Memo from Edward C. Renwick to E. E. Bennett about the purchase price given to the Las Vegas Valley Water District, August 26, 1952

Memo to E. E. B.: August 26, 1952 80-11 Re: Differences between rate base fixed by Nevada Public Service Commission in Decision of August 13, 1952, and reproduction cost valuations made by L. R. Maag and James M. Montgomery. In its decision of August 13, 1952, the Commission fixed a rate base for the combined production and distribution system of $1,197,220. In doing so the Commission ignored entirely any figure submitted of the original cost of such facilities, which was somewhat higher, and the figures submitted showing the present value of the same facilities, which were very substantially higher than the book cost. There are some errors in the Commission's figures which I will refer to hereafter, but disregarding them for the time being, it can be said that the Commission's figures represent the average of the book cost as of December 31, 1950, and December 31, 1951, of 679.42 acres of land and those portions of the production and distribution systems which were capitalized when constructed, less accrued depreciation deductions made by the Commission plus $30,000 for water rights and $20,000 allowance for working cash and materials and supplies. The Commission's figures have nothing to do with the sale price of land and plant any more than the cost to some householder in Las Vegas of building a house ten years ago upon a piece of land acquired by him in 1902 would have to do with the present market value. As you know, most of the land included in the rate base estimates of the Commission was purchased in 1903 or 1904, and a substantial part of the production and distribution systems has been constructed at prices lower than the present costs of construction. Furthermore since the Commission averages the year-end book costs of 1950 and 1951, it is apparent that its figures do not represent even the book cost as of December 31, 1951. Furthermore the Commission's figures disregard entirely any capital expenditures made to date in the year 1952. We are selling to the District many valuable facilities which were never capitalized on the books of the Railroad or the Water Company, and therefore the Commission's figures do not reflect even the cost of such facilities. With respect to the railroad production facilities these non-capitalized items include such things as maintainer's shanty and dwelling, roads, most fences, dikes and ditches and pavement work. With respect to the Water Company facilities these non-capitalized items include service connections and the Marlin and 14th Street lines. The Commission's figures represented depreciated book cost. The deductions for accrued depreciation of the production facilities of the Railroad made by the Commission were excessive because they represent the depreciation which Roy Wehe computed upon the original cost of such facilities, which was higher than the accrued depreciation which he had computed upon the book cost of such facilities. With respect to the distribution system the deductions for accrued depreciation made by the Commission included the amortized defense plant facilities, which have been completely written off the books, but which are facilities which actually have substantial present value. In arriving at its rate base figure the Commission also deducted $206,400 as advances in aid of construction. This is the same deduction which Roy Wehe took from the capital base for the purpose of arriving at a rate base and represents approximately 70% of the unre-funded advances existing in the period covered by the Commission's figures. If you were going to consider book values at all, you should consider the true book value of the properties as of the present time. Mr. Hulsizer's letter to Mr. Stoddard of July 2, 1952, attaches a schedule showing the ledger value of 507 acres of land and of the capitalized production and distribution systems. His figures also include approximately $15,000 as the ledger value of office furniture and work shop and equipment. The total undepreciated ledger value of the production and distribution facilities plus 507 acres of land as of June 30, 1952, is shown to be $1,861,039.12. The actual accrued depreciation charged off on the books on these facilities, including the defense plant amortisation, totals $431,630, leaving a depreciated book value of $1,459,408 as of June 30, 1952. If you were to add to this figure the undepreciated portion of the amortised defense plant facilities, you would add approximately $140,000. Furthermore if you were to add to Mr. Hulsizer's figures the present value estimated by L. R. Maag of the portions of the production and distribution system which were never capitalized and are therefore not reflected in Hulsizer's figures, you would add approximately the following amounts: $53,000 for uncapitalized Railroad improvements such as fences, ditches, pavement work, 152,000 for service connections alone owned by Los Angeles & Salt Lake Railroad Company, 13,000 for the Marlin and 14th Street lines, which were not capitalized. If you were also to add the difference between the book cost of 507 acres of land and the present value estimated by Mr. Bates, you would add $253,543. These few adjustments increase Mr. Hulsizer's depreciated book value to $2,030,951. Of course this is not a proper figure upon which to base sales value since it represents depreciated book value of capitalized items of plant, present value of land and present value of uncapitalized facilities in the production and distribution system plus an adjustment to reflect the true depreciation in the defense plant facilities. This figure still does not represent the present cost of constructing the production and distribution facilities which are included in the investment accounts of the Railroad and the LVL&W Company. The only valid way to determine the present value for purposes of sale is to determine the reproduction cost of such facilities less proper allowance for accrued depreciation and add to that the market value of the land which will be sold. This is what Mr. Maag and Mr. Bates did. The statements attached to Mr. Maag's letter to Mr. Reinhardt of August 7, 1952, show that Mr. Maag estimates that the depreciated value of the production and distribution facilities as of May 1, 1952, is $2,841,926. Adding the present value of 570 acres of land of $267,650 brings the present depreciated value of the property to be sold to $3,109,576. The estimated unrefunded amounts of advances by subdividers is $338,082, leaving a net Railroad value of $2,771,494. Mr. Montgomery's estimates of the present depreciated value of plant amount to $2,794,561, from which should be deducted $89,057 for depreciation from December, 1950, to May, 1952, because Mr. Montgomery claims that his figures are based upon present values and the figure of $2,794,561 does not include depreciation deductions for the period mentioned. When the present value of land is added to Montgomery's figures, it will be seen that Montgomery's valuation amounts to $2,973,154, which is only approximately 4% lower than Maag's comparable valuation of $3,591,576. The statements attached to Maag's letter also show that Mr. Montgomery has suggested some other further deductions which might be made for purposes of sale discussion. These are really faulty deductions and do not represent proper deductions from a reproduction cost value. They were merely offered by him as trading talk. For instance he suggests that the overhead costs including freight included in the value of production facilities be deducted. This amounts to $222,357. He also suggests that the item of $76,564 as the estimated cost of removing and replacing pavement in the construction of new system should be eliminated. He also suggests that the District be given credit for the charges paid by customers for installation of service connections totaling $34,385. When all these deductions are made from Montgomery's figures and also the unrefunded advances by subdividers are deducted, Montgomery's figures show a net present value of $2,301,766 as compared with a comparable figure furnished by Maag of $2,771,494. E.C.R.