Washington Suburban Sanitary Commission v. Utilities, Inc.

LAWRENCE F. RODOWSKY, Judge, Retired, Specially Assigned. Appellant and cross-appellee, Washington Suburban Sanitary Commission (WSSC), petitioned for the conventional con ⁷ demnation of water and sewerage systems (the Systems) owned and operated by the appellee and cross-appellant, Utilities, Inc. of Maryland (UIM), a public service utility. The jury valued the Systems at $9.7 million from which, per statute, the court deducted $3.2 million representing contributions in aid of construction (CIAC). 1 UIM contends, inter alia, that the statute requiring the deduction of CIAC effects an unconstitutional taking without just compensation. 2 WSSC contends, inter alia, that the trial court erred in admitting evidence relating to the value of the Systems based on capitalization of the regulated cash flow at rates of return appropriate to an unregulated, governmental owner. As explained ⁸ below, we shall reverse on the appeal of UIM and affirm on the appeal of WSSC.

WSSC is a state agency, vested with broad authority to construct and operate water supply, sewerage, and storm water management systems in Prince George’s and Montgomery Counties. See Maryland Code (1957, 1997 Repl.Vol., 2000 Cum.Supp.), Article 29, §§ 1-101 through 19-101; Katz v. WSSC, 284 Md. 503, 509 , 397 A.2d 1027, 1031 (1979). UIM is a subsidiary of a nationwide holding company, Utilities Inc. (UI), that operates more than 350 utility systems in fifteen states. The Systems serve Marlboro Meadows, an unincorporated community of 1,200 residences in Prince George’s County lying east of U.S. 301, approximately 1.6 miles northeast of Upper Marlboro.

The Systems are capable of serving 1,800 residential units. Major components of the condemned property include two wells collectively capable of producing three million gallons per day, a 500,000 gallon water tower, a 500,000 gallon ground source reservoir, auxiliary power sources, twenty-nine miles of pipe, seventy-five fire hydrants, 323 manholes, a waste water treatment plant, a waste water pumping station, a fresh water treatment plant, chemicals, inventory, spare parts, laboratory equipment, and office equipment. The utility also leases space on its water tower to three cellular telephone companies. Marlboro Meadows was under development in 1965.

The developer was Hylton Enterprises, Inc., a corporation owned by Cecil D. Hylton, Sr. (Hylton). Hylton also owned all of the stock of First Maryland Utilities, Inc. (First Maryland). In April 1965 the County Commissioners of Prince George’s County granted First Maryland an exclusive franchise for the operation of water and sewerage treatment systems in Marlboro Meadows, and in July 1967 First Maryland received Public Service Commission of Maryland (PSC) authorization to exercise its franchise. It is undisputed that the PSC treated at least some substantial portion of the cost of construction by First Maryland of the initial water and sewerage treatment facilities at Marlboro Meadows as CIAC, made by ⁹ the initial purchasers of homes in that community as part of their purchase prices, and that the PSC deducted the CIAC from First Maryland’s rate base.

By 1988 First Maryland had been sued by the Maryland Department of Health and Mental Hygiene for violations in sewerage treatment operations, and First Maryland had agreed to pay $200,000 in fines and plant improvements to settle that action. Re First Maryland Utilities, Inc., 76 Md. P.S.C. 175, 177 (1985). The drinking water frequently contained “sand, iron and other particulate matter” and there were “instances of raw sewage backing up into ... homes.” Id. at 176-77. In March 1985 the PSC approved the transfer of the assets, rights, and franchises of First Maryland to UIM.

Id. at 179. For purposes of the PSC’s calculation of the rate base, UIM’s purchase price was $200,000. 3 UIM promised the PSC that it would make substantial improvements to the Systems. At the time of trial of the instant matter UIM had made approximately $2 million of improvements to the Systems. Despite the improvements made by UIM, homeowners in Marlboro Meadows continued to complain about the quality of the tap water.

