Cost of capital is often a contentious issue in utility ratemaking. This is due, in part, to the inexact nature of the tools available to financial analysts and the considerable room for divergent...
The Color of Just Compensation
Government agencies sometimes condemn privately owned operating utilities for their own use. Water companies, landfills, hydroelectric plants, and transportation lines are examples.
But these cases pose a problem: How to measure "just compensation," especially when regulators set the rates charged (and profits earned) by a privately owned utility at artificially low levels, even when the commodity is scarce and the need for the service high. What elements underlie valuation when there are no recent sales of similarly situated, or "comparable," utility properties to look to?
Courts emphasize flexibility in setting "just compensation" under the Fifth Amendment and similar provisions of state constitutions. Yet, all too often, condemnation commissioners and trial courts adhere to "black letter" rules of valuation. In fact, many circumstances compel a variation (em a "toning" (em of the black letter law.
"Value," or "market value," is ordinarily measured by the purchase price that, in all probability, would emerge from fair negotiations between an owner who is willing, but not forced, to sell, and a buyer who is willing, but not forced, to buy. That definition raises another question: What is the highest and best use to which the condemnee could legally have put his property?
Fact-finders normally employ three methods to determine market value: 1) the comparable sales approach, 2) the reproduction cost approach, and 3) the capitalization of income approach. In most cases, these methods are applied mechanically. The adjudicator examines comparable sales; if there are none, it looks to reproduction cost minus depreciation or capitalization of income. Other "rules" of condemnation often come into play: "The value of the property must be determined based upon the value in the hands of the condemnee, not in the hands of the condemnor"; "Comparable sales is always the best indicator of value"; "The business profits of the condemnee cannot be considered in determining value"; and "Lost earnings of related companies are not to be considered."
Nevertheless, courts have recognized that "just compensation" is not always a black-and-white process. Sometimes the "light" of the circumstance must be allowed to tone the black letter rules.
Black Letter Rule:
Measure value of property in the hands of the condemnee (utility),
not the condemnor.
What if regulation depresses utility rates? In that case, should adjudicators look to the prospective unregulated income of the condemnor as an indication of value? The answer depends on the circumstances.
Nichols, in his treatise, Eminent Domain, frames the issue as dependent upon whether price controls create a market that is "purely artificial," or whether regulations leave standing a "free, open, and competitive market."1 The U.S. Supreme Court has put it this way: Where price regulation and control create a special hardship, such pricing may not form the basis of a determination of just compensation.2
So when does price regulation create a special hardship? If the price regulation does not cover all similarly situated utilities, or does not effectuate the valid governmental purpose throughout the franchise area, then fundamental fairness should demand reliance on unregulated rates to set just compensation.
For example, suppose that a particular state regulates the "tipping