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1944_VILLAGE OF EDINA(2)
KARL C. SCHMIDT CONSULTING ENGINEER 4200 GROVE AVENUE WESTERN SPRINGS, ILL. ' 3 v ot the VUlage or EdIM Le OM- Rte. b-- S :•1. .4F�j -fair valustion on whleh to b"o rat" *: ! q - -. serviee +A•. +s #_t.'!q ee: r I CONCLUSIONB I. The original cozutruotion coast of entire Water Works System in the villas! of Nina, uxed and usable as of January 1, 1944 is t, Thee .reprodu►ation cost of thi# prop- erty based on 1940 coast .prices would be 3+ The grsaeent : va1ua of . the entire prop- erty based on cost less depraalation aQ of January 1,, 1944 is . 4. The pro seat value of the '*ntire prop- erty based on reproduction cost less depreciation as of January 1,, 1944 in. 5• The present Value of the portion of the property asco=t attributgble to the Country Club District service Co. -. for purposes of calculating and pro- rating depreclaetion reserves in 6, 'The present value of the sarvIce Conpwwts portion of the Water Works property account based on cost 1,e00 depreciation is 74 The present valuer of the Service Cosapanyts portion of the Water Works praPerty account based on reproduction coat, leas- depreciation .is 8. The present value . of the Service Campaxryf a port,04 of the Water Works property account based on considera- tion of they two Methods of approach shown Imodiately above it 9. Of they above amount "dontributions in aid of construction" Vero =Rde by water aaxasumers to secure servioo to tbe ex- tent of 10. This sum is dedluotible from the present value of Service Vvmpany# g portion of the Waster Works property, account for purposes of d0tsrminimg the valuer upon which the company Is entitled to earn a return, Used on physical values, leaving a balance of approx1j"tely 16ls 345.03 15 "5$500,00 $ 130o969.35 $ 119, 841, 00 88,596.27 74 *379.20 4 69,* 430. oo t , 14, 900.00 4 57,100.00 11. This .net .total investment by the Service Co. in the properties after allowances for. deprsaiation_ ahsrges .VithdMVU ai d for "contributions' is aid of construction" as of January 1, V64 12. The net investment by the CovzLtry Club . District Service Co} amounting to $48,'40.59 has been rinanced by Stock sold for-cash ..Preferred otock Dess.purchaaos by Co. Trsas. 6,000-00 First Mortgage 16ond Issue originally 20,g000- -,Belo 1 -1 -44 Advances by Realtors - Bal. 1 -1-44 gxoesaiver }depreciation Charges Bxoeseive Profits over Fair Return Total 13. During the same poriod Br. Qaarden as the promoter of the Company has with- drawn in salaries charged to water works operation Salaries. oha4rged to Sewer Operation Xr. Gaardent s personal Ing, Strviaeas have-been- oapitalized In arriving at the not investment la a sae slightly in excess of A net profit vas "alined on *ever operation by virtue of depreciation abarges agatet the sover 'ey0tex amounting to approximtely Total 14. When these facts are wel&ed against a imam investment at any one time of $57..203.31,9 it is obvious that the Country Club Distriat Service Co. per se has never had any substantial actual, investment in the property. $ 48s 740.59 3.000.00 .900004,00- 13, 000.03 9s868.16 56,085.00 15,120.00 4500.00 3 000.00 ....+. 2! 50Q. OC � 22,12n.0U 15..Th* total of excessive earnings and depreciation charges over and abovo a fair eturn during the period from 19.36-194.3j inclusive, vas 160 Ia no evout should. tho. Service Co. be permitted to compound this sbusa by earning future returns on matey .taken from Its customors� through the madiuk of excessive rates largely Sustifted by depreolatloh charges. . against 'their cusxtomersa r property. 17. The maximum present Value of the property basted on, f1macial history of the Company on vhiah a return should be permitted is Net total, 3nvestmont 48„740.59 Lase Ross s.ive earn- Inge and depreciation 21,812.67 The sarnings record of the cxomp"y warrants a rsducti.on ' in rates of ap- . Proximtely l2j% or to 15 cents per lcaii cu. ft. gross and 13# cents per 100 ou* ft. net . after a cash-discount of 1.0%, 19. These rates should be -made retro� 4otive. to yanuary 10 1940, and tho Company should be required to rebate the overcharges since that date . to all Users $ !6,927.92 20, This requirement should result in a re. . fund to consumers of approximately 8, 7,50. via 21. The Company should also be required to rebate to the Village tbo amount of the fair depreciation oharges against the Village Nquity -in . the Water Works property ; account for the-years 2940- l 43, inclusive, amou ntlzg to 2% of 6,038.40 for four years 22. Total, rebates would thus amount to approximately 23. The net total of .the Company Invest- .Mont, exclusive of excessive earnings and depreciation= and.after rebates would be 4 3s683-07 $ 12,433.07 39x360.99 2$. Based on careful consideration of; (1) Prersnt rslue Cif the Country Club Metriat Service Company's portion as determined (a) By ,origin al cost less fair depreciation (b) Bp reproduation c.o&t .loss - depreCiat3Axa. -- . (c) By. consideration of the two nothods Immediately above (2) Deductible "Contributions in aid . of • construction? (3) belanee .of se*vlce 'Company portion In Present Valuts of Physical Assets, #) Cost by Financial History after tasking rebates Bugg *ated (5) Balance Szoessiv ..ar ings deprecirti,on reserves not. to be rebated (1936 -1943) (6) An allovance for working capital, tool*,, equipment, and invoutory. accounts in the sum of . T conclude that the fain present value of th* Country Club District soi+vloe Company's interests for the purpose of computing an allowable net retuarn should not ,oxeeed 5. .A new Bate sabodule should be established . to yl0ld For Depreciation Reserves approximately For. Fair Return on Investment a t 70-V Operatulg i penses 'dotal 26. Belted on the average return over the past four pears a rate of 15 cents per 100 au. ft. less 10% cash discount V ill 'Tiold approx;.mately 74,379.20 6g, 4130.00 14,900.00 57,E 104. did 39060.9.9L ► 9r 379.60 40 0oo. 00 4 50*000,00 3,250.00 3, Q00. €10 10_1200.00 • it wrw 17,200.00 27. As an alternative rate structur0, your board might Wish to consider a two part rate consisting. of a service charge plus a water charge. In ttlat event, approximately the same result would be attained by a rate schedule providing, for (1) A service charge of 50 cents per meter per month which would cover costs of reading deters, accounting:, billings etc, and take the place of any minims charge. (2) A water charge of 91 cents per 100 cu. ft. lose 10% cash discount. 28. The two part rate world have the. advanta`e of more equitably distributing overhead costs and at the same time Mould permit a more generous use of water for sprinkling; and similar purposes. it would probably result in a substantial in- crease in gross water sales and lead to the possibility of further reductions in future rates. 299 From the funds provided by the above suggested rates for Depreciation Reserves, the Service Company should pay annually a sun equal. to 2% of the villagers portion or interest in the Property Account, to the village Treasurer., to be held in trust as a depreciation reserve for replacement of the Village's portion of the r1ater "Forks System, Eased on present con_ struc-Gion, this almual payment would amount � 1¢55.00 to Res ubmit to d Consulting Engineer l� .k..� X04 Or ADM M ft.t KUM.ZOTA -W «t ** vital particular- r- -or-orence t* "bop. " * C. bated o 4ous tfil u. 0 History The historical background of the construction and operation of the Waterworks and Sewerage systems.-in the-Vil- lage of Edina, particularly those portions of the systems located in the Country Club District, is of more than ordi- nary importance in arriving at an accurate understanding of the problems involved in the allocation of interests, and hence in the determination of fair values for purposes of rate making. This history is completely and officially told in a decision of the Supreme Court of.the State of Minnesota filed January 2nd, 1943. To avoid repetition and the possibility that through repetition a misinterpretation or misunderstanding would re- sult, the 'complete Decision of the Court is included in an Appendix to, this report. This decision should be carefully studied by those not thoroughly familiar with the entire back- ground of the Country Club District Service Co. and -the water - works.system in the Village of Edina before going further with the reading of this report. Rate Making Principles It has become a well established rule-in.the United States that a- public utility, in, return for.: the special r - 2 privileges graanted it by the Community or State, must permit its rates and services to be regulated. This is to prevent abuse of these more or less monopolistic privileges. The right of a,Council, Legislative Body*or Commis- sion, as the Case may be, to regulate rates has been.restricted, however, by the Supreme Court which has laid down a very gener- al rule to guide such regulatory bodies. This rule springs from the interpretation given by the United States Supreme Court to the "due process" clauses in the Amendments of the Constitution of the United Statea and may be briefly stated -as follows= Public Utilities, subject to regulation, should be entitled to earn a fair return on a fair value of the property they devote to the service of the public, The converse of this principle is equally accepted, to wit: that because of.the protection provided in more or less inauring the right to charge rates which will earn a fair return on a fair value, the utility is not entitled to main - tain rates that will yield net revenues in excess of a fair return.- o The famous case of Smyth vs, Ames, decided by the Supreme :Court .of the United States, laid• down a legal princi- ple which serrves.as a guide in determining the reasonableness' of rates. In this decision Mr. Justice Harlan said. 3 "What the Company is entitled to ask is a fair return upon the value - of that which it employ`s , in the public convenience. On 'the other hand, what the public is entitled to'demand is that no more be extracted from it than the services rendered by it are reasonably worth," (Smyth V. Ames, 169 U.S. 466 -546) It should be pointed out, however, that despite many opinions to the contrary, there is no exact formula for arriv- ing at the determination of the "Rate Base" or. °Fair Value." This is clearly pointed out by Chief Justice Hughes in reading the opinion of the Court in the Los Angeles gas case. "This Court has repeatedly held that_the basis of cal - culation is the fair value of the property ;.that is, that what the complainant is entitled to demand, in order that it may have 'just compensation' is a fair return upon the reasonable value of the property at the time it is being used for the public" - - = We have said that the judicial ascertainment of the value for the purpose of deciding whether rates are confiscatory "is not a matter of formu- ias ", but there must be reasonable judgment, having its basis in a proper consideration.of all relevant facts -3 (Los Angeles Gas & E. Co. vs. Comm. 289 'U.S. 287. decided May 8, 1933) Principal among the "relevant facts" which the courts have said must be considered are; 1.. Initial.Cost of the Property 2. Reproduction cost of the property 3. Financial History of the- Company. "The actual cost of the property - the investment- the owners have made - is a relevant fact." (Smyth v. Ames 169 u.s. 466 -547) "But while Cost must be considered it is not an exclusive or final test. The public have not under- written the investment. The property on any admissable standard of present value, may be worth more or less • -4- than it actually cost. The time and circumstances of the outlay.. and the effect o—f--art—ered con i ens errand consider ion.. Even when cost is revised so as.to re- flect what may be deemed.to have been invested prudently and in good faith, the investment may embrace property no longer used and useful .for the public. "This court has further declared that, in order -to determine present value, the cost of reproducing the property is a relevant fact, which should have appropri- ate consideration. But again the court has not decided that the Cost of Reproduction furnishes an exclusive test.. - -= We have emphasized the danger in resting con- clusions on estimates of conjectural character. We said in Minn. Rate Case Simpson v. Shepard 230 U.S, 452 -576 ed.- 1563 - - --) The cost of_ reproduction method is of service when the cost of reproducing the property may be ascertained with a proper degree of certainity,. But it does not justi- fy the acceptance of results based on conjecture."