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Rangeley Water Case, corrected 4-2-97
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MAINE SUPREME JUDICIAL COURT				Reporter of Decisions
Decision: 1997 ME 32
Docket: FRA-96-161
Argued October 10, 1996
Decided February 28, 1997

Panel:  WATHEN, C.J., and GLASSMAN, RUDMAN, and LIPEZ, JJ.

RANGELEY WATER COMPANY v. RANGELEY WATER DISTRICT
LIPEZ, J.

	[¶1]  The Rangeley Water District appeals from the entry of a
judgment in the Superior Court (Franklin County, Mills, J.) adopting the
report of the referee appointed by agreement of the parties to value the
assets of the Rangeley Water Company (Water Company) after such assets
were condemned by the Rangeley Water District (Water District).  On appeal,
the Water District challenges the referee's valuation of the assets of the
Water Company and his inclusion of the Lakehause water line as a Water
Company asset.  The Water Company cross appeals, challenging the referee's
valuation of its assets.  Finding no error in the judgment of the Superior
Court, we affirm.  
Background
	[¶2]  The Rangeley Water Company was created in February of 1905 by
an Act of the Legislature to serve water customers in the Rangeley Lake area. 
P. & S.L. 1905, c. 44.  Immediately before the assets of the Water Company
were condemned in 1993, the utility served about 385 customers.  The
Rangeley Water District is a quasi-municipal corporation formed in 1992 by
the Legislature.  P. & S. L. 1991, Chapter 72, § 1 (effective March 11, 1992). 
The District is regulated by the State under the provisions of 25-A M.R.S.A.
§§ 6301 et seq.  The Water District exercised its power of eminent domain
on January 22, 1993, condemning and subsequently acquiring the assets of
the Water Company.  P. & S. L. ch. 72, § 13.{1}
	[¶3]  The Water District paid $262,000 to the Water Company for its
condemned assets.  On March 29, 1993, the Water Company sought review
of the condemnation award in the Superior Court.  By agreement of the
Water Company and the Water District, the matter was referred to a court-
appointed referee, who held seven days of evidentiary hearings and issued a
report to the Superior Court detailing his findings concerning the value of
the condemned properties.  The referee's initial report to the Superior
Court underwent two subsequent revisions{2}, and a final report was issued on
March 29, 1995.
	[¶4]  Both the Water Company and the Water District objected to the
referee's final report valuing the Water Company's condemned assets at
$407,504 and filed their objections to the referee's report with the
Superior Court.  In an order dated February 24, 1996, the Superior Court
adopted the final report of the referee in its entirety.  A timely appeal by the
Water District and cross appeal by the Water Company followed.
Discussion
	[¶5]  When the court adopts a referee's report in full, we review the
decision of the referee directly.  The referee's findings of fact are reviewed
for clear error.  In re Valuation of Common Stock of McLoon Oil Co., 565
A.2d 997, 1001 (Me. 1989).  "On appeal, we will uphold the court's
adoption of those factual findings if there is credible, probative evidence
supporting them, even though there may be evidence to support contrary
findings."  Wellington Associates v. Capital Fire Protection Co., 594 A.2d
1089, 1091 (Me. 1991).  We will not invade the province of the referee and
substitute our judgment for the factfinder, who was appointed by agreement
of the parties to value the utility property.  "It is not for us to mandate the
use of any single appraisal method in valuing" such property.  Shawmut Inn
v. Town of Kennebunkport, 428 A.2d 384, 392 (Me. 1981).
Valuation Methods Water District's Contentions
	[¶6]  The Water District argues that the referee erred in choosing
among valuation models and in applying a final valuation figure to the Water
Company's property.  The District contends that the referee erred in two
ways:  first, by failing to consider the sales of three water utilities proximate
in time to that of the Rangeley Water Company, and second, by failing to use
the "capitalization of income" method of valuation.  
The Three Water Companies
	[¶7]  The referee excluded the sales of the Millinocket, Skowhegan
and Greenville water companies in arriving at his "multiplier" figure for
valuing the Rangeley Water Company because he determined that there was
a distinction between the purchase price paid for a water utility by private
purchasers of water utilities and the price paid by water district or water
utility purchasers.  In reaching his conclusion, the referee compiled a list of
water utility sales that he considered relevant to his analysis.  He averaged
the price to net utility plant ratio of the sales of seven water utilities in
Maine since 1980, all of which were sold to water districts.  The referee
excluded those water utilities that were sold to private parties, finding that
as a group sales to private companies were at significantly lower prices than
