
    411 F.2d 1314
    VIRGINIA ELECTRIC AND POWER COMPANY v. THE UNITED STATES
    [No. 109-66.
    Decided June 20, 1969]
    
      
      E. Brice Graves, attorney of record, for plaintiff. E. Milton Fa/rley, III, and Eunton, Williams, Gay, Powell & Gibson, of counsel.
    
      Michael 3. Singer, with whom was Assistant Attorney General Johnnie M. Walters, for defendant. Philip R. Miller and Joseph Kovner, of counsel.
    Before Cowen, Chief Judge, Laramore, Dureee, Davis, Collins, Skelton, and Nichols, Judges.
    
   Per Curiam :

The issues in this Federal income tax case (involving the calendar years 1959, 1960, and 1961) are: (1) whether the plaintiff-taxpayer, Virginia Electric and Power Company (Vepco), is entitled to depreciation deductions on its costs incurred for initial clearing of easements acquired and used for construction, maintenance, and operation of its transmission and distribution lines, and if so entitled, whether such costs qualify for the double declining balance method of depreciation; (2) whether Vepco is entitled to depreciation deductions on its costs of acquisition of such easements; and (3) if Vepco is entitled to depreciation deductions with, respect to the assets described, what are their estimated useful lives?

With one exception, identical issues are presented to the court in Pennsylvania Power & Light Company and Subsidiary Companies v. United States, ante, at 76, 411 F. 2d 1300 (1969). In that case, decided today, we held that Pennsylvania Power & Light Company’s transmission and distribution easements, and its initial clearing costs thereof, were depreciable items, the useful lives of which could be estimated with reasonable accuracy.

Upon a careful study of that exhaustive opinion and the numerous authorities cited and analyzed therein, it is our judgment that the conclusion on this point in favor of the taxpayer is entirely correct for the reasons stated in that opinion. Merely to reiterate here that careful analysis of the basic issue would seem redundant and pretentious. Therefore, since the main issue of whether the assets involved are depreciable items is identical in both cases, judgment is entered in favor of the taxpayer-utility.

The foregoing disposes of issues (1) and (2) above, except for the question of the applicable depreciation method which is discussed below. Consideration must now be given to issue (3), namely, a determination of the useful lives of the assets in question.

At the outset, we note the very important fact that the proof as to useful lives in the present case differs from that adduced in Pennsylvania Power & Light Company. In the latter case, as fully described in the opinion, the experts in property life analyses based their estimates of useful life on historical statistical studies using the “annual rate” and “geometric mean” methods in conjunction with the so-called “Iowa type survivor curves.”

Vepco’s expert witnesses took a different approach. The statistical method above described was not ignored by Vepco, however. Indeed, in this respect the same expert, John J. Eeilly, testified in behalf of both Vepco and Pennsylvania Power and Light Co. His studies of Vepco’s plant and accounts resulted in an opinion that Vepco’s transmission easement and initial clearing costs had useful lives of 100 years and that its distribution easements and initial clearing costs had useful lives of 50 years. However, Mr. Keilly qualified his opinion as to the above estimated service lives by stating that they were primarily ceiling figures to indicate an upper level of estimated lives. He testified that his “estimates would be too long” if, as he thought probable, Vepco’s future retirement experience turned out to be more rapid than in the past, due both to technological improvements in underground cable construction and to the trend towards replacement of steam power plants by nuclear energy plants.

With this qualification in mind, Vepco produced expert testimony with respect to what may reasonably be expected in the area of future technological improvements and changes in operational techniques employed by electric utilities, in general, and by Vepco, in particular.

Vepco’s assistant vice president, a well-qualified electrical engineer who has spent his entire career working on the problems of Vepco’s transmission and distribution system, testified that there is substantial public concern over the appearance of overhead power lines, and this aesthetics problem is under active consideration. In his opinion, this public concern will force Vepco to replace its overhead facilities with underground cable in the foreseeable future. Apart from the cost of such conversion to underground cable, the major problem confronting the industry today is the lack of suitable insulation for such cable. However, extensive research and experimentation in this area is underway both here and abroad, and in his opinion the problem of insulation will be solved with the result that transmission and distribution facilities will be placed underground in the predictable future. Such a development means that Vepco’s easements for overhead facilities have a limited useful life because the easement agreements make no provision for any underground installations, and thus the conversion to underground cable would necessitate the acquisition of new easements and abandonment of the old. In his opinion, all Vepco’s distribution lines will be underground somewhere between the years 1990-2000, and all its transmission lines will 'be underground somewhere between the years 2020-2030.

Another expert witness for Vepco was Hr. Alexander Kusko, an eminent consulting engineer with very extensive academic, research, and industrial experience in the study of electric power system problems. He testified that, at the time of the years here involved, it was possible to make rational predictions with respect to the future development of the electric power systems in the heavily populated region of the Atlantic Seaboard, including that of Vepco. He made his predictions by decades for the period 1960 to 2000 and for the period 2000 to 2030.

The decade 1960 to 1970 he described as a decade of mine-mouth coal burning plants built close to coal mines in order to reduce the cost of fuel transportation. Their power output is transported by long extra high voltage overhead transmission lines. By the end of this decade, nuclear power generation will probably have become less expensive than fossil-fuel power generation, and, with the exception of some new hydroelectric generating stations constructed primarily in Canada, substantially all new generating plants should be operating on nuclear fuel after 1970. Because of radiological dangers, these plants will be located away from cities, but near cooling water for volume cooling of their condensers. ’Phis will require massive overhead transmission lines to carry-increased voltages of up to 1,000,000 volts.