- In more recent cases, however, the.Courts have approved giving greater weight .to original rather than reproduction costs because of the greater reliability of original cost rather than reproduction cost estimates. To this effect see Bronx Gas & Elec. Co. v. Maltbie, 271 N.Y. 364. Your own Minnesota Supreme Court.has quite recently spoken directly.to these points in the case of State v. Tri State Tel. & Tel. Co. Minnesota Reporter 204 - page 516 - decided Feb. 24, 1939. This decision is quoted rather extensively below as sum- ming-up, the most generally accepted principles in excellent clear language that leaves little doubt of its meaning. "In deciding the question of fair.return, a number of intermediate determinations must be made. Since fair return is computed With reference to fair value, the latter quantity must first be found. It is elementary that this may be less than, equal to, or more than pre- sent cost of plant less depreciation plus working capi- tal. - - -�- "Fair Value for rate-'making purposes must therefore be determined in another way, and the indieia observed are historical cost, or cost of original plan; plus additions, less.retirements end accrued depreciation; re- production cost as of the time of inq,41ry, lose accrued depreciation; the financial history of the company, and all other relevant facts. It cannot be determined with precision for it is not derived from the application of • formula., but must be reached through the excereise of • reasonable judgement, guided but not ruled, by the foregoing processes according to the weight, which de- pends upon the circumstances, attributable to each. Actual Cost "Historical cost, the worth of the property at,the time it was devoted to the public service, may be greater or less than the value for rate making purposes, depend- ing upon the circumstances attending the outlay and sub- sequent events. Of course the -cost of a utility well planned and efficient in.the pubifc service is good evi- dence of its value at the time of its construction, and continues to supply a measure of the value of the physi- cal elements of the property so long as there is no change in the level of applicable prices. But even though'an alteration in the general price level has oc- curred, actual experience, especially in a recent period, is a valuable check upon extravagant estimates. ", - - -- Reproduction Cost "The Company is entitled to a return upon any increment to the value of the plant since installation. The present value of the plant may be indicated in some degree by this method, when the costs of its components may be found with reasonable certainity. -- In applying this formula, how - ever, it must constantly be remembered that the appearance of substance, given by the delusive exactitude of the re- sults, is wholly imaginative. It is but an attempt to es- timate the cost of constructing a plant exactly like the present used and useful plant. The theory indulges in a -number of unfounded assumptions. It is inconceivable that the present plant would suddenly cease to be, or that if • - 6 - it Were not in existence other environmental circumstance affecting its form and value Would be operative, or'that the same plant would be built, if reconstruction .immediate and complete were possible. Even in this speculative ven- ture, however, some contact with reality must be preserved, and estimates,.even those of experts, must relate to things and conditions having counterparts in reality. - - -- 1' - -_. The use of a genera, commodity index to translate original cost and subsequent additions into present value by its application to a conglomerate of assets has been disapproved. But where the index is built for a particu- lar class of property and is applied to that property it has been found acceptable.." -- Another thoroughly-established principle of rate regu- lation is that a utility should not be permitted to benefit from the continuance of excessive or unreasonable rates through the medium of Court proceedings and the incidental delays, nor should it be permitted to include the cost of legal battles in its operating expense statements, with the result that the cost of such trials is paid by its consumers. "Reasonable amounts for rate case expenses are allow- able where the utility prevails or the rates fixed by the com- mission are retroactive." West Ohio Gas Co. v. Public Utilities Comm. 294 U.s. 63 55.3. Ct. 316,796 , ed. 761 "Such expenses need not be allowed if the rates charged are found to be greater than are fair and reasonable." Scranton Spring Brook W. 8erv. Co. v. Public Service Comm. 119 Pa. Super. 117, 181 A. 77; Reno P L.& W.Co. v. Public Service Comm. • (D.C.) 298F 790,800 PUR. 1923 E, 485,499- Any appraisal of "Fair Value" for Rate Making purposes u - 9 - must be guided by the above stated principles and involves first' of ell a determination of the several factors that the Courts have said are "Relevimt `acts" which must be considered. PROPERTY TO illy ` VALUED Before any determination of the Fair Value of the pro- party of a utility.ean be made the ownership of the property to be valued must first be ascertained and the property defined. The ownership of those portions of the water -works built subsequent to 1935 by the .Country Club District Service Co. is acknowledged to rest in the Service Company, however tie ownership of those portions built prior to 1936 has been in dispute and .a grief review of certain facts is ossefntial to explain my handling of certain entries representing the initial investmeht by the ^arvice.Company In this disputed title. V:hen ter, Oaarden undertook during the latter part of 19-55 to purchase the water- vrorks. and sewer systems in the so- called "Country.Club District" in the Yilla,e of r5d1na, he first negotiated with Thorpe Bros., the development realtors, for control of the corporation known as the Country Club District riervice Company, in whose name the franchises had been issued, but which had not.up to that time actually on- gaged in business. After Fainin% control.of the corporation in 1935, Mx'• Goarden caused the corporation to issue 153 Shares of preferred stock having a nominal par value of ,,100.00 per share to Thorpe ?iros. in payment of the viater -works ant sewer systems, trans - fer of whtch was authorized to be made to the Country Club Dis- triot Service Company by resolution of the Board of Directors of Thorpe Bros. Co. Leiter a deed was issued by Thorpe Bros. Co. to the °arvice Cc* conveying title to the lot, on which the elevated tank anti .tower .provid�ra," a reserve water supply and pressure reservoir. was located. Although the Thorpe Bras. directors authorised trans for, no bill of sale or other evidence was ever e7.ecuted so that the only actual transfer of title consisted of the deed above.mentioned. The Supreme Court of the'State of Minnesota has since held in effect, that the water and sewer system were not rMorpe +s to sell, :inasmuch as Thorpe Bros. had represented to all lot purchasers that "these utilities' were installed and paid for and included in the price of the Iota" and that they had there- fore been prov.touslg sold to the lot purchasers. (See Appendix). Attemipts h4ve been mach, to isolate certain portions of the grater and sewer systems such as the elevated tank and tower'O parts of the 50th Street.main, amid certain hydrants, etc., and i 0 to maintain that these features were purchased by the rervioe Co. This claim i.e wholly untenable inasmuch as the-water- works system would be unworkable Without these features, arid, to .have made the representations.to lot purchasers which were made and then provide only an unusable portion of a %ater- .Vorks system would have been no less .a travesty on justice than to have provided no waterworks at all. This reasoning; can also be logically extended to the real estate on which the tank and tower are located, for the reason that .thee tank and tourer are essential elements in the water works system and could not exist without r sal property on which to stand. I'he tank and tower were erected in 1943, Mora . than 12 yoa.rs 'before the lot was transferred. The lot had in eff6ct been dedicated to the water -works system and con - sequently to the pijvchasera of lots in the Country Club Dis- trict. Mst then .did . the service Co. buy? Perhaps the correct answer is that, their bought nothing, and that, inasmuch as pay- ment was made In stock without any actual value at the time it was issued, it is further possible there was no consideration on either, side of the transaction, That, in effect. to the posrition.of Counsel for the village. - 10 - Perhaps what Yr. Oaarden actually bought on behalf Of the Service Co. were certain intangibles that might be called$ for want of better tertna, "Franchise s" "GoIns Valuevil or "Good Will." or perhaps merely the AF;ht to operate the water - works. and sever systems. But the franchise for the water -works system says "In they determ2nation of .such fair and ,reasonable; value, there shall not be included there lac nor in the purchase or any condenina- Lion price of such ey`stem, any al.lo*hnO4 for. franchise, good will or gaging concern value,-. but such fair and reasonable value shall be the normal reproduction coat, excluding the. it*ms hersinbefore mentioned." In view of these faeste, a strictly technioal position would undoubtedly warrant the rejection of the „A5,.300.00 item and of any qnd all recognition of interest by the "orvice Co. In property built prior to 1936. H.Owever, i feel a. more leni- ant position is in order in the Interests of complete fairness And equity* Because no claim to ownership of' any property built prior to 1936 can be substantiated or accepted, and because no intangible item such as "Going Value” can be recognized in determining a "Pair value" under provisions of they franchise, I have elected to rives r ecognition to the original purchase by arbitrarily assiTning to the Service Company the benefits which would normally have been derived had they actually pur- C] 11 chased an Equity in. the property to the extent of the stock iSsue or 15.ZW.00. This position is, I believe, equitable, though not technically or legally accurate.. If acceptablo to your hoard,, the service Cf;, will be entitled to a fair return on . the value of the stock, issued for the oriSinal purchase and to credit fOr depreclatioh •reserves arpai.nst a proportionate .share in the property account of that portion of the water works built prior to 1036. por reasons hereinafter explained 1 have also elected to assign the on.tire amount of the original purchase price to the waterworke .account rather than. prorate part of it to the sewer system accounts. Ovmersh.ip of flower Sys tams After a careful review. of all known Facts, evidence, and the . opinion of the Minnesota Supreme Court, it is my con- elusion that the Country Club District Service Co. has no claim whatsoever to any title or equity in the sewer syStoms, either s ani tb ry or a torn, in the Country Club District,, snd . accordingly 1. have made no attempt tci evaluate tl.e newer properties.' The erVice Co., during; the period of a even years Oap- italited expenditures to the extent of ,246.00 for additions - 12 - to-the sewer systems of the district, which consisted, in part at least, of the personal Engineering Services of Mr. Qaarden. The Service'Co. should be reimbursed for this expenditure in consideration of a quit -claim deed on all sewer systems in the Country Club District. The sewer system.property accounts, and depreciation reserves presently reflected "in fixed asset accounts of the company should be written off by a suitable charge against the, unearned capital. 'surplus'.. Any apparent injustice in this. position and procedure can be corrected by giving recognition to the_full.extent of actual investments by the Service Co. in consideration of the water works property account and the assignment of benefits thereof, it will make.no practical difference whether the Country Club District Service Co. is assigned the benefits from a rela- tively large portion in the water works property account or from a proportionately smaller portion in the combined property accounts. The first of these alternatives, however, is more, nearly in accordance with the actual facts and with the inten- tions of all parties at the time of alleged trans -br by Thorpe Bros. to the Service Co. Depreciation Rates Much time can be wasted by quibbling over detail de- preciation rates,.whereas, in fact, there can be no scientifi- cally accurate rate determined in-advance for any given location. 3f See Deiendent's Exhibits 57 & 57 -a - Appendix 13 - The rates used by Mr. Graber and the rates subsequently used by Mr. Gaarden, although slightly higher than Graber's rates are both reasonable and consistent with accepted practice; however, the lower rates used by.Graber should not have been- accepted to, determine value and then raised for accounting purposes to determine depreciation costs. Complete fairness demands consistency in the applica- tion of depreciation rates once adopted, While various items comprising the complete water works system properly take different rates of depreciation, a composite - rate for the entire system can be adopted for purposes of this survey without materially affecting the end result.. The average annual composite depreciation rate shown by defendant's exhibit 66 up to March 1939 was 1.9%. Depreciation charges,actually written off and shown. by the Audits., of .the Service Co. books, as compared with the composite W4ter works property accounts are shown on Table II and average 2.012 %. For purposes of this appraisal and report I have assumed a composit depreciation-rate on the entire property of 2% per year. 14 TABLE I WATER WORKS PROPERTYACCOUNT From_Service Company's Books -. Depreciation Charges Composite Depreciation Rates Prop. .Account Average .Beg n Average Charge R„ ate 1937 98,654 109,930 lo4,292 2,100.12 2.02% 38 109,930 120023 115,126 2017.66 2.00% 39 120023 140,124 130,223 2,626.08... 2.02% 40 140,124 148,132 144,128 2,900:86 2.01% 41 148,132 149,549 148,840 2,998.62 2.01 Average 2.012% Odd'cents are dropped Rates calculated 'bg' slide rule - 15 - Because the Service Company has previously adopted the straight line depreciation theory, under which the original - cost or value of a"property Is written off in equal annual in- stallments over the assumed useful life of the property, .it is desirable to continue the property account as a separate item for purposes of calculating depreciation charges, independent of.any' present fair value" which may be determined for purposes of calculating a.fair return. When a ".fair value" is determined by your council the books of accounts of the company should be adjusted to re- move from same any and all property not owned by them and the balances remaining in the property account and depreciation re- serves should be reconciled with the determined "fair present value" to avoid future complications in the interpretation of the books or audits of the'Company accounts. Graber Appraisal =_ In order to establish property values when the books of account of the Service Co.'Were opened, Mr. Albert Graber, Consulting Engineer of Minneapolis was retained by the Service Co. to appraise the property to which the Service Company claimed title. This appraisal was presented during the later trial in .1940 and admitted in evidenee.as Plaintiffs Exhibits "Ll' and "N ". The.exhibits purported to.show the reproduction cost of the property, but in the opinion of the writer were based on . - 16 unit prices very much in excess of either the prices which actually prevailed during the construction period or at the time of . the appraisal -. When the writer was asked by counsel to check these appraisal figures, he accepted, as accurate, the physical in- ventory shown by the.Graber appraisal, but substituted unit. prices taken'froin the actual construction contracts secured from the office of Thorpe Bros. Co. The inventory quantities were then extended at the actual construction prices to determine the true Historical Cost of the construction work completed by Thorpe Bros.. Co. prior to 19366 The resulting figures, together with the•Graber figures, were presented in court as Defendents Exhibit no. 60. Mr.. Graber expressed the opinion that construction' costs as of Jan. 1st, 1937 were somewhat higher than at