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HomeMy WebLinkAbout1944_VILLAGE OF EDINAKARL C. SCHMIDT CONSULTING ENGINEER 4200 GROVE AVENUE WESTERN SPRINGS, ILL. April 13, 1944 Honorable President and Village Council Village of Edina Edina, Minnesota Gentlemen: At a conference with Mr. Harold Utley, Chairman of your Water Works Committee, and Mr. Perry R. mare, Special Attorney for the Village of Edina, held Friday, January 14, 1944, the writer was requested to make a care- ful study and report to your Council on the following ques- tions. a. In the event that the present plan of opera- tion of the Water Works System in the Country Club District and certain other portions of the Village of Edina is con- tinued, vhat would be a fair valuation on which to base rates to be billed by the Country Club District Service Company for such service. b. What changes, if any, should be made in the present rate schedule to yield a fair return on the valua- tion or rate base above described. It will be recalled that the writer was present throughout the trial which opened before Judge Montgomery on January 31, 1940, and that he testified at that time as to construction costs, valuations, etc. and presented numer- ous exhibits in support of such testimony. Copies of those exhibits and the background stud- ies for the preparation of same, as well as the records of the appeal of that trial to the Supreme Court of the State of Minnesota; the decision of the Minnesota Supreme Court; copies of audits of the Country Club District Service Comp- any accounts for the years 1937 -1941, inclusive; unaudited operating statements of the Service Company accounts for the gears 19#2 and 1943 prepared by Mr. Oscar Qaarden; Mr. Gaar- den s proposal of dune 1943 addressed to Mr. Earl Sharpe, President of Edina Village Council; and several miscellane- ous memorandums prepared or loaned to me by Mr. Harold-Utley, Chairman of your Water Works Committee, formed the basis of a rather extended study upon which the following conclusions are based. Supporting tabulations and details of accounts, explanations and calculations form the body of this report. 1, The original construction cost of entire Water Works System in the Village of,9dine, used and usable as of January 1,.1944 is 20 The reproduction cost of this prop= ertg based on 1940,cost prices would be 3. The present value of the entire prop- erty based on cost less depreciation as of januarry 1, 1944 is 4. The present V4 .lue,of the entire prop- erty based on reproduction cost less depreciation as of January 1, 1944 is 5, The.preae t value :of the portion of -the property acoount attributable to the Country C1ub.District Service Co. for purposes of,ealculatiAg and pro rating depreciation reserves-is 6. The present value of,the Service Company's . portion of the Water Works. property account based on cost less depreciation is 7. The present value of the Service Company's portion of the Water Works property account based on reproduction cost, less depreciation is 8, The present value of the Service Company's portion of the Water Works property account based on considera- tion of tho Uro methods of approach shown immediately above is 161#345-03- $ 15% 500.00 A $ 13x,969.35 119, Sul . o© $ 88,596.27 74079.20 $ 69,,430-00 6 � 's s'\ $ 72,000.00 9.. Of the above amount "contributions in aid of construction ",were made by water consumers to secure service to the ex- tent of $ 14, oo. oo^ 10. This sum is deductible from the present value of Service Company's portion of the Water Works.property account for purposes of determining the value upon which the company is entitled to earn a return, based on physical values, leaving a balance of approximately $ 57,100.00 11. The net total investment by the Service Co. in the properties after al=lowance for depreciation,charges withQrawn and for "contributions in aid of construction's as of January 1, 1944 was 48,740.59 12. The net investment by the Country Club District Service Co. amounting to $4$,740.59 has been financed by Stock.sold for cash $ 3,000.00 Preferred stock 15000.00 Less, purchases by Co. Treas. 6000.00 $ 90000.00 First Mortgage bond Issue originally' 20,000. - Bal. 1 -1 »44 $ 13,0 ©0.00 Advances by+ Realtors - Bal. 1 -1 -44 $ 9,372.33 Excessive Depreciation Charges. 90868.16 Excessive Profits over Fair Return , 11, 844.5. Total $ 560085.00 '13. During the same period Mr. harden as the promoter of. the Company has with - drawn in salarles' oharged to water works operation $ 15,120.00 Salaries charged to Sewer.0peration $ 1,500.00 Mr. Gaarden's personal Bug. Services have.been capitalized in arriving at the net investment in a sum slightl9 In excess of $ 30000.00 A net pr fit was realized on sever operation by virtue of depreciation charges against the sever system amounting to approximately $ 2,500.00 Total $ 22,120.00 14. When these facts are Weighed against a maximum investment at any one time of $570203.31, it is obvious that the Country Club Distriet'Service Co. per se has never had any substantial actual ,� investment in the property. 15•.The total of excessive earnings and depreciation Charges over and above a fair return during the period from 1936 -1943, inclusive, .eras $ 21, $12.67 160 In no event should the Service Co. be permitted to compound this abuse by earning.futUre returns on money taken from its customers through the mediuk. of excessive rates largely justified by depreciation charges against their customers' property. 17. The maximum present value of the property based on financial history of the Company on which.a return should be permitted is Set total investment- 48j,740-59 Less Excessive earn- ings and depreciation 21,$12.67 $ 26,927.92 18.. The earnings record of the company warrants a reduction in rates of ap- proximately 12 or to I Cents per. 300 -cu. ft, gross and 131 cents per 100 •cu. ft. net after a. cash discount of 10%. 19. These rates should be made retro- active to January 1, 19400 and the Company should be required to rebate the overcharges since that date to all users 20. This requirement should result in a re- fund to consumers of approximately 80750.00 21. The Company.should also be required.to rebate to the Village the amount of the fair depreciation charges against the Tillage Equity in the mater Forks property account for the years 1940- X3, inclusive amounting to 2$ of ,o3$•4fl for four years 6g 3, 3. o7 22. Total rebates would thus amount to approximately 12,433.07 23. The.net total of the Company Invest- meat, exclusive Of excessive earnings and depreciation, and after rebates would be $ 39060.99 24. Based on careful consideration of: .(1) present value of the Country .Club District Service Company's portion as determined (a) By original cost less fair depreciation $ 7079,20 (b) By reproduction cost less depreciation $ 69,430-00 .(c) By consideration of the two Methods immediately above $ 72,x00.00 (2) Deductible "Contributions in aid -of construction" $ 14,900.d0 (3) *Balance of Service Company portion In. Present Values of Physical Assets $ 57,100. 00 (4) Cost by'Financial History after making. - rebates suggested $ 39060.99 (5) Balance Excessive earnings and depreciation reserves not to be rebated (1936 -1943) $ 9079.60 (6) An allowance for vorking capital, tools, equipment, and Inventory accounts in the sum Of $ 4, 000, 00 I conclude that the.fair'present value'of the Country Club District Service Company's interests for the purpose.of computing an allowable net return should not exceed $ 50,000.00 25. A new Rate Schedule should.be established to yield For Depreciation Reserves approximately $ 3,250.00 For .Fair Return.on Investment at 6% $ 30000.00 For Operating Expenses $ 10 00.00 Total $ 16,550,00 26. Based on-the average return over the past four years a rate of 15 cents per 100 cu. ft. less 10% cash discount � will yield approximately $ 17,200.00 27. As an alternative rate structure, your -board might wish to consider a two part rate consisting of a service charge plus a water charge. In that event, approximately tho. same result would be attained by a rate schedule providing; for (]) . A service .charge of 50 cents per meter per month which would cover costs. of reading meters, accounting, billing, etc. and take the. place of any minimum charge (2) A water charge of 91T cents per 100 cu. ft. les's 106' cash discount. 2$. The two part rate.would have the advantage of- more equitably distributing overhead costs and at the same time would permit a more generous use of water for sprinkling and similar purposes. It would probably result in a -substantial in- crease in gross sales and lead to the possibility of :further reductions in future rates. 