In Dr. Kusko’s opinion, Vepco’s power system will probably change also by reason of other -technological developments. With the expected increase in population will also come an increase in energy requirements. Voltages in the range of 1,000,000 to 2,000,000 volts, which is probably what will be necessary within the next 30 to 40 years, are difficult to handle by the present air insulation overhead lines. The development of a better insulation for both overhead and underground transmission will be necessary by the turn of the century. Such a development is under active research and experimentation.

Dr. Kusko further believes that, as atomic generation of electricity is proved to be safe, generating plants will no longer be constructed in isolated areas, but will be built in the heart of cities and near other load centers. This power system change will begin to take place in the decade of 1990 to 2000. No new overhead transmission lines will be constructed after 1990 because they would no longer have any function. The tremendous loads will require that generating plants be located in populated areas. It will probably be impractical to 'bring that type of power into such areas by overhead transmission lines. Plants will have to be brought to the load centers. In this same time period, heavy water and breeder type reactors, which reproduce their own fuel, will begin to replace the light water reactor plants constructed previously in order to conserve nuclear fuel.

On the basis of the above analysis, Dr. Kusko concluded that after 1910 it is reasonable to believe that electric distribution systems in cities and in surrounding populated areas will be constructed in underground cable. Furthermore, by the year 1990, all distribution circuits in densely populated areas will have been converted to underground cable, and by the year 2000, substantially all the distribution facilities of Vepco, wherever located, will be in underground cable.

As for the transmission system, Dr. Kusko concluded that all new transmission will be constructed in underground cable by the year 2000. Overhead lines built after 1910 carrying 500,000 to 1,000,000 volts will iemain in operation, although portions of them will be replaced by cable as population grows into areas in which those lines are located. As stated previously, any new construction during this period will be close to load areas, not requiring extensive overhead transmission lines of the type earlier built. He concluded that by the year 2030 the last of (the overhead lines built in the 1970 to 2000 period will have been retired.

In the Government’s view, the foregoing constitutes merely some interesting crystal-ball gazing and does not rise to the stature of a “reasonable approximation” as required by the United States Supreme Court. Burnet v. Niagara Falls Brewing Co., 282 U.S. 648, 655 (1931). It will simply not do, however, to place Vepco’s expert witnesses in the category of soothsayers. All were electrical engineers possessed of impressive qualifications and long experience in the electric power industry. Admittedly, the rather startling predictions by Dr. Kusko and Vepco’s assistant vice president may not be fulfilled in precisely the manner and sequence to which they testified. But precision in estimating useful life for purposes of the depreciation allowance is not required. The statements of Vepco’s experts are sufficiently convincing that they may be classified as reasonable predictions of “probable future developments,” which is all the regulations require in the context of this case. Treas. Beg. § 1.167(a)-1(b), 1956-1 O.B. 100. Indeed, the Supreme Court has held that the deduction may be based upon a “rough estimate.” United States v. Ludey, 274 U.S. 295, 302 (1927). Clearly, Vepco’s expert testimony meets all of the applicable standards, and it is significant that the defendant made no effort to rebut the experts’ predictions. "VVe repeat again that the proof in this case is very different from the proof before the court in the Pennsylvania Power & Light Co. case, and we find different objective facts to be present in the two cases. Accordingly, it is our conclusion that Vepco has proved as of 1959 a useful life for its transmission easements and initial clearing costs of 71 years a useful life for its distribution easements and initial clearing costs of 41 years.

Finally, there remains for consideration Vepco’s contention that, being entitled to the depreciation allowance on its initial easement clearing costs, it may compute its deduction under the double declining balance method provided for in section 167 (b) (2) of the 1954 Code which reads, in pertinent part:

(b) Use of Oertam Methods cmd Rates. — For taxable years ending after December 31,1953, the term “reasonable allowance” as used in subsection (a) [providing for the depreciation deduction] shall include (but shall not be limited to) an allowance computed in accordance with regulations prescribed by the Secretary or his delegate, under any of the following methods:
(1) the straight line method,
(2) not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in paragraph (1).

Subsection (c) of section 167 goes on to provide, in effect, and among other things, that the declining balance method of computing the allowance may not be used in the case of “intangible property.” Defendant argues that Vepco’s initial easement clearing costs are “intangibles” and hence do not qualify for the declining balance method. Vepco responds that the initial clearing costs are part of the costs of constructing the transmission and distribution lines themselves, the latter being obviously tangible properties. Therefore, says Vepco, since it elected for the years 1960 and 1961 to use the double declining balance method of depreciation for its transmission and distribution line construction, the initial clearing costs as a part of that construction also qualify for the double declining balance method.

Both parties agree that the clearing costs are not 'an independent 'asset; rather they are a cost item which is included in the depreciable cost base either of the transmission and distribution lines or the cost base of the easements. Both parties also agree that the trial commissioner was inconsistent in permitting rapid depreciation font finding also that the useful lives of the clearing costs are those of the easements. We agree that this is an inconsistent result and, therefore, these costs should be included in the easement costs subject to depreciation over the useful lives of the easements, and not subject to rapid depreciation.

The useful life of an easement is not coterminous with the useful life of the first line to be placed on the easement because substitute lines may replace the initial line during the life of the easement. Initial clearing costs are incurred only once; yearly maintenance costs to keep the ea'sement clear are deductible annually as operating expenses. That initial clearing cost, however, may not be exhausted over the life of the first line and, therefore, as the trial commissioner correctly held, the initial clearing costs are depreciable over the useful life of the easement, not the useful life of the line. When new lines are substituted, these initial clearing costs are not normally again incurred, and plaintiff has not proved that any part of these costs is exhausted over the life of the first line.