the -time of..construction, whereas it was the opinion of the writer that they would be very much the same or a trifle lower. To substantiate this position,.Plaintiff's Exhibits 62, 03, 640 650 66 and'67 were prepared. Exhibit 63 shows the relative yearly value of main items entering into the physical.value.of water works plants 17 - through the tabulation of the Lambert Water Works cost indeces for the gears 1913.to 1937 inclusive. Exhibit .62 applies the ratios of these cost index factors to actual construction costs and establishes the fact that reproduction costa based'on 1936 prices would actually have been approximately ll %.less than the actual costs, instead of approximately 2610o more, as shown by the Graber appraisal. In his testimony Mr. Graber stated that he had based his unit prices on the use of Class B cast iron pipe, although he admitted that a centrifugally cast pipe known as DeLavand Pipe was used throughout the construction. This error alone accounted for some $3,200.00 of the excess valuation shown by the Graber appraisal*' Calculations to substantiate this point were detailed on exhibit 67. Copies of the above mentioned defendents exhibits are reproduced for convenient reference in the appendix of this report. Depreciation rates used by Mr. Graber were accepted by the writer as being reasonably consistent with accepted practice, for the determination of depreciated values as of January lat.. 1937, and shown by the above mentioned Exhibits. Fair Return The.fair return which a utility should earn should be such as to cover all operating expenses, plus suitable t _ is appropriations to depreciation reserves, plus a reasonable net, return or interest allowance on the investment or.fair value of the property employed. It becomes obvious that a fair return is a flexible and variable amount, changing from time to time and depending upon many factors. For example in Wilcox v. Consolidated Gas. Co. 212 U.S. 19, the Supreme Court of the United States declared: 'There is no particular rate of compensation which must in all cases and in all parts of the country be re- garded as sufficient for capital invested:in business en- terprises. Such compensation must depend greatly upon circumstances and locality; among other things, the amount of risk in the business is a most important factor, as well as the locality where the business is conducted and the rate expected and usually realized there upon investments of a somewhat similar nature with regard to the risk attending .them. There may be other matters which in some cases might also be properly -taken into account in determining the rate which an investor might properly expect or hope to receive and which he would be entitled to without legislative-inter- ference. The less risk, the less right to any unusual re- turns upon the investments. One who invests his money,,in a business of a somewhat hazardous character is very properly held to have the right to a larger return without legisla- tive interference, than can be obtained from an investment in Government bonds or other perfectly safe security." The Supreme Court of Iowa in Cedar Rapids Gas Light Company v. City of Cedar Rapids, 144 Iowa 426,, at 450 has held:. "When Government bonds bearing two percent annual interest are selling at a premium, and those issued by state or municipalities at little if any more than double such rate are in demand, and when the current rate of interest on ilt'ed et securities on real estate or puDlIc sere ce corporations rarely exceeds five percent,, t wi no 0 fi the —courts o say that nnccome move all expenses-, including taxes, on property devoted to the public service, must necessarily much exceed the last- mentioned ra.e to _ 19 .. avoid the'eharge of being confiscatory. What.such plants usua3 y earn, unless they `6e ased on reasonable :charges, cannot bo-accepted as a criterion, for usually the rates fixed are all the tariff will bear. Possibly the plant should earn a return equal. to the interest paid in the ✓communith on investments equally permanent in character, but what this' was is not disclosed by the record." (Italics ours.) Ordinarily, in determining rates, one determines what is a fair and reasonable return in the light of the above decisions, and is - particularly watchful to inquire whether ouch a return is confiscatory or not. (b) Factors Affecting Rate of Return All the factors juentioned in the above decisions as affecting the rate of return, must be considered individually in determining the Fair Return. In current yields on securities, it is interesting to note that the average yield of utility bonds dropped from 7.3% in 1921 to 3.01% in 1940, while..the yield'on utility preferred stocks has dropped from 7., 4% in 1921 to 4.49% in 1940. This was pointed out by the Supreme Court of Illi- nois in the recent decision of Peoples aas_Light.& Coke Company, v. S1a.ttery, 373 Ill. 31, 68', 69, where the Court declared: d "It appears that in 1936 the yield.of'the highest grade public utility bonds was between three percent and three and.one -half percent, and that between 1934 and 1936, first class public utilities were enabled to borrow upon their bonds money at from three and one - fourth percent to four and One- fourth percent, and that the average yield on the best- bonds - of railre;ada and industries, during 1936 -. 20.- and 1913x, ranged 'from three. and one- fourth percent to four and one -half percent. It was also shown that State bonds and high grade City 'bonds were sold to yield anywhere from one and one - fourth percent to two and one -half percent. It also appears In the record that the company borrowed several million dollars for refunding purposes at four per- cent. The fair rate of return is to be tested primarily ba�rr present day conditions, (United Railways Cc'. v. West 280 U.S.. 2349 74 L. ed. 390•1 If aeems reasonaUly clear that in view of present economic conditions,.of which we take judicial notice (Los Angeles (has & Elect .CCor2. V. Railroad Comm., supra) that the company would nave great dIfficulty in re-a- ing five percent. upon the money it has invested in its utility enterprise, in securities .which would be as sound and as certain to return a hike percentage." That the present downward trend of interest rates still prevails is demonstrated by the fact that.the present market rate on four to six months' prime commercial paper is around 1/2 to 5/8 of 1% compared with .rates of 4 to 6 -1/4 %% which "prevailed in the 19201s. Call loans have a renewal rate of.1% compared with rates of 3 -1/3 to 9% in the latter half of the 1920's. Average yields on long term United States Treasury bonds are about 2 -1 /4% compared to 3 -1/3 to 5% in the 1920'x. High-grade municipal bonds have an average yield of 2 -1/2,% compared.to 4 to 5% during the 19201s. Public utility bond averages show very marked reductions from levels that prevailed 10 to 15 years ago. In recent years, water Company financing has been largely done by private companies at interest rates from 3 -1/2 to 4 -1/2 %. Risk - Obviously, the element of risk is very low in the case of a public water work3 system in a community of the - 21 - caliber of the Country Club District and adjoining sections of the. Village of -]�dina. Conclusions on Rate of Return The.relatively small size of the property undoubtedly warrants a greater rate of return than the present prevailing interest rates and other factors would seem, to warrant. Under all circumstances it appears that a return of 5 -1 /2p to 655 of the.present fair value of the property would �f be .a fair and reasonable yield on,the water works property in the Village of Edina. In fact it is improbable that, all factors .con�i.dered, a rate of. return highher .than 6% could be justified. por. purposes of aetermiiiing the adequacy of exist Ing rates for.past years, 1 have assumed a 6% return on the actual Average Annual investment, and for determining.new rate schedules.a return on the present.fair value of the property as fair and., roper; Assignment of Benefits For purposes of determing the,fair value of the water works properties built prior. to 1936 and proportioning the benefits therefrom I have accepted the.actual cost figures less depreciation as,shown on Exhibit 60 and explained above, I as most equitably representing the fair value of the total water works property as of January lst, 1937, at which time 22 It was Placed on the COMP& Ay books Teblo Dumber 11 bas. been prepared from Xxhibit 60. This shove a total cost prior to 1936 of $62,768,09 and s depreciated value: as of january 1st, 1937 of. $5+0; 897.21» The nominal Purehaee PrieS paid in stock to Thorpe Bros . Co. was 4150 30e. M Dividing 1%,30040 by 451,000.000, we arrive at .& figure of 30%4 Vor the purpose of assigning the benefit* .frox a portion of the property' account for Computes fair deprecia- tion credits due the 0erVice3 Co., 3 have added they $3000 40 for real astate to the construction cost and have credited their. property account with-30% of-465,768.09, car ' *19, 730.50•. The . remainder., or $46,0437.59 will be refearred' to as the Village's Portion .of the initial property account: ' They net investment - acco unt by the Service Co. is credited with $15,300 arc of November 1935 and January lst, 1936 . The aboie figures take no account of water works iMprovenents . made in 1928 by. the VIII age, vhLoh were financed by special &$80 "ment -and Ito which the Service Company hots r made no claix to v"rahig. I b04 11 Iavostwut by C.C.D.3. Co 15.300 Portion. of 8m+efits 1 00 :. assigned to SerVICe Co. 5� .0 Portion of Bonefits assigoid to Village *Adjustment for 8" Prain built is 1924 by Sani,tor Constv�wLioa Co. See Mibit 60 1 BSCAPITWATION OP CONS "UCTION WOIM ISUIM PRIOR TO 1936 FROM =IBIT Coat Jess- Dop"ciation Depr *ciation Actual Depreeiation. Deproolation Service Co. vilugo cost to. J".1419,3Z Takel1 Portion Portion 1923 Cons t. *1924 33 .87 ` 24,823.5 29_.156.16 2, 592.18 1926 745 »03 611.3f 1928 1,662.oa 10485.82 Total b2l7W.09 500 597. 11$871.92- 3#561.58 8, 310.34 Iavostwut by C.C.D.3. Co 15.300 Portion. of 8m+efits 1 00 :. assigned to SerVICe Co. 5� .0 Portion of Bonefits assigoid to Village *Adjustment for 8" Prain built is 1924 by Sani,tor Constv�wLioa Co. See Mibit 60 1 - 24 •-Development of the, Property • Since January lst, 1936 all extensions -and improve- ments to the water works system in the.Village of Edina have been made by the Service Co. with the exception of certain extensions made in 1941 and financed by special assessments a.ga.inst the property benefited. Improvements made each year. by the Service Co. have been added to.the property account at cost as ,shown by company audits, together with an allowance for engineering sere;ces at a ra=te of 6% of the construction costs. In some instances engineering services had been previously capitalised at approx- imately 4% of cost and in ' such case$ an adjustment for the dif- ference'between 4% and 6% is made. Retirements of property taken from service are de- ducted from the property account at undepreciated balances and prorated against the portions assigned to the Service Co. and the Village. To determine the.net investment by the Service Co.,' from year to year, contributions made'by customers. "in.aid of construction" and-the depreciation charges actually written off by the company were deducted. From the above the average annual values of the pro-- Perty account and net total investment were determined and the 25 Pair depreciation chargeable to the as well as the fair return on their calculated. .The development of these shown in.Table loo. III, which also investments in portions assigned to Service Company's portion, actual net investment, were accounts year by year is Shows the development of the Village. f TABLE II ANALYSIS OF PROPERTY ACCOUNT & CAPITAL INVESTMT DEPRECIATIM CHARGES. & FAIR RPFUAN 1 2 3. 4. 5 6. , 7. 8. Average Average Depreciation. Investment Allowance Fair Re- turn (9 6% Property Valuation Account Property Depreciation Net Addition Total Net for Year 2� 2 Co on Col= C= lative Account Charges to Property Investment Prior By cost to Thorpes $62,768.09 to 1936 000 -.00 $65,768,09 Less portion ns s.tgne d t,p Village 46,0 7.59 19,730.50 $15,300.00 1935 .1936 Original investment Additions 16,488.96 $ 1,16.07(1) 15,072.89 30,372.89 $22,836.44 49 1,370.18 $27,974.98 .559. 36,219.46 Additions` Engineering allow. 11,275.89 676.55 2,100.12 9,4.32 35,083.05 2,104.98 Retirements 4 =(2) 41,979.68 39,793•u 839.59 47,739.90 1938 Additions Eag'r.al.low.(3) 10,483.64 2,317,66 176.25 8,252.23 42,792.87 2,567.57 Retirements 90.00 530024.84 2, 252.91 45792.53 , 1,060.49 Contributions 58,309.79 1939 Additions (3) 19,800.76 426.47 2,626.08 17,601.15 50,003.06 3, 000.18 ingtr.. allow Contributions 68,423.40 91,18D.09 54,213.59 1,368.47 78,537.02 1940 Additions 8,007.83 480.47 6 ,882.31 3,412.94 Eag r. Allow. Contributions _ 250.00 59,551.03 1,655.62 82,781.17 87,025.32 1 1941 Additiona l bg'r . Allovenoe Contributions 1942 Additions Magi • Allorwance Contributions 1943 Additions Bag 'r . Allowance Contributions • TABLE M - Cdntid Aft.LYSIS OF PROPIM AOCCOUDT & CAPITAL MEMM naMECIATION CHAFES & FAIR RSPUPDt' 1. 2. 3. 4.. 5. 6. 7. 8. Average. Average Depreciation Fair Be- Property Valuation Investment Allawanae turn @ 6% Aocoont Property Depreciation Not Addition Total Not for 2% 6% on Cuwalative, Account Charges to Property Investment gear 2% on Col.1 Col. 6 1,417.66 85.06 $ 2,998.62 1,495.90. 457,306.31 $3,438.38 21993.53 487,776.68 $55,o61.6o 12755.53 23.32 - 1.40 3.081.55 3,x%•83 532470.68 3.208.24 : 8801rW.40 88,552,76 41.05 2.46 8$,574.51 68,596.2'x. $20..523.65 . 51,879.77 1,77o.81 3, 039.18 50010.18 100.00 Adjustment for depreciation on land included -30 of $60 per year for 7 years. NET DEPRECIATION C9AMES ALLOWLE Depreciation prior to 1937 on portion assigned to Service Co. 4,740.59 Present value By .Cost. Leas Depreciation of portion assigned to Service .Co. (1) From Defendent'e Skhibits $74 Depredation taken.by Appraisal (2) A portion of 30th St. main having undepreciated balance of $1,040.00 and the meter box and connections with InnneapolJOL Maine with undepreciated balance of $400.00 were discmUnned - 30% of total charged to Company's equity in pro- perty account - 70%.to Village equity. (3) engineering allowance of 6% on additions lose amountes previously capitalised 3,018.61 1,771.49 $10,781.49 $22,121.08 126.00 1. $1 , 74079.20 TABLE III - Continued ADJUSTMENTS VILLAGE PORTION IN PROMTY ACCOU14T AS OF JANUARY Ist, 1944 PropertZ A/c Original Cost of $45;037.59 Construction prior to 1936 r Assigned to Village Less Retirements 10,008.00 0451,029.59 (4) Plus - Const. 