29. From the funds provided by the above suggested rates for 1?epreciation Reserves, the Service Company should pay annually .a' sum equal to 2% of the village's 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 is portion of the Water Works System. Based on present-con- struction, this annual payment would amount 10455.00 to Respec f submitted Consulting Engineer REPORT VILLAGE OF EDINA EDINA,.MINNESOTA VALUATION AND MATE STUDY of the WATER WORKS SYSTEM IN THE VILLAGE OF EDINA, MINN. El with particular reference to r PROPERTY OF THE COUNTRY CLUB DISTRICT SERVICE CO. X. C. Schmidt, Consulting Engineer Western Springs, Illinois 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 inarriving 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 ii! a decision of the'SUpreme Cotirt 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 1 2 privileges granted 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,pri.vileges.. 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 States 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 insuring the right to charge rates which will earn a fair return on a fair value, the tain rates that will yield_. return. The famous case�of Supreme Court.of the United ple which serves as a guide utility is not entitled to main - 3.et revenues in excess of a.fair. Smyth vs. Ames, decided by the States, laid down a legal princi- 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 employs 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 caonfiscatory "is not .a matter of formalas ", but there must be reasonable judgment, having its basis in a- proper consideration of all relevant facts."' (Los Angeles Gas & E. Co. vs. Comm. 289 u.s. 287 -33.4 . 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 of altered conditions demand 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'estimatea. 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 - wing 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 . 5 - 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 indicia observed are historical cost, or cost of.original plant, plus additions, less retirements and accrued depreciation, re- production cost as of the time of inquiry, less 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 excercise 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 pub li service is good evi- dence of its value at-.the time of its construction, and. continues to.eupply 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 inexistence 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 preservedo and estimates, even those of experts, must relate to things and conditions having counterparts in reality. - - -- " - -- The use of -a general 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 S. Ct. 3i6,796 ed. 761 . "Such expenses need.not be allowed if the rates charged are found to -be " are'fair and reasonable." Scranton Spring Brook W. Serv. Co. v. Public Service Comm. 119 Pa. Super. 117, 181 A. 77 Reno P L.& W Go. v..Public Service Comm. (D.C.) 298F 7902800 PUR. 1923 E, 485,499. Any appraisal of "Fair Value" for Rate Making purposes I - 7 - must be guided.by the above stated principles and.involves first of all a determination of the several factors. that the Courts have said are "Relevant Facts" which must be considered. PROPERTY TO BE VALUED Before any determination Of the Fair Value of the pro - perty of a utility can 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 she Country Club District Service Co. is acknowledged.to rest in the Service Company, however the.ownership of those portions built prior to 1938 has been in dispute and a brief review of certain facts is essential to explain my handling of certain entries representing the initial investment by the Service Company in this disputed title. When tero aaarden undertook during the latter part of 1935 to purchase the Water -works and sewer systems in the so- called "Country Club District" in the Village of Edina, he first negotiated with Thorpe Bros.,, the development.realtors, for control of.`the corporation known as the Country Club District Service Company, in-whose name the franchises had been issued, but which had not up to that time actually en- gaged In business. a- After wining control of the corporation in 1935, Mr. Gaarde.n caused the corporation to issue 153 shares of preferred stock having a nominal par value.of 4100.00 per share to Thorpe Bros. in payment of tho water -works and sewer systems, trans -' fer of which was authorized to'be made to the Country Club Dis- trict Service .Company by resolution of the Board of Directors of Thorpe Bros. Co. Later a deed was issued by Thorpe Biros. Co. to the Service Co. conveying title to the lot, on which the elevated tank and tower providing.a reserve water supply and pressure reservoir was located. Althoudh.the. Thorpe Bros. directors authorized trans- fer,'no bill of sale or other evidence was ever executed 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 Thorpels' 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 lots" and that they had there- fore been previously sold to the lot purchasers. (See Appendix) Attempts have been made to isolate certain portions of the water and sewer systems such as the elevated tank and tower, parts of the 50th Street main, and certain hydrants, etc., and to maintain that thoso features were purchased by the Service Co. This claim.is wholly untenable inasmuch as the water - works system would be unworkable without these features, and, to have made the representations to lot purchasers which were made and .then provide only an unusable portion of a water- works 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 the tank and tower are essential elements in the water works system and. could not exist without real property on which to stand. The tank and tower were erected in 1923, more than 12 years before the lot was transferred. The lot had in effect been dedicated'to the water - works system and con- sequently to the purchasers of lots in the Country Club Die - trice. What then did the service Co. buy? Perhaps the correct answer is that they bought nothingp 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, is the position of Counsel for.the Village. - 10 - Perhaps ghat Mr. Gaarden actually bought on behalf of the Service Co. were certain intangibles that Haight be nailed, for want of better terms, "Franchises" "Going Value" or "Good. Will" or perhaps merely the right to operate the water -works and sewer systems. But the franchise for the water -works system says "In the determination of such fain and reasonable value, there shall . not be included therein, nor in the purchase or any condemna- tion price of such system; any -allowande for franchise, good will or going concern value, but such fair and reasonable value shall be the normal reproduction cost, excluding the items hereinbefore mentioned." In view.of these facts, a strictly technical position would undoubtedly warrant the rejection of the 615,300.00 item and of any and all recognition of interest by the'Service Co. in property built prior to 1936. However, I feel a more leni- ent 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 intan rible item such as "Going Valuer` can be recognized in determining a 'Fair Valuers under provisions of the franchise, I have elected to %five recognition to the on ;final purchase by arbitrarily assigning to the Service Company the benefits which would normally have been derived had they actually pur- - 11 chased an equity in the property to the extent of the stock issue or x+1.5,$00.00. This position is, I believe, equitable, though not technically or legally accurate. If acceptable to your board, the Service Cu. will be entitled to a fair return on the value of the stock issued for the original purchase and to credit for depreciation reserves against a proportionate share in the property account of that portion of the water works built prior to 10.36. For reasons hereinafter explained I have also pleated to assign the entire amount of the original purchase price to the, vater%yorks account rather than prorate part of it to . the sewer system accounts. Fewer Systems After a careful review of all known facts, evidence, and the opinion of the Minnesota Supreme Court, it is my con - clusion that the Country Club District Service Co. has no claim whatsoever to any title or equity in the sewer systems, either sanitery or storm, in the Country Club District, and accordingly I have made no attempt to evaluate the sewer properties. The 7ervice Co., durin the, period of a even years cap- italized expenditures to the extent of 4x246.08 for-additions 12 - to the sewer systems of the district, which consisted, in part at least, of the personal Engineering Services of Mr..Gaarden.. 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 transfer 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. See Defendentfs 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 Graben 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 defendent's exhibit 66 up to March 1938 was 1.9%. Depreciation charges actually-written off and shown by the Audits',of the Service Co.-books, as compared with the composite-Water. 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 PROPERTY ACCOUNT From Service Company's Books Depreciation Charges Composite Depreciation Rates Prop. Account: - Average Begin +ncL Average Charge Rate 1937 98,654 109,930 104,292 2,100.12 2.02% 38 109,930. 