As a result the Prince George’s County Council organized the Marlboro Meadows Policy Review Group. It consisted of representatives of the County Executive of Prince George’s County, certain members of the Maryland Senate, House of Delegates, and Prince George’s County Council, and representatives of WSSC and Marlboro Meadows. At times meetings of the group were attended by representatives of the Maryland Environmental Service (MES). 4 WSSC received funding in its capital improvement ¹⁰ programs for fiscal years 1994 and 1996 to study acquisition of the Systems. In September 1996 consultants engaged by WSSC reported that the tap water met current federal and state primary and secondary drinking water standards but that customer dissatisfaction with discoloration caused by the high iron content of the water continued.

In November 1996 the review group recommended that WSSC acquire the Systems. By resolutions of July 30, 1997, and October 29, 1997, the Commissioners of WSSC authorized condemnation. The instant action was filed in the Circuit Court for Prince George’s County on September 8,1997. At trial, the sole witness called by WSSC was John J. Boland, Ph.D.

(Boland), a professor of applied economics at Johns Hopkins University. Boland opined that the fair market value of the Systems is $2,083,693, a figure which included valuing the leases to the cellular telephone companies at $461,180. Of the three basic approaches to value, comparable sales, capitalization of income, and reconstruction cost new less depreciation (RCNLD), Boland rested his ultimate opinion on his analysis of comparable sales. 5 Boland calculated ¹¹ the value under the RCNLD method to be $7.2 million. In his income approach Boland capitalized the regulated income of UIM at rates which he considered appropriate for an investor owned buyer.

He excluded rates appropriate to a willing acquisition by a governmental entity because he did not believe that there was a reasonable probability of a willing acquisition by a governmental entity, other than WSSC. 6 Comparing his valuation by the income approach with his valuation by the RCNLD method, Boland concluded that the disparity was due to “external obsolescence,” namely, the regulation of the rates charged by UIM. Because of his view that the income approach placed a ceiling on what a buyer would pay, Boland excluded his $7.2 million calculation of RCNLD. Based on sales of privately owned utilities in Maryland which Boland considered to be comparable, he computed the value of the Systems under the comparable sales method at $1,622,513, to which he added the value of the tower leases, arriving at his ultimate opinion of value at $2,083,693. Unlike WSSC’s trial strategy, which sought to minimize or negate the weight of evidence of RCNLD value, UIM focused its case on attempting to persuade the jury to give maximum weight to a RCNLD value.

UIM’s first witness described the facilities and processes of the Systems. He testified that UIM ¹² invested between $1,750,000 and $2 million on capital improvements. UIM next called James Camaren, the CEO and board chairman of UI. He explained UI’s business strategy of acquiring water and sewerage utilities from developers, making capital improvements to the utilities, and ultimately selling the utilities to municipal purchasers.

He estimated the value of UIM, excluding the water tower leases, to be $3,000 for water service and $3,000 for sewerage service per actual and potential customer for a total of $10.78 million. UIM’s third witness appraised the land without any improvements at $2,062,400. A consultant who had been retained by WSSC to perform a RCNLD analysis which was rejected by WSSC testified that the value of the improvements under that method was $7.2 million. An expert, Gerald Hartman (Hartman), who had been retained by UIM to perform a RCNLD valuation of the Systems opined that the value was $9,233,036, exclusive of the land.

Next, UIM called John F. Guastella (Guastella), a consultant specializing in water and sewerage utility issues. In his opinion, based upon the RCNLD approach, the value of the tangible property as a going concern was $9,233,000 so that the fair market value of the Systems, including the land, was $11,295,000. Guastella’s testimony included a discussion about a hypothetical government purchaser as part of the relevant market. UIM’s final witness was Robert F. Reilly (Reilly), an appraiser and author of works on appraisal whose experience is nationwide.

Reilly expressed no opinion on value. He was retained by UIM to review and critique the appraisal performed by Boland, and to correct, if necessary, the latter’s methodology and data sources. Reilly testified that it was impossible to correct Boland’s methodology because the “major conceptual and practical errors” were too fundamental. Reilly criticized Boland for ignoring municipal purchasers, which Reilly said constitute ninety percent of the purchasers in the relevant market. ¹³ The court submitted the case to the jury on a verdict sheet in the following form: “1.

