Hard-and-fast ring-fencing rules are not the best way to maintain order in the partially deregulated utility sector.
In 1992, my...
The Color of Just Compensation
fees" charged to solid waste haulers for disposal at privately owned landfills, but not at public landfills. Suppose further that 18 out of 20 landfills in the state are public and, being unregulated, charge an average of $80 per ton to tip. Suppose regulators had set a tipping fee of only $40 per ton at a privately owned landfill subject to condemnation. Clearly, the hearing commissioners in the condemnation case should look beyond the regulated rate. If the $80-per-ton tipping fee reflects the market, commissioners should use that higher fee to capitalize income to set property value. This result violates black letter law, but satisfies notions of fundamental fairness.
Similarly, in a recent New York case, the court affirmed a condemnation award reflecting the full value of property operated as a landfill, even though a municipal ordinance banned private landfills, which had led the municipal condemnor to offer compensation only for the property's next best use (em as a county recreational area. It declared that, "an owner whose property has been taken is not to be limited to the use he made of the property, but is entitled to the market value based on the most advantageous use, even though the owner may not have been utilizing the property to its fullest potential when it was taken."3
When a condemning authority takes a utility by eminent domain, condemnation commissioners should consider the value of the utility in the hands of the taker. The black letter rule that shuns this consideration has no place where the market of owners and operators consists largely of governmental agencies. Thus, the relevant inquiry in these cases should be: What would the government pay voluntarily to purchase the utility if it had no condemnation power? If the agency believes that it needs to provide the service, it would probably pay an amount approaching, but somewhat less, than the cost to establish the utility itself, plus an amount representing the risks involved in constructing and establishing a new business (entrepreneurial incentive), minus depreciation.
Moreover, the acquisition of a utility by a governmental agency may result in increased profits because of a synergy between the new utility and an already owned utility. If the government owns a sewage plant, for example, it might use the treated sludge as cover material at a landfill it acquires instead of paying for disposal, at substantial savings. Also, landfill operators can sell the methane gas byproduct as a fuel. These factors are relevant in determining what a non-coerced buyer (em in this case a governmental agency (em would have paid after negotiations with a non-coerced seller.
Black Letter Rule:
Disregard profits of business conducted on the property.
While it has been said that business profits are inadmissible evidence of the value of the land on which the business is located,4 this rule often proves unjust in utility condemnations, since the condemnation effectively ejects the owner from its business.
It is unjust because the value of a utility is often inextricably tied5 to the unique characteristics and income-producing capabilities of the land itself (em