120023 115,126..2017.66 2.00% 39 120,023 140,124 i30,223 2,626.08 2.02 %. 4o 14o,124 148,132 i44,128 2,goo.86 2.01% 41 1+8,132 '149,549 148,846 2,998.62 2.01 Average 2.012% -._ Odd cents are dropped Rates calculated by 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 remaiAing 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 19+0 and admitted in evidence as Plaintiffs Exhibits "L" 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 figuresi he accepted, as accurate, the physical in- ventory shown by the araber appraisal, but substituted unit prices taken from 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 1936. The resulting figures, together with the Graber figures, were presented in court as Defendents Exhibit No. 60. Mr..,Grab.er expressed the opinion that construction costs as of.Jan.,lst, 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, 63, 64, 65,.66 and. 67 were prepared. Exhibit 6.3 shows the relative 7ear17 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 years 1913 to 1937 inclusive. Exhibit 62 applies the ratios of these cost index factors to actual.construction costs and establishes the fact that reproduction costs based on 1936 prices, would actually have been approximately 11% less than the actual costs, instead of approximately 26% 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 lst, 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 '18 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. lg, 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 ainount 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 'gilt ed e' securities on real estate or u c sere ce corporations rarely exceeds five De-r-c—en--F. lt willnot To- Ir., the courts to say -that the income, above all expenses, including taxes, on property devoted to the public service, must- necessarily.much exceed the Jas -mentioned-ratv, to - 19 - avoid the charge of being confiscatory. What such plants usua ly earn, unless they be based on reasonable charges, cannot be 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 such a return is confiscatory or not. (b) Factors Affecting Rate of Return All the factors mentioned 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 7.54% in 1921 to 4.49% in 1940. This was pointed out by the Supreme Court of I11i- nois in the recent decision of Peoples Gas Light & Coke Company, v. Slattery, 373 Ill. 31, 68,.69, where the Court declared: "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 193+ 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 railroads and industries, during 1936 20 - and 1937, 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 dollar's for refunding purposes . at four per - Cent. .The fair rate of return is to be tested primarily by praRent day conditions.' (United Railways Co. v. West 280 U.S. 234,- 74 L. ed. 390.) _­IT seems reasonably c ear that in view of present economic.conditions, of which we take judicial notice Los Angeles {has & Elect. Corp. v. Railroad Comm... ,supra)'t`hat the company would .have great difficul y in realizing five percent upon the money it has invested in its utility enterprise, in securities which would be as sound and as certain to return alike 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,1920's. 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 19201s. High -grade municipal bonds have an average yield of 2 -1/2% compared to 4 to-5% during the 1920's. 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 works system in a community of the - 21 caliber of the Country Club District and adjoining sections of the Village of Edina. 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 -1/2% to 6% of the present fair value of the property would be a fair and reasonable yield on the water works property.in the Village of Edina. In fact it is improbable that, all factors considered, a'rate of return higher than 6% could be justified. For purposes of determining the adequacy of exist- ingrates for.past years, I have assumed a 6% return on the actual average annual investment, and for determining new rate schedules a 6% return on the present fair value of the property as fair and proper. 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, ;. as most equitably representing the fair value of the total water works property as of January 1st, 1937, at which time 22: - it was placed on the Company books. Table Number II has-been prepared from Exhibit 60. This . shows a total.. cost prig .to 1936 of $62..768.09 and a depreciated, value.as of January lst, 1937 of $50,897.21. The nominal - purchase price paid'in stock to Thorpe. Bros..Co. war$ $15000.00. Dividing 15000.00 by $51,000.00, we arrive at a figure-of 30 For the purpose of assigning the benefits from-a portion -of the property account for computing fair deprecia -, tion credits due the service Co., I have added.tine $3000.00 for-real estate to the-eonstruction cost and have credited their property account with 30% of $65,768.x9, or $19,730.50. The remainder, , or $46 -, 037.59 will. be ref erred to as the Village "s portion -of the -initial.property account. The�net investment account by the Service Co. is credited with $15,300 as of,November.1935 and January let, 1936. The above figures =tape no account of water works improvements made in 1928 by the Village.. Which were financed by special assessment and to which the Service Company has '� made. no. claim to ownership. TABLE NO. II. RECAPITULATION OF CONSTRUCTION WORK-BUILT PRIOR TO 1936 FROM DE"NDMS.EXHIBIT #60 A) Cost Less Depreciation Depreciation Actual Depreciation Depreciation, Service Co'..' Village Cost to Jan. L 1937 Taken ..Portion Portion 1923 Const. 31, j977-87 24,,823-54 *1924 29,156.16 24,592-18 1926 .705-03 611.36 1928 1,662..00 00 1,485:82 *AdJustment' 732 . ('7 L 615.6 Total b2,,7bd!0q 50* 69TA 112871.192 3,561-58 ..8,310-34 Investment by C.G.D.S. Co 15*300 Portion of assigned to Benefits Service Co. 15 300 30% Portion of Benefits . = 70% assigned to Village *Adjustment for 8" main built in 1924 by Sanitor Construction Co. See Exhibit 60 A) 24 - Development of the Propert Since January lst, 1.936 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 against 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 services at a rate of 6 %,of the.construction costs. In some instances engineering services had.been previously capitalized at approx- . , imately 4% of cost and in sucheases 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 �5 fair depreciation chargeable to the as well.as the fair return•on their calculated. The development of these shown.in Table No. II'I, 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. _+: �_ ti. !1 ;R a .,:i� {. :!r #'!it �' '`► L. i:7:i` T I 1. �. 3. 7 • Avery Froperty Valuation- Aver Invest=" Depreciation Ailor =e ft2r.RO- 'n. 6 ,. Addition Account, �r`y Depra©latim Not Addition Cupila'tiVe, Awount r �' to Total �p Total Net for. , Cn Cola, 6* on COLOO 6 Prior B3r Civet to M $62, {68.ti9 to 1935 2SO00000 5,T •09 Less porLUM assigned 09 t .o Village 46,,03T*52, ® °��� �s 16 1935 1936 1�, ?30!5 Original iuvestwnt Addlticna 16,488.E 1,416.070 15,0!2.89 15,3 •�� � ,836•44^ 1,370.18 1,14.98 ,3T•9_ 559.49 36,21 A6 OL-31 Additions lagimering allow. il, ls•89 67+6.55 " 2,100.12 9,420.32 350083.05 2,1134.98 l;atira ats �2 •00 2) 41,979.68 39,793.21 839.59 47 :?39.90 1938 Additioae Bg r.a11o.0) 10,4830 t 176.25 2,317.66 8,252.23 42,792•°! 2,567.57 Retirements Omtrluuts=w 53,024.84 .45,792.53 1006 0.49 58,3fl9.79 1939 Additlms Sagir. allow (3) 19,x•7 4 .4� 2,626,08 17,601.15 50,003.06 g 3 *000 Camtributims �....,.��..� '10 68,423. e� 9fJSO. %1213.59 1,368 -47 78,537.02 19413 Additlms 11r. A11ow. 8,WT083� .u71 20900.86 50587.44 56,882.31 3,412.94 �tribustioa�► _.._....._..._ 82,781.17 � .` 59,_551. 03 1655.62 , 870025.32 Jig 1941 Additiana Oai trlbnUme 1942 AUltims Jbg'r. ALlovame Cantributims 1943 AddlUmn 1s•r. A11annoe CautributIms ti w* t.a It it 1' 2• 3• 5• 6. 7. 8. Ya AveMp �t Deprecdatim AllaMt =* lr So- turn a 6%. AC=Mt Property Depmolatim Not Additim Total Not for CmmIati�s ur�r�r.�� Account 8v -' Ptg.l�rea3L lacer on Cc�ia CQI. 6 - 8g. 457006.31 43 0438• 5,061.6D # 1#755.53 23.3 1.40 3,O81.55,.. 53,470.688 3,208.24 51,879.77 6S*Y2.76 41.t 2. 3s .69 3,O o1 5as314.]rt3 100.00 88,*6.27 t3,'7b0; :52365 AdJr Mtmut for 4aptae3 lan Oft land 1=1Ud.ad- of Per JOU for ? Yaara. NIT Cimm CHA2m bgW8 iatIOU Tri °r to 1537 an dim aaag,ll 4 t o Se ry i c e C o . Pre amt roue � Cost Lem DOX"iattm of portion assigned to Service Co. (1) Fr= 11afb9dent•u bIIk bits 474 'O Um taken by Ap+pralual (2) A pcartioo of 500 St. meta b&yi.ng imaegrscs.►�a balmm of iftaa�sspolss aa3na �41,a0l4� 0.0 0 ad th e mt ba aotcmnect3n With With beleoe x f OW-00 total f e (3) V" asering � o b nw tIm Use its pCVwi+aa4y aapitalissi 1,770.81 .3#018-61 1#771.49 $10,78i.49 126.00 W 1. #1 #217.07 74,379.20 $22,121.08 TABLE.III - Continued ADJUSTMENTS - VILLAGE PORTION IN PROPERTY ACCOUNT AS OF JANUARY 1st, 1944 Village PRESENT VALUE TOTAL PROPERTY As of January 1st, 1944 $1300969.35 By Cost less Depreciation (4) Construction by Special Assessment financing. Property A/C Fair Dep. Allow. at 2% Original Cost of $46,037.59 Dep. Subsequent to 1937 $6,304.27 Construction prior to 1936 - Assigned to Village Less Retirements 1,008.00 252.16 1,585.84 $45,029.59 (4) Plus - Const..1928 788.45 Dep. Village Equity (4) Plus - Const. 