What amount of just compensation do you award to UIM? "$__________ “UIM holds title to certain infrastructure that was contributed by developers in aid of constructing UIM’s water and sewerage system. The amount of this contribution in aid of construction (CIAC) was $3.2 million. “2. What amount of CIAC, if any, that you considered to have been an inducement for the purchase of lots or land to be served by the system did you include in your award of just compensation? “$_” The jury verdict set just compensation at $9.7 million and found the amount of CIAC to be $3.2 million.

The circuit court deducted the CIAC from the jury’s valuation and ordered that “upon deposit by WSSC of $6.5 million into Court,” the Systems “shall be held and become vested in WSSC.” Each party noted an appeal to the Court of Special Appeals. WSSC petitioned this Court for a writ of certiorari after the case was briefed in, but prior to oral argument before, the Court of Special Appeals. We granted the writ. WSSC v. Utilities, Inc. of Maryland, 362 Md. 189 , 763 A.2d 736 (2000).

The issues that we address are: I. Necessity of the taking; II. The CIAC reduction of the award: A. Applicability of the statute to this case, B. Evidentiary sufficiency of applicability, and C. Constitutionality of the statute; III. Admissibility of an unregulated income approach to valuation; and IV. Miscellaneous evidentiary issues. ¹⁴ I UIM presents a threshold issue, contending that WSSC’s determination of necessity for the taking was legally erroneous.

Article 29, § 3-106, conferring on WSSC the power to condemn existing water or sewerage systems, provided, prior to April 14, 1998, as follows: “(a) Acquisition. — If the WSSC extends its general water supply or sewerage system to a municipally or privately owned water supply or sewerage system and the WSSC is ready to connect with the system, or if the WSSC considers such action to be expedient, advisable, and proper for the adequate operation of the system under the WSSC’s jurisdiction, the WSSC may purchase the system. “(b) Purchase price; condemnation. — If the WSSC and the owner fail to agree to the purchase price or conditions of purchase of the water or sewerage system, the WSSC may acquire the system by condemnation, as provided in Title 2 of this article.” 7 The circuit court granted partial summary judgment in favor of WSSC, finding that WSSC did not act arbitrarily or unreasonably in determining that a public necessity existed. In a written opinion the circuit court described in detail the information considered by WSSC in its decision. WSSC planned to extend its water main 1,200 feet along Route 301, to connect to UIM’s water system. Essentially WSSC rested its decision on the problems experienced by residents in Marlboro Meadows with discolored water and also on the concerns of those residents that they were paying significantly more for water and sewerage service than was being paid by homeowners serviced by WSSC.

Efficient operation dictated ¹⁵ acquiring UIM’s sewerage system at the same time. UIM, in opposing summary judgment, pointed to evidence indicating that the taking was not “expedient, advisable, and proper for the adequate operation of the [Systems] under the WSSC’s jurisdiction.” The court concluded that “UIM’s case boils down to its argument that WSSC will not likely meet its stated goals of improved water quality and lower rates.” Although the circuit court agreed that it was uncertain whether “WSSC will actually achieve better water quality and lower rates,” that court found “ample debatable evidence in the record to demonstrate a rational basis for” WSSC to condemn the property. First, UIM contends that it was error to defer to WSSC’s determination when ruling on a motion for summary judgment, saying: “The trial court misapplied the summary judgment standard in this case when it granted partial summary judgment to WSSC on the very basis that ‘there is ample debatable evidence’ regarding whether WSSC acted reasonably in making its necessity determination.... The court’s reversible error results from its conflation of the procedural standards of summary judgment with the underlying substantive standard of judicial review of the decisions of a governmental agency.