Accordingly, we conclude that under the circumstances of this case and the proof 'before us, the only reasonable and con-si'stent approach is to permit depreciation, of the initial clearing costs as part of the easement costs, depreciable over the life of the easement together with other easement costs. As part of the easement cost, the initial clearing costs are considered intangibles and are not subject to rapid depreciation.

Therefore, in accordance with the above opinion, Vepco should have judgment entered in its favor, with the amount of recovery to 'be determined in accordance with Rule 47(c).

Skelton, Judge,

concurring in part and dissenting in part:

I respectfully dissent from that portion of the opinion that holds that as of 1959 the useful life for the transmission easements and initial clearing costs of Virginia Electric and Power Company, hereinafter called Vepco, is 71 years and the useful life of its distribution easements and initial clearing costs is 41 years. I believe that this holding is a discrimination against Pennsylvania Power and Light Company, ante, at 76, 411 F. 2d 1300 (1969), hereinafter called the P. P. & L. Co.

Both cases involve basically the same facts. Both companies manuf acture and distribute electric power in a similar manner over territory similar in nature in the east coast area of the United States (Virginia and Pennsylvania, respectively) over electric power lines erected on poles over and along easements acquired by them from property owners. There is no practical difference between the manner of operation of the two companies. Both companies seek the same relief at the same time from this court, and, in my opinion, should be treated alike by the court. But this is not the case, because Vepco has received more favorable treatment at the hands of the court than has P. P. & L. Co.

It is true that the two cases were tried by two different commissioners of our court at different times. However, both cases are before us at the same time. It is understandable that the commissioners may have reached different results on the problem at issue, because each of them tried his own case on the evidence before him in that case and based his decision thereon. This is not meant to be any criticism of the commissioners. With ns, the situation is different. We are considering both cases together and we can make whatever findings of fact we think are appropriate that are supported by the records in both cases. The findings of the commissioners are presumptively correct under the rules of our court, but we are not bound by them.

When this is done, we find that the only difference in the evidence in the two cases is the testimony of certain experts in the Vepco case that because of advances in technology and practice in the industry, in a few years all overhead electric lines and modern electric generating plants would be out of date and would be replaced by underground lines and nuclear generating plants. On this testimony the commissioner concluded, and the majority of the court agree, that the useful life of the transmission easements and initial clearing costs of Vepco is 71 years, and that of its distribution easements and initial clearing costs is 41 years. This evidence was not before the commissioner in the P. P. & L. Co. case. The evidence in that case was to the effect that such useful lives are 100 years and 45 years, respectively, and the commissioner so found, and the majority agree.

It should be pointed out that an expert witness named John J. Eeiily testified in both cases. His testimony was essentially the same in the two cases. He said in the P. P. & L. Co. case that the useful life of a transmission easement is 100 years and that of the clearing costs is 60 years, and the life of the distribution easement is 45 years and that of the clearing costs is 35 years. On this evidence, the commissioner and the majority hold that the useful life of the transmission easement is 100 years and that of the distribution easement is 45 years. The clearing costs were given the same useful lives as the easements (in both cases).

In the Vepco case, Mr. Eeiily testified that the useful life of a transmission easement is 100 years (same as in the P. P. & L. Co. case) and that of the distribution easement is 50 years (5 years more than in the P. P. & L. Co. case). His testimony was based on present conditions and without indulging in speculation as to future underground cable and nuclear plant developments. His evidence was the same in both oases as to the useful life of the transmission easements (100 years) and practically the same on the life of the distribution easements (5 years more in Vepco than in P. P. & L. Co.).

In my opinion, this evidence, based on present conditions, compels us to enter the same judgment in both cases as to the useful lives of these easements. But the majority has adjudged that the easements have the following useful lives:

1. In the P. P. & L. Co. case :

Transmission easements_100 years

Distribution easements_ 45 years

2. In the Vepco case:

Transmission easements_ 71 years

Distribution easements_ 41 years

The shorter lives for the easements in the Vepco case, as stated above, was arrived at on the testimony of certain experts (its Vice-president and a Dr. A. Kusko) as to the future developments in underground cables and nuclear generating plants. As a practical matter, these witnesses did not testify that these developments would occur only in Vepco’s system, but testified with reference to Vepco and the industry in general. Consequently, from a theoretical standpoint, their testimony is as applicable to P. P. & L. Co. as to Vepco. In my opinion, this testimony was too speculative on which to base the opinion of this court. While their predictions may come to pass, on the other hand, as the government contends, their observations in this regard may be mere “crystal-ball” gazing. In any event, it occurs to me we need something more tangible on which we can base our judgment. If the developments these witnesses predict should materialize in the future, changes in the tax position of the taxpayers could be made at that time. As the majority say in the P. P. & L. Co. case:

* * * As stated by the Supreme Court, if what now appears to be reasonable useful lives of such assets proves by further experience to be in error, administrative steps are readily available for a redetermination. * * *.

I do not believe we are justified in treating these two taxpayers differently on practically the same facts and issues. To do so is to prefer one over the other and to discriminate in favor of one and against the other.

I would hold that the useful lives of the easements in both cases are the same, as the court may determine. However, it would be preferable to fix the useful lives of the transmission easements at 100 years and that of the distribution easements at 45 years, because the testimony of the witness Reilly in both cases was to this effect, whereas, there is no evidence in the P. P. & L. Co. case that would support shorter lives for the easements.

Collins, Judge, joins in the foregoing opinion concurring in part and dissenting in part.