1941 26,930.72 Prior. to 1937 8 310.34 72,748.79 6, 5 .6 16,158.61 Adj•. for Dep. on Land 294.00 Present Value by Cost W,590.15 16, 58. Less Depreciation of Portion assigned -to Village PRESENT VALUE TOTAL PROPERTY As of January 1st, 1944 $1300969.35 By Cost less Depreciation (4) Construction by Special Assessment financing. -27_ Historical Cost The development of the historical cost as above described is summarized in Col. 1 of Table Flo. IV, and is shown to "amoFunt to $161,345.03.. The.feir present value of the entire water works system as determined from historical coat is shown on Table III to amount to $130,969.35 Of this last amount,,the present value of the Service Company's portion would, be - - - r _ - - $ 74.379.20 Basis of Reproduction Cost Estimates Reproduction as of today is, of course, wholly impossible because of'the war program and the freezing of all materials for such construction outside of strictly defense areas. Si.atce the United Statea entered the.war there has been.no material amount of waterworks construction on which to base costs or construct aecurat® cost Indice's for the years 1942 and 1943.. Although the Lambert Index of Water vorks construe- tion costs for,the year 1941 is available it .was unquestionably influenced, at.least during the latter months of the year, by ,fin the fact that we were at that time rapidly approaching a state -28- ._of war, end thgt metals•of all kinds were becoming scarce. Although it is , a 'matter of recognized principle that a Utility Company is' entitled to benefit fairly from appreciated values as shown by-'reproduction 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 year's construction work are known it is not necessary that a completely new 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 Cost Index for Water Works Plants" Table IV shows the cost index figure for each year and the ratio between the 3.ndex 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 due to savings in engineering work, moving of equipment, 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 game ratio as the totals bear to each other without consideration of this factor. To determine present value on a reproduction cost basis the cost so determined was depreciated at the rate of 2% per year of service. $,P TABLE IT COST OF WATER WORKS PROPEN - AND PRESENT VALUE BASED ON SAME Construction 612.00 Less Retirements ;,400.00 by years 1923 Cost 24 duction 26 as of 28 y�G of Ratio Cost TABLE IT COST OF WATER WORKS PROPEN - AND PRESENT VALUE BASED ON SAME C.C..D.S.Co.. Village Portion Portion 10,973.00 250536.00 Lambert 612.00 Repro- ;,400.00 Value 3,000.00 Cost Rep.Cost duction Dep. to as of Cost - Index Fig. Ratio Cost dan.111944 dan.1,1944 31,977.87 198.6 98.2 31,400.00 13,200.00 18,200.00 28,423.19, 200.8 97.0 27,600.00 11,040.00 16,56o.00 705.03 188.8 103.2 728.00 264.00 464.00 - l7k62.00_. 171.7 113.5 1,890.00 6o5.00 1 285.00 G 8 0 9 100.0 8,488.00 680.00 7,8o8.00 1509.00 C.C..D.S.Co.. Village Portion Portion 10,973.00 250536.00 1928 Const. by Village 1941 Const. by Village Less Adj. 26,930-72' 199.1 1 lb 345.03 Less probable savings due to reconstruction of the entire property at one time - Approx. 5% 2,300.00 900.00 Land e v T>" e , 000.00 612.00 100�i ;,400.00 None 3,000.00 900.00 1936 16,488.96- 178.0 109.6 180100.00 2,900.00 15,200.00 15,200.00 37 i�S744f *10,512.44 195.5 99.9 10,500.00 1,480.00 9,020.00 9,020.00 38 10,569.89 . 193.8 101.0 10,650.00 1,275.00 9,375.00 91375.00 39 20,227.23.E 189.8 102.9 20,400.00 2,040.00 18,36o.00 18,36o.00 40 8,,4.88.30*, 195.2 100.0 8,488.00 680.00 7,8o8.00 7,8o8.00 41 .1.,502.72- 199.1 98.0 1,470.00 88.00 11382.00 1,382.00 42 24.72# -- 25.00 1.00 24.00 24:00 43 - 43.511, =- 43.00 1.00 42.00 42.00 1928 Const. by Village 1941 Const. by Village Less Adj. 26,930-72' 199.1 1 lb 345.03 Less probable savings due to reconstruction of the entire property at one time - Approx. 5% 2,300.00 900.00 288.00 612.00 612.00 26,4o0.00 11584.00 24,816.00 24,816.00 1 1,59 •00 3.5s446.00 12 ,1 .00 73.-064.00 53,0 .00 8 080.00 153o514-00 Say -- 153,500.00 . 61307"00 3,654.00 91641!00 ro9,430.00 1653.0�0 .. 1T 1.00 Calculations of ratios and reproduction costs are by slide -rule for the reason that the resulting figure is well within the limits of accuracy of the index figures used or of any estimate based upon the imaginative factors that mast enter into a reproduction cost estimate. * Less adjustments and retirements not otherwise charged. 0 -31- production Cost The reproductioa cost of the entire property deter- mined as described above would be 153,500,00 and the present value of the property based alone on reproduction cost less depreoiation Mould be $119,841.00. Of this .last amount, - -_ . The present value of the Service Company's portion would be - - - - - - --- - - - - - - . - - � 69,,430-00 Contributions in Aid of Construction It is of course simple equity, accepted by Courts anal. Commissions alike, that'a Utility Company is not entitled to a return on money which has been provided by- oustomers without consideration in the form of stocks, bonds or other similar- obligations, but-merely as'-an "aid in construction" of addi- tions or extensions to the property, which otherwise would not yield an adequate.return on,the Investment required by the utility. Accotdiagly,.it is necessary to deduct any such con -' tributions from the present physical values as determined'by Historical Cost or Reproduction Cost to arrive at the present fair value for rate making. purposes. In accepting this type of aid, however,.and creating the extension, the Utility assumes the responsibility to main- tain and replace, if necessary, the property built with such ~' funds. For this reason "Contributions in aid of construction" P. 32 - are not properly deductible from the property account for the purpose of computing fair and proper depreciation reserves. The Country Club District Service Company has re- ceived a total of 014,901.00 through -such "Contributions In aid of construction." Financial History In addition to the "Historical Cost" and 'the Repro duction Cost" of a util4.ty 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 ?15,300.00 par value of preferred stocks. The-Company next 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 1st, 1937, at a total of approximate1y.;182,000.00 of which "'98$654.20 was charged to the W& ter Works Division and 083,356.39 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 . 33 - This inflated value has been the basis ever since for excessive charges -to depreciation reserves and has resulted, in years' time, in excessive depreciation charges amounting to a total of -$9, 868.16, _ as compared with a fair allowance for de- preciation computed against a pro -rated portion of a property account based on actual costs, as hereinbefore explained, A 'mortgage in the amount of $20,000.00 Baas placed on the property in 1937 in favor of the St. Paul Fire & Marine lnsuranee.Co., of which 413,000.00 remains unpaid as of Decem- ber 318t, 1943. "Contributions in aid of construction" have been made .as previously stated., by customers desirous of securing ser- vice, to.the extent of $14,901.00. Several extensions to serve newly platted property have been financed by means of advances by customers or realtors) which are repayable from revenue in an agreed ratio of 50% of the service billings against the property served by extensions .so financed. Under certain conditions a portion.of.these ad- vances may, after ten years, become "contributions in aid of constr►ietion." 'The balance 'of :such unpaid advances as of December 1st, 1943, wa$ $9,372.33 Table V presents a comparison of actual earnings of the property and fair returns. r, Column l .lists the operating profit from . the Water Works Division.as.shouft by company statements before income taxes. - 34 Column.2 lists interest charges, and mortgage ex- 'pense. Column 3 shows legal expenses incident!to the 1940 trial which were included in statement as operating costs,, but which are not properly allowable in computing a fair re- Column shove-the-actual depreciation taken or charged off each year,..4s shown by audits and statements. Column 5 Is the total of columns 1, 2, 3 & 4: and represents the gross profit before interest, depreciation and income taxes. Column 6 lists the allowable fair . depr�eia-ti:on allow -. anee based on 2% of the average balance of the property ao+ count. (see Table III). Column. "7 shows allowable Pair return based on 6% of the average investment for each year (see Table III). Colunin 8 is the total allowable fair roturn before interest, depreciation or income taxes column 6 -plus column 7. Columb.9, the final column shows the total excess of returns received by the company over proper and -Pair returns - column 5 minus column 8. It is thus seen that in the period of eight years a total gross profit of $54,489.24 has been taken From the pro- perty of which $21,812.67 has been excessive. 