Holland, R. P.

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Volume 35 Issue 4 Article 7 April 1929 Public Utilities--Valuation of Leaseholds R. P. Holland West Virginia University College of Law Follow this and additional works at: https://researchrepository.wvu.edu/wvlr  Part of the Energy and Utilities Law Commons, and the Property Law and Real Estate Commons Recommended Citation R. P. Holland, Public Utilities--Valuation of Leaseholds, 35 W. Va. L. Rev. (1929). Available at: https://researchrepository.wvu.edu/wvlr/vol35/iss4/7 This Student Notes and Recent Cases is brought to you for free and open access by the WVU College of Law at The Research Repository @ WVU. It has been accepted for inclusion in West Virginia Law Review by an authorized editor of The Research Repository @ WVU. For more information, please contact ian.harmon@mail.wvu.edu. STUDENT NOTES AND RECENT CASESPUBLIC UTILITIES-VALUATION OF LEAsEHLDs.-Appellant gascompany, a public utility, has a total of 814,910 acres of gasterritory under effective control, principally by lease. Of thisamount 136,384 acres are proven territory. 126,208 acres areprobable territory, the rest being designated as improbable or un-favorable. Not all the proven territory is now in use. On the"present value" rate base theory the appellant claims that itsleaseholds should be valued at $36,449,176.00 instead of theamount fixed by the commission, $6,732,920.00, the "book value."Held, "expert" testimony, based upon assumed quantities of gasumder lease, but not yet in possession, estimated life of the fields,estimated profits in an estimated and yet to be established "un-regulated" market, is not sufficiently clear and positive evidence of"present value" to justify* interference with the findings of the)ommission. United Fuel Gas Company v. Railroad Commissionof Kentucky, 49 Sup. Ct. Rep. 150 (1929), and United Fuel GasCompany v. Public Service Commission of West Virginia, 49 Sup.Ct. Rep. 157 (1929),These decisions apparently terminate the long controversy begunby the gas company in 1917 with the intention of doubling its ratebase by an ingenious appreciation of its leaseholds. 1 W. Va. P.S. C. 504, P. U. R. 1918-C, p. 193; 1 W. Va. P. S. C. 561, P.U. R. 1920-C, p. 583. The present decisions do not question the"present value" theory of the rate base. The Supreme Court as-sumed the soundness of the proposition that present reproductionvalue of the property used-and useful in the business is to be takenas the primary factor in determining the present value. Thus thelatest pronouncements of our highest tribunal still state the theorywhich has given rise to such immense difficulties. See also, MobileGas Company v. Patterson, 271 U. S. 131, 46 Sup. Ct. Rep. 445(1926). No attempt will be made herein to point out those dif-ficulties. That has been done by many writers. See Richberg, "APermanent Basis for Rate Regulation," 31 YALE L. J. 263; Hale,"The 'Physical Value' Fallacy," 32 YALE IL. J. 710; Hale,"Pseudo-Protection of Property in Rate Cases," 24 MIcH. L. REV.166. The accepted doctrine of valuation for rate purposes flowsfrom Smyth v. Ames, 169 U. S. 466, 42 L. ed. 819 (1898). In-creasingly muddied by every new decision, the turbulent flood be-comes larger year by year. Justice Brandeis made an examinationof 363 cases taken from Public Utility Reports between the years1920-1923 and found therein eleven distinguishable methods of1Holland: Public Utilities--Valuation of LeaseholdsPublished by The Research Repository @ WVU, 1929STUDENT NOTES AND RECENT CASESarriving at the elusive "present value." Thirty-six of these casescould not be classified, due to an apparent lack of any formula.Missouri, ex rel. Telephone Companij v. Public Service Commissionof Missouri, 262 U. S. 276, 43 S. Ct. Rep. 544 (1923). However,Goddard suggests that the commissions are more willing to ac-cept an improved theory than the courts. "Public Utility Valu-ations and Rates," 19 Micn. L. RTv. 849. Because we have nocertainty in this matter every possibility is tried by the utility tothe end that rates may be advanced. The public fights back man-fully. The result is a compromise, usually without more than amere approximation to that which ought to be the base. ' Smyth v.Ames, supra, allows almost everything "to be taken into consid-eration" and in the end the result is in the sound (?) judgmentof commissions and courts.Writers almost unanimously denounce the present value theoryas a logical fallacy, depending upon artificial and metaphysicalreasoning for its support. Every man of affairs knows that thereis no value except that based upon the return for service. To hidethe "bogey" behind the so-called rule of Smyth v. Ames is onlytemporarily possible. The courts have refused to place the rulesquarely upon exchange value. Under such a theory the utilitymakes its large earnings the excuse for a higher capitalized value,that justifies an increase in rates, which in turn justifies another,and so on, ad. infinitum. The converse would also be true. If theutility earned nothing on one valuation, then the fault is in thevaluation, and to earn a return all that one need do is to makeup one's mind that the property is less valuable. The exposure istoo rapid-everyone perceives the "vicious circle." What avenueof escape is there?When one of the series of cases culminating in the decisionshere under discussion was before the West Virginia SupremeCourt, Judge Meredith expressed the regret of the court that itwas unable to follow the famous concurring dissent of Holmes andBrandeis in Missouri, ex rel. Southwestern Bell Telephone Com-pany v. Public Service Commission of Missouri, supra, whereprudent investment theory was so ably championed for the ratebase. Judge 'Meredith said, "We think the adoption of this as ageneral rule is to the ultimate interest of the utility, and parti-cularly so to all those utilities that have made heavy outlays dur-ing the past few years when prices were extraordinarily high;and that as soon as new low price levels shall have been reached,such utilities will