1928. 783.45 .(4) :Plus_ - Const. 1941 260930.72 16 153.61 Present Value by Cost �V'3 ,5 Less Depreciation of Portion assigned to Villa ge PRESENT VALUE TOM PROPRIM As of-January 1st, 1944 01b0,969.35 By Cost less Depreciation (4) Construction by Special Assessment financing. Fair Dep. Allow._ t 2 }gip. Subsequent to 1937 ;`6,304.27 252.1-6 T,585.84 Dep. Village Equity Prior. to 1937 a 310.34 4 , 5 .61 Adj. for Dep. on Land 294 ge PRESENT VALUE TOM PROPRIM As of-January 1st, 1944 01b0,969.35 By Cost less Depreciation (4) Construction by Special Assessment financing. 1, �7_ Historical Cost The dovelopmeAt of the historica3. cost as above described le sumarlsed in Col. 1 of Table No. iV, and is shO" to amount to 061045. 03. The fair prOtOnt VSIUO of the emirs water vorks syatom as determined . f1koit hiatarical cost is shorn on Table TYT to amount to $13Oj g6g. 35- Of this last aeRoust, the present valve of the Servie0 COMP&WO POPtioA VoUld be - - _ .- - - . 74,,379.90 Basin of Rogroduction Cost Estimates a���wpw�iriu e i Pe e � M rr..r � Reproduction as of today is, of courae, wbo3.11 impossible because Of the war program and the freezing of a13. materials for such construction outside ,of strictly defense . .areas. Since the Wted, States watered the mar there hall been no material axsomat of water works construction on vhieh to base costs or construct accurate cost India" for the y+sara 1942 and lg #. Although the ,Laxbert index of hater Works construe- tion costs for the year 1941 is available it was uu4uOttionably ina,Iuenced, at least dUriAS the latter months of the yesro by the fact that we were at that ties rtipldly spproachifg a state 2S - of war,.and that metals of all kinds were becoming scarco. Although it is a matter of recognized principle that a Utility company is: entitled to benefit fairly from appreciated values as shown by reproductioxl.costs, and that for this reason reconstruction cost must be considered in determining -the fair present Value of a property, I do not believe'that any regulatory body or court would permit a utility,to profit unduly because of war time inflation of that cost. In order to discount the inflationary war influence in a.manner that I- believe equitable, I have chosen the year 1940 as most nearly representing conditions for the calcula- tion of fair reproduction costs. Because actual costs of each years construction work are known it 1s not necessary that a completely neu -in.- ventory and appraisal based on imaginative unit prices be re sorted to in order to determine the reproduction cost of the property. We can arrive at much more accurate and equitable reproduction cost estimates by applying suitable factors repre- senting the.ratio between cost index figures for the year of actual construction and the year of reproduction. ...For this , _purpose the index figures of the univer- sally recognized "Lambert Gost: Index for Water Works Plants" _29- have been applied. Table IV shows the cost index figure for each year and the ratio between the index figure for each of the several years and the year 1940, Actual costs were multiplied by this ratio to deter- mine reproduction costs- of-each year's construction work as of 1940. A substantial saving from the resulting total figure would undoubtedly.be affected by reconstructing the entire pro- perty at one time clue to savings in engineering work, moving of equipme.nt, and other contractors' overhead expense, An allowance of approximately 5% is made to recognize this factor of savings. It is unquestionably on the conservative side.. This savings is weighted in the determination of "present value by reconstruction cost" in the same ratio as the totals beer to each other without consideration of this factor. To'deterraine present value on a reproduction cost basis the cost so determined was-depreciated at the rate of 2% per year of service. • Canatruction Lose Retiremasto _. w Years 1923 24 26 28 Land 1936- 37 39 40 41 42 43 1928 Const. by Village 1941 Conat. by V1 11age Less Adj. • TABLE IV 30000.00 REMMMIOH COST OF WATER Vona. 100 PMP -r AND PA MR W VA= 8AM CE SM None : 30,000,00 lsibert 16j4M.96 Repro- 109.6 value 2,900.00. Coat Rep.Cost &wdon Deep. to am of C.C.D.S.Co. Village Court Index Fig. Ra tie Cost dan.l. Jan.ljP44. Portion Portion 310,977.87" 19.6 98.2 31 #400.00 13,200.00 18,200.00 28,423.9 200.8 97.0 27,600.00 11,040.00 16,560.Oo 705.43 188.8_ 103.2- 728.00 264.ao 464.00 1,662.00 171.7 113.3 1,890.00 6o5.0o 1 .00 1082.00 1,382.00 24.72 r509.00 10,973.00 25,536.00 30000.00 100 3,000.00 None : 30,000,00 900.00 21100.00 16j4M.96 178.0 109.6 18,100.00 2,900.00. 15,200,00 15,200.00 *10#312.44 195.5 99.9 IOJDM.00 1,480.00 -' 9..020.00 99,020.00 1Qj,1%9.89 193.8 101.0 10,650.00 1.,275.€0 9 ,P375.00 9#375. 20,227.23 189.8 1.02.9 20,400.00 2,040.08 18.,3W.00 . 18,360.00 8,488.30 1,45.2 100.0 8,488.00 680.00 7.,808.00 7,8o8.00 1,502.72 199.1 98.0 1,470.00 88.00 1082.00 1,382.00 24.72 2`'5.00 1.00 24.00 24.00 hx _ 51 _- h i -no 1.00 42.00 42.00 .t�7, vcJ.w 26 788.45 171.7 L.a 199.1 16104.5-03 Leas Probable ,sorrel due to reconstruct Am of the entire proms at one tlma - Approx. % .+ t M: 612.00 N� .00 Zi7Jii -►.w i.�,.�.i.i.v .,�s�J.....,.. - Jrs- ..0,s..., Calculations of ratios and reprodnation coats are 1w .slide -rule for the reason tAat the reaniting figure is well within the limits of accuracy of the Index figures used or of ashy eetimte 'hewed upon the imnglusti9a fectore that mat eater Into a reproduction cost eatimste. * Less adjustmmto and retiranenta not othervies, cbarged. � 31 r 2e2r2d ion Cast The reproduction toot of the entire property deter- sued as described above Mould be 1530500.00 and the present value of the property based abase on reproduction Cost less depreciation would be $119,8 41.00., Of this last amunt, - The present value of the Serviee company's portion would be - - - - - w i r - - - - - i i w - r - - $ 69V430,00 Contributions in Aid of Construction It is or course siW* equity, aeeepted by Courts and Coamdosi.onx alike, that a Utility Company is not entitled to a return oil money which bas been provided by customrs without eonsiderstion in the form of stocks, bonds or other similar obligations, but sorely as an "aid in aollStrustion" of addi- tions or extensions to the property, which otherwise would not yield an adequate return on the investment required by the Utility, Acoordingly, it is necessary to deduct say such coo» tributlons from the present p4sicsl values as determixted by Historieal Cost or Reproduction Cost to arrive at the present fair value for rate mkL g purposes. In accepting this type of =aid, bawever, and creates the exteasion, the utility asstn es the responsibility to main- tain and replace, it AOcessary, the property b%dlt with sash funds. For this reasoA "Contributions in aid of construction" 32 are not properly deductible from the property account for the purpose of computinZ fair and proper depreciation reserves.- The Country Club District Service Company has re- ceived a total of � 14, n01. CQ throuoh such "Contributions in aid of construction." Financial History' In addition to the "historical Costs' and the Repro- duction Cost" of a utility property, the Courts have said that consideration must be given to the "Financial History" of the company in arriving at a "Fair Present Value" for rate making purposes. The ,history of the Country Club District Service Company has shown that.the initial financing was accomplished thru the, issuance of x¢15,300:00 par -value of preferred stocks. The Company ne t claimed t tle to the entire water works and sewer systems in the Country.Club District and, thru the medium of the Graber appraisal, opened its Fixed asset on property accounts. As of January lst, 1937, at a total of approximately "'.182$000.00 of which 498,654,20 was charged .to the Water Works Division and. ;Iw83,356.39 to the Sewer Division. Not only was property belonging to the village or the lot owners therein thus placed on the Company books, but the value of the property. was inflated by approximately 26% over the original costs. . This inflated value bss 'been the basis ever lime t ®r eX+aeessive 0bArg9% to dtpre+aiation reserves and has resulted, 1A a years t tlxo,* inn ex+aeaDive dopreoiation abargea amouating to a total of $9. M.16, _as compared with A fl air :allowance for do- preeYiation aoaputed against a prO»rated portiox% of a property Account based - on actual costa, as hereiabefore *Xplalned. ! mortigag in the aNIo t 'of $20.9000.00 eras placed on the property in 1937 in favor of the st t Paul Piro Marine Insurance Co. , of vhich $130000.00 remains unpaid an of Decem- ber 31at, 1943. "Contributions In aid of construction" haver -bean made as previously stated, by OuXtomers desirous of seovring sar- vine, to the $*tent of 414,901.00. deverral estabsions to serve nearly platted property have been flaanood by assns -of advances by eustomors or roaltors, vhioh acre, repayablo from Vovenue in an agreed ratio of 5o% of the service. billings +agaist the property served by oxteimlons so fina►Aced. ITuder aortain 6onditions a portion of these' ad- Vance,$ ssy, after tear, jelari, becoae "contributious in aid of cozzttrnotion." , The balancer of such unpaid advances as of December 1st, 1943, was $903T2•33. Table V.. prerremtu a comparison of actual earnings of the property and fair returns. Colwm Z list,$ the oporatIng profit from the Water Works Division as shove by company statsaats before incosee takes. .-Alt r Cosa, 2 lists interest oharges, and mortgage ox-1 payee. . 001uma 3 Whove legal expenses incident to the 1940 trial whiah Vera Included 1A statement as operating costs, but vhieh are not properly allowable in computing s fair re- turn." Column u shown.the actual depreciation taken or oharged off each year as shavu by audits and statements. Column 5 is the total of coltM" 11, 2, 4, and represents the gross profit before laterest, depreciation and lnoome takes. Column 6 IUto the allowable Fair depreciation allow- ance based on- 2% . of "tho average balance of the property he- count. (oee.Table 111). COlumii, 7 shows allowable fair return based on 6% of the average 3nvostment tor. each. year- (see Table 111). Oolum 8 is the total. allowable Pair return beto" Interest, depreal$ti oi% or inooa * tetxes eo:,umn 6 plus colum To Column , the final column shoes the total excess of returns receivod'by the oompan7 over proper and fair returns Column 5. xlmi#s O AAa a .8. It Is thus soon that in the period of eight gears a total . gross profit of $540489.,04 has been taken from the pro. poxrty of xhich 421,812.67 has been excessive. TI q- Tot" *U: -13 . #3,709 -* $,459.93. s 1940 2cs9 .?1 " .1 33.5�5y 2,gco.86 6,9B.0 3.941 r � 21,993.6e s 1942 lAM94 952.2'3 UM MOM, TAM .. ��y �.�{►���g �! M . /� rig �i, � �U _ R:Y\Aic' 1936 4 3,h36.90 00 41,U6. 41 •97 839.59 3s % -1 1. *�T67 4 24923.30 -1937 3,463.00. 4 -O? ,-.Cu. 2,la.98 2, .57 ,210-42 1938 5,522.62 -1097-18, 2,317 =� 4j937. 6 1,06CA9 2,567.57 :3,628.o6 1,3og.h � 1939 s•{ 3 1 i. —24626.08 i . �.. LOW 18 4 . 2 382.2B TI q- Tot" *U: -13 . #3,709 -* $,459.93. $23,56.25 1940 2cs9 .?1 " .1 33.5�5y 2,gco.86 6,9B.0 3.941 6,i34.� i,�.W 21,993.6e 10210-71 1942 lAM94 952.2'3 1,5W-00 3AML.55 6;606.2 1943 8.1 . 3 089!. _k -i- . 3,828.04 * 9:042•91 SM." 410,#825-3D x.,655.62- 3Al2.54 5,00.% 1,889.5E Io't'35 -53 3 ,*436.36 5,193.91 5,016.8D 1x7704 -6 . 3,208,24 4 :979.05 1,627.6. .. . #� .ate '''� a .� �•.� *54,x.24 ,7m -49 *W,2s1' 06 $320902.57 #a.,686.67 (1) 3V= UM%n&mtl a ambit fit. 126.Lo 126.00 $32.,78645" $x.,82.67 Table V1 Usts the salariGs paid by they Company to Mr. 'Gearden in each of . they several years and the distributlon of same betwean the Water Wore ead ftver Divisions. The salary paid iu the early years was quite moderate and the present, salary is not large by ordinary standards It could not be critiolzed 1f-the growth of the cony Var- ranted the -increase. iiovever, It vill be seen from Table -VI that the cost has beet inaroased, quite radically vh*n consi dered ..ft - its re-- lation to the .n=ber of meters aerved. It would also seem tbAt the 'increaseo in 1941 sud 1942 yore hardly warranted in view of they discontinuance of the ; rawer system operation bar the - Se►rvioe Company, and of the part- time nature of the managemeAt a employmsnt. , G+ho4 it, Is realised that the ugximum average Investment the Serviee .Cozoany bas had is the Waterworks property during any one year (vas $57006,31 and that the present investment in $48o740,59; . sees Table III both after , gives full credit for the initial issue of *15000-00 of preferred .stock) it is ap Pax- ent that die dauntx�y 'Club Distri et $ervioe Cyr. per ae has never bad ant substantial Investment in the property 4`AWX M SALO= PAID BY COURM CI= a!M3S= CCirAVY TO aSM t3AARM _ • Tbtal to - to In .. leer Water Workis 1936 7200 i18 1938 /. 300• M5. Fe .U. 2 '78 19" 1940 300. 300- 686 2,30 11941 2400. - 832 'M 2v52 336 Tot W020v0D tio•VV #61L1Js� 3E EXCeSBive rates hav$ produced The ,mortgage balance is Advances from Realtors produced 00itallZaticn of Engineering Services produced Profit From - Operati.on of Seater System. produced 21,812.67 13,000,00 9, 372.33 3, 000.00 2,300.00 '�Irfi��lr AI Iq�. 490685.00 Tn TIOW of the fact that the exPaWiOn Of the Water Works .properties has been largely f Aabcad thru contributions., and advances by-the customers of the Utility Co., and tip the reinvestment of.excessive depreciation reserves oreated against property actually belonging to its csustomers,# it would seem entirely proper to gave more than usual Ve ght to the financlal . history of this coMPany in determining what constitutes the fair present value of the property as a base for future earn g8 €gad rates* In my opinion it Would not be unreasonable to deduct tram the present investment, the amount of excessive ears and depreciation over and above 'what might nor I17 be called Weir allovances to determine a present value based on financlal histary,, car, in other wor4s, the aOtu&l 00st of the property to the Comp=y, This calculation Would show a cost as of December 31st 1943 of 26,997;92 V' 8 -Cr CROSS XATaMKO -`A. PVflt 44775.00 .X67,88 1938 712-39 673. 