4R -yo o,.ss83 4- aq oat C� 1 BAR MCCIM TAXES 8%PEM LWAAL EKP. C8@WO LEGAL ALLOWAI= ALUVANM TOTAL CGS 1936 $ 3,436.90 (1) $ $ $ 1,416,07 $ 4,852.97 $. 559.49 $ 11370.18 $ 10929.67 $ 20923.30 . 1937 3,463,00 4591,.87 2,100.12 71154.99 839.59. 2,104.98 2 :944,57 40210.42 1938- 1,522.62 1,097,18 2,317.66, 4,937.x+6 1,060.49 2,567.57 3,623.06 1,309.40 1939 3 00.61 1,020.14 2,626.08 6 .8 1,368.47 3,000.1$ 4 '.6 2,382,18 Sub Total $:11,427.13 $31709.19 $ 81459.93 $23 :596.25 $3,828.04 9,042.91 $12,870.95 $100825.30 1940 2,927.71 4329.55 2,904.86 '6,958.12 11655.62 3,412.94 5,068.56 1,889.56 1941 161134.29 1,o77.8o 2,998.62 10,210.71. 110755.53 3,438.38 5,193,91 5,016.80 1942 1,072.94 952.23 1,500.00 3,081.55 6,606.72 1,7'{0.81 3,208.24 4,979.05 1,627.67 3943. 54843 7 2O.27 2,714,33 3.082.69 7.117.44 1,771.49 3,018.61 4,7 0.10 2,327.3+ Sub Totes. *10,683-P 931.8 $4,214-35 12 063.*?. $30,M-92 $ 6,953.4 1 o 8-tE 20,031.62, l0 861. $22,110.20. .$7,641.04 $4,214.35 $20,523.65 $54,489.24 $10,781.49 $22,121.,)8 02,902.57 $21,686.67 Adjustment for Depreclatlen on Land-- w a d - - - - - 126.00 $10,655.49 (1) From Defendent'e Exhibit #74. 6,00 126.00 $32,786.57 $21,812,67 -35- Table VI lists the salaries paid by the,company to Mr. Gaarden in each of the several years and the distribution of same between the Water Works and Sewer Divisions. The salary paid in the early gears was quite moderate and the present aalerp "is not large by ordinary standards. It could no be criticized if the growth of the company war- ranted the increase. - However.,., it will be seen from Table V,that the cost has been increased quite radically when 6onsidered in its re latiOh to the Number 6.f. meters served. It would also seem that the- increases in 1941 and 1942 were.hardly warranted in view of the discontinuance of the Sewer System operation by the Service Company, and of the part - time nature of the management's employment.. When'it is realized -that the maximum average investment the, - Service Company has had in the Waterworks property during any one_year Naa $57006.3. and that the present investment is $48,74.0.59; see Table III.both after giving full credit for the initial issue of $15,300.00 of preferred stock) -it is appar- ent that the Country Club District Service Co, per ee has never had any substantial investment in the property. Of the present net total investment amounting to $48,744.59 TABTZ Y.C. SALARM PAID BY 'COMW CIM DISTRICT SEMCS CCHPANY TO OSCAR GAARUM charged Charged Meters Salary Total to to in per Tear ' S�l Sever 8870tem Water Worms Servioa Meter 1936 $ 720• 720• 1937 1875. 300. 1575• 461 3.42 1938 1875. 300. 1375. 506 -3.11 1939 1875, 300• 1575• 2.78 1940 1875. 300• 1575• 686 2.30 - 1941 � 2400. � 300. 2100. 3000. 632 895 2.52 3.36 1942 1943 3000. LOW. -_-- io00- 904 - . 3.33 Total. $16,320.00 #1,500.00 $14,820,Od - 36 Excessive rates have produced $ 21,812.67 The mortgage balance is 13,000.00 Advances from Realtors produced 9072.33 Capitalization of Engineering Services produced. 3,000.00 Profit from operation of-Sever System produced 2000.00 $ 49,685,00 In view of the fact that the expansion of the Water Works properties has been largely financed thru contributions,. and advances by the customers of the Utility Co., and thru the reinvestment of excessive depreciation reserves created against property actually belonging to its customers, it would seem entirely proper to give more than usual weight to the financial history of this company in determining what constitutes the fair present value of the property as a base'for future earnings and rates. In my opinion it.would not be unreasonable to deduct from the present investment, the amount of excessive earnings and depreciation over and above what might normally be called fair allowances to determine a present value based on financial history, or, in other words, the actual cost of the property to the Company. This calculation would show a cost as of December 31st 1943 of $ 26,927.92 �� OF MOSS � � . W.r�.. � • Use - Bad Debts written off in 1943 balancd . :3 $2,496.05 Profit Oparatixg Deprooiat ion befma Lose Taken- Depredation 1936 1937 1,775.00 1,667.88 1938 712.39 1,673.82 _1939 42. �0�.80, Sub - Totals 5,012.50 $1,892,69 . 1940 *,679-08 1,672.05 1941 ..119633.89 4672,05 1942 -1, 672.05 1,672-05 1943 1x672.05 1,$72.05 tub Totals *5-,6 57-21 $ 62688.20 ld To�e1 $8,776.88 11,700.70 $2 :923.82 Use - Bad Debts written off in 1943 balancd . :3 $2,496.05 - 38 - a . Rate AdJustments & Reber As h€o'been heretofore pointed outs in the discussion of Principles of Rate Making, it Is entirely proper and in order, where.rates have been found excessive and an adjustment of such rates has been delayed thru court action, to establish new rates effective as of some earlier date in order to prevent the utility from profiting unfairly as a result of delays in court. In the present ease, the title to the property was dis- puted during, the -rear 1938 by a letter from Mr. Earl Sharpe, then President of the Tillage, addressed to the Service Company. However, the issue was not .Formally pressed until-shortly before the trial, previously referred to, opened in January 1940. Table VIII shows the actual Water sales for each year from 1936 to 1943 inclusive, together w1th the excessive earnings for each of'-said years and the percentage that such excoesive earnings bear to the years' sales. It will be seen, that the excess has varied from a little less than 9% to as much as 34.4% with an average of 18.3; for the entire period.' Based on the last four years the average excess earnings have been 15.1% of the gross billing$. It is obvious therefore that a substantial reduction in rates can and should be made. It is not practical to adjust a rate schedule to a point that will produce exactly the desired yield in dollars and cents for the reason that all lt-iS)J�i'+ V 11b ANALYSES OP EXCESS EARNINGS & WATER DEPARTMENT SALES Water Excessive � Sales Barn Ex_ cess 1936 $11, 206.16', 2j,923-30 26.2 1937 12,247.88 40210.42 X4.4 1938 11,154.04 1009.40 11.7 1939 .13,276.10 2 3, 87.18 1 Sub- Totals $47,885.18 $100825.30 X2.2 1940 $15,324.34'' $ 1,889.56 12.3 1941 20,022.89 5,016.80 25.0 8' 238.71 1, 6^27.67 8. -9 1943 1 2.327:3 12.8 Sub -Teals 471#755.28 lox 861.37 15.1 Grand Totals, $119,640.46 126.00 21,812,67 18.3% * Adjustment for Dep. Real Estate R w39- 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 margin of safety should remain in the rate structure. A reduction of,approximately 12-ffl% 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 15X per-100 cu. ft. gross., The 15� figure would result in a decrease of 12t% and a continuance of the present 10% cash discount would.result in a net rate of 13j/ per ' 100 .cu. ft.. if such rates-are adopted and made re uary 1st, 1940, and the company is required charges since that date to its consumers,_ a the total billings for. the four year period X71,755.28 would result. This would amount 08,750.00. troactive to Jan - to rebate over refund of 124% of amounting to to approximately Adjustment for Depreciation Reserves The above refund would be_ substantially less than the total of the excess earnings during the period since the issue .of ownership was joined in the Courts. Inasmuch as the company has during.;this tire received the benefits of the depreciation on reserves charged against the Village t s position, ,of the Water H, -4o- 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 Depreciation Re- serve account. It is suggested that an equitable basis for such a refund or adjustment would be the depreciation accrued during the past four years on the Village portion-of the original water works-,plant built prior to 1936. This would amount to 4 x 2% of 06,038.00 or $ 3,683,07 Investment after Refunds Assuming that a rate schedule as above described and retroactive January lst, 1940, is adopted and that refunds for overcharges and to adjust charges for depreciation of the Village's portion of the property are made by the Service Company, their net total investment in the property would'be increased by the total amount of such refunds or approximately $12.,433.07• The net total of the company's investment, exclusive of excessive earnings and depreciation charges; and after mak- ing suggested refunds would thus become $39,360,99 Determination-of Fair Present Value The rate reductions tentatively suggested above can of Ae course not be adopted by the Village Council unless the-proposed H, - 41 - new rates will yield a fair return on the fair present value of the property/. We must therefore reach a conclusion as to what is a fair present. value in order to check to reasonable- ness of the proposed rates. They have been tentatively sug- gested in an'unnatural order,because of the effects of