themselves be clamoring for the adoption of thevery rule they now so vigorously assail." Charleston v. PublicService Commission, 95 W. Va. 91, 107, 120 S. E. 398 (1923). Itis not to be seriously contended that the adoption of the prudent2West Virginia Law Review, Vol. 35, Iss. 4 [1929], Art. 7https://researchrepository.wvu.edu/wvlr/vol35/iss4/7WEST VIRGINIA LAW QUARTERLYinvestment base for rates would be a panacea for all valuation ills.No theory will be that. Its adoption becomes more necessary witheach passing day, in spite of its disadvantages. See, Goddard in15 AfiCH. L. REv. 205, and also, Stanislaus Company v. SanJoaquin C. & L Company, 192 U. S. 201, 24 Sup. Ct. Rep. 241(1904), which case Goddard regards as being the final rejectionby the court of this case. It has these positive advantages: It iscertain and ascertainable; it is largely free from opinion andspeculation; and, it is comparatively constant in the face of pricefluctuations. It involves the new concept-that one who hasinvested for the public interest is entitled to a fair return uponthe value prudently invested, when invested, and to a return ofthat value when the service is finished. It abandons the conceptthat the property of the utility plus the increment, at the parti-cular moment, is the property upon which a return is to be made.What more could one ask, in the first instance, than the fair re-turn upon the money invested? What, under the present theory,will protect the utility when prices go down, as they may at anytime?The difficulties of the present theory are well illustrated in thetwo cases now before us. If it were not for the appellant's failureof proof of the "present value" of gas under lease the people ofWest Virginia would be paying nearly double the price whichthey are now paying for their gas supply. Yet the District Courtfound that the appellant was earning a fair return on about$17,000,000.00 more property than the commission said they wereentitled to earn upon. Our own court has said that when the gascompany can establish the actual present value of the gas in theground by evidence independent of the rate of return or earnings,and definite enough to be reliable, that it may include that valuein its rate base. Natural Gas Company of West Virginia v. PublicService Commission, 95 W. Va. at p. 567, 121 S. E. 716 (1924).In spite of the fact that the Supreme Court did not specificallydecide the point in the present cases, it is submitted that there aretwo objections to allowing this supposed value to become a part ofthe rate base: (1) Gas merely under lease is not "property" inthe rate-making sense. Hickenlooper, J. said, "Not only are per-colating waters and oil and unrecovercd gas in the ground notthe subject of owneiship until recovered, but, if the subject ofownership, such gas is the property of the owner of the fee untilrecovered. Not only has such gas no value unrecovered in theground, but such value as it might have would seem to be theproperty of the lessor." United Fuel Gas Company v. RailroadCommission of Kentucky, 13 Fed. (2d) 510 (1925), citing thereinHeadley v. Hoopengarner, 60 W. Va. 626, 55 S. E. 744 (1906).3Holland: Public Utilities--Valuation of LeaseholdsPublished by The Research Repository @ WVU, 1929STUDENT NOTES AND RECENT CASESIt is very clear that there is a substantial difference between gasin untested fields and the tangible equipment of this company. Itwould be decidedly unfair to the public to allow the utility tohold immense tracts of acreage under lease at a value of some$200.00 per acre, at a cost of not more than $5.00 per acre (delayrentals being charged to operating expenses and paid annually bythe public) for by this means the utility could earn approximately$28.00 per annum ($200.00 multiplied by the 14% return on thebase which was allowed). Further injustice could result if theutility should abandon the leases after several years, when the publicwould have paid in more than even their inflated value. (2) Asidefrom the question of property, it is submitted that this is a merecapitalization of earning power, which the court has refused tosanction under any circumstances. The true limit of the "presentvalue" theory, even here, would seem to be the present value ofleaseholds in the market. Uncontradicted evidence in these casesproved that the gas company had acquired leasehold rights during1921 to 1923 at an average price of 83 cents per acre, and that in1923, 15,184 acres were taken at a cost of 66 cents per acre. Asbefore stated, delay rentals were paid by the utility and chargedto operating cost. The whole investment amounted only to a fewdollars per acre-and the public was asked to double or treblethat amount annually in the form of rates on supposititious values,payable into the company coffers.-R. P. HoLLAwq.CONTRACTS-ALTERNATIVE PERFORMANES-DAMAGES.-An in-teresting subject, about which there is an apparent conflict amongthe authorities, is that of alternative contracts, i.e., such as bytheir nature may be executed by doing either of several acts, atthe election of the party from whom performance is due. Com-pletion of one of the modes, at the option of the promisor, is aperformance of the entire contract. Where one of the modes ofperformance is to pay a sum of money however, considerabledifficulty arises in determining whether it is still a true alternativecontract, or merely a contract providing for liquidated damages.If the former, then by one rule the measure of damage for breachof the contract is the value of the least onerous alternative, on thesupposition that had the promisor performed, he would have takenupon himself the discharge of the alternative the most beneficialto himself.1 Thus the promisee has only been damaged to that1 WII=STON, CONTrAcTS (1920) §1407.4West Virginia Law Review, Vol. 35, Iss. 4 [1929], Art. 7https://researchrepository.wvu.edu/wvlr/vol35/iss4/7

Public Utilities--Valuation of Leaseholds

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Public Utilities--Valuation of Leaseholds

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