approving or disapproving the several specific findings of value of the main items entering into the aggregate base valuation together with the grounds for our conclusions. We shall, however, omit a few which, even in the aggregate, are too small to affect the judgment whatever it may be.

The valuations of the water company's property, variously reckoned, are these:

The Board by its decision in the order of May 26, 1927 under review fixed the value at $6,650,000 as of June 30, 1926.

The water company contended that the true value was in excess of $9,200,000.

The master found it to be $8,402,020.50.

The District Court found the value to be "at least" $10,000,000 and, either on its own base finding or on the master's, issued its writ of injunction against the Board.

The Board conceded that a return of 7 1/4% on its valuation of $6,650,000, or a return of $482,125, is ...


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