any re- troactive conditions on the net investment by.the Company which is an.important'.factor in the determination of fair present value. We have now arrived at three 'different figures, each of Which represents the present value of the property from a different point of view. (a) By Historical Cost 74079.20 (b) By Reproduction Cost 69,430.00 (c) The.net investment of the Company as shown by.study of its financial history, after rebates 39060.99 From (a) and (b) it may be concluded that a fair physical value of the Company's property is 720000.00 However, this amount includes'property built by "contributions in aid of coa= struction" made by consumers on.which no return is permissable to the extent of 14,900.00 Balance - Value Physical Property 57,100.00 42 Included in the above balance there still remains approx- imately $9,379.60, representing excessive earnings and depre- clation.charges accrued against Village property Which would not be refunded; there still remains full recognition of the preferred stock i.ssuecl for a doubtful consideration; and there remains $9,372.33 advanced by customers a:ad realtors, at least part of which is apt to revert to the category of "contribu- tions." Another and final factor which must be considered in a final determination of a fair present value is the need of a reasonable amount; of working.co6pit4l. There.should be included in this item an allowance for the company's investment in small tools and equipment, office furniture, and inventory accounts such as meters and supplies. Inasmuch as billings for water service are rendered monthly and the total operating cost of the property Fill seldom, exceed $1,000.00 per month, the need for working capital for operations .e not large.. A study of the several audits Stith respect to operating costs and inventory accounts indicates that an allow- ance for this purpose.need.not exceed $4,000.000 After .carefully considering all the data outlined in this report and particularly that summarized under thin- heading - "Determination of Fair Present Values," it is my opinion that the fair present value of the property for the purpose of computing an allowable net return should not exceed $50,000.00. A TABLE IX Distribution Exp,' Operation of Dist.-S: Maintenance Services Cunt. Prem. Accounting & Collection: Meter Reading Salaries & Wages Pay Roll Taxes Miscellaneous Office Rent 42.63 203.20 SUHMARY OF OPERATniG COSTS 173.40 290.31 .245.50 2W.26 250.00 Less - Interest,. Depreciation, Trial Costa 114.34 70.59 835.05 266.18 159.36 245.41 250.00 0. 230.72 103.62 103.61 Estimate for 61o.76 389.4o 1938 1939 1940 1941 3,242 1943 Normal Year Power & Pumpingi 125.00 14o.00 140.o0 15o.00 16o.00 225.00 224.5o Operation Labor $ 21. :00 $ 22.00 $ 41.OQ $ $ 236.25 $ 182.65 $ 392.'15 $ 300:00 Supplies & F. acp 166.88 192.68 14o.91 lo6.80 15o.68 145.90 142.45) 250.00 Maintenance 24.38 77.05 114.47 317.36 87.61 51.29 54.95) 480.00 Posner Purchased 1938.20 16ll.80 1854,75 2063.00 2554.00 2426.09 2498.00 2500.00 Local Taxes 0 0 - 0 , 0 0 0 0 0 Water Purchased 0 0 64.52 179.64 342.77 360.48 306,88 350.00 Distribution Exp,' Operation of Dist.-S: Maintenance Services Cunt. Prem. Accounting & Collection: Meter Reading Salaries & Wages Pay Roll Taxes Miscellaneous Office Rent 42.63 203.20 32.74 173.40 290.31 .245.50 2W.26 250.00 646622 114.34 70.59 835.05 266.18 159.36 245.41 250.00 0. 230.72 103.62 103.61 303.6 61o.76 389.4o 300.00 $ 688.85 $ 548.26 $ 206.95 $1112.06 $ 859.65 $ 1015.62 $ 862.07 125.00 14o.00 140.o0 15o.00 16o.00 225.00 224.5o 225.00 795.00 805.00 787.50 800.00 1815.00 2470.00 2633.75 1200.00 26.34 40.00 29.14 110.29 218.12 211.74 649.59 785.73 860.34 834.54 540.00 480.00 504.00 480.00 Taxes: Real Estate. 591.04 1055.08 1136.24 186.31 177.02 180.00 Personal Property 1194.30 944.88 500.00 Money & Credits 8.00 $5,189.60 $5,568.6 $9,513-79 $8,320.80 $9,920.o4 $11,632.19 $11,051.40 $10,295.00 * Less $1500.00 and $850.00 trial fees disallowed (2) Less Transcript, $1864.35 disallowed ffio. Meters 461 506 3 �1� 904 or TAKE IX - continued Summary of Operating Costs Less - .Interest, Depreciation, Trial Costs Estimate for 1937 1938 1939 1940 ` 1941 19W2 19+3 Normal Year Administrative &- General: Salaries & Wages $ 810.00 $ 907.00 $ 854.70 $1329.25 $1319.00 $1541.25 $1500.00 $ 2400.00 Expense of Gen. offices 69.25 9.30 71.69 107.45 15.24 94.08 32.56 50.00 Insurance 107.77 172.79 140.84. 151.75 155.64 33.06 .21.25 75.00 Legal services 10.00 80.00 375.00 50.00 0 +x.25.00 25.00 -50.00 Payroll Taxes 26.34 45.31 59.10 91.02 42.57 23.31 44.97 45.08- - Fed. .Cap. Stock Tait 20.00 55.00 77.50 91.70 106.25 .3.11.25 123.75 100-00.- Misc. Supplies & Ex- 180.20 164.53 238:73 265.10 221:00 457.10 (2) 96.95) pease 10.31 1.00 4.41 2.30- 12.23) 250.06 Other Gen. Off. Sal, 218.95 123.50) Taxes: Real Estate. 591.04 1055.08 1136.24 186.31 177.02 180.00 Personal Property 1194.30 944.88 500.00 Money & Credits 8.00 $5,189.60 $5,568.6 $9,513-79 $8,320.80 $9,920.o4 $11,632.19 $11,051.40 $10,295.00 * Less $1500.00 and $850.00 trial fees disallowed (2) Less Transcript, $1864.35 disallowed ffio. Meters 461 506 3 �1� 904 or - 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 operating costs for 1944 and future years, 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 tjie ratio of operating costs to total revenues should change in favor of the utility so that in considering operating costs as a basis for rate studies it is entirely fair and proper to base calcu- lations upon an average year's operations udder presently existing conditions. The reasonableness Qf 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, e.tc., ai,d the changes in such items which car. be reasonably brought about by the management. It is unnecessary to go into detail with respect to each item. I `believe the estimate,given us on the conservative ride and that cost dur- ing an average year should not exceed the sum of 010,300.00. Mr. Gaardents own estimates of operating costs as pre - sented in his proposal of June, 1943, addressed to the City 5/12/43 OperatL,,, Estimates from Proposal made to Village Council June, 1913 by Mr. Oaarden ED= WAM SYS= Estimated Revenue Under Village Operation With 900 consumers With 1200 consumers With 1500 customers (Present) (Future) (Future) Wet year Av. year Dry 7ear Wet year Av. year Dry year Wet year Av. year Rry year Grose Operating Revenue $18,500 $22,000 $28,000 $24,700 $29000 $37 :400 $34000 $37,000 $47,000 Operating Costs Electric Power Pump Main. & Supplies Main. of Linea Water Purchased Office Supplies 8i Pap. Extra Labor Miscellaneous Taxes Total Operating Cost Bal. Available for Financing . $ 2.1+00 $ 2 700 $-3 100 . $-3 000 $ 3.1'140 $ 3 800 250 275 .350 _ . - .350 375 150 1 050 1 100 1 100 400 1x+50 1 450 300 350, 475 400 150 575 500 -550 550 650 700 700 l 500 1 600 1 800 1 500 1 600 1 800 500 Soo - 500 660 600 6o0 0 0 0 0 0 0 6 500 7 075 7 875 7 900 8 575. 9 375 $12 000 $14 925• $20 125 $16800 $20 ?50 $28,025 3 500 $ 3 900 $ 4 500 •• 450 550 • •0 •f :• :•• 800 goo 900 fIf ff 2 300 :J• :0• 0 1 f • 9.750 10.680 11 750 $21 250 $26 320 $35 250 - 44 Council have been carefully considered in arriving at the estimates shown in Table IX, and they are reproduced herewith for convenience as Table X. Yield from New Rates .Having determined the coat of the physical plant compris- ing the complete mater storks to have been $161,345.00, and that, the straight line theory of depreciation having hereto- fore been adopted, should be continued; any new rate schedule should yield sufficient money to establish suitable deprecia- tion 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 need not exceed $10000.00 Any new rate schedule should therefore yield from present property and customers during an average year approximately $16,550.00 Based on the average return per meter over the past four years, the rate.previously suggested,' namely 15¢ per 100'cu. ft. less 10% discount for cash, will yield approximately, $17,200.00 See Table %I Mr. Gaardenfs.own estimate for an average year based on 900 customers at present rates was $22,000. If reduced 12 as suggested, the yield as per his estimate would be approximately See Table % Alternative Rates $19,300.00 It has been suggested that the Council'might wish to consider an alternative "step- rate ",in order to affect a re- duction in charges for abnormal use of water during seasons when heavy lawn sprinkli4g is required. I believe the purpose of such a "step -rate" can be more equitably accomplished by mesns of-a so. called "two -part" rate which makes an initial service charge to cover fixed overhead expenses such as meter reading; billing, accounting, 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 charge would of course taste 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 rate 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 15¢ gross less. 10% as compared with present rating, 17.10 less 10%, a net reduction of 1* would result.. Annual revenue based on the present number of meters would be: 904 times 21,62 less 12 = $17,200.00 The average annual consumption per meter, assumirig al.1 bills discounted, would be: 21.62 ' = 14,000 cu. ft. per meter per year 15.39 $21.62'iess 12 = $1.9.00 Assuming a,two part rate consisting of a service charge of 60¢ per month W meter, plae a water charge of 9 per 100 cu. ft., less 16%, the average annual yield per meter would be: Service Charge $7.20 14,000 cu. ft. Q 9NA00 cu. ft., less 10% - .80 Total $19.00 904 time $19..00 = $17,176.00 *Slide rule calculations for all averages and extensions. TABLE YY. ANALYSES AND ESTWM OF OFEMIffG MMM, Water Number .of Revenue per Sales deters Meter 1940 X15,.324.34' 686 22.35 1941 20,022,89 832 24.20 1942 18,238,71 895 20.40 1943 18,169.34 904 20.20 Totals $74755.28 3317 Average. 