Data for Valuation of Warren Water Plant

Data for Valuation of Warren Water Plant

At Warren, Ohio, a report has just been submitted declaring the present worth of the plant of the Warren Water and Light company. This report was made after a thorough study of the plant by competent engineers, at the solicitation of the municipal authorities. The findings of the engineers with regard to the value of the plant, are of special interest in that there are numerous combinations of water and electric plants throughout the country. Furthermore, some pertinent observations are submitted as to the value of the water power used as compared with the steam power of the plant, and the whole schedule of values is worthy of study by those having to do with water plants in cities similarly conditioned with Warren, a place, according to the 1900 census, of 8,500 inhabitants.

The report of the engineers, together with a tabullar recapitulation in figures, are as follows:

To the Board of Public Service of the City of Warren, Ohio.

jentlemen :—Pursuant with the request contained in the letter of your chairman, dated August 4, 1909, and in accordance with our promise we enclose herewith a copy of the consolidated schedule of the property of the Warren Water and Light company, showing the values placed upon the physical structures of the water and electrical plant separately; also the value of the real estate and tlie business or “going value,” and tlie final determination contained in our report of August 4. amounting to $442,811, of which $267,650 is chargeable to the water plant and $174,661 to the electrical plant.

To properly appreciate the full bearing of the majority report it is necessary to direct your attention to the basis of the estimates, and the principles-followed by us, as well as to certain other matters, more or less negative in their influence to which we gave consideration.

The more important matters will be considered under special heads.

  1. Structural values have been determined in the usual way, by estimating the cost of reproducing the several parts of the plants, as of the present time and at present prices of labor and material, as if each part was new. The age of each part was ascertained and its life fixed as nearly as possible, by determining its usefulness as an operating element of the plant, dating from the time it was installed. Jn doing this consideration was given not only wear and tear, but also to actual and prospective obsolesence.
  2. The depreciation was then determined as a mathematical problem, by ascertaining what sum placed anually in a 4 per cent, sinking fund during the whole life, will equal the estimated reproduction cost. The amount of this annual fund for the period of the age of the part, compared with the total costs, gives the per cent, of depreciation.

  3. The land value for the water plant, $7,500, includes the value of the water rights for the city supply, and that for the electric plant, also $7,500, the water right for a boiler supply and condensation purposes, but no value for water power purposes is allowed in either case. The land for the electric plant aiso includes side track privileges and right-of-way.
  4. The valuation of the company’s water power rights was considered first in relation to the operation data furnished by the company supplemented by some tests * made by the hoard, and second by the run oft from the drainage basins of the Mahoning river and other Ohio streams.

The company’s water power installation consists of the one 61-in. Trump turbine, which operates a power pump and is also so geared with the electrical machinery that any surplus water power is used to generate electricity, and when the water power is deficient, the pump is operated in whole or in part by the steam engines.

During the year 1908, 87 per cent, of the city’s water supply was furnished by this power pump, but what proportion of this was done by water power is not definitely known.

The water wheel record shows that during the last three years it was in operation an average of 6,160 hours per year, but for the most of the time it operated with a very lim ited supply of water because the run off was insufficient to develop the full power of the wheel. The engineer at the works is of the opinion that for an average the wheel operated at half gate.

Paper read at the 29th annual convention of the American Waterworks Assn.: June, 1909.

By actual tests made by us, we found that with a 6-ft. head and a half gate, the net power m pumping is about 26 k. w. or 160,000 k.w. hours per annum. The value of this in the saving of coal is barely enough to pay the interest and depreciation on the cost of installation, including the dam, estimated at $12,200. The cost of raising the head to 8 ft., and of increasing the installation, would in our opinion, fully offset any advantage to be derived thereby, notwithstanding the fact that the labor cost of operating the plant would be and is nothing, because the attendants of the steam plant run the water plant without additional aid.

