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MCCARDLE ET AL. v. INDIANAPOLIS WATER COMPANY

decided: November 22, 1926.

MCCARDLE ET AL
v.
INDIANAPOLIS WATER COMPANY



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR INDIANA.

Taft, Holmes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Sanford, Stone

Author: Butler

[ 272 U.S. Page 402]

 JUSTICE BUTLER delivered the opinion of the Court.

June 8, 1923, the water company filed with the commission its petition in which it stated that its rates were too low and proposed a higher schedule. The city of Indianapolis answered, alleging that the rates in force were adequate. After hearing the parties, the commission found that, as of May 31, 1923, the value of the property used was not less than $15,260,400; that the annual return under existing rates would be approximately $800,000; that seven per cent. was a reasonable rate of return; that the rates in force were insufficient and that those proposed would be exorbitant and discriminatory. And the commission made an order, effective January 1, 1924, prescribing a schedule increasing some of the rates. In its report it stated that the rates authorized might not produce a seven per cent. return for the immediate future; but it expressed belief that on the average over a period of approximately three years the schedule would produce an adequate return.

This suit was brought by the company against the members of the commission to enjoin the enforcement of that order on the ground that the rates prescribed are confiscatory. The members of the commission answered. The

[ 272 U.S. Page 403]

     city intervened and answered. There was involved the value of the property used, probable earnings, operating expenses, and the amount required to constitute just compensation safeguarded by the Fourteenth Amendment.

The decree states that the court, in an opinion given orally, sustained as proved the material averments of the complaint, and held that the amount as found by the commission was less than the fair value of the property as of January 1, 1924, by more than $3,500,000, and that "the fair value of complainant's said property at said time was and is not less than $19,000,000, and that the water rates imposed in that order . . . are too low and are confiscatory of complainant's said property"; and it enjoins the enforcement of the order. The members of the commission and the city appeal jointly. ยง 238, Judicial Code.

Appellants contend that the court adopted as the measure of value the cost of reproduction new less depreciation, estimated on the basis of spot prices as of January 1, 1924, or gave that figure controlling weight. The appellee says that the cost of reproduction less depreciation, estimated at such prices, was shown to be more than $22,500,000, and that the court did not adopt such costs as a measure or give them undue weight as evidence of value.

The record contains three reports of the commission dealing with valuations of the company's property. In Case No. 1400, the commission, March 15, 1917, reported that, as of January 1, 1917, the value of the company's property used in the public service was not less than $9,500,000. In Case No. 6613, the commission, January 2, 1923, reported that as of December 31, 1921, the valuation of the company's operative and non-operative property was $16,455,000. In case No. 7080, the commission, November 28, 1923, made the order attacked in this suit. It reported that as of May 31, 1923, the value of the company's operative property was not less than $15,260,400.

[ 272 U.S. Page 404]

     In No. 1400, the commission stated: The accounting of complainant and its predecessor was defective in that there was not a careful division of expenditures between capital account and operating expenses. The plant account of the predecessor company owning and operating the plant from 1869 to 1881 was $1,574,840.04, but it expended more than $200,000 that is not included in that figure. According to complainant's books it expended between April 23, 1881 and January 1, 1917 for construction, $6,112,320.86. The amount of moneys actually invested in the plant exceeded $8,000,000; and real estate value had appreciated more than $1,500,000. The commission did not definitely state the original cost of construction or the total expenditures for permanent improvements. It found the cost of reproduction new -- including $328,000 for going value and $75,000 for working capital -- to be $10,406,431, and that less depreciation $9,670,191. The estimate was based on prewar prices -- those prevailing in 1916 and prior years. It reported that the property could not be duplicated "to-day [January 1, 1917] for less than $12,500,000." This figure covered only the physical operative property. Nevertheless the commission fixed the "value of all the property . . . that is used and useful for the convenience of the public at not less than $9,500,000." This is the sum of $8,000,000, stated as the minimum amount of money expended to produce the plant, and $1,500,000, the increase in the value of the company's land. It is apparent that the enhancement in the value of the plant other than land was not taken into account, and that nothing was included for cash working capital, or intangible elements of value.

In Case No. 6613, the commission reported that between January 1, 1917, and November 31, 1922, capital additions amounted to $1,639,146, which added to $12,500,000, cost of duplication (as reported in Case No. 1400) made $14,139,146. It said the company "would

[ 272 U.S. Page 405]

     be entitled to have added to this sum reasonable allowances for working cash, going value, water rights, and such other elements as may not have been included in the original figure and also the value of the non-operative property which apparently was not included in the original figure. The value on this basis would exceed $16,000,000 for the whole property without giving any consideration to the enormous enhancement of value of all good property in Indianapolis which has occurred since January 1, 1917." And the commission set out a number of estimates based on different price levels, made by its own engineering staff of which Mr. Earl L. Carter was the head. There is shown, as to physical property only, the cost of reproduction less depreciation estimated on different price bases. Some of these estimates were on quoted market prices of cast iron pipe and some were on prices approximately ten per cent. less. This made a difference of about $375,000. The estimates on the lower basis follow:

Average prices 10 years ending with 1920 $13,979,744

10 years ending with 1921 14,689,078

10 years ending with 1922 15,232,676

5 years ending with 1922 18,335,974

Prices prevailing October 1, 1922 17,328,249

These include $102,997 to cover materials and supplies.

The company submitted various estimates made by valuation engineers Hagenah and Erickson. There is shown below, in respect of physical property only, cost of reproduction less depreciation.

Average prices 10 years ending with 1920 $16,020,456

5 Years ending with 1921 20,535,543

Prices prevailing October 1, 1922 19,447,193

There were added for materials and supplies $100,000, for working capital $135,000, for water rights $500,000, and for going value $2,000,000.

The company also submitted estimates and appraisals made by valuation engineers, Sanderson and Porter.

[ 272 U.S. Page 406]

     They estimated cost of reproduction of the "bare physical property" on prices as of October 1, 1922, at $19,087,560, and on average of prices for ten years ending with 1920, at $16,169.257. Neither of these included anything on account of working capital, water rights or going value. To cover working capital $267,312 was added and for water rights and going value $2,355,050.

By its order the commission fixed the value of the property at $16,455,000. Its report shows that figure to have been made up as follows:

Commission's engineering staff's appraisal, cost of re-

production less depreciation, on basis of average

level of labor and material prices for the 10-year

period ending December 31, 1921, including mate-

rials and supplies $14,689,000

Capital additions from April 1, 1922 to ...


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