82 a t1 679-03 1672.05 - � 1,633.89 - r/�jt/y1 1943 " an" U. #7 3 «70. #2�9e3.82 i•fir; -37- Operation of Sewer Systems The atom and sanitary sewer systems within the Country Club District area were operated by the Service Company from 1936 to 1941, and a service charge to cover costs of operation was collected quarterly from all residents. This service charge was discontinued as of January lst", 1941, by agree: ,Tent with the village in order to avoid eonfliOt with bills rendered by the village in connection with the Yetropolitan Sewer District charges. The operating accounts of the Service Company, as shown by the several audits and statements, reflect a cumulative loss amounting to approximately- l - 8, 776, 88 over the period 1337 -43 Inclusive. This loss, however, is after depreciation charges in the amount of $11,700.70, so there was in fact a not profit of ;;;;2,496.06 due to the operation of the sewer system. From the standpoint of the combined operating statements and for purposes of establishing income tax liability, a profit in the full amount of the charges to depreciation reserves or X11,700.70 has been submerged. In addition to the above the sewer strstem operating; accounts have been charged with a portion of Mr. Gaarden.ts salary to the extent of $1500.00, which of itself is fairly generous compenea- tion for the Five yearst supervision of operations and maintenance of the relatively small system involved. i Mate Ad iustments ' & Rebates As' has been heretofore pointed out, in the discussion of Principles Of Rote MkIII& it to entirely proper and in order wbaro rates .have. been found ekeessive and an e.d jus tment . of suoh rates has bevu d©lay4d thru co"t action, to establish new rates effective ai of aoste earlier date to order to provent the UtIlIty from 'prof ltuk$� unfairly. as a result of delays 'in eaurt. Ian the present aaae, ' the title to `the property was d a- put+ed durIA8 the gear 1938 by a Ietter from Mr. Parl diaaerpL, then President of the village, addressed to tho $ervice Company. iiovover, the issue was not for III preased until, shortly "adore the trISIJ, pre'Viously referred to, opened iA January 1940. Table vIIr sbovss the actual water $alas for each year 'from 19 to 19 43 inaei.usi.ve, togethor with th* excessive earnings for each of said bears. and, the percentage that such excessive earnings beear to the bears + aaYes . It will be seen that the excess tans varied from A AAttlb lose than 9% to as mueh as 34,4% "with an average of 18.3 for the entire perlodo used on the last Four years the average exaOss earnings :have been 15.1% _ of the gross billings.. It is obvious .therefore that a substantial reduction in rates can and should be made., it Is not. praot itsa1 to adjust -a rate schedule to & point that will .produce, exactly the desired yield in dollars and cents for the reason that all � 38 Mate Ad iustments ' & Rebates As' has been heretofore pointed out, in the discussion of Principles Of Rote MkIII& it to entirely proper and in order wbaro rates .have. been found ekeessive and an e.d jus tment . of suoh rates has bevu d©lay4d thru co"t action, to establish new rates effective ai of aoste earlier date to order to provent the UtIlIty from 'prof ltuk$� unfairly. as a result of delays 'in eaurt. Ian the present aaae, ' the title to `the property was d a- put+ed durIA8 the gear 1938 by a Ietter from Mr. Parl diaaerpL, then President of the village, addressed to tho $ervice Company. iiovover, the issue was not for III preased until, shortly "adore the trISIJ, pre'Viously referred to, opened iA January 1940. Table vIIr sbovss the actual water $alas for each year 'from 19 to 19 43 inaei.usi.ve, togethor with th* excessive earnings for each of said bears. and, the percentage that such excessive earnings beear to the bears + aaYes . It will be seen that the excess tans varied from A AAttlb lose than 9% to as mueh as 34,4% "with an average of 18.3 for the entire perlodo used on the last Four years the average exaOss earnings :have been 15.1% _ of the gross billings.. It is obvious .therefore that a substantial reduction in rates can and should be made., it Is not. praot itsa1 to adjust -a rate schedule to & point that will .produce, exactly the desired yield in dollars and cents for the reason that all w 0 Excess 26.2k .4.4 1,1.7 22,2 5.4 8.9 12.8 18.3% ANALYSIS OF 1XCF33 EMKINGS & WAM PEtARTMW SALES Water ce�siv� 1936 *11 *206.16 206.16 $ 2a 923-30 193Q7 12,24 .88 4,210.42 19,E 11:154.04 1 009.40 1939 1 276.la .2 .18 Sub-Totals $47,885.:W $10,825.34 - 19�i X24' 3ti22, 8 � # i, 889.56 1942 1943 18,238.71 18 169. 1 ,1627 .6 2 2 , Sub- Totals $11* 755.28 `std, 861.3' Grand 'TotAle $119,640.46 i26.00 21, x.67 +� Ad jus invent for Dep. Real, Estate 0 Excess 26.2k .4.4 1,1.7 22,2 5.4 8.9 12.8 18.3% - -39- contingencies cannot be foreseen and for the further reason that rate reductions almost invariably result in increased consumption. While these factors tend-to offset one another it is reasonable that some rear - in of safety should remain in the rate structure. A reduction of approximately 12�� would provide this margin and at the same time seem to be entirely justified by the record. Such a reduction was tentatively tried and found to permit a rate of slightly less than 15,E per 100 cu. ft. gross. The 15¢ figure would result in a decrease of 12j% and • continuance of the present 10% cash discount would result in • net.rate of 13j� per 100 cu. ft. If such rates are adopted and made retroactive to Jan - uary 1st, 1940, and the company is required to rebate over- charges since that date to. its nsumerrss t a refund of 12V of the total billingm for the four year period amounting to 471,755.28 would result. This would amount to a,pproxinately 18,730.00. Adjustment for Depreciation Reserves The above refund would be substantially less than the total of the excess earhings during the period since .the issue of ownership was . joined in the Courts. Inasmuch as the company has during; this time received the benefits of the depreciation on reserves charged against the Village +s position of .the Water -44- Works System, it would also be entirely proper to ask that' the Service Company make at least partial restitution of these funds to the 'Village to be held in its own Depreolation Re- serve account* It is suggested that an equitable basis for such a refund or adjustment would be the deprealation accrued during the past tour years on the 'Village portion of the' original. water vorks plant built prior to 1936. This would amount to 4 z 2% of $46,C38a00 or $ 3x683,47 Investment after Refunds Aasumi g that a rate schedule as-above described and retroactive January 1st, 1944., is adopted and that refunds for overcharges and to adjust charges for depreciation of the Villagers portion of the property are made by the Service cor4paany, their net total investment in the property would be Increased by the total amount of such refunds or approzimtely $120433•07s The not total of the G MPM2y9 s inVeOtmento eaKalusiVO Q�'+'n excessive earnings and depreciation charges q and after - suggested reftmds would thus become $39,364 *99 Determinatlon.of Fair Present Value The rate reductions tentatively suggested above can of course not be adopted by the Village Council unless the proposed s 41 now rates will yield a fair return on the fair present value of the property. We must therefore Tech a conclusion as to v'hat Is a fair present valuo in order to check to real blo- no'ss of the proposed rates. They have been tentatively sue— gusted in .an unnatural order because of the effects of any re- troactive oonditions on the not investment by the Company vhioh is an Important factor in the detorminati on of fair present valuo. , tine have -now. arrived at three different figures,, eacta of which represents the present value of the property from a different point of view. * 74, 379.20 b) By Reproduction Cost, (c) The net investment of the Company as shown by study of its financial history, after From (a) and (b) it may be concluded that a fair physical value of the Comaaul's property is Hovever, this amount includes property built by "contributions in aid of Qo$- struction" made by consumers on ubich no return. Is permissable to the extent of Balance - Nalue Physical Property 690430.00 39m, 360-99, 14, goo. oo S7,Ye®.00 . - 42 Included in the above balance there still remains approx. lmately 9, ?9.60, representing excessive earnIngs and depre- dation charges accrued against Village property which would not, be refunded; them .still remains full recognition of the Preferred stock issued for a doubtful. consideration) and there remins $9,07203 *dvanced by customers and realtors, at least ,Fart of which js apt to revert to the category of "contribu,- tions." Another acid final, factor vhich atuat be consider44 in a final determination of a fair present vslu# In the need of a reasonable &w nt of working capital. There should be included 1zi this itest an allowance, for the companyts investment in 131011 tools and equipment, Office I'vr01ture, and inventory acaountg . s°uc as meters and supplies, lnammuch as billings for-water service are rendered Monthly and the- tOtsl, operating cost of the property rill seldom exceed $1„ 000.00 per month, the need for vorkiag Capital for operations Is not large.. A study of the several audits with roepoet to operatinS costs and inventory accounts indicates that an allov- ance for this purpose need not exceed $4$000.00. After carorully considering all the data outlined in tkj,4,$ rsport and 'partieuUrly that Bunwrised under this heading - "Determination of FaIr Present Valuess" it 3s Zty opluion that the fair present value 'of the property for the purpose of CoMputing an allowable net return should not exceed 450,000,00, Poser & Peffiping: Operation Labor Supplies &. Eap. Maintenance Power Purchased. local Tames Water Purchased. Distribution Exp. Operation of Diot. S. Maintenance Services Cuot, Vim. TABIR TS Sma&W OF 0PZtAT ^' COSTS Lees Interests De reeiatio=i, Trial Cosh 79:59 835.05. 03.62 103.61 $ . 206.95 0.1.i2.06 40.00 29.14 218.12 Sstimte for l j 8 1239- 1940 3-941 19 2 ' .. 1943 Mr l Year- 21 .00 22.00 41.OQ 236.25 382.65 392.15 300.00 166.88 192.68 140.91 - 106.80 154.68 145.90 14,2.45) 250.00 24.38 77.05 114.47 117.36 87.61 51.29 54 -95) 1938.20 1633..80 23%.75 2063.00 2554.00 2426.09 2498.00 2500.00 0 0 .O 0 O 0 0 0 0 0 64,52 1791.64 .3421677 364.48 306.88 350- 42.63 203.24 646.22 114.34 0 230. $ 608.85 $548.26 Accounting & Collection: Mater Reading 125.00 Salaries & Wages 795.00 Pay Ron Taxes 26.34 miscellaneous 110.29 Office Rent 32.74 173.44 79:59 835.05. 03.62 103.61 $ . 206.95 0.1.i2.06 2190. 245.•50 227.26. 250.00 266.18 159.36 245.41 250.00 3 03.16 _ 610.76 389-40 300-00------ . - 859.65 1015.62 862y 140.00 140.00 1W.00 160.00 4 805,00 787.50 800,00 1815.00 247 ` 40.00 29.14 218.12 211.74 649.59 x`785.73 860 480.E 504.40 40 TAM IX continued wary of Operating Costa Less - Interest, I*Xeclation, Trial Coate Estimate for 137 aL8 1939. 1940 . 191 _ 192 x.943 Neal Year Ailminletrative1 Geaeral: Salaries & Wages, $ 810...00 $ 907..00 8%.70 $1329.25 $1319.00 --$1541.25 $1500.00 $ 2400.00 Expense of Gen. offices 69 °.25 9.30. 71.69 107.45 15024 94108. 32.56 50.00 'Llsu •amce 107.77 172.79 140.84'. 151.75 - 155..64 33.o6 21.25 T5.00 . Legal Serv3ceg 10..00 80.00 375 -� 50.00 0. a 25.00 25.00. 50.00 Payroll Taxes 26.34 45.n 59:ao 91.02 42.57 23.31 l ..97 45.00 Fed.. Cap. Sock. Tag 20'.00 55.00 77;50 91.70 106.25 in.- :x.23.75 100.00 Misc.. supplies & Lx- 180420• -- 164.53 238.73' 265.10 221.00 457.10 (2) 96.95) dense 10.31... - 1:00 4.41 2.30_ 12.23) 250.00 Other Gen. off. 1. 218.95 123.50) Taxes - Reel Estate 591.04 1095.98 1136.24 1-86.31 .177.02 180.60 Personal Prooperty 3194.30 944.88 500.00 Money & Credits __�.: � �. Ada �:...�. $5,189.60 $5,568.6+ $6,513..89 $8,320.80 $9,920.o4 $11;632.1 $11,051.40 $1000---___ +� Less $1500.00 and $850.00 trial fees dioalloVed (2) Lase Transcript, $1864.35 ftea7lovefl No. Meters 4Gl 506 568 686 832 895 s -43- Operating, Costs Table IX presents a, summary of operating; costs of the water Works, Division- from 1937 to 1943 inclusive. The, figures given are exclusive of charges for interest, depreciation, legal expense and financing cost, The last column presents an estimate of probable operatin!, casts for 1944 and future gears, based upon operation of the present property to serve the ex- isting customers* operating costs will of course vary as the property and number, of customers is increased in the future, but- t-*ie ratio of operating; costs to total revenues s?.ould change . in. favor of the* utili.t*y so that in considering operating costs as a basis for rate studies it is entirely fair and proper tea base calcu- lations upon an average years operations under presently existing conditions. The reasonableness of the operating .cost estimate shown in the last column was established by careful study of past years+ costs, in relation to extraordinary expenses ,salaries, tax items, etc., and the changes in such Items which oRn be reasonably brought about by the management. It is unnecessary to go into detail with respect to each item. 1r bellevo the estimate given us on the colservative aide and t1lat cost dur- ing an average year should not exceed the sum of 4,100300.00. Mr.• Gaardenlc own estimates of operating costs as pre. seated in his proposal of June, 1943s addressed to the /C ft • 5/12/3 Gross Operating Revenue Operating Costa Electric Power Pump Main. & Supplies Mail. of Lines Water Purah sed Office Supplies & Up. Extra Labor Miscellaneous Taxes Total Operating Cost Pal.. Available for Binarming TAME X EDn[A WATW SISM Estimated Revenue Undsr Yg1 Me Operation . Operating Eetimaies from Proposal made to Villas Council June, 1943 by Mr. Gaarden With 9OO corm mere With 12OC? consumers With 1500 customers (Presont (ru ) (rature) e v. ztr ®ar ®` _..._, AV. year wet mar Av. a year $18 :500 $22.,000 $28.,000 $24, 740 $29, 300 $37f W $31,OQa $37 f OOO $47P-000 $ 2 400 $2700 $ 3 100 $ 3 040 3 400 3 800 250. 275 350_ 350 375 450 1 0% 1 100 1 100i 1 400 1 450 -1 450 300 350 475 4OO 450 575 500 55O 550 .650 700 700 1 5401 - 1- 1 800 1 5OO 1 600 1 800 500 500 500 600 600 600 0 0 0 .0 0 0 6 540 7 075 7 875 7 9v0 8 575 9 375 $12 0100 $l4 925 $20 125 $16800 $20 750 $28025 $ 3 500 $ 3 900 $ 4500 _., 450 550 a 1 850 1 goo .. 5w 800 80 900 900 •i0 2 2W 2 3W wi &* t•t t 1 t 9 750 10 680 11 750 $21 2W $26 320 $35 250 44 Council. have been oarefully considered In arriving at the estimates shown in Table U, and they are reproduced herewith for convenience as Table X.