21.62 Assuming a rate of 15¢ gross less. 10% as compared with present rating, 17.10 less 10%, a net reduction of 1* would result.. Annual revenue based on the present number of meters would be: 904 times 21,62 less 12 = $17,200.00 The average annual consumption per meter, assumirig al.1 bills discounted, would be: 21.62 ' = 14,000 cu. ft. per meter per year 15.39 $21.62'iess 12 = $1.9.00 Assuming a,two part rate consisting of a service charge of 60¢ per month W meter, plae a water charge of 9 per 100 cu. ft., less 16%, the average annual yield per meter would be: Service Charge $7.20 14,000 cu. ft. Q 9NA00 cu. ft., less 10% - .80 Total $19.00 904 time $19..00 = $17,176.00 *Slide rule calculations for all averages and extensions. owt) - 46 - Such a two part 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 that people feel more free to use the services generously. A Two Part Rate providing for (1) A service charge of 600 per meter per month plus (2) A water charge of 9jo.per 100 cu. ft. less 10% cash discount would yield a gross return substantially identical to the rate° of 150 per 100 cu. ft. gross less 10% and would quite certainly result in increased consumption and revenue which would make further reductions possible in the near future. Table XI summarizes calculations to demonstrate the above statement. Proration of Depreciation Reserves Of the total original cost of used and useful Water Works property amounting to $161045.03, 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 as the Village's portion of the property account which forms the basis for the calculation of annual charges for depreciation. The rate 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 may determine.,-.a sum'of money equal to the depreciation reserves provided by rate structures against the Village's portion of'the property. Based on present construction, this annual payment to the Village would.amount to 2% of $72,748.76 or approximately $10455.00 per year. Hydrant Rentals There has been a great deal of discussion, both in and out of Court,. on the subject of hydrant rentals. My position today is the same as it was during the trial, to wit, that.the Utility Company is, properly,.only interested in securing a rate structure which will yield a fair return 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 are by franchise the function of the Village Council. Hydrant: Rentals are usually justified by a need or desire. to transfer a part of the cost of operating a water works system to a general tax. In communities where certain sections have a large amount of industrial.property which require large mains and fire pro- tection facilities out of proportion to the amount of water consumed 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- cipating hydrant rentals would in fact result in a serious inequity to those tax payers which would not have the benefit. of service from the water works or of fire protection from same. Hydrant rentals often tend to become somewhat of a poli- tical football, in that they are frequently included in rate schedules for the purpose of camouflaging water rates. in order that the "Administration" may "point with pride" to lower 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 recommend against 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 3305.2 .- 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 comppliance with Minn. St. '1941., Sec. 300.03,(Mason St. 1927, Seca 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 -(Sec* 1199)• Judgment affirmed as to intervener and reversed as to plaintiff. OPINION PIRSIG, Justice 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 authorizing the ins.tallation and operation of water 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 homes.ite 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 192+ to August 1927. Similar statements appeared in pamphlets which were distributed. Under instructions from Thorpe Bros., similar statements were made by'sale,smen in their negotiations with prospective buyers. Some of the buyers ap- pearedat 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 and 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 $70,000. 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, wh6 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. Gaarden 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 Gaarden purchased the remain- ing 100 shares held by them. At the same time Thorpe Bros. - 5 - �( 'transferred the 98 shares of common stock held by them to /Gaarden without, further consideration. From and after 1938, Eby these transactions, Gaarden was the sole party interested i."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, 2272 291 N. W. 104. That is particu- 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. There 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 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, 182 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 water 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. 1, 164 N. E. 62, recovery was similarly denied, but on the ground that, "having 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.'564, 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 can- not refuse to recognize and give effect to it merely because an applicable precedent 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 serve 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. From 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 the truth of the transactions. What Thorpe Bros. and their employes did in connection 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. We 905; In re Trust Under Will of Clarice, 204 Minn. 574, 284 N. W. 876; Penn A. M. Co. v. Clarkson Sec. Co. 205 Minn. 517, 287 N. W. 153 1 Fletcher, Cyc. 'Corp: (Penn. ed.) p. 154, Sec. 43. "If a corporation.is owned and controlled by another and is manipulated by the owner for its own purposes and in its own interests to the prejudice of innocent third parties, or the public welfare, it may be necessary to limit such abuse of the.corporate capacity or shield." Ballantine, Manual Corp. L. & Pr. P. 37 Sec. 6. Hence plaintiff is as much.bound by the legal consequences of the facts relating to the sale of the lots as was Thorpe Bros. The fact that (warden 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 systems and so was put,'on notice of any possible claims that'might be established. The decision of the lower court cannot be sustained for a further reasba.. 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 Fright ".to erect and maintain "fire hydrants approved by said Village Council." By this language the vil- lage did not assume a liability. It only granted a right and a privilege. Much reliance is put upon the provision that "said hydrants may also be 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 water 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 Gaarden 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 Dis. 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 should be 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. 516, 535, 284 N. W. 294) have any application where the basis of recovery is implied or quasi contract. Since plaintiff has not under the principles stated, shown a right of recovery, the question is not considered further. For the reasons stated, the judgment against the village cannot be sustained. After Gaarden had acquired his interest in plaintiff he began improving and extending the water system. For this pur- pose he obtained a loan of $20,000 from intervener secured by a mortgage upon the water system. The funds obtained were used by plaintiff mostly for the improvement and extension.of the water system outside'of Brown and Fairway Sections. In- tervention was allowed for the purpose of establishing the validity of the mortgage as against the claim of the village to ownership of the system. Before intervener would make the loan it insisted that the water franchise held by plaintiff be amended by the village so that any title which the village might acquire to the pro - perty under the provisions of the franchise would be subject to the mortgage. It insisted further that a resolution be - 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- pples of estoppel apply. Thom v.. Thom, 208 Minn. 467, 294 N. W. x+61; Barchent v. Selleck, $9 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'com ensation to the village therefor as required by Minn. St. 1941,. Sec. 300.03 (Mason St. 1927, Sec. 7+32) (see Duluth Terminal Ry,' Co. v. City of Duluth, 113 Minn. 45% 130 N. W. 18, and Larson v. Minn. N. W. Elec. Ry. Co. 131 Minn. 183, 154 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 entitled_to consider a sufficient 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 Id. Sec. 412.21 (Sec. 1199). Chisholm Water Supply Co. v. City -of Chisholm, 205 Minn. 245, 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 oonsideration,-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. 