sales to water districts.  The record indicates that the water utility sales
used by the referee sold at prices ranging from 1.60 to 1.88 times net utility
plant, while the three properties excluded by the referee sold at an average
price of only .76 times net utility plant.  
	[¶8]  There is substantial evidence in the record to support the
referee's finding of a distinction between private and water district
purchasers of water utilities.  For example, the Water Company's accountant,
John White, testified that certain water utility sales more closely matched
the characteristics of the buyer and seller in the case of the Rangeley Water
Company.  The distinction drawn by the referee was an appropriate means of
balancing competing evidentiary offerings from the Water District and the
Water Company.
Methods of Valuation
	[¶9]  We have previously approved the use of three standard methods
of valuation:  the "comparative" method, the "income or capitalization
method," and the "reproduction cost new less depreciation" or "cost"
method.  Shawmut Inn v. Town of Kennebunkport, 428 A.2d 384, 390
(1981).  We further recognized that "theoretically, all three methods are
employed in any appraisal, but often only one or two are useful or even
useable in a given appraisal, depending upon its nature and purpose."  Id. 
Notably, we held in Shawmut Inn that it "is not for us to mandate the use of
any single appraisal method in valuing commercial or any other taxable
property."  Id. at 392.
 	[¶10]  In his report, the referee conducted an extensive analysis of
each of the methods of valuation that were presented to him by the opposing
parties and discussed his reasoning for rejecting certain methods and
adopting the "comparable sales" method.  The referee was not compelled by
law to adopt any particular method of valuation, and his reasons for rejecting
the "capitalization of income" method of valuation{3} find substantial support
in the record.   Similarly, the record supports the referee's rejection of both
the replacement cost new less depreciation (RCNLD){4} and the ability to
finance{5} methods.
Water Company's Contentions
	[¶11]  In addition to arguing unpersuasively that the referee erred in
refusing to apply the replacement cost new less depreciation and the ability
to finance methods of valuation, and erred in his reliance on the
comparative sales method of valuation, the Water Company contends that the
referee erroneously excluded $12,000 in construction work in progress
(CWIP) and $9,937 in inventory (material and supplies) from the value of the
Water Company.  The referee concluded that the evidence provided an
"insufficient basis for a finding of additional CWIP that should be included in
the net operating plant account."  That decision is supported by the record.  
The referee found that the materials and supplies "were also not included in
the net operating plant accounts of the comparable companies used as the
basis for determining the appropriate factor for application of the
comparable sales method."  That conclusion is based on extensive testimony
offered by both parties about various methods of valuing water utilities.  His
decision to exclude the $9,937 in equipment and material from the
valuation of the Rangeley Water Company finds support in the record.
	[¶12]  The Water Company also argues that the referee erred in
reducing the multiplier derived from the comparative sales analysis from
1.65 to 1.55 to reflect the reduction in the value of the Water Company
because of its noncompliance with the Safe Drinking Water Act.  There is
substantial evidence in the record to support the referee's conclusion that
the Water Company was not in compliance with the Act and that its
noncompliance lessened the value of the company's assets.  Although the
referee found "scanty evidence" to suggest how the reduction in value
should be reflected in the multiplier applied to the Water Company's assets,
the referee's application of a .10 reduction in the multiplier appropriately
considered numerous aspects of the Water Company's physical plant.{6} 
Inclusion of the Lakehause Line
	[¶13]  The Lakehause line is an approximately 1200 foot distribution
main attached to the Water Company's Route 4 line and extending into the
Lakehause development, a three building condominium complex.  The
Lakehause line provides water service to nine condominiums in the three
buildings.  The Water District contends that the referee improperly included
the Lakehause water line in the valuation of the Water Company.  The
condemnation order issued by the Rangeley Water District on January 22,
1993, stated that it was taking by eminent domain "the entire plant,
properties, franchises, rights and privileges owned by the Rangeley Water
Company . . . ."  The referee concluded that the Lakehause line was owned
by the Water Company.
	[¶14]  Chapter 65 of the Maine Public Utilities Commission (PUC)
rules establishes standards and conditions for the extension of water utility
lines.   Under Chapter 65, §1(H) (1987), a main or main extension is
defined under the PUC rules as:

a water line in a public way owned by the utility to serve one or
more customer, multi-unit dwelling complex, or commercial or
industrial development; or a water line owned by the utility on
private property to serve more than one customer, multi-unit
dwelling complex, or commercial or industrial development or
to serve a single customer, multi-unit dwelling complex or
commercial or industrial development if another person or
entity has an easement or other right of access for water line
purposes.  A new main shall be a main extension for the 10 years
following connection of the first customer.  Pursuant to a
decision by a utility under section 2(C), a new water line on
private property to serve a single customer, multi-unit dwelling
complex development shall be a main extension.  

Ch. 65, §1(H) (1987).{7}

Section 2(C) of Chapter 65 provides that

[a]ny private line which will continue to be used as a main shall
be conveyed to the utility without charge.  All mains shall be
owned and maintained and replaced by the utility as provided in
section 2(A) and the utility shall be provided all necessary
easements.  Refusal or failure to comply with the requirements
stated herein or failure of the unauthorized connecting person to
voluntarily disconnect shall be grounds for disconnection . . . .

Section 2(A) of Chapter 65 provides that all water main extensions
"constructed pursuant to this rule shall be owned, maintained and . . .
replaced by the utility." Ch. 65, § 2(A) (1987).
	[¶15]  Despite these rules, the Water District cites evidence in the
record that the Water Company sought to have ownership of the line
transferred from "Rangeley Lake Hause, Inc.," the developer of the
condominium complex, to the Water Company.  In a letter dated September
5, 1989, Water Company President Eldon Morrison wrote to the
condominium developer that "ownership of the line needs to be transferred
to the Rangeley Water Company via a recordable document . . . ."   The Water
District argues that no such transfer was ever made, and thus ownership of
the Lakehause line rests with the condominium complex.{8}  We agree,
however, with the Water Company's contention that no formal deed was
required because the Water Company, pursuant to the rules of the PUC,
owns the Lakehause line by operation of law.
	[¶16]  The activities of the Water Company reflect this ownership. 
Albert Hodsdon, an engineer, testified before the referee that he was hired
by the Water Company to prepare a design for the Lakehause line.  He
testified that the Water Company decided to design the line "after we
realized . . . that they didn't have the expertise to do -- to prepare a design
for it.  So we prepared the design of the Lakehause for them."{9}   Eldon
Morrison of the Water Company testified that since the time he acquired a
controlling interest in the company in 1988 the residents of the Lakehause
condominium units had been billed for service by the Water Company.  He
also testified that the Water Company conducted annual maintenance activity
on the Lakehause line.
	[¶17]  Even if the Water Company owns the Lakehause line as a matter
of law, the Water District contends that the referee should not have included
the line in his valuation of the Water Company because the Company did not
pay for construction of the line and is thus being unfairly compensated for
property that the Water Company suffered no expense in acquiring.  In a rate
proceeding, contributed property is not included in a utility's rate base
because it would be unfair to allow the utility's investors to recoup from
ratepayers money that the utility did not expend.  "Depreciation on
contributed property is therefore disallowed not to credit the donees, but to
insure that investors who did not supply capital for the contributed property
do not recover on an 'investment' they did not make."  Central Maine Power
Co. v. P.U.C., 405 A.2d 153, 166-7 (Me. 1979).  The P.U.C. will not permit
utilities to recover from ratepayers the depreciation of contributed property
because the utility "did not make the original investment in the contributed
property, [and] it has nothing to recover through depreciation."  Maine
Water Co. v. P.U.C., 388 A.2d 493, 495 (Me. 1978).
	[¶18]  The condemnation of utility property, however, involves
different considerations.  Valuation of the utility's condemned property must
ensure that "as the end result of the exercise of the power of eminent