Findings oe Fact

1. Plaintiff, Virginia Electric and Power Company (Vepco), is a corporation organized and existing under the laws of the Commonwealth of Virginia with its principal office located in Richmond, Virginia. Its accounting records have been maintained, and its tax returns have been filed for ail periods here involved on an accrual and calendar year basis.

2. During the taxable periods involved herein', which are the calendar years 1959, 1960, and 1961, Vepco was (and it continues to be) a corporation engaged in the production, transmission, distribution, and sale of electric energy in Virginia, North Carolina, and West Virginia. It is subject to regulation in those states by the respective state regulatory commissions, as well as by the Federal Power Commission. In 1959, Vepco had approximately 743,000 customers, in 1960 approximately 762,000 customers, and in 1961 approximately 785,000 customers all located within about 92 counties of its service area. During the years involved, Vepco’s primary sources of electric energy were 21 steam and hydroelectric power plants. For a secondary source of supply, Vepco also purchased power and had interchange agreements with other electric power companies.

3. The electric power generated by Vepco in its various plants is marketed to industrial, commercial, governmental, and residential consumers over transmission and distribution lines. As a general rule, such lines are overhead facilities with the electric power carried by wire on overhead poles, towers, etc. Cross-country transmission lines carry the highest voltage. Vepco’s transmission system operates on voltages of 69,000 volts, 115,000 volts, 138,000 volts, 230,000 volts, and 500,000 volts. The transmission system consists of conductors (wires), poles, towers, insulators, overhead ground wires, underground ground wires used for lightning protection, and easements or rights-of-way which have been cleared of all obstructions so that there is no potential hazard to the overhead electric system. The power is transmitted from the generating sources by the transmission system to load areas (areas of demand) where the voltage is stepped down at substations for distribution. From this point to the consumer, the power is further transmitted over distribution lines operating on 44,000 volts or less. These distribution lines are comprised of similar components to the transmission lines, that is, poles, conductors, rights-of-way, and grounding connections although they are generally substantially smaller than those used for transmission. In addition, however, distribution lines generally have more transformers, switches, and lightning arresters than transmission lines.

4. The first step taken by Vepco in the creation or expansion of its transmission or distribution system is the selection of a route for the lines. This route is largely determined by the location of the demand or load. The route is then surveyed, property plats are prepared and titles to the land are examined. In constructing its facilities over the years, Vepco has obtained easements in the form of right-of-way agreements from the owners of the land over which the lines are to be placed. Generally, Vepco has been able to negotiate mutually satisfactory agreements with the landowners. However, as a public utility, Vepco has power of condemnation which can be resorted to, if necessary. All of the costs incurred by Vepco in acquiring its easements are recorded in accounts on its books.

5. All transmission and distribution easement agreements here involved consist of rights to construct lines and related facilities above ground. They make no provision for Vepco underground lines (commonly referred to as caíbles). Accordingly, should it become desirable or necessary for Vepco to install underground cables, additional easements would have to be acquired. The typical agreement provides in pertinent part:

That for the sum of ___ dollars * * * Owner grants unto Company * * * the perpetual right, privilege and easement of right of way- (-) feet in width, to construct, operate and maintain one or more lines of poles, towers or structures, as Company may from time to time deem expedient or advisable, located on the right of way hereinafter described, for the purpose of transmitting electric power by one or more circuits, including all wires, poles, towers, attachments, ground connections, equipment * * * over, upon and across the lands of Owner, * * *

In addition to the payments made to the owners of the property for the acquired rights-of-way, Vepco incurred additional acquisition costs in respect thereof for purchase options, court certificates, abstracts of title, recording, appraisal and legal fees, tree clearing privileges, wages to employees, traveling expenses, surveying, meals, and state and stamp taxes. All of such costs 'have been capitalized by Vepco as costs of acquiring rights-of-way.

6. Before Vepco could either establish or expand its transmission or distribution facilities over the rights-of-way which it had acquired, it was necessary to incur certain costs in clearing the easement area. Included in such costs were those expenses incurred in cutting and removing trees, brush, debris, and other obstacles from the area in order to construct, operate and maintain the transmission and distribution facilities. Such initial clearing costs included payments to Clearing contractors, wages to supervisory employees and expenses incurred by such employees in respect of transportation, meals and lodging. Costs incurred by Vepco to maintain the rights-of way in a cleared condition following such initial clearing have been deducted by Vepco as operating or maintenance expenses and are not involved herein.

7. In order to use the acquired land and land rights for transmission and distribution, it was necessary for Vepco to construct or have constructed such facilities as towers, poles, transformers, cables, and wires. Such facilities are replaced by Vepco as required upon wearing out or becoming obsolete and are removed at the time of the disposal or abandonment of the land and land rights. If the right-of-way has been maintained properly for operation and maintenance there may be very little clearing required when facilities are upgraded or replaced along the same right-of-way. The costs incurred by Vepco for removing stumps, grading, and excavating incident to the preparation of foundations for towers or other structures are not considered part of the cost of clearing land and rights-of-way, and are not involved herein, nor are the costs to purchase and construct such facilities as towers, poles, transformers, cables, and wires. All of such costs, as well as the initial clearing costs and the costs of rights-of-way are treated by Vepco as part of its electric plant in service.