Rather than applying the summary judgment standard mandated by Maryland law, the court fabricated an admittedly ‘unique’ summary judgment standard, because the underlying necessity determination constituted an agency action.... But this is not the law, because the presence of ‘debatable’ evidence requires summary judgment to be denied.” Brief of Appellee at 44-45. Second, UIM argues that it presented substantial evidence indicating that WSSC lacked a rational basis for its necessity determination. Third, UIM contends that WSSC acted arbitrarily by “violating its own rules and procedures.” The first and second points may be considered together. ¹⁶ In order to defeat summary judgment, the disputed facts must be material.

Maryland Rule 2-501. That there were conflicting facts before WSSC is immaterial. The issue before the circuit court was whether the decision ultimately reached by WSSC was supported by substantial evidence. So long as WSSC reached a conclusion that is fairly debatable the circuit court could not substitute its judgment for that of the governmental body on which the condemnation power had been conferred.

See Mann v. White Marsh Props., Inc., 321 Md. 111 , 581 A.2d 819 (1990) (holding that, in specific performance action, conflicting inferences from undisputed facts do not defeat alleged vendor’s statute of frauds defense, raised by summary judgment, because part performance avoidance of statute of frauds is not available where inferences are conflicting). The judiciary has a very limited role in reviewing an agency’s decision that there is a need for particular property. County Comm’rs of Frederick County v. Schrodel, 320 Md. 202, 216 , 577 A.2d 39, 46 (1990). The following passage from Murphy v. State Roads Comm’n, 159 Md. 7, 15 , 149 A. 566, 570 (1930), succinctly summarizes that limited role: “Ordinarily the question of whether a proposed [location] is required by public necessity is legislative rather than judicial .... [T]he decision ... as to the public necessity for taking particular property is not subject to judicial review unless [the] decision is so oppressive, arbitrary or unreasonable as to suggest bad faith.” (Emphasis added).

In WSSC v. Santorios, 234 Md. 342, 346 , 199 A.2d 206, 208 (1964), we quoted with approval the following passage from what is now 1A J.L. Sackman, Nichols on Eminent Domain § 4.11[3], at 4-215 through 4-218 (3d ed. rev.2000) (footnotes omitted): “ ‘The necessity is for the condemnor and not for the courts to decide, and the decision of such condemnor is final so long as it acts reasonably and in good faith. If the land is of some use to it in carrying out its public object, the degree of necessity is its own affair. Whether there is any necessity ¹⁷ whatever to justify the taking is, however, a judicial question.’ ” The most recent pronouncement by this Court was made in Green v. High Ridge Ass’n, 346 Md. 65, 79 , 695 A.2d 125, 132 (1997), cert. denied, 522 U.S. 1047 , 118 S.Ct. 690 , 139 L.Ed.2d 636 (1998), where we explained: “This Court has held, however, that the question of whether there is a ‘necessity’ for a particular condemnation is primarily for the legislative and/or executive branches of government.... “The determination by a condemning authority that a particular taking is ‘necessary’ will not be set aside by the courts unless the condemnor’s decision ‘is so oppressive, arbitrary or unreasonable as to suggest bad faith,’ Anne Arundel County v. Burnopp, 300 Md. [343,] 349, 478 A.2d [315,] 318 [ (1984) ].” In support of its assertion that there was a lack of substantial evidence to support WSSC’s decision, UIM argues that there was no evidence that WSSC would be able to achieve its stated goals of improving water quality and stabilizing or reducing costs to consumers. No such finding is required by the law, and the absence of proof that WSSC could achieve its goals certainly does not render its findings arbitrary or unreasonable.