We also considered the value of the water power as shown by steam measurements made by the U. S. Geological bureau, first obtaining all the available records which have either a direct or inferential bearing upon the subject.

The drainage area above the dam at War ren is approximately 560 sq. miles. A run off ot one-half a cubic foot per second, if properly utilized with a head of 8 ft., would give a con tinuous power of about loo k. w. at the switch board, but probably less than half of this would be utilized because of the low load factor of the plant and because floods destroy the power entirely while they last. But the most un favorable condition is that for more than half of the time the average monthly run off from the basins of the Ohio rivers such as the Ma honing, the Muskingum, the Scioto and their branches, is greatly under one-half a cubic foot per second per square mile, and that it irequently falls below one tenth of a second foot per square mile.

It may safely be said that a development of over 50 k. w. capacity with 8-ft. head for drain age area of 560 sq miles would he money thrown away under any conditions, and that a development of this magnitude at the dam site of the Warren Water and Light company, would barely pay for itself with no charge for station labor against it. If the usual labor charges incident to independent stations were made there would be a loss even in a plant of such small magnitude. The present installation, inexpensive without station labor charges, would entail a loss if there had been no dam when the property was acquired. Such considerations as these have led us to the conclusion that water power rights on the Mahoning river are without value, and we have hence given no value to that owned by the Warren Water and Light company. It Ma honing river has value as a water power, then we have wronged the water company in not giving it a value in our schedule.

The going or business value allowed in the estimates is $30,000 for the water plant and $10,000 for the electric plant. It must not be assumed, however, that these sums are as great as the actual going value of the respective plants. As a matter of fact they are but a fraction of the true going value.

Going value is peculiarly an attribute of pub lie utilities and it represents the potential earning power of a plant that has accumulated or acquired a private business by years of operation.

T he measure of this value is the difference between the net earnings of the plant in opera tion having acquired a business, and the net earnings which a new hypothetical plant could make, the construction of which was begun at the time of valuation, the comparison covering the period between the time of valuation and that time in the future when the net earn ings of the two plants became equal.

The meaning of this can best be illustrated by the concrete example of the electrical plant belonging to the Warren Water and Light company.

In considering this question, it must be kept in mind that the net earnings to be considered is the revenue from private sources only and omitting that derived from the city contract lor lighting streets.

ssuminp the city of Warren in every re sped the cit it is today, with the present population and rate of growth, the waterworks. the gas works, the various manufactories in operation, except that no electric plant has been installed, it is manifest that the houses and streets would be lighted in some other way than by electricity, and the manufactories would not be using electric power. I his then would be the clear and unoccupied field, in which the hypothetical electrical plant is to be installed, the net revenue of which is to be compared with the net revenue of the present electrical plant continuing in opration.

Such a field, if presented to the city today, would be analagous to the one entered upon by the Warren Water and Light company in 1890.

It the city should begin the construction of an electrical plant costing $165,000, the approximate reproduction cost of the present plant undepreciated, in such a field, no one would doubt but that it would take many years to acquire a private business equal to that of the present plant today and that before the two plants could be supposed to have equal net earnings still more years would elapse.

I he difference in the yearly net earnings of the two such plants from the present time until they were equal, reduced to the present worth, would show the advantage of taking over the present operating plant, rather than starting a new one in a clear and unoccupied field.

This i, the “going value.” That is the value due tn the operating plant being a going con cent and having years of acquirer! revenue, which can not be eparated front the plant, but which must enhance its value.

A scientific study of the past operations of the present plant in relation to the population ot the city, enables deductions to be drawn which furnish a means of computing the “go ing value with accuracy cloudy approaching that with which the structural physical value can be determined.

The first electrical installation of the War ren Water and Light company was completed about 1891 and the west side plant in 1899.

