For the Atlantic City Sewerage Company, Autenrieth & Wortendyke and Thompson & Lloyd (Joseph F. Autenrieth, of counsel.
For the City of Atlantic City, Samuel Backer.
For the Board of Public Utility Commissioners, John A. Bernhard (Frank H. Sommer, of counsel).
Before Brogan, Chief, Justice, and Justice Heher.
The opinion of the court was delivered by
HEHER, J. The Atlantic City Sewerage Company and the City of Atlantic City have sued out cross-writs of certiorari to review the judgment of the Board of Public Utility Commissioners disapproving a proposed schedule of charge for the Company's various services and directing the submission of a revised schedule "so designed as to produce on the basis of present billing data, together with reasonable charges for air conditioning and refrigeration service, an increase of not more than $28,000 in annual operating revenue." The determination was predicated on findings that the fair rate base as of October 31st, 1940, including the "estimated expenditures subsequent to that date necessary to complete" a chlorination plant demanded by the State Board of Health, was $2,500,000; that the Company "is entitled to earn" thereon "at the rate of 6 per cent., or $150,000 per annum;" that the "estimated annual return" under the pre-existing rates, less adjusted operating expenses, chlorination expense, amortization of rate case expense, taxes and depreciation, is $129,716, or $20,284 less than is just and reasonable; that the Company is required to pay a franchise tax of 5% on operating revenue and a federal income tax of approximately 24% on net taxable income; and that therefore an increase in operating revenue of $28,013 is requisite to realize the prescribed additional return of $20,284.
It is the insistence of the Company that the proofs establish a rate base value of $3,000,000, entitling it "to an increase in rates in the sum of approximately $160,000, designed to be raised by its proposed schedule of rates," and that a lesser valuation for rate purposes would be confiscatory. The municipality, on the other hand, maintains that there is no rational basis in the evidence for a finding of a rate base in excess of $2,300,000, and that the rate increase granted by the Board is therefore arbitrary and illegal. [128 NJL Page 362] The company is a public utility as defined by R.S. 1937, 48:2-13. It was incorporated on December 28th, 1888, and has ever since rendered sewerage service in Atlantic City. This municipality comprises a group of irregularly-shaped sand islands. Its highest point is about six feet above high water; and in places tidewater is found at three to four feet below the surface. It is bounded by the Atlantic Ocean on the east; and a tidal channel known as the Beach Thoroughfare separates the islands from the mainland on the west. Its permanent population is approximately 70,000, but at times during the summer season it increases nearly to 500,000. Concededly, the physical conditions and the extraordinarily large fluctuation in population have given rise to constructional and operational difficulties. The original collecting system was designed to serve what is now the principal commercial and hotel section of the municipality, located on the main island. It provided for a deep receiving well and pumping station at Baltic and Chalfonte Avenues. Sewage flowed by gravity to the pumping station, whence it was conveyed by pumps to filters on the meadows northwest of the city. In 1897 the disposal works were moved to City Island, where the Company's treatment plant is now established. The growth of the city required an expansion of the sewerage system; and the area now served is slightly less than three square miles. The facilities for the disposal of sewage in the Chelsea Heights section are owned by the City, but operated by the Company under a contract with the City. There is no physical connection between the two systems. There are four pumping stations, one in each of the four principal districts comprising the service area. Except during the summer season, all the sewage is treated at the City Island plant and then conveyed through twelve sedimentation tanks, whence the effluent is discharged into the Beach Thoroughfare. The sludge from the tanks is removed by pumps, dried, and devoted to the raising of the elevation of the surface of City Island. When the summer flow is beyond the capacity of the City island facilities, the excess is treated at a pumping station situate on Texas Avenue, whence it is discharged into the Beach Thoroughfare. The Company's collecting system
includes 81 miles of pipe, chiefly terra-cotta, ranging in size from 6 to 66 inches. The mains are laid at depths varying from near the street surface to 14 feet. The force mains consist of approximately 7 1/2 miles of cast-iron pipe, mostly class B, ranging in size from 10 to 36 inches in diameter. The number of service connections has increased from 1,849 in the year 1891, to 13,021 in the year 1940.
I. Valuation of Property:
The Company submitted two valuation bases -- (1) plant reproduction cost new less depreciation, amounting to approximately $3,400,000. These are termed "yardsticks designed to reflect the 'present value'" of the property as a rate base. The City's estimate of "reproduction cost new less depreciation" is condemned as grounded on "average prices" and an "excess in the depreciation reserve;" and the vice of the Board's valuation is asserted to be the acceptance of the original cost of the property without attempting "to trend" such "cost to reflect prevailing prices at the time of the inquiry."
We concur in the Board's appraisal of the property as the fair value base. Its own expert calculated the original cost of the property, less depreciation, at $2,075,985.49; and there is no reasonable basis in the proofs for a finding in excess of that sum. Although they were in substantial agreement as to the inventory, and there was a common assumption of reproduction cost in a two-year construction period, the Company's expert estimated the reproduction cost of the physical property on the basis of the prices prevailing "at the time of the inquiry," less depreciation, at $3,031,925, while the City's expert, using prices "current on October 31st, 1940," fixed it at $2,745,629. The former made an addition of $400,000 for "going value," or a "total reproduction cost new, depreciated as of the time of the inquiry," of $3,431,925. The latter considered $250,000 entirely ample for this item, or a total of $2,995,629. Such, it seems to be conceded, fairly represents the reproduction cost new, less depreciation, "at the time of the inquiry." But this witness deducted $290,000,
"due to the use of price levels higher than average price levels;" and this is assigned for error. The witness made a further deduction of $433,000, the difference between what he conceived to be the quantum of actual physical depreciation and the accrued reserve for depreciation entered on the Company's books. The Company's engineer estimated the depreciation at $998,819; the City's at $555,000. One of the Board's engineers, whose qualifications are unquestioned, fixed the original cost, less the adjusted depreciation reserve as of ...