- Yield from New Rates Having determined the cost of the physical plant compris iM the Oomplete Water works to have been $161,345.008 and that., the straight line theory of depreciation having hereto - fore been adopted* should be continued; any now rate .schedule should yield sufficient money to establish suitable d.epreoi i Lion reserves against said cost. A composite depreciation charge of 2% per year will be ample for this purpose and will amount to approximately $3250.00 A six (6) percent net annual return on a present .fair value of $50,000#00 will amount to $.3000.00 A proper allowance for operating expense rued not exceed $100300.00 Any new rate schedule should therefore yield from present property and - customers during an average year ' approximately $i6, 550 • oo Based on the average return per motor over the.past four years, the rate previausly Suggested, n4mely 150 per 100 cu. ft. less 10% discount for cash, Vill yield approximately .$170200400 a 45 See Table X1 ter, .Oaardent s 4v estimate for an average year based on 900 customers at present rates was $22,x4©. If reduced l2 ,as suggested,'the yield as per his estimate would be approximately $19000,00 See Table X o Alternative R€ctes It has be ®n suggested that 'the council Might wish to cajasider an alternative t1 step- rate" in order to affect a re- duction in charges for abnormal use of water wring seasons when heavy lawn sprinkling is required. I believe, tine purpose of such ,a ",step -rate" can be more equitably accomplished by means of a so celled "two -part" rate which makes an initial service charge to.cover flied overhead expenses such as Meter reading, 'billing,. account, collections, supervision$ in part, and similar items which depend on the number of customers served rather than the amount of water consumed. Such a service change would of course tape the place of the present minimum charge which is only justified by the same type of expense as would be covered by the service charge. The second part of the Pate schedule would then be a. charge for water consumed which would of course vary with the amount used as shown by.the usual meters. Assuming a rate of 150 gross less 1{% as tampered with present rating, 17.10 lees 10,, a net reduction of 12 b would result, Arm. revenue based an the present mamber of meters would be; 904 tad 21.62 less 12 2 $17,200.00 The average annual coneumptian per meter, assuming all bills discounted, would be: 21.62 14,000 ou. ft. per meter per year 15.39 $21.62 less 1* = $19.00 Assuming a tyro. ,part rate o msisting of a service charge of 64 per month per meter. plus a Hater charge of 9 per 100 cu. ft., less .10%, the average annual yield per motor would bet Service Chergs - $7.20 lk..000 cu. ft. G 9,4/100 cu. ft., lose 10% - .80 Total $19.00 904 times 19.00 $17,176.00 *Slide rule calculations for all averages and extensions. TABIZ XI. ANALISE s AID ESTIMATE OF —OPERATING Water Number of Revenue per Sales Meters meter 1940 $15024.34 686 * 22.35 1941 20,022.89 832 24.20 1942. 18,238.71 895 20.40 1943 18569-34 � 20.20 Totals $71,755.28 3317 Average 21.62. Assuming a rate of 150 gross less 1{% as tampered with present rating, 17.10 lees 10,, a net reduction of 12 b would result, Arm. revenue based an the present mamber of meters would be; 904 tad 21.62 less 12 2 $17,200.00 The average annual coneumptian per meter, assuming all bills discounted, would be: 21.62 14,000 ou. ft. per meter per year 15.39 $21.62 less 1* = $19.00 Assuming a tyro. ,part rate o msisting of a service charge of 64 per month per meter. plus a Hater charge of 9 per 100 cu. ft., less .10%, the average annual yield per motor would bet Service Chergs - $7.20 lk..000 cu. ft. G 9,4/100 cu. ft., lose 10% - .80 Total $19.00 904 times 19.00 $17,176.00 *Slide rule calculations for all averages and extensions. - 46 - Such a two pert rate can be balanced against the so- called normal or average Consumption much more accurately than a step rate and has the advantage of making the charge for all water used substantially lower so than people fool more free to use the servides generouslyo A TWO Part Mate providing for (1) A service charge of 600 per meter per month.- plus ( 2) A vater charge of 9jo per 100 au. ft. less 10% cash-discount vould yield a gross return substantially identical to the rate of 150 per loo Cu. ft. gross bless 10% and would quite eartainly result in increased consumption and revenue which would mike further reductions possible a in the near future. Table XT summarizes aaleulations to demonstrate the above statement. Proration of peareciation Reserves wwwr wwws. wr Of the total original- cost of used and useful Water Works property-amounting to $161,345.03, the sum of $88,596.27 has been allocated as the Service Company's portion of the total property account; and the sum of $72,748.76 ae the Vil.lagmss portion of the property account vh?ch form the basis for the calculation of annual Charges for depreciation. The rata schedules as described above are adequate to - 47 yield revenues sufficient to create a suitable depreciation reserve against the entire property, and the Service Company should be required to pay annually or in such installments as your Council my determine, a sum of money equal to the depreciation resorves provided by rate structures against the Vi.11ago1e portion of the property. Based on present construction, this annual payment .to the Village would amount to 2% of $72,748.76 or approximately $lp4S5 *00 per year. Rydrant Aentals There has been a great dead, of discussion# both in and Out Of Court, on the subject of hydrant rentals.. My position today is the $am as It xr s during the trlsl, to wit, that the Utility Company 1a,, properly, only interested in securing .a rate structure Vhich will yield a fair rett% on, the present fair Value of the property which it devotes to the service of the public. The determination of details of that rate structure sre by franchise the function of the Village Couraeil. Hydrant Rentals are usually Justified bye need or doeire tO tray.Ofer a part of the cost of operating a meter we r a system to a general tax. _4a- In communities where certain sections have a large amount of industrial property which rewire large mains and fire pro- teot,ion facilities out of proportion to the amount of water cohsumed by such industries, hydrant rentals provide an equit- able means of adjusting the burden of maintaining and operat- ing those facilities, In a homeogenious, strictly residential community such as the Country Club District and adjoining sections of the' Village of Edina, there is no such condition. Because the water works distribution system serves only a portion of the entire Village of Edina the adoption of rate schedules anti - ei:pating hydrant rentals would in Past result in a. serious inequity to those tax payers which would riot have the benefit of service from. the water works or of fire protection from same. Hydrant rentals often tend to become somewhat of apoli- tical football., in that they are frequently included in rate schedules for the purpose of oamouflaging water rates, in order that the "A.dmYnistrati orl' may "point with pride" to lover rates than are charged in neighboring Villages. This, of course, is accomplished at the expense of tax. rates with no actual gain, in the case of the Village of Edina, I would reco=end elainst the adoption of water rates providing for hydrant rentals. APPENDIX I Complete Decision of the Supreme Court, of the State.of Minnesota Case Filed Saturday,. January 2, 1943 33052 - No. 205 - Pirsig,.J. Country Club District Service Company Respondent vs, Village of Edina . Appellant St. Paul Fire & Marine Insurance Co. Intervener - Respondent Syllabus. 1. The owner.of a platted area Who has installed improve - ments such as water and sewer systems at his own expense and who,, to induce purchase of lots in the area, represents to buy- ers that no assessments therefor will be imposed because the purchase price of the lots includes - payment of the improvements, cannot thereafter claim full ownership of the improvements. To the extent of the payments made, the improvements become the property of the community, and its - rights may be asserted by the local unit of government. 2. In an action by a utility company to recover the value of fire hydrant and storm sewer service rendered to a community, it cannot, in determining such value, include the.portion of the water and storm sewer systems owned by the community. 3. On facts stated in opinion, HELD that the legal entity of plaintiff as a separate corporation will be ignored, and the rights of the parties determined on the basis of the actual nature of the transactions involved. 4. Findings of fact stated in general terms and influenced . by an erroneous conception of the law applicable will not be given the usual weight accorded findings. - 2 - 5. Evidence HELD not to Show an express agreement by village to pay.for fire hydrant and storm sewer service. 6. services rendered in one's own interest impose no liability upon another in implied contract merely because bene- fits were thereby bestowed upon the latter. 7. Evidence HELD to sustain finding that village was estopped to question the validity of intervener's-mortgage. 8. Under facts in - case, the possibility that the village might-acquire title to the utility systems for which franchises were granted HELD a.sufficient consideration for their issuance in compliance with Minn. St. 1941, sec. 300.03 (mason St. 1927, Sec. 7+32). HELD also that.the village cannot now raise the invalidity of the franchise relating to the water system for want of public bidding as required by ID. Sec. 412.21 (See. 1199)• Judgment affirmed as to intervener and reversed as to plaintiff . . o ' PIRSIG, Justice OPINION Action to recover for services rendered by plaintiff for defendant through the use of fire hydrants and storm sewers. In 1922 Thorpe Bros., a corporation engaged in real estate business purchased a 300 -acre tract of land known as Browndale Farm in the village of Edina located outside of, but adjacent to, the southwest end of the city of Minneapolis. It proceeded to convert the tract into a suburban residential district. The area was platted into the Brown Section on the west, and the Fairway Section, on the east, and the whole was called the Coun- try Club District. In order to dispose of the lots as planned, it was necessary to provide for the installation of modern im- provements such as water and sewerage systems,.light, gas, etc, We are concerned here only with the water and storm sewer sys- tems. The storm sewer in the Fairway Section was installed by defendant village and is not involved in the present litigation. To provide these facilities, Thorpe Bros. organized the present plaintiff in 1923. To it, defendant, the village of Edina, issued water and sewer franchises authorising the inatallation and operation of hater and sewer systems. From the beginning,. however, plaintiff remained inactive, and the installation of the systems, their later maintenance, and the tendering of water and sewer services was under the direction and supervision of Thorpe Bros. Only three shares of stock of plaintiff were issued, and these were to three members of the firm of attorneys - 3 - who had charge of the organization of plaintiff. No consider- ation was paid to the corporation for them, They were later transferred to members of the Thorpe Bros. organization. Con- tracts for the installation of the water and sewer systems were, with one exception, in the name of Thorpe Bros., and in the one instance in which the contract ran in the name of plaintiff it was guaranteed by Thorpe Bros. The contractors who installed the systems were paid by Thorpe Bros. out of their own funds, and this was charged to an expense account kept by them in connection with the development of the lots. Water furnished to the residents was obtained from the city of Minneapolis under a contract made in the name of Thorpe Bros, After the improvements were about completed, Thorpe Bros. began an aggressive advertising campaign for the sale of the lots. in this campaign attention was directed particularly to the improvements which had been installed, and it was empha- sized that they "were fully paid for." Typical statements held before prospective buyers and the public were that "the purchase of a homesite in the Country Club District carries with it, all the modern improvements - paved streets * * water and sewage. There are no improvement assessments to follow," "nor will he (the buyer) have improvements assessed against his property at a later date"; "water and sewers are provided, you will never be bothered with any assessments for any of these improvements. They are paid for: The original cost of the Home -Site includes all your obligations." Examples of such advertisements, introduced in evidence, cover the period from June 1924 to August 1927. Similar statements appeared In pamphlets which were distributed. Under instructions from Thorpe Bros., similar statements were made by salesmen in their negotiations with prospective buyers. Some of the buyers ap- peared at the trial. They testified that they relied upon such representations as those set out above. The evidence is clear that in fixing the price of the lots the cost of these improvements were proportionately included. During this period numerous residences were erected, and these were connected to the water and sewer systems. Charges for water and sewer service were made to the residents. State- ments therefor were made out in the name of plaintiff, but they were prepared and sent out by Thorpe Bros. Moneys received in payment of them were deposited by Thorpe Bros. in their own, ac- count in their own name. During this period plaintiff had no account of its own. Similarly, the two systems were maintained and operated by Thorpe Bros. by the use of their own funds and employes. During this period no claim was made by anyone against de- fendant for any services rendered in connection with the fire hydrants, the storm sewer, or any other service connected with these systems. - 4 .