In Schrodel, supra, this Court, relying upon the United States Supreme Court’s decision in Hawaii Housing Auth. v. Midkiff, 467 U.S. 229 , 104 S.Ct. 2321 , 81 L.Ed.2d 186 (1984), rejected the argument that Frederick County’s decision to condemn certain property in order to build a landfill was oppressive, arbitrary, and unreasonable because there existed a possibility that the County might fail to obtain the necessary permits and be unable to use the land as a landfill. We said: “ ‘Of course, this Act, like any other, may not be successful in achieving its intended goals. But “whether in fact the provision will accomplish its objectives is not the question: the [constitutional requirement] is satisfied if ... the ... [state] Legislature rationally could have believed that the ¹⁸ [Act] would promote its objective.” Western & Southern Life Ins. Co. v. State Bd. of Equalization, 451 U.S. 648, 671-672 , 101 S.Ct. 2070, 2084 , 68 L.Ed.2d 514 [, 532-33] (1981);’ Hi # H* * ❖ “ ‘When the legislature’s purpose is legitimate and its means are not irrational, our cases make clear that empirical debates over the wisdom of takings — no less than debates over the wisdom of other kinds of socioeconomic legislation — are not to be carried out in the federal courts.’ ” Schroedel, 320 Md. at 217 , 577 A.2d at 47 (quoting Midkiff, 467 U.S. at 242-43 , 104 S.Ct. at 2330 , 81 L.Ed.2d at 198-99 ).

That WSSC may ultimately fail to improve water quality or control the costs to consumers does not render its decision arbitrary and unreasonable. Finally, UIM asserts that WSSC acted “arbitrarily and capriciously by violating its own policies and procedures.” In support UIM refers to a consultant’s memorandum of a meeting and to deposition testimony of WSSC’s General Manager, describing how WSSC proceeded in certain matters in the past. UIM fails to point to any violation of statutes or rules. There is simply no basis for invalidating WSSC’s decision for purported procedural irregularities.

For these reasons, the circuit court did not err in granting summary judgment in favor of WSSC on the issue of public necessity. II The special verdict form in this case was designed to comply with Maryland Code (1957, 1997 Repl.Vol., 2000 Cum.Supp.), Article 29, § 3-107 which, as of April 14, 1998, provides: “(a) Jury award in condemnation proceeding. — If a privately owned water or sewerage system is the subject of a condemnation proceeding under this article, a jury in the proceeding shall: ¹⁹ “(1) Consider as part of an award any payment, contribution, or tax paid by the respective lot owners or purchasers toward the construction of the system; and “(2) If the system has been built in connection with and for the purpose of developing home sites, subdivisions, or villages by any person and the system has been offered as an inducement for the purchase of lots or land to be served by the system, deduct from the determined value of the plant or system a sum that the jury reasonably determines was added to the purchase price of the land or lots for the purpose of constructing the system.” The figure of $3.2 million representing CIAC that appeared in the verdict sheet as furnished by the circuit court to the jury was derived from reports filed by UIM with the PSC. For purposes of rate-making a public utility is not permitted to include CIAC in its rate base on which the charges to the utility’s customers are based. See City of Hagerstown v. Public Serv.

Comm’n, 217 Md. 101 , 141 A.2d 699 (1958). It appears that the $3.2 million figure for CIAC represents the original cost of building the Systems, presumably less the original cost of property no longer in use, plus any contributions to UIM of property added to the Systems after UIM’s acquisition. UIM asserts that current § 3-107 is not applicable to this condemnation because on September 8, 1997, when WSSC petitioned for conventional condemnation, the text of the statute expressly limited its application to “quick take” condemnation by WSSC in Prince George’s County. Further, UIM asserts that the evidence is legally insufficient to establish that the Systems were “offered as an inducement for the purchase of lots” or that “a payment” was made by the lot “purchasers toward the construction of the [Sjystems.” Ultimately, UIM contends that § 3-107 effects an unconstitutional taking.

A Since WSSC’s creation by Chapter 122 of the Acts of 1918 and until Chapter 767 of the Acts of 1982, the statutes ²⁰ governing condemnation by WSSC of water and sewerage utilities provided for deducting CIAC from fair market value. See Chapter 122, Acts of 1918, at 260; Code of Public Local Laws of Montgomery County, § 1196, at 671-72 (1939); Code of Public Local Laws of Prince George’s County, § 1446, at 831-32 (1943); Chapter 53, Acts of 1967, at 64-67 (conferring the “quick take” power on WSSC for takings in Prince George’s County); and Chapter 805, Acts of 1981, at 3078 (transferring statutes relating to WSSC from public local to public general laws). After the 1981 transfer from public local to public general laws, the CIAC provision was codified as Maryland Code (1957, 1978 RepLVol., 1981 Cum.Supp.), Article 67, § 3-6. In 1982, then Article 67, § 3-6 was recodified as Article 29, § 3-107.