I he first installation cannot be considered adequate for the then size of the city, in order that re nue should be acquired at a normal rate. 1 he trend of the revenue curve shows that to discover the normal rate of acquiring revenue in Warren, the plant should be consulered ahaving been put into operation in 1894. n this basis, using the year 1894 as the year with which to begin, it would appear that it took the present plant:

i years to acquire $1 of private revenue per capita; 9 years to acquire $2 of private revenue per capita; 12½ years to acquire $2 of private revenue per capita; 15½ years to acquire $4 of private revenue per capita.

If this rate of acquiring private revenue is credited to the hypothetical city plant, and tingoing value is computed on this basis, it is found to be approximately $250,000, which may be termed the probable gross going value of die present plant continuing to opperatc under the ordinary and proper conditions for a public utility.

To realize this amount it would take 15½ years but the total sum represents the present worth of the annual values.

W r ne would contend that under any circunistaiH.es should such a sum enter into an appraiseiihnt, for various reasons which there is not now time to enter into.

I is sufficient to say that with a plant that has been in operation from 20 to 25 years the city should, generally speaking profit by this element of value, more largely than the owners of the plant being valued.

If. instead of assuming that the hypothetical city plant attained revenue at the same rate per capita as the present plant has done, it is credited with obtaining it three times as fast; that is that its rate will be:

$t per capita in 1.66 years instead of 5 years; $2 per capita in 2.00 years instead of 9 years; $8 per capita in 4.20 years instead of 12½ years; $5 per capita in 5.20 years instead of l years. I he going value would be about $100,000 As before stated, we have allowed in our finding only $40,000 of going value.

1 he foregoing figures give some idea of the enormous advantage the city of Warren has gained in contracting with the present company to do the pioneering, and by having an operating plant with its present acquired earnings to take over rather than to start a plant of its own in a raw field at this time.

This advantage becomes more apparent when we consider that if the city acquires this plant at our valuation of $174,661, and should proceed to discard all of its physical parts replacing them immediately with new ones, it would still profit to an amount approximately of $non, the difference between $250,000 of business value and $105,000, the full reproduction cost.

Similar results could be shown by considering the water along analagous lines.

I’he legal warrant or considering that a public utility plant is enhanced by reason of its acquired business and that it should be included in :m appraisement, was once for till established in Judge Brewer’s decision of the Kansas C ity case (see J. S. Fed. Reporter 62-853.) 1 he franchise of the waterworks company had expired some two years before this decision rendered, and of the $3,000,000 judgment rendered by the court, at least 20 per cent., or $600,000 was what is now termed “going alue.”

The court specifically ruled that no franchisc value could he allowed. Judge Brewer says in this opinion that the city “steps into possession of a property which not only has the ability to earn, but is in fact earning. Jt should pay, therefore, not merely the value of tile system which might he made to earn, but that t a system which does earn.”

Since tin Kansas C ity decision there has been no difference of opinion relative to this subject, expressed by courts, and no question in the minds of competent and fair-minded appraisers, that to force the sale of a public util tty, at its depreciated structural value, with no allowance for accumulated business value, is wholly inadtnissuhlc, is no more justifiable than it would be to take a like portion of the physical plant without compensation.

5. Franchise value was given no consideration by us, as it was specifically inhibited by the terms of the ordinance of June 19. 190$, under which we derived our powers to appraise ihis property.

WATERWORKS.

Tin method of valuing the waterworks has been hereinbefore described, but there are certain matters connected with the operation t this ph nt which are unique, and which tend to establish the fact that everything considered our valuation of $267,630 is none too great.

It is particularly noticeable that there is in our experience scarcely a parallel to the cheapness of the service rendered by this plant w hen its quality is considered.

e have at our disposal statistics of 27 mini icipally owned and operated waterworks plants, pump supply scattered over the country from the extreme New Fngland states to Cali fornia end Texas. The average population of the citii s ow ning these plants was 99,171 per city at the time the statistics were collected, the average age of the plants was 35 years, and the average investment was $2,400,000 per city.