- As the lots were sold and homes erected upon them, the burden of-supplying-the water rind sewer services increased, and, as this burden increased,. the primary interest of Thorpe Bros: in the project was reduced as the lots were sold. Until 1932 the residents were charged no more for their water than was paid by Thorpe Bros. to the city of Minneapolis.. To offset losses sustained, the price was increased in 1932 and again. in January 1935. The residents were informed that the increase was to cover the cost of "repairs to hydrants, * * * flushing sewers," and other items. The residents also became dissatisfied. They wanted better service at lower.rates. An organization of them had a so- called water committee to deal with the problem. By 1933 Thorpe Bros. were ready to dispose of their interest in the systems. In February 1933 they offered to donate the storm sewer to the village if it.would accept and operate it. In 193+ and 1935 they offered to sell their interest to the resi- dents' organization.- In an offer made in 1933, they listed their original investment in the water system at $700000. Of this, $50,000 was listed as "installation of pipe line in the district," which has been "pro rated and added to the price of the lots, about 70% of which have been sold. Thorpe Bros. therefore have received that part of their original investment back." They stated further that the water tank and a Fiftieth street main had not been included in the lots. Their total unrepaid investment in the water system was listed'at $35,000. They offered to sell the system for $15,000 cash or for $20,000 on a deferred payment basis. The storm and sanitary sewer sys- tems they offered to turn over without charge. While these various negotiations were going on, one Oscar Gaarden, who was first a member of-the water committee and later its chairman and as such took an active part in the negotiations, decided in the fall of 1935 to buy the systems for himself. An agreement, reached between him and Thorpe Bros., was incor- porated in an instrument which provided for the purchase of the systems by a manipulation of the stock of the plaintiff. When .executed and.performed, it left Thorpe Bros. holding 153 shares of preferred stock of the par-value of $100 and 98 shares of common stock. G4aarden had purchased 20 shares of preferred stock from plaintiff for $2,000 cash, and Thorpe Bros. had purchased -an additional 10 shares for $1,000 cash. Then for the first time, plaintiff had funds of its own, consisting of $3,000 cash. Gaarden had control of plaintiff by his ownership of 102 - shares, of common stock. Other than stated, no consideration passed to plaintiff or between the parties. . Later plaintiff retired 63 shares of preferred stock by paying Thorpe Bros. $6,300, and (warden purchased the remain- ing 100 shares held by them. At the same time Thorpe Bros. I transferred the 98 shares of common stock held by.them to Gaarden without further consideration. From and after 1938, by these transactions, Gaarden was the sole party interested in plaintiff. On acquiring his interest in the plaintiff,- and through it in the water and sewer systems here involved, Gaarden's concern was in getting a return on the investment he had acquired. He had no lots to sell in connection with which it might be to his advantage to continue the services without profit or at a loss. He demanded of the village that it pay for the services which had been rendered in connection with the storm -sewer system and the fire hydrants. His claim was not merely for the ser- vices rendered subsequent to the time he acquired his interest, but for the entire period from the time the systems were put into-operation. Negotiations with the village failing, the present suit followed. After an extended trial, the lower court found for plain- tiff and allowed recovery for the six -year period prior to the commencement of,the action. The court found that the.vil- lage had granted a water franchise to plaintiff which plaintiff accepted; that in accordance therewith plaintiff furnished fire protection service to the village -and residents thereof; that, among other things, hydrants and connections were installed, operated, and maintained during the period for which recovery was allowed, and that the same had been used and relied upon by the village and its residents at all times for fire protec- tion purposes; that plaintiff's efforts throughout the period to reach an agreement with the village on the fair and reason - able hydrant rental had failed and that no payment had been made. The reasonable rental value of the hydrants also was stated. Similar findings were made with respect to the storm sewer system. In its conclusions of law the court held that plaintiff was and at all times had been the owner of the pipes, hydrants, mains,,and other items of the systems and that neither the village nor any lot owner or resident nor any other person has any right, title, or interest therein, and that plaintiff is entitled to the reasonable hydrant rental and storm sewerage service charge therein stated. The question is whether these findings and conclusions can be sustained. We hold that they cannot be. They are permeated in part by a failure to give sufficient recognition to the un- disputed facts in the case and in part by a failure to apply the correct principles of law which govern.-.When findings of fact are couched in general terms that anticipate the result and disclose that they are colored by an erroneous conception of the law applicable, this court will not give them the weight to which they are ordinarly entitled In re Trust under Will of Holden, _207 Minn. 211, 227, 291 N. V. 104. 1 That is. partiou- larly true when, as here, more specific findings.were requested and refused. As the findings - stand, they fail to give the required legal effect to the representations made-by Thorpe Bros. when the lots in the Country Club District were sold.. The people of this district were told when they purchased the lots that the price they were paying included a proportionate charge for repayment.of the expense of putting in the various ,improvements. Thera were no assessments to be feared, in reliance-thereon they paid., and Thorpe Bros. received, an amount which, by their own statement in 1933, had repaid them. 70 per cent of,the cost of the pipe lines. it would-be a, patent fraud upon the com- munIty if these people should now be compelled, as members of the village, to contribute to the payment of hydrant and storm sewer services on a basis which assumes that these systems are still entirely owned by plaintiff and that plaintiff is entitled to a return on their full value. There is no legal principle or authority that leads to that result, True, the cases on the subject are few and not satis- factory. Most of them involve the effect on the systems involved of,a subsequent annexation by the adjoining city of.the suburban area. The question raised in them is whether the annexation constituted an appropriation of the water and sewer systems. In City of Danville v. Forest Hills Development Corp. 165 Va. 425, 192 S. E. 548, recovery for such an appropriation was denied on the ground that the cost thereof had been included in the purchase price of the lots sold. The court said, "When the eater mains, pipes, etc., were constructed by the plaintiff as an inducement to the purchase of its lots, the plaintiff thereby dedicated said mains and pipes to the use of the lot owners and has no right to claim adverse ownership in or remove same without such lot owners' consent." In Suburban R. E. Co. v. Incorporated Village of Silverton, 31 Ohio App. 452, 167 N.E. 474, and Ford Realty & Const. Co. v. -City of Cleveland, 30 Ohio App. 11 164 N. E. 62, recovery was similarly denied, but.on the ground that, it sold the lots on the representation of fur- nishing water, and a means having been provided therefor, the realty company would not be heard to claim ownership in the water mains, with right to remove the same." The significance of these cases lies not so much in the analytical validity of the reasons given as in the fact that the basic sense of justice so appealed to these courts that they had no hesitation in deciding as they did. No cases to the contrary have been found. In Abbott Realty Co..v.. City of Charlotte, 198 N. C. 5640 152 S. E. 686, and Stephens Co. v. City of Charlotte, 201 N. C. 258, 159 S. E. 414 cited by plain- tiff, the facts do not show that representations of the kind here made were.held out to purchasers of the lots sold or that the purchasers had repaid any part of the cost of the improve- ments involved. In the Abbott Realty Co. case it distinctly appears that the claimant expected payment not from the buyer but from the adjoining city. _7. If a court is convinced of the justice of a,cause, it oan- not refuse to recognize and give effect to it merely because an applicable precedcnt or legal principle cannot be found. In the absence of authority, it .must of its own develop and assert those, legal principles which in its judgment will best servo the ends of justice in the case before it and in-other like cases. Cases of the kind before us must stand on a foot - ing of their own. When the residents of the Country Club Dis- trict bought .their lots and paid the purchase price agreed upon, they paid for something more than the real estate in the lots. When the statements made to them by Thorpe Bros. are taken into account, it is evident that they were paying also a sum which represented their contribution as owners of the lots to the re- imbursement of Thorpe Bros, for the cost incurred in installing the improvements. They were not attempting to buy any specific share in the systems -or any part.of the mains and piping front- ing their lots. For this reason, the deeds in'the lots did not attempt to convey or transfer any interest in any property of the systems. But the plain understanding between Thorpe Bros. and the buyers was that they, the buyers, were contributing their share to the payment of the improvements, which were public in purpose and which were to serve the community as a whole. What they paid for the law should and does give them. To the extent 'of .the repayment made to Thorpe Bros. in the course of the sale of the lots, the community acquired a public right in the property of the systems, and to that extent Thorpe Bros. could no longer claim that they owned the systems. The public right so acquired may be asserted by the local unit of government representing the community, in this case the village. Implicit In the transaction is the right of plaintiff to use the systems without charge in the exercise of its franchises; but in claiming compensation for the service rendered the com- munity thereunder it cannot claim the right to a return on the basis that it is the full and exclusive -owner of the systems. What the lot owners have paid for cannot be included. This the findings and conclusions of the lower court appear to have al- lowed, and hence they cannot be sustained. Little significance can be placed on the fact that plaintiff was organized as a corporation separate from that of Thorpe Bros. prom its original organization until 1935.-plaintiff as a corporation was no more than a hollow legal shell. There were only three shares of stock outstanding, issued without consideration.. Plaintiff had no funds, no active officers or employes, no property. "Throughout that period, whatever was done was done by the members of Thorpe Bros. Plaintiff was only a convenient legal means.by which Thorpe Bros. conducted part of its business in connection with the Country Club pro- ject. It is well settled that under those conditions the inter- position of the corporate entity will not be permitted to conceal L the truth of the transactions. What Thorpe Bros. and their employes did in connect'-on with this project is attributable to plaintiff so.far as its legal rights are concerned. Specht v. Missouri P. R. Co. 154 Minn. 314, 191 N. W. 905, In re Trust Under Will of Clarke, 2o4 Minn. 574, 284 N. W. 876; Penh A. M. Co. v. Clarkson Sec-. Co. 205 IYUnn. 517, 287 N. W. 15; 1 Fletcher, Cye. Corp. (Penn. ed.) p. 154, Sec. 43. "if a corporation is owned another and is manipulated by the purposes and in its own interests of innocent third parties, or the may be necessary to limit such ab- capacity or shield." Dallantiiie, P. 37 Sec. 6. and controlled by owner for its own to the prejudice public welfare, it use of the corporate Manual Corp. L. A; Pr. Hence plaintiff is as such bound by the legal consequences of the facts relating to the sale of the lots as was Thorpe Bros. The fact that Gaarden subsequently became the owner and holder of the stock in plaintiff corporation does not alter the result. It was still the same.corporation. Moreover, the evidence is clear that Gaarden at the time he acquired his interest in the corporation was aware that there was a dispute as to the status of the title to the Water and sewer.syetems and so was put on notice.of any possible claims that'ml.ght be established. The decision of the lower court cannot be sustained for a further reason. No contract, express or implied, was estab- lished on which the village can be held liable. There was no express contract under the franchises acquired from the vil- lage by plaintiff for they merely "granted the right and priv- ilege to install maintain and operate" the water and sewer systems and the 'right" to erect and maintain "fire hydrants approved by said Village Council." By this language the vi1- gage did not assume a liability. It only granted a right and a privilege. Much reliance is put upon the provision that "said hydrants may alsote used by the Village of Edina for fire protection purposes upon such terms as may be mutually agreed upon between said Village" and plaintiff. But this merely looks to an agreement in the future and conditions the right to use the hydrants upon the reaching of such an agree- ment, No agreement was ever reached and except for possible isolated incidents, the hydrants were not used by the village. Neither was there any liability on the basis of quasi con- tract or contract implied in fact. The franchise was granted at'the request of Thorpe Bros, Thereafter Thorpe Bros. installed the systems and provided Mater and sewer service, including the maintenance of the fire hydrants, in their own interest and for the purpose of rendering their lots more salable. Except as operating expenses were reflected in the water and sewer charges made to the residents, no claim was made against the village for these services for a period of,10 to 12 years, and not until Qaarden acquired his interest in plaintiff.. When services are rendered for another in one's own interest and without expectation of reward, compensation cannot later be claimed on the ground of implied contract. Under those conditions, it is not an unjust enrichment for the recipient of the benefits to retain them without compensation. See Johnson v. Unorganized School ibis. 159 Minn. 226, 198 N. w. 463. Plaintiff, having originally rendered the services in its own interest, cannot later, when its own purposes have been served, insist. that the village accept and pay for the services which plaintiff thereafter continued to render. See Johnson v. Unorganized School Dist. supra, The findings and conclusions of law give no recognition -to these princi- ples and for this reason also cannot be sustained. Much discussion was devoted here and in the court below to the question whether the original cost . or the reproduction . cost of the systems shouldobe used in determining the amount of plaintiff's recovery. Both parties proceeded on the basis that a fair return, on the portion of the investment represented by the hydrants and storm sewer should be ascertained by using one or the other of these tests as starting points and allow - ing recovery accordingly. 