In that recodification the phrase “under Title 2” was added preceding “of this article” in House Bill 1802, enacted as Chapter 767 of the Acts of 1982. Title 2 of Article 29 deals only with quick take in Prince George’s County. “[UJnder Title 2” was deleted by emergency legislation, Chapter 21 of the Acts of 1998, effective after this petition for condemnation was filed. WSSC submits that the 1982 change was a mistake. The 1982 legislation was the product of the “WSSC Code Revision Committee” (the Committee), formed in 1981 and consisting of certain legislators from Montgomery and Prince George’s Counties.

Its chair, in a June 4, 1981 letter, explained that the Committee’s work would be “to accomplish desired structural, stylistic and technical changes and clarification of language where necessary.” He further explained: “It should be noted here that substantive changes are not a part of this process but, rather, the Committee is charged with performing in a manner similar to that of the Code Revision Commission in its handling of Articles of the Annotated Code of Maryland.” A December 21, 1981 letter from another member of the Committee stated that a public hearing on the bill was unnecessary because it involved “strictly Code revision and stylistic” ²¹ changes. A written statement, dated November 16, 1981, prepared by a staff attorney for briefing the Montgomery County Delegation, confirmed that the purpose of the bill was to modernize and clarify the WSSC law, not to make substantive policy changes. The statement also indicates that the vehicle for substantive changes would be a companion bill, eventually enacted as Chapter 768 of the Acts of 1982. Finally, the minutes of the February 25, 1982 House of Delegates Bi-County Committee meeting, at which House Bill 1802 was given a favorable report, referred to it as a “stylistic revision.” WSSC argues that the plain language of § 3-107, as it read from 1982 to 1998, effected no substantive change because the language change was made during the course of Code revision, is an obvious mistake, and there is an absence of the clearest legislative intent to make a substantive change.

WSSC cites Rettig v. State, 334 Md. 419, 426-27 , 639 A.2d 670, 674 (1994); McGarvey v. State, 311 Md. 233, 242 , 533 A.2d 690, 694 (1987); and Kaczorowski v. Mayor & City Council of Baltimore, 309 Md. 505, 508-09 , 525 A.2d 628, 629-30 (1987). WSSC also argues that applying the plain language of the 1982-1998 version would defy the clear legislative purpose which the plain language test seeks to discern and would lead to a result that is “ ‘unreasonable, illogical, [and] inconsistent with common sense.’ ” Kaczorowski, 309 Md. at 516 , 525 A.2d at 633 (quoting Potter v. Bethesda Fire Dep’t, 309 Md. 347, 353 , 524 A.2d 61, 64 (1987)). We do not accept the premise of UIM’s argument that the applicability of present § 3-107(a) is determined by the date of institution of the instant action. Maryland Code (1974,1996 RepLVol., 2000 Cum.Supp.), Title 12 of the Real Property Article (RP) and Title 12, Chapter 200 of the Maryland Rules govern “[a]ll proceedings for the acquisition of private property for public use by condemnation.” RP § 12-101.

Where, as here, the condemnation is not effected by a quick take procedure title is deemed to be taken “if the plaintiff pays the judgment and costs pursuant to Title 12, Chapter 200 of the Maryland Rules.” RP § 12-102(2). RP § 12-103 then provides: ²² “Unless an applicable statute specifies a different time as of which the value is to be determined, the value of the property sought to be condemned ... shall be determined as of the date of the taking, if taking has occurred, or as of the date of trial, if taking has not occurred.” The language of Article 29, § 3-107 dictates that, in determining value, CIAC is to be deducted from the fair market value of the property taken. The language of § 3-107 states a special rule of valuation for condemned, privately owned water and sewerage systems in the Washington Suburban Sanitary District. Under RP § 12-103 the critical date for determining value in a conventional condemnation is the date of trial.