domain, the owner will be receiving the equivalent monetary worth for the
value of the property taken from the time of taking."  Orono-Veazie Water
District v. Penobscot County Water Co., 348 A.2d 249, 255 (Me. 1975).  The
Rangeley Water Company is entitled to "just compensation for the taking of
[its] property by the process of eminent domain."  Curtis v. Maine State
Highway Comm'n, 160 Me. 262, 265, 203 A.2d 451, 453 (Me. 1964). 
"Constitutional protection against confiscation does not depend on the
source of the money used to purchase the property.  It is enough that it is
used to render the service."  Board of Public Utility Commissioners v. New
York Tel. Co., 271 U.S. 23, 31, 46 S. Ct. 363, 366, 70 L. Ed. 808 (1926). 
The original source of the funds for construction of the Lakehause line does
not prevent the inclusion of the line in the valuation of the Water Company
when the line was Water Company property under the law.  "The complete
dissimilarity between rate-making concepts and the just or full
compensation standards which govern eminent domain have resulted in
rejection of attempts to equate rate-making with eminent domain as a basis
for determining fair market value."  Dade County v. General Waterworks
Corp., 267 So.2d 633, 640 (Fla. 1972) (citation omitted).  The Water
Company owned the line and used it in the provision of water service, thus
entitling the company to compensation for the line when it was condemned.
Valuation of the Lakehause Line
	[¶19]  The Water Company challenges the referee's decision to adjust
his valuation of the Lakehause line downward from $69,422 to $55,066.  In
his final report, the referee made two adjustments to the valuation of the
Lakehause line.  First, he adjusted for inflation by reducing the 1993 value of
the Lakehause line by 3% per year from the 1987 construction date to the
1993 condemnation.  Second, he applied a five year depreciation in value
based on a 75 year life of the line.  The Water Company argues that there is
no evidence in the record supporting either reduction.
	[¶20]  We find no error in the referee's inflation calculation.  "The fact
that there has been a substantial inflation has not escaped our attention. 
'Judges are not necessarily ignorant in court of what everybody else, and
they themselves out of court, are familiar with; and there is no reason why
they should pretend to be more ignorant or unobserving than the rest of
mankind'."  Central Maine Power v. P.U.C., 150 Me. 257, 272, 109 A.2d 512,
519 (1954) (rejecting PUC valuation for failure to take account of
"substantial inflation") (quoting Affiliated Enterprises v. Waller, 5 A.2d 257,
261 (Del. 1939)).  The referee's use of a 3% inflation rate to reduce the
value of the Lakehause line is consistent with this rationale.
	[¶21]  The depreciation figure is based on a trial exhibit, the 1992
annual report of the Rangeley Water Company, which contained a schedule
of depreciation losses taken by the Water Company.  "Depreciation, like the
market value of property, could not be proved with mathematical certainty
and must ultimately rest in the realm of opinion, estimate and judgment." 
Kittery Electric Light Co. v. Town of Kittery, 219 A.2d 728, 738 (Me. 1966). 
The referee was not required to accept the Water Company's estimate of the
value of the line, and the referee's reduction in the value of the line based on
depreciation is supported by the record.
Severance Damages
	[¶22]  The Water Company contends that the referee erred in refusing
to grant severance damages of $62,720 to the company, reflecting the
money the company spent on plans to bring itself into compliance with the
Safe Water Drinking Act (SWDA).  These plans became useless when the
Water District condemned the Water Company.
	[¶23]  The referee found that even though the Water Company's SWDA
compliance plans were no longer of use, it was impossible to determine
which, if any, of the expenditures for those plans would have been of use to
the company had it not been condemned.  The referee further found that
the valuation of the Water Company had already taken account of whatever
portion of the company's SWDA compliance plan expenditures could be
considered Water Company assets, and thus severance damages should not
be awarded separately.  The referee's decision to deny severance damages is
based on competent evidence in the record.
	The entry is:
		Judgment affirmed.
         