We also have statistics of ten privately owned waterworks besides Warren, with an average population of 1t,320, an average age of 22 years, with an average investment per plant of $290,000, this sum being the average appraised value of the plants made either by Mr. Williams individually, or receiving his sanction a: a member of a board making the appraisements, and into which there entered the same elements that make up the Warren appraisement.

In the matter of the cost of public service which generally includes not only tire service, but the supply of the public buildings it is shown that per mile of main the 27 municipal plants cost $306 per mile: the ten company plants cost $250 per mile; city of W arren plant cost $134 per mile.

In obtaining the cost per mile of cities having privately owned plants, to secure public service, the taxes paid by the companies are taken from the hydrant rental, as the taxes re imburse the public authorities largely and reduce the cost by that amount.

Jt is noticeable that Warren secures service for about half the cos? to other cities having privately owned plants; also that the privately owned plants generally give public service cheaper than the municipal plants.

In the matter of private service the compari on stands as follows:

Revenue collected per tap, municipal plants, $17: revenue collected per tap, 10 companies, $19; revenue collected per tap, Warren, $14.

Notwithstanding the fact that all the Warren water supply is filtered in an expensive manner, it is seen that the rates collected are much below the average in other cities whether supplied by companies or municipalit ies.

Notwithstanding that the rates are lower in W arreti, there is more collected per capita showing that the company has succeeded in introducing its writer more generally than is usual.

The relation of operating expenses to revenue are as follows:

The foregoing comparison establishes the fact that the city of W arren has fared better than usual with cities as regards their water supply.

The amount paid for public service is so small that it is strange that the city has not had to endure unusually poor lire protection. That it has not been badly served can only he due to the general use of water for domestic service and the economy with which the plant has been operated.

FK city a a municipality can certainly claim no cred’t for the favorable conditions that exist. ami if there had been any deficiency in lire service, it must be found in the utter inadequate compensation paid therefor. Good fire service should not have been expected for less than twice the hydrant rental paid in a city where general rates are low.

Ihe franchise of the 11 ydro-Electric company was urged by one member of the board as negatively affecting the value of the electrical plant, but after due consideration of the laws of Ohio relative, to the power of municipalities over public service corporations, and the sequence of certain ordinances passed by the council relative to the general subject, we decided as between the city of Warren and the W arren Water and Light company, no such consideration should be permitted to enter.

Flic fact that on the 19th day of June, 1908, the council passed the ordinance “No. 21” providing lor the appraisement of all the property belonging to the Warren Water and Light company, with the evident purpose of the city purchasing the existing water and electric plants anil that it was not until July 17. 1908, that the franchise was granted to the HydroFleetric company, and that since then the appraisement has been carried forward under the provisions of ordinance 21 indicating that so far as the purpose of the city is expressed by the acts of the council it was to establish the Hydro-Electric company as a competitor to the city in furnishing electric current to the inhabitants of the same.

W till the ample powers possessed by the city to regulate rates if unreasonable in amount, or if discriminating, and to compel adequate service, if it is poor, it is inconceivable that the Hydro-Electric company ordinance was passed to break or-to prevent a monopolv in electric current.

Bu whatever the purpose may have been, in view of the fact that public service corporation . are recognized by sound law and sound economics, as servants of the city, which are entitled to fair treatment and that no city has ever secured good service and cheap rates from a public utility under competition, it is evident that it would be unsound morals which would aid a city in profiting by an act which can only bring injury to a servant that has at the least given fairly good utilities, always lead to higher rates or poorer service or both. Hence the city suffers alone.

the ordinance under which we acted in appraising the property of the water company requires that a copy of our finding made on the fourth he given both to the city and the company, we construe otir duty to both parties to be that whatever is furnished to one should be furnished the other, we will hence send the company a copy of this report.

In conclusion, we desire to express our highest appreciation of the courtesy which we received at your hand, and of the valuable work done by your city engineer and the superintendent of the Warren Water and Light company, in preparing an inventory and aiding in making computations.

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