8. Vepco’s practice is to record the costs of acquiring land and land rights, and the initial clearing thereof, in capital accounts on its books. Such costs are determined by Vepco’s management after analysis of pertinent records. When cleared or uncleared land and land rights were sold, abandoned or otherwise retired, Vepco wrote off on its books the cost so determined in the year of retirement. The mean clearing tax basis, and the mean tax basis of transmission and distribution easements, on a straight line basis, were as follows:

1959

Easements Clearing

Transmission... $6,645,192 $2,794,031

Distribution.. 5,390,887 3,879,704

Total-. 11,942,079 6,073,736

1960

Transmission. $6,927,476 $2,887,000

Distribution. 5,714,890 4,328,208

Total... 12,642,386 7,215,208

1901

Transmission. $7,268,954 $2,963,108

Distribution... 6,022,193 4,736,592

Total. 13,291,147 7,698,700

Vepco does not claim herein any right to depreciation of land or land rights used in connection with the production and generation of electric energy.

9. For the years 1959 through 1961, Vepco computed its deductions for depreciation in the following manner: Its depreciable properties (excluding initial costs of clearing and acquisition costs of land rights) were included within a single group of all properties in its electric plant. This group included facilities used in both the generation and transmission of electric energy. The adjusted tax costs for this group at the beginning of each taxable year and at the end of each taxable year were ascertained. Then the beginning and ending tax costs for each taxable year (for straight line purposes) were added and divided by two in order to determine the average annual costs on which depreciation was computed for that taxable year. The average annual cost of the electric plant group for the taxable year was then multiplied by a composite rate of depreciation applicable to electric plants to determine the depreciation deduction allowable in respect thereto. The rates allowed by the Internal Revenue Service for the electric properties of Vepco for the years 1959-1961 were 3.25 percent, 3.20 percent and 3.15 percent, respectively, on a straight line method, and 6.4 percent and 6.3 percent, respectively, for 1960 and 1961 on the double declining balance method.

10. On its income tax returns for the years 1959,1960 and 1961 Vepco did not claim an allowance for depreciation for (i) the initial clearing costs for its transmission and distribution lines, and (ii) the cost of its transmission and distribution easements. The Internal Revenue Service has not allowed Vepco any deduction for depreciation with respect to initial clearing costs or the costs of acquiring right-of-way easements. In lieu thereof, the Internal Revenue Service has allowed deductions, as claimed by Vepco on its Federal income tax returns, for retirements of such property for each of the years 1959 through 1961 as follows:

Amount

$481 1959

140 1960

1,272 1961

If Vepco is allowed depreciation on its and on the costs of transmission and distribution easements, it has been stipulated that defendant has a right to set off the additional taxes that would be attributable to disallowance of deductions for retirement of the properties.

11. Vepco filed with the District Director of ¡Internal Revenue, Richmond, Virginia, timely claims for refund of income tax for the years here involved, claiming depreciation with respect to the costs of acquiring and- clearing transmission and distribution easements on the ground that the easements had a limited useful life to Vepco and that the clearing costs constituted a part of the cost of construction of the lines to which those costs were related. The 1959 and 1960 refund claims were disallowed by the District Director. The 1961 refund claim was not acted upon formally. The issue thus raised as to whether the assets in question have a limited useful life, which can be estimated with reasonable accuracy, requires findings of fact with respect thereto.

12. From time to time, transmission lines, poles, and towers have been retired by Vepco for various reasons. Since in the past, electric generation has about doubled every ten years, constantly larger lines are required to carry the higher voltages involved. When a line carrying comparatively lower voltage is replaced by a line carrying comparatively higher voltage, the replacement is referred to as a system change. In some cases the new, higher voltage line is constructed over the same easement over which the lower voltage line had been constructed. In many cases, however, system changes result in the abandonment of the easements on which the old line was located, thus requiring the acquisition of entirely new easements. Other reasons for retirement of lines and supporting facilities have been governmental requirements, highway construction, physical damage and obsolescence.

When overhead lines are retired, Vepco removes the poles, towers, conductors, insulators and any other material forming the line. The easements thereupon are abandoned, and they do not have any salvage value.

13. Three expert witnesses testified at the trial in behalf of Vepco. Each witness made an impressive showing that it is possible to estimate with reasonable accuracy the useful lives of Vepco’s transmission and distribution easements and the initial clearing costs. One expert, John J. Eeilly, based his opinion mostly on a comprehensive statistical study of Vep-co’s easement retirement data. The two other experts, James A. Eawls and Alexander Kusko, took a different approach and based their conclusions on industry trend studies justifying the prediction that, within the foreseeable future, Vep-co’s entire power output will be carried by underground cables because of both aesthetic requirements and the gradual conversion to nuclear powerplants.

14. Mr. Eeilly is a consulting engineer with vast experience in the preparation of appraisal and depreciation studies for many public utility clients. He conducted an extensive statistical study of the costs incurred by Vepco for electric transmission and distribution system easements and clearing with a view to developing estimates of reasonable average service lives which could be used to depreciate such costs for Federal income tax purposes during the years 1959', 1960 and 1961. In his long experience, Mr. Eeilly had found that such costs, depending upon the manner in which their retirements were treated for accounting purposes, generally have been considered as depreciable to the same extent as the electric transmission and distribution lines with which they were associated. Although not subjected to the same physical causes of retirement as the lines, he had concluded that these associated costs are directly affected by the same functional causes of retirement, such as, obsolescence, inadequacy, requirements of public authorities, and the like.

Ei arriving at his determination of the average service lives of Vepco’s various property accounts for the years in issue, Mr. Eeilly employed the geometric mean method of life analysis to each account. In addition, because of the availability of aged retirement data from Vepco’s records, he also made use of the annual rate actuarial method (employing the Iowa-type survivor curves) in determining the predicted service lives of the transmission right-of-way easements account and the initial clearing of transmission rights-of-way account. The results obtained by use of these life analysis methods were then interpreted by Mr. Reilly in light of his and knowledge of electric utility property in general, and Vepco’s property in particular, in arriving at his estimates of the average service lives of the account classifications in issue.