'No one'seems to have considered whether these bases, - ordinarily used in proceedings to fix utility rates+ (see State v. Tri -State Tel. & Tel. Co. 204 Minn. 5161, 535► 284 N. w, 294) have any application where the basis of recovery is .implied or quasi contract. Since plainti - 10 - adopted by the village approving the mortgage. Both of these requests were complied with. In reliance thereon the loan was made and the mortgage executed. The property described therein specifically included water mains and fire hydrants. There is a dispute over whether the full description of the property covered by the mortgage was before the village coun- cil when the mortgage was approved. The evidence thereon is sufficiently conflicting and doubtful to entitle the trial court to find as it did against the village. The court found also, and on sufficient evidence, that the village was barred by laches and was estopped from questioning the legality of the mortgage, either on behalf of itself or 'on behalf of the lot owners. The issue was one of fact. The court could pro- perly find that intervener acted in reliance on the action taken by the village, and that the village so intended. The princi- lea of estoppel apply. Thom v. Thom, 208 Minn. 467, 294 N. W. 61; Barchent v. Selleck, 89 Minn. 513, 95 N. W. 455. The claim that the amendment to the franchise authorizing the mortgage, as_ well as the original franchise, was invalid for failure to pay a comppensation to the village therefor as required by Minn. St. 1911, Sec. 300.03 (Mason St. 19270 Sec. 7432) (see Duluth Terminal Ry. Co. v. City of Duluth, 113 Minn. 459, 130 N. W. 18, and Larson v. Minn. N. W. Elec. Ry. Co. 131 Minn. 183, 151 N. W. 948), is without foundation for the rea- son alone that under the provisions of.the franchise the vil- lage would acquire title to the entire system, including the improvements made from funds obtained by the loan,.in case plaintiff failed or neglected to operate the same. This pos- sibility'the village was to consider a.suffieient compensation for the franchise under the circumstances of this case. Nor can the village at this late date claim the invalidity of the original franchise 'because it was.granted without public bidding as required by Td. Sec. 412.21 (Sec. 1199). Chisholm Water Supply Co. v. City of Chisholm, 205 Minn. 215, 285 N. W. 895; City of Staples v. Minnesota P. & L. Co. 196 Minn. 303, 265 N. W. 58. It follows that the decision of the trial court so far as the intervener is concerned cannot be disturbed. This leaves open.for consideration, however, should the question arise, whether the village, in the event of a Foreclosure of the mort- gage, may insist that those portions of the water system, in the improvement of which the funds obtained by the loan were used, should first be subjected to the payment of the mortgage before resort is had to the portion of the system located in Brown and Fairway Sections. Whether the equitable doctrine of marshaling assets and securities, or related principles.* apply is not decided. Numerous other questions have been raised by the parties. -11- They are not discussed, either because they have become im- material in view of the disposition made herein, or because the answer.to them is made obvious by the application of what has been said so that explanation is unnecessary. Nor should we unduly lengthen this opinion by discussing each of the multitudinous assignments of error covering, in condensed form, 30'pages of appellant's brief, or 611 of the legal points- argued in 600 pages of briefs of the parties. Discus- sion has been confined to those issues which are deemed con - trolling. Judgment-affirmed as to intervener and reversed as to plaintiff. COPY . 11R. OSCAR GAARDEN Defendant's Ex. 57 Consulting Engineer N. 0. Ward, Reporter Minneapolis, rinnesota 15 South Fifth St. January 7, 1955 Yr. J. R. Thorpe 519 L7arqu #3tte Avenue Yinneapolis, Unnesota Dear rr. Thorpe: I am enclosing herewith an appraisal of the portion of the water system set up in my report last June. The new apDra.isal will be as of. June, 1935. You will note that the new depreciated value is ,,1303550 this figure not including the extra lot proposed for a village hall. Since talking with you a week or two ago, i have been thinking; over the possibilities of purchasing or leasing the distribution system from the Country: Club District Service Cor-► poratioa. The.leasing proposition would seem preferable to me. To you this plan would have the adva: .,tage of retention of own - ership. In the event of a lease, some agreement woii,ld have to be made as to the ownership of the wells and pumping equipment at the termination of the lease. These would be located on property owned by you. I suE.c;est that you think over the .terra and rate for a lease proposition in the event that you decide to adopt this plan. You will probably know within the next two weeks as to whether or not you will continue, negotiations with the village council. I do not wish to rush natters but I am thinking of the tir,e limit of ray 15th set by the Z+inneapolis 'dater Department on the increased storage capacity. At least three months should be allowed for installing: wells and. equipment. This means that the proposition should be settled by February 15th so that equip- ment can be ordered at that time, When you are ready to discuss the matter, please get In touch with me, Very truly yours, (Signed) Oscar Gaarden OG ;EIS Eno 1. rA Item 75.000 Gallen Tank 51 Eydrants 50th Street fain, 140() Ft. Lend for Tank Haglueering - (Prorated) TOTAL COU TEY CLUB DISTRICT SEMCE CORPORATION APPPAISAL OF QRTION OF EDTNA WATER SYSTER (Pillsbury) ( Graeber ) $19,775 $17.-875 $17.875 $13,931 $13.736 $13,355 �a - cz mod RMODUCTION COST Annual MATED VALUE Deprec. As of 6711135 As of 6/11/34 As of 11 35 Contractor 1S 2" 1934 1935 Este 3923 prlcea 193k Prices 1935 Prices Lovell $ 7 :900 7,000 7,000 3% $ 5,056 $ 4,690 $ 4,480 Lovell 3,825 3,825 5,825 2 2,907 2.984 2,907 Lovell 3.500 3,500 3,500 l i 2,870 21922 2,870 Thom 3,000 2,000 22000 - 2p000 2,0O0 2,000 ( Bans ) 1,550 1,550 1,550 2.4% 1,098 1,140 1,098 (Pillsbury) ( Graeber ) $19,775 $17.-875 $17.875 $13,931 $13.736 $13,355 �a - cz mod ISCAPITMATION OF WATER WOW APPRAISAL ACTUAL CORTRACT COSTS AND COVAIRISON ? WITH BECAPITULATION OF GRAZER APPRAISAL COPY I Defendent {s Exhibit 60 *All 1924 Construction extended st unit prices of Thornton Bros, contract and corrected for work built by Sanitor Condtraction Co. at lower price, (a) Appraisal figurea accepted for items so marked for the reason that actual cost prices could not be isolated fkxZ lump sum contracts involving other cork. (b) Service pipe appraised In the oum of $422.0 omitted for the reason that work was built by the Village of Edina under special aseesemsnt procedure - other work by contract between t^horpe Broe. and the Pholps Duke Coonpany. (c) Meters included in appraisal at $260.17 omitted as clearly being a merchandise item not properly included in the property account - otherwise appraisal figures are accepted upon.Graber's statement that coats were compiled from contracts and vouchers. Rate of Depreciation. Applied: Mains & Hydrants 1 -1/y Tank & Tower 33 1936 Construction - Same as Graber appraisal,. Graber Appraisal Contract Costa Reproduction Reproduction Actual Coat A.atual Cost Coat Cost L0013 Loss Depreciation Depreciation 1923 Construction 420656.53 33,652.97 31,977.87 24,823.54 ►1924 " 33,437.79 28,101.29 29,1�f.10 24,592.18 1926 705.30 611.26.(a .705.03 (a 63a.36 1928 " 2,565.89 2,292.88 (b 1,662.00 b 1,485.82 1936 " 16,749,13 16,513.87 0 16,488.96 u ial X6,253.70 Land Acquired - 1936 3,000.00 3,000,00 (a)- 3 *000,00 31000-00 99,114.37 84,172.27 82,990.02 70,766150 Going Concern, Value 5, 766.86 5, 766,86 Nil, Nil *Lase adjustment for 8" main, built in 1924 by Sanitor Coast. Co. at 2.02 per ft. 732.97 61-5.69 104,881.23 89,939...13 829'257.99 .70,150.81 Excess over Actual Coate Approx. 260 Excess over Actual. Cost Less Depreciation Approx. 280 *All 1924 Construction extended st unit prices of Thornton Bros, contract and corrected for work built by Sanitor Condtraction Co. at lower price, (a) Appraisal figurea accepted for items so marked for the reason that actual cost prices could not be isolated fkxZ lump sum contracts involving other cork. (b) Service pipe appraised In the oum of $422.0 omitted for the reason that work was built by the Village of Edina under special aseesemsnt procedure - other work by contract between t^horpe Broe. and the Pholps Duke Coonpany. (c) Meters included in appraisal at $260.17 omitted as clearly being a merchandise item not properly included in the property account - otherwise appraisal figures are accepted upon.Graber's statement that coats were compiled from contracts and vouchers. Rate of Depreciation. Applied: Mains & Hydrants 1 -1/y Tank & Tower 33 1936 Construction - Same as Graber appraisal,. COPY Defendentr8 Exhibit 61 TOTAL ACTUAL CM OF WAMM WOMM SWU OPERATED Y:1' COU=Y CLUB DISTRICT ^IS}f' V !iL CCHPANY IN Ya VILTAGE OF ]MINA By extension of fiber Inventory. Unirg Unit prices of Contracts 82,990.p2 1937 Additions from Ernst & Ernst Audit Property Account Additions Water Division 111275.89 1938 Additions frclml Ernst & BXwAt Audit as above for year 1938. 10,x+83,64 Total $104,o749-55 Adjustment for 8" mains built by Sanitor ConstrAdtion Conpany 732.97 Total Coat of Water Works An of Jan. lot, 1.939 $104)016.58 (Same as of Marcah 318t, 1939 by Gaarden testimony that no additions -were made between Jan. let aril March 31st, 1939) 'Depreciated Value of above property as of Jan. lot, 1939, based on cost $88,483-12 Calculation accepts dpreciation for 1937 and 1938 from Ernst & Ernst Audits. (Exhibits .H sad I) COPY Defendentrs Exhibit 62 REPRODJCTZ04 COST AS OF JANUARY 1ST, 1937 CAD 1204 ACTUAL COSTS ARD ADJMM BY LAXMM wATERWMM CoNSMWION COST IMX ' Reproduction mtuel cost Cost As Of 1923 Construction 178 . 1 . $34977,87 .*$28,600.00 1924 Construction 178 200. 29,156.16 25,800.0o 1926 Construction. 1 8 . 1 705,30 * 660.00 . 1928. Construction ,178._0 171.1 1, x2.00 * 1"740.00 1936 Construction 16,488.96 16,488.96 $810990.02, $73.,288.96 or Pay - $73,300.00. * Calculationa by- slide rule not accurate beyoxd third Meet, Land Bldgs. Equip. Distr, Mien. Land Bldgs, Equip. Distr. Mien. Land B1dge. Equip. Distr. Mir c. Land Bldgi.. Equip. Dietr. Miss, Lead B1490. Equip. Distr. Misa, Total Total. Total Total. Total RU ATIVB YEARDY VAIXE OF MAIB I ENMMG nITO MMICAL YANZ OF WAR WORD PLANTS. 1913 -1937 1913 = 100 - Lmnbort COPY Defendent'a Exhibit 63 12L3 114 &12 1916 2.9 2.9 2.9 2.9 2.9 11.2 10.8 11..1 13.3 16.5 12.1 12.0 '14.0. -17.3. 22.6 72.7 67.1 71.3 94.1 143.2 1.1 1.1 1.2 1.4 1.8 100.0 93.9 1.00.5 129.0 -187.0 1212 M' 1 21 1,9 2.9 2.9 2.9 2.9 2.9 18.5 20.6 25.6 20.9 19.0 23.4 24.3 26.0 23.4 21.8 161.1 165.8 1.97.8 155.8 130.1 260 2. 2.$ 2.2 2.0 24 .9 255.1 205.2 175.E 123 1924 192 3926 2.9 2.9 2.9 2.9 2.9 20.8 20.7 20.6 20.7. 20.2 22.9 23.0 22„9 22.7 22.5 149.8 152.2 143.2 140.5 127.5 2.2 1 2.0 200- - 9 2.1 39 2.0 1$x. 8 1.9 175.0 128 1929 130 1 2.9 2.9 2.9 2.9 2.9 20.1 20.4 19,7. 18.2 16.6 23.0 23.2 22.3 _ 20.9 19.5 123.8 131.8 130.0 123.3 112.6 1 1.2 1 1 153.0.. 71.7 . 1933 1934 ? 1936 L9X 2.9 2.9 2.9 2.9 . 2.9 3.6.9 18.7 18.6 18.9 20.9 21.0 22.9 22.5 22.7 25.0 116.8 12947 130.7 131.8 144.8 1.6 1.7 1.7 107 109 359.2 175.9 176.4 178.0 195.5 COPY Defendent Is Exhibit .64 RELATIVE Mommy 9ALU9 For 1937 with 1913 = 100 LAMEM Water Electric Street Natural Artificial Works Light, Br. Gas Gary Jan. 184.7 178.6 161.:3 178.0 186.4 Feb. . 185.1 181.8 163.8 178.2 186.5 March 193.0 186.5 168.41 187.6 196.4 April 197.1 188.1 170.3 190.1 198.2 May 1.97.7 1920 171.2 190.1 19903 June 197.9 192.2 171:? 190.2 199.3 J'u1,9 198.0 192 ,t2 171.9 190.2 199.4 August 198.4, 192.6 172.3 190,7 199.7 Sept. 198.4 192.4 172.3 -."'1900-8 19;7 Oct. 198.1 181.3:_ 171.2 190.7 19915 NOV. 198-5. 190.2 . 170.8 .. 191.1 200,1 Dec. 198.2 189.4 170.4 191.1 200.0 Average 195.5 188.4 168.8 188.3 197.1 COPY Defondent ►a Exhibit GS COMARISM Off' C!AK8a CCffiTRZiCT1(7QY COST IMEM. 1923 - 19'2 - 1936 - 1937. Coat Yadeces Authority For ex 1937 1923 924 193 Ameriom Appraisal Co. 2030 198. . 156.. 183.. Mplo. Area - Erg. Neva Record 214.,. 2.5.36:. 206.42 236,41 Consolidated Erg. - 226.7 213.8 X91.7 '202.8 Aberthaw 202. 1986 195+0 199.E Fruln- Colman 2170 223, 187.5 -210.0 Fuller., Ceo, A. 190. 194. 168.0 186.5 Turner Carat. Co.' 1966 19446 . 169.0 592.0 Tattle 2020 202* 180. 19865 Avoraga excess of 1936 3adeces oar 1923 - 10.6% ti 1937 n n 3.923 COPY Dofondentfs Exhibit 6G k1 4 ' v 1M Yt�k 1dU VA t+�LS1Pl. it MOPM AS OF WC$ 311, 1.939 MM OR YaMO- DUG`�.'10iS AS JA A let, 1937 PLUS SUMQT= AWITIOINS AS , TER COMMY . BOORS Reprodnetion Depreciation Cost Value Reprofuotion Cost as of X 1st, 1937 - based upon costs ad usted by Lambert Index $73,300,00 $57 .'207.0 1937 Additions 14275.89, 10.'990,60 1938 Additions 10,483-64 10A452.00 . $95,1059.53 - $78, 647.60 Legs Rotirements 1 Hydrant $90.00 650 + -8" main on 50th Street 1..040,00 Meter en& Meter Chamber at France and. 5m 40 .1,530-00 $77,117.60, Averse depreoiation assumed 1.9 ADJ'U' IN APPRAISAL FCM m LAVEDD p 12 PU 2,146..7 at. .06 100322.8 at .09 2$089.8 at .14. 929.9 at .06` 9,722-4 at .09 . 3,060.3 at 013 330.8 (4 ") at •05 59,5 (6 ") at .07 1928 348-0 (6 ") at .07- 136,o (811) at ,io COPY Defendent +s Exhibt 67 128.70 929.05 557.94 874.98 397.84 16.54 4.16 24.36 13.60 $ 3,239• 995.0 (6 ") ) Gmber has testified'he uoed - actual costs hence they reflect 10259.0 (8 ") ) DeLavaud page If ueed.