In the instant matter trial commenced January 24, 2000, well after amended Article 29, § 3-107 became effective. Therefore, amended § 3-107 applies in the instant matter. B The evidence was sufficient for the jury to find that the Systems “had been offered as an inducement for the purchase of lots or land” and that the respective lot owners paid an amount toward construction of the Systems. UIM’s Annual Reports to the PSC for the years 1996, 1997, and 1998 were received into evidence and showed the amount of CIAC to be $3,190,000, $3,209,000, and $3,171,000, respectively.

The jury was entitled to infer that the Systems had been offered as an inducement for purchase and that the lot owners indirectly paid toward the original construction of the Systems. See Hagerstown, 217 Md. at 108-09 , 141 A.2d at 702 (“[W]e have no doubt that any such costs originally paid by the developers were passed on to the purchasers in the form of increased prices for lots____”); In re Kaanapali Water Corp., 678 P.2d at 590-91 (holding in rate case that there was a rebuttable factual presumption that privately owned water utility had received CIAC from developer of hotel-resort complex); Princess Anne Utilities Corp. v. Commonwealth ex rel. State Corp. Comm’n, 211 Va. 620 , 179 S.E.2d 714, 717 (1971) (hold ²³ ing in rate case involving privately owned utility that “it would be wholly unrealistic to say that the costs of the sewerage facilities contributed by the land development companies were not passed on to those customers”). As a corollary to the argument now under consideration, UIM submits that the circuit court erred in structuring the verdict sheet by stating, without qualification, that the amount of CIAC was $3.2 million.

If this argument were successful, the result would be a new trial at which the $38,000 swing between $3,209 million and $3,171 million would be at issue. Deciding that issue at a new trial would still leave unresolved the constitutionality of Article 29, § 3-107 which we were unable to reach in Utilities, Inc. of Maryland v. WSSC, 362 Md. 37 , 763 A.2d 129 (2000), and which was a substantial factor in the grant of by-pass certiorari in the instant matter. Reaching the constitutional issue is unavoidable in this case. C The Supreme Court of the United States “has repeatedly held that just compensation normally is to be measured by ‘the market value of the property at the time of the taking contemporaneously paid iri money.’ ” United States v. 50 Acres of Land, 469 U.S. 24, 29 , 105 S.Ct. 451, 454 , 83 L.Ed.2d 376, 382 (1984) (internal attribution omitted).

Accord Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 10 , 104 S.Ct. 2187, 2194 , 81 L.Ed.2d 1, 10 (1984); United States v. 564.54 Acres of Land, 441 U.S. 506, 511 , 99 S.Ct. 1854, 1857 , 60 L.Ed.2d 435, 440-41 (1979); Olson v. United States, 292 U.S. 246, 255 , 54 S.Ct. 704, 708 , 78 L.Ed. 1236, 1244 (1934); United States v. Chandler-Dunbar Water Power Co., 229 U.S. 53, 81 , 33 S.Ct. 667, 679 , 57 L.Ed. 1063, 1082 (1913). UIM contends that § 3-107(a) operates to take its property without just compensation in that step one of the procedure under § 3-107(a) requires a determination of fair market value of the going concern, including CIAC, but, in step two, the statute directs that the fair market value of the property be reduced by CIAC. ²⁴ CIAC, as part of the Systems, is not specifically identifiable property. It is a running tally maintained for PSC reporting purposes dating back to the original construction of the Systems by First Maryland. UIM holds title to the Systems, UIM pays taxes on the Systems, and UIM is responsible for maintenance of the Systems.

UIM concludes that the Systems are its property. WSSC basically makes two interrelated arguments in support of the statute’s constitutionality. The condemnor says that UIM has no reasonable, investment-backed expectation to payment for CIAC. In support WSSC cites Penn Central Transp