Mr. Reilly testified that in his opinion the estimated average service lives of the mass properties at issue in this case would be as follows:

jService lives, Class of property: years

Transmission right-of-way easements- 100

Distribution right-of-way easements- 50

Initial cost of clearing transmission rights-of-way- 100

Initial cost of clearing distribution rights-of-way- 50

Mr. Reilly qualified his opinion as to the above estimated service lives by stating that they were primarily ceiling figures to indicate an upper level of estimated lives. He testified that his “estimates would be too long” if, as he thought probable, Vepco’s future retirement experience turned out to be more rapid than in the past due to technological improvements in underground cable construction and the trend towards replacement of steam power plants by nuclear energy plants.

15. In contrast to the statistical approach employed by Mr. Reilly, Vepco’s other expert witnesses testified primarily with respect to the probability of substantial future changes from the present system of generating, transmitting, and distributing electrical power.

16. Mr. Rawls is Assistant Vice-President of Vepco. He is a well-qualified electrical engineer, and his entire career with Vepco, spanning some 42 years, has been spent working on the problems of Vepco’s transmission and distribution system. At the time of trial, Mr. Rawls was in charge of planning new sites for power generation, the location and construction of transmission and distribution lines, and the acquiring of easements.

He testified that, during the years in question, a substantial public concern was beginning to be expressed with respect to the appearance of overhead transmission and distribution lines, and the aesthetics problem of overhead facilities was very much, under consideration. Although during that time, as well as today, there are substantial problems in transmitting high voltages by underground cable, Vepco has been one oí the industry leaders in working to find a solution for them. The principal problem in the construction of high voltage underground alternating-current cable is to develop a method to dissipate heat caused by the thickness of the insulation required underground where, unlike an overhead line, there is no natural ventilation. One of the principal problems with respect to high voltage underground direct-current cable is the high cost of conversion facilities at each end of the line, in the one case to convert alternating-current to direct-current and in the other to reconvert direct-current to alternating-current. The cost of underground transmission construction in the taxable years and today is of the order of ten times the cost of overhead line construction carrying the same voltage. Whereas the cost of underground distribution construction during the taxable years was ten to fifteen times the cost of overhead construction, today the cost of direct burial underground distribution cable is only about three times the cost of overhead construction. Extensive research and experimentation with underground cable has been, and continues to be, conducted in the United States and foreign countries.

During the years in question Vepco did not have any underground transmission facilities. Vepco did have 137 miles of -underground distribution cable during those years, but substantially all such underground cable was located in city streets. Such underground distribution routes had no cost to Vepco.

On the basis of the above facts, it was Mr. Bawls’ opinion that overhead distribution lines of 44,000 volts and less would probably be phased out within 30 to 40 years in favor of underground cables. Further, he believed that all transmission lines would probably be underground within 60 to 70 years.

17. Dr. Kusko is an eminent consulting engineer with very extensive academic, research, and industrial experience in the study of electric power system problems. He testified that, at the time of the years here involved, it was possible to make rational predictions with respect to the probable future development of the electric power systems in the heavily populated region of the Atlantic Seaboard, including that of Vepco. He made his predictions by decades for the period 1960 to 2000, and for the period 2000 to 2030. Insofar as transmission and distribution systems are concerned, Dr. Kusko’s ultimate conclusion was that by the year 2000, nearly all overhead distribution lines will have been replaced by underground cables, and that by the year 2030, all overhead transmission lines will have been replaced by underground cables, a conclusion very close to that of Mr. Eawls. The following finding is a summary of Dr. Kusko’s reasons for his opinion.

18. The decade 1960 to 1970 may be described as a decade of mine-mouth coal burning plants. These plants will have been built close to coal mines in order to reduce the cost of fuel transportation, and their power output is transported by long extra high voltage overhead lines. An example of one such line, in operation for Vepco, is a 500,000 volt line from its mine-mouth generating plant at Mount Storm, West Virginia.

By the end of this decade, nuclear power generation will probably have become less expensive than fossil-fuel power generation, and with the exception of some new hydroelectric generating stations constructed primarily in Canada, substantially all new generating plants should be operating on nuclear fuel after 1970. Because of radiological dangers, these plants will be located away from cities, but near cooling water for volume cooling of their condensers. This will require massive overhead transmission lines to carry increased voltages of up to 1,000,000 volts.

Vepco’s power system will probably change also by reason of other technological developments. With the expected increase in population will also come an increase in energy requirements. Voltages in the range of 1,000,000 to 2,000,000 volts, which is probably what will be necessary within the next 30 to 40 years, are difficult to handle by the present air insulation overhead lines. The development of a better insulation for both overhead and underground transmission will be necessary by the turn of the century. Such a development is imder active research and experimentation. As higher voltage lines are constructed, lower voltage lines will 'become obsolete, and new lines will probably be constructed on new easements, as well as on existing easements where feasible.

As atomic generation of electricity is proved to be safe, generating plants will no longer be constructed in isolated areas, but will be built in the heart of cities and other load centers. This power system change will begin to take place in the decade 1990 to 2000. No new overhead transmission lines will be constructed after 1990 because they would no longer have any function. The tremendous loads will require that generating plants be located in populated areas. It will probably be impractical to bring that type of power into such areas by overhead transmission lines. Plants will have to be brought to the load centers. By the year 2000, power systems will be completely automatic and operated by computers. In this same time period, heavy water and breeder type reactors, which reproduce their own fuel, will begin to replace the light water reactor plants constructed previously. This development will be essential in order to conserve nuclear fuel.