Attorneys for plaintiff: William S. Harwood. Esq. (orally) William C. Knowles, Esq. James I. Cohen, Esq. Verrill & Dana P O Box 586 Portland, ME 04112-0586 Attorney for defendant: Alan G. Stone, Esq. (orally) Clifford, Stone & Herman P O Box 590 Lewiston, ME 04243-0590
FOOTNOTES******************************** {1} P. & S. L. ch. 72, § 13 reads as follows: "The district may acquire by the exercise of the right of eminent domain, a right expressly delegated to the district for that purpose, the entire plant, properties, franchises, rights and privileges except cash assets and accounts receivable, owned by the Rangeley Water Company . . . and if and when so acquired, the district, in addition to the powers conferred by this Act, shall have and enjoy and be entitled to exercise all rights, privileges and franchises of the Rangeley Water Company." {2} The initial report, issued January 2, 1995, valued the Water Company's condemned property at $464,764. The referee's first report was adopted by the Superior Court on January 5, 1995, but the Court vacated its judgment on January 13, 1995, following the parties' joint motion for relief from judgment. The referee's second report, dated February 13, 1995, reduced the valuation to $397,752. The referee's final report, issued on March 29, 1995, increased the valuation to $407,504 and was adopted without modification by the Superior Court. {3} The referee rejected the capitalization of income method because "the particular circumstances of the Rangeley Water Company make it difficult, if not impossible, to arrive at a reliable indication of value by this route." The referee rejected both the Water Company's and the Water District's suggested capitalization methods. He rejected the Water Company's because it could "in no way be relied on to establish the actual value of the assets being condemned"; the referee found the Water District's method "equally extreme in the opposite direction." {4} The referee found as follows: "Because of the obsolete condition of many of the Rangeley assets and because of the high improbability that anyone would reconstruct the system in its present configuration, the replacement cost new less depreciation method of appraisal cannot be relied on for determination of value. . . . Neither party was able to provide satisfactory evidence of land value under this method." {5} This method was presented to the referee by the Water Company's expert. The referee found that "Mr. White's 'ability to finance' method may set an upper limit on fair market value, but can in no way be relied on to establish the actual value of the assets being condemned." The referee also concluded that the "various income and capitalization methods are of less applicability because of the low level of past earnings and the difficulty of determining what level of earnings can be anticipated in the future." {6} In his report, the referee cited "the sales ratios of comparable water systems before the Safe Drinking Water Act; the antiquated condition of the Rangeley assets; the small size of the system; the size of the investment required to modernize the system and bring it in compliance with the Safe Water Drinking Act, the owners' ongoing difficulties in obtaining financing and sufficient revenues to support the financing." {7} This chapter of the PUC rules prevents the construction of water systems that mix public and private lines because of the difficulty of maintaining consistent and uniform water service through those lines. Towards the goal of uniform service, section 2(C) of the 1987 rules provides that if the owner of a private line requests that a water utility provide water service through that line, the utility may require that the private line become utility property: Upon application for service through a water line to be constructed after May 7, 1986, which is otherwise defined by section 1(K) as a private line, the utility may require a main extension if it decides that the private line will be detrimental to the proper development of the water system. Ch. 65, § 2(C). {8} In a letter to the Rangeley Lake Hause, Inc., dated January 21, 1993, the Water Company wrote to "confirm the acceptance of the Phase I water main extension . . . which the Rangeley Water Company has been maintaining for the last 7 years." {9} Hodsdon also testified about the extent of his inv