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 fora, 30 pages of appellant's brief, or all of the legal Points argued in 600 pages of. briefs of the. parties. 'Discu.c- sion has been confined to those issues which are deemed con- trolling. Judgment affirmed as•to intervener and reversed as to plaintiff. a COPY MR. OSCAR GAARDEN Defendant's Ex. 57 Consulting Engineer w. C. Ward, Reporter Minneapolis$ Minnesota 15 South Fifth St.. January 7, 1935 Mr. J. R. Thorpe 519 Marquette Avenue i inneapolis, Minnesota Dear Mr. Thorpe: I am enclosing herewith an appraisal of the portion of the water system set up in my report last June. The new appraisal will be as of June, 1935. You will note that the new depreciated value is $'130355, 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- poration. The leasing proposition would seem preferable to me. To you this plan would have the advantage of retention of own - e'rship. In the event of a lease, some agreement would 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 suggest that you think over the term 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.matters but I am thinking of the time limit of May 15th set by the Minneapolis Water 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 :ER Enc1. COUNTRY CLUB DISTRICT SERVICE CORPORATION APPRAISAL OF PORTION OF ED]NA WATER SYSTEM t, m �a YN . a .REPRODUCTION COST Annual DEPRECIATED VALUE Degrec ._ As of 6711M As of 671-1734 As of 671173-5 Item Contractor 1923 1934 1935 Rate 1923 Prices 1934 Prices 1935 Prices 75,000 Gallon Tank Lovell 7,900 $ 7,000 $ 7,000 3% $ 5,056 $ 4,690 $ 4,480 51 Hydrants Lovell 3,825 3,825 3,825 2% 2,907 2,984 2,907 50th Street Main, 1400 Ft-. Lovell 3,500 3,500 3,500 1 2,870 2,922 2,870 Land for Tank_ Thorpe 3,000 2,000 2,000 - 2,000 2,000 21000 Emineering - (Prorated) ( Bass ) 1,550 1,550 1,550 2.4% 1,098 1,140 1,098 (Pillsbury) ( Graeber ) TOTAL $19,775 $17,875 $17,875 $13,931 $13,736 $13,355 t, m �a YN . a RECAPITULATION OF WATER waR&g APPRAISAL BASED ON CRAM. nW=O0RY F%MD AT ACTUAL COMACT COSTS AIM COMPARISON WITH RECAPITULATION OF GPAEZR APPRAISAL Graber Appraisal Reproduction. Reproduction Cost Cost Less Depreciation 1923 Construction 42,656.53 *1924 33,437.79 1926 705.30 1928 " 20565.89 1936 16,749.13 Land Acquired - 1936 - — 3,000.00 Going Concern Value *Less adjustment for 8" main built in 1924 by Sanitor Cont. Co. at 2.02 per ft, 99,114.37 5,766.86 104,881.23 Excess over Actual Costs Approx. 26% Excess over Actual Cost Less Depreciation Approx. 28% 33,652.97 28,101.29 611.26 (a) 2,292.88 b) 16,513.87 c) 3,000.00 a 84,172.27 5,766.86 89,939.13 COPY Defendent's Exhibit 60 Contract Costs Actual Cost. Actual Cost.. Less Depreciation 31,977.87 29,156.16 705.03 1,662,00 16,488.96 3,000.00 24,823.54 24,592.18 (a) 611.36 b) 1,485.82 c) 16,253.70 a) 3,000.00 82,990,02 70,766.50 Nil Nil 732.97 615.69 820257.99 70,150.81 *All 1924 Construction extended at unit prices of Thornton Bros. contract and corrected for work built by Sanitor Construction Co. at lower price. (a) Appraisal figures accepted for items so marked for the reason that actual cost prices could not be isolated from lump sum contracts involving.other work. (b) Service pipe appraised in the sum of $422.40 omitted for the reason that work was built by the Villager of Edina under special assessment procedure - other work by contract between Thorpe Bros. and the.Phelps Drake Company. (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 costs were compiled from contracts and vouchers. Bate of Depreciation Applied. Mains & Hydrants 1 -1/3% Tank & Tower �� 1936 Construction - Same as Graber appraisai. COPY Defendent fs Exhibit 61 TOTAL ACTUAL COST OF WATER WCPM SYS= OPERATED BY TO COUNTRY CLUB DISTRICT . MWICE CONFANY Ilff THE TZUGE OF EDINA By extension of Graber Inventory —Using Unit Prices of Contracts $ 82,990.02 1937. Additions from. Ernst & Ernst Audit Property Account Additions. Water Division 11,275.89 1938 Additions fl= Ernst & Ernst Audit as above for year 1938 10,483.64 Total $104,749.55 Adjustment for 8" mains built by. Sanitor Construe Company 732.97 Total Cost of Water Works As of Jana let, 1939 $104,ol6.58 (Same as of March 31st, 1939 by Gearden testimony that no additions were made betteen Jan. lot and March 318t, 1939) *Depreciated Value of above property as of Jan. let, 1939, based on cost $88,1+83.12 * Calculation accepts dpreciation for 1937 and 1938 from Ernst &Ernst Audits: (Exhibits $ and 1) COPY Defendent's Exhibit 62 YWRODUCTION COST AS OF JAWJARY 1ST, 1937 COMP'U`TED FROM ACTUAL COSTS AND ADJUSTED BY LAMBRT WATMORKS COMTRUCTION COST IMX Reproduction Actual Cost Cost As Of 1/1/37 1923 Construction 178 $31,977.87 *$28,600.00 1996 192+ Construction 178 200. 29,156.16 -*.250800.00 1926 Construction 1778 705.30 660.00 1928 Construction 178.0 10662.00 1,7+0.00 171.1 1936 Construction 16 16,488.96 $81,990.02 $73,288.96 or say $73,300.00 calculations:by slide rule not accurate.beyond . tbArd diSet. l COPY Defendent's Exhibit 33EI ATIVB MMELY -VALUE OF MkM IMS 63. FARING INTO PKMICAL VALtI OF WATER WOM PLANTS. 1913 -1937 - 1913.= 100 - Lambert L913 1914 1915 1916 1 Lmd Bldge. 2.9 11.2 2.9 10.8 2.9 11.1 2.9 13.3 2.9 Equip. 12.1 12.0 14.0 17.3 2.5 22 2.6 Distr. 72.7 67.1 71.3 94.1 143.2 Misc. 1.1 1.1 1.2 1.4' 1.8 Total 100.0 93.9 100.5 129.0 187.0 *18 1919 1921 P22 Land 2.9 2.9 2.9 2.9 2.9 Bldge. 18.5 2o.6 25.6. 20.9 19.0 Equip. 23.4 24.3 26.0 23.4 21:8 Distr. :161.1. .165.8 197.8 155.8 130.1 MisC. ` 2.0 ' 2. 2.$ 2.2. 205.2 2.0 375.8 Total 207.9 215.9 255.1 1123 1924 19�5 1926 1927 Land 2.9 2.9 2.9 2.9 2.9 Bldge. .20.8 20.7 .20.6 20.7 20.2 Equip; 22.9. 23.0 22.9 22.7 22;5 Distr. 149.8 152.2 143.2 10.5 127.5 Misc. 2.2 2.0 2.1 '.2.0 '1.9 Total 19.6 200.E 191.7 1�8. 175.0 1928 1929 1930 19 '1932 Land 2.9 2.9 2.9 2.9 2.9 Bldge. 20.1 20.4 19.7 18.2 16.6 Equip. 23.0 23.2 22.3 20.9 19.5 Distr. 123.8 131.8 130.0 123.3 112.6 Misc. 11.9 �1,.� �.1� 1.6 1.4 Total 171.7 1130.2 176.E 9 153.0 ,1933' 1934 1935 1936 193 Land 2.9 2.9 2.9 2.9 2.9 Bldgs. 16.9. 18.7 18.6 18.9 20.9 Equip. 21.0 22.9 22.5 22.7 25.0 Distr. 116.8 129.7 130.7 131.8 144.8 Misc. 1.6 1.7 1.7 1.7 1.9 Total 159.2 175.9 176.4 178.0 195.5 Jan. Feb. March April May June July. August Sept. Got. Nov. Dec. Average COPY Defendent's Exhibit 64 RLIMIVE MONM Y VALE For 1937 with 1913 = 100 LAMEERT Water Electric Street Natural-, Artificial Works Light By. Gas Gas 184.7 178.6 161.3 178.0 186.4 185.1 181.8 163.8 178.2 186.5 193.0 186.5 168.4 187.6 196.4 197.1 188.1 170.3 190.1 198.2 197.7 192.2 171.2 190.1 199.3 197.9 192.2 171.4 190.2 199.3 198.0 192.2 171.9 190.2 199.4 198.4 192.6- 172.3 190.7 199.7 198.4 192.4 172.3 190.8 199.7. 198.1 191.3 171.2 190.7 199.5 198.5 190.2 170.8 191.1. 200.1 .198.2 189.4 170.4 191.1 200.0 195.5 188.4 168.8 188.3 197.1 COPY Defendent Is Exhibit 65 C TARISON 0$ C AI. CONSTRUCTION COST MECES. 1923 - 1924 -,1936 -,1237 Cost Indeces Authority for Index 1937 1923 1924 1-93& American Appraisal Co. 203. 198. 156. 183. Hplo. Area Eng. News Record 214. 215.36 206.42 236.41 Consolidated Zng. 226.7 213.8. 191.7. 202.8 Aberthaw 202. 198. 195.0 199.4 Fruin- Colman 217. 223. 187.5 210.0 Fuller, Geo. A. 190• 194.. 168.0 186.5 Turner Const. Co. 196. 194. 169.0 192.0 Tuttle 202. 202. 180. 198.5 Average excess of 1936 iadeces over 1923 - 10.6 n n n 1937 " n 1923 _ 4 COQ Defendentfs Exhibit 66 PHYSICAL VALIM OF yrAmm woam PRoPERTIES AS OF MARCH 311P 1939 BASS OR REPRO- WCTION AS OF JANUARY let, 1937 PLUS SUBMQt=T ADDITIOM AS EM CCHPANY BOOKS Reproductioni Depreciation Cost Value Reproduction Cost as of January _ 1st, 1937 - based upon costs adjusted by Lambert Index $73,300.00 $57,207.00 t 1937. Additions . 32,275.89 10,990,60 1938 Additions 10,483.64 10,450,00 - $95,059.53 $78,647.60 Less Retirements 1 Hydrant $90.00 6501 -8" main on 50th street 1,0o..o0 Meter and Meter Chamber at France and 50th 400.00 1,530.00 $77p3-17.60. Ayereze depreciation aesumsd 1.9% COPY Defendent's Exhibt ADSUSTMM IN APPRAISAL 67 . FOR 1E LaVIUD Pi�E' 23 2,14607 at .06 $ 128.70 10,322.8 at .09 929.05 ` 2,089.8 at .14 292.51 929.9 at .o6 557 +94 9,722.4 at .09 874.98 3,o6o.3 at .13 397.84 .330.8 (4 ") at .05. 16,54 59.5 (6 ") at .07 4.16 1928 348.0 (6 ") at: .07 - . 24.36 136.0.(8 ") at- .10 13.60 $ 3,239.68 995.0 (61 ) • Graber has testified he used actual coats hence they reflect 1,259.0 (8 ") ) DeLavaud pipe if used.