On the basis of the above analysis, Dr. Kusko concluded that after 1970 it is reasonable to believe that electric distribution systems in cities and in the surrounding populated areas will be constructed in underground cable. Furthermore, by the year 1990, all distribution circuits in densely populated areas will have been converted to underground cable, and by the year 2000, substantially all the distribution facilities of Vepco, wherever located, will be in underground cable.

As for the transmission system, Dr. Kusko concluded that all new transmission will be constructed in underground cable by the year 2000. Overhead lines built 800,000 to 1,000,000 volts will remain in operation, although portions of them will be replaced by cable as population grows into areas in which those lines are located. As stated previously, any new construction during this period will be close to load areas, not requiring extensive overhead transmission lines of the type earlier built. He concluded that by the year 2030 the last of the overhead lines built in the 1970 to 2000 period will have been retired.

19. As previously noted, the transmission and easement agreements make no provision for construction of cable and related facilities underground. Vepeo, the Chesapeake & Potomac Telephone Company of Virginia, and 17 other telephone companies operating in Vepco’s service area have agreements granting each other the right to attach facilities to each other’s poles. These agreements confer upon Vepeo the right to attach lines, wires, transformers or any other related overhead facility to the telephone company’s poles, and the reciprocal right is conferred upon the telephone companies. The following table shows the number of telephone company poles on which Vepeo had installations during the revelant period, and vice versa:

1969 I960 1961

Telephone company poles on which Vepeo had Installations— 112,482 127,762 135,618

Vepeo poles on which telephone company had installations— 218,693 237,208 254,834

20. Since 1942, the Internal Revenue Service has allowed telephone companies to depreciate their easements. Originally, an estimated useful life of 67 years with zero salvage value was established for the easements acquired by the telephone companies. See Bulletin E entitled “Income Tax Depreciation and Obsolescence Estimated Useful Lives and Depreciation Rates” which was published by the Treasury Department in January 1942 and republished without change as to useful lives in 1960. In July 1962, however, Rev. Proc. 62-21,1962-2 C.B. 418, was published.

Rev. Proc. 62-21 provided that depreciable lives or depreciation rates of capital assets of telephone companies, as established by the Federal Communications Commission and other regulatory agencies, were to be used in the computation of depreciation for Federal income tax purposes.

In 1965, the Internal Revenue Service published Rev. Proc. 65-13, 1965-1 C.B. 759, as a supplement to Rev. Proc. 62-21. This supplement did not change the manner in which telephone companies were to compute depreciation for tax purposes from that previously prescribed under the earlier editions of Rev. Proc. 62-21.

21. On its returns for the years 1959,1960 and 1961, Vepco claimed deductions for the amortization of emergency facilities, including initial clearing costs and the costs of easements relating to certified facilities. All of the certificates of necessity here in question contain the following proviso:

The rights-of-way and land clearance described in the attached Appendix A are certified only to the extent that they may be determined to be depreciable under Section 167 of the Internal Revenue Code of 1954 and applicable Regulations.

The District Director disallowed the portion of the deduction claimed for amortization of emergency facilities based on initial clearing costs and the cost of easements included in the cost of constructing certified emergency facilities under certificates of necessity containing the proviso quoted above.

22. Vepco had claimed amortization deductions under Section 168 of the Internal Revenue Code of 1954 for the initial costs of clearing rights-of-way and the cost of easements from the time the related emergency facilities were placed in service. When the 1959, 1960 and 1961 income tax returns of Vepco were audited, the statute of limitations barred the reopening of the returns for earlier years. Upon the audit of the 1959, 1960 and 1961 returns, the District Director reduced the basis of admittedly amortizable emergency facilities by the amount of amortization allowed for years barred by the statute of limitations with respect to the costs of initial clearing and the costs of easements.

23. Vepco filed its 1959,1960 and 1961 corporation income tax returns with the District Director of Internal Revenue, Richmond, Virginia. The dates of filing such returns and the amounts of income tax liabilities (including interest for the year 1960 in the amount oí $14,041) shown were as follows:

Tear Date Amount

1959..-_Sept. 15,1960 $17,792,353

I960.-.-.Sept. 15,1961 21,010,078

1991.......June 15,1962 23,271,266

The above amounts have been paid in full by Vepco.

As a result of the initial audit of Vepco’s returns for the years 1959 and 1960, deficiencies of tax and interest were timely assessed and paid as follows:

tax plus Tear: assessed interest

1959_$664,629.32

1960_ 30, 086.47

The foregoing deficiency for 1959 was paid by Vepco on May 14,1962, and that for 1960 was paid on September 24,1962.

During the audit of the return of Vepco for the year 1961, the returns for 1959 and 1960 were reopened, and deficiencies of tax and interest were assessed and paid as follows:

Deficiency in tax plus Year: assessed interest

1959_ $355,777.36

1960_ 261,265.47

1961_ 222,362.31

The foregoing deficiencies of income tax, plus interest, were timely assessed by the District Director, and were paid by Vepco on January 11,1965.

24. On December 18, 1964, Vepco timely filed with the District Director of Internal Eevenue, Bichmond, Virginia, separate claims for refund of income tax for the years and in the amounts as follows:

Year: Amount claimed

1959 $205, 313

1960 225,309

1961 248,873

On March 2,1965, Vepco timely filed with the District Director amended claims for refund for the years 1959, 1960 and 1961 in the following amounts:

Year: Amount claimed

1959 _$560,281.73

1960 _ 485,772.83

1961 _ 464,726.94

The claims set forth in the petition for the years 1959,1960 and 1961 had previously been included in, and formed the basis of the claims for refund which were filed for such years. The claims were disallowed as set forth in finding 11.

