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The Color of Just Compensation

Fortnightly Magazine - November 15 1995

a stream located on the land of an electric company; a reservoir on property owned by a water company; a quarry pit surrounded and underlaid by natural barriers, ideal for landfill purposes. In most condemnations, the condemnee can use the proceeds to restart its business anew at a different location. But where the condemnee's business is inextricably tied to the condemned land, the business is terminated.

In utility condemnations, the value of the land in business use must often be considered if the condemnee is to be justly compensated for the taking (see sidebar).

Black Letter Rule:

Ignore income of affiliates of the condemnee.

Regulators usually limit the rate of return earned by utilities through a cost-plus formula. But state laws generally allow regulated utilities to form related companies to provide services to the utility at market rates that include market rate profits. Should "just compensation" for utility property reflect profits earned by unregulated affiliates?

Bearing in mind that a utility condemnation will often effectively put the owners out of business (since it is often difficult to reestablish the utility due to a lack of suitable sites or franchise restrictions), a good argument can be made that adjudicators should consider the income earned by unregulated affiliates when valuing the loss from the taking of regulated property.

Courts have recognized in other contexts that legal niceties must sometimes yield to achieve just compensation under the Constitution. A prevailing rule in condemnation is that damages are only to

be awarded to the owner of the property being condemned; owners of adjacent or nearby lots, under normal circumstances, cannot recover damages in the condemnation proceeding. Courts recognize an exception where there is unity of use and ownership between separate lots, and the value of the lot not being condemned has been diminished as a result of the condemnation.6

Such reasoning could, and probably should, be extended to utility condemnations, to allow compensation for the lost profits of related entities whose business is inextricably tied to the condemned property. t

William D. Grand is a member of the Woodbridge, NJ, law firm of Greenbaum, Rowe, Smith, Ravin & Davis. In a recent condemnation case, the firm obtained a $34-million award for the owners of a landfill after the condemnation authority had appraised the property at $3.5 million.

More Than ScrapSome 30 years ago, the Port Authority of New York and New Jersey condemned the tunnels and railway system that comprised the "Hudson Tubes" (now known as the PATH System). A long-standing private railway linking 33rd Street, Manhattan, with terminals in Hoboken and Jersey City, NJ, the Hudson Tubes faced bankruptcy.

It would have cost at least $100,000 to plug the tunnels. Other assets, including over 200 passenger cars, an electrical transmission and distribution system, electrical substations, and passenger stations, would have required $32 million to rehabilitate.

But the New York court went beyond black letter law and considered the value of the property in the hands of the condemnor: "A condemnor should not be permitted to tell [the former owner]: 'It's only worth scrap or less.'"Port