25. It has been stipulated that should Yepco be found to be entitled to depreciation of initial clearing costs and costs of acquiring transmission and distribution rights-of-way, and to amortization of certified emergency facilities measured by the initial clearing costs and the costs of transmission and distribution rights-of-way, no adjustment to basis should result from the allowance of amortization of initial clearing costs and the costs of transmission and distribution rights-of-way before 1959 on certified facilities, or any of them, and the amount of recovery to which Yepco may be entitled will be determined in accordance with the procedure prescribed by Rule 41 (c) of the court.

CONCLUSION OK LAW

Based upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, and judgment is entered to that effect, with the amount of recovery to be determined in further proceedings pursuant to Rule 47 (c). 
      
      We are indebted to Trial Commissioner Lloyd Eletcher for his opinion and recommended conclusion of law which we adopt with minor modifications, except for our denial of rapid depreciation deductions for initial clearing costs.
     
      
       A subsidiary issue relates to the amortization of emergency facilities by Vepco under certificates of necessity which provided that costs of easements and clearing with respect to such facilities were amortizable only if such assets qualify for the depreciation allowance under section 167 of the Internal Revenue Code. Since it is held that these assets do qualify for the depreciation allowance, it follows that amortization is allowable, and this issue is, therefore, moot.
     
      
       To rewrite that opinion would be to invoke recollection of Judge Frank’s jocular dictum: “Papa bring the hammer, there’s a fly on baby’s head.” Wabash Corp. v. Ross Electric Corp., 187 F. 2d 577, 595 (2d Cir., 1951).
     
      
       This Is not to say that, in reaching conclusions in this area, an engineer-analyst -will rely merely on statistical computations and projections. He must also have extensive knowledge of the utility’s overall electric plant and related facilities, and information with respect to both the causes of property retirements in the past, and the likelihood that such retirements will continue or become more frequent in the future. See, Pennsylvania Power & Light Company, ante, 86-87.
     
      
      
         One entire chapter of the 1965 Proceedings of the White House Conference on National Beauty is devoted to a consideration of the underground installation of utility systems; an extensive report on the subject was submitted to the Federal Power Commission in 1966; and tills have been introduced in Congress to provide funds for research programs in the field.
     
      
       At the time of trial Vepco had plans to build three nuclear energy plants to become operational in 1971,1972, and 1974.
     
      
       “No one — not even the most brilliant scientist alive today — really knows where science is taking ns. We are aboard a train which is gathering speed, racing down a track on which there are an unknown number of switches leading to unknown destinations. No single scientist is in the engine cab and there may be demons at the switches. Most of society is in the caboose looking backward.” Lapp, The New Priesthood: The Scientific Elite and the Use of Power, Harper & Row, (1965) at p. 29.
     
      
      
         A comparable problem was before tbe court in Panhandle Eastern Pipeline Co. v. United States, 187 Ct. Cl. 129, 408 F. 2d 690 (1969). Therein, the rapid depreciation issue involved certain roddage fees paid to acquire the easements. We held that these were costs of the easement and intangibles, not subject to rapid depreciation.
     
      
       Plaintiff relies on Portland General Electric Co. v. United States, 189 P. Supp. 290 (D. Ore. 1960), aff’d on other issues, 310 F. 2d 877 (9th Cir. 1962), and Commonwealth natural Gas Co. v. United States, 266 F. Supp. 298 (E.D. Va. 1966), aff’d, 395 F. 2d 493 (4th Cir. 1968).
      In the Portland General Electric Co. case the parties stipulated to the cost basis of depreciable property except for two items, one of which was “Costs of Rights of Way”. In deciding that the costs of clearing rights of way were depreciable, the court held “these properties were depreciated over the useful lives of the properties with which the rights of way are associated. These costs are proper items to be made part of the cost basis of PGB’s de-preciable properties.” [189 F. Supp. at 306.)
      In our case, the initial clearing costs are depreciable over the useful life of the easements; in the PGM Go. case, they were depreciable over the useful life of the properties placed on the easement. In PGM the court made these costs part of the base of the properties and depreciable together with them. In our case, these costs are part of the depreciable base of the easements. It is incongruous to consider these costs depreciable over the life of the easements, not an independent asset, yet subject to rapid depreciation.
      In the Commonwealth Natural Gas Go. case, the useful lives of the pipeline and easement were coterminous, and the court found that the useful life of the clearing costs would be exhausted together with that of the pipeline. Here, the useful life of the clearing costs extends beyond the life of the initial line and, accordingly, we have not made these costs part of the depreciable base of the line.
     
      
       Trial Commissioner Hogenson tried the P. P. & L. Co. ease and Trial Com-missoner Eletcher tried the Vepco case.
     
      
       In some instances, Vepco has acquired the entire fee simple title from the landowner, but it does not claim herein a right to depreciation of any land thus acquired by it.
     
      
       Such consideration has continued. One entire chapter of the 1965 Proceedings of the White House Conference on National Beauty is devoted to a consideration of the underground installation of utility systems; an extensive report on the subject was submitted to the Federal Power Commission in 1966; and bills have been introduced in Congress to provide funds for research programs in the field.
     
      
       At the time of trial Vepco had plans to build three nuelear energy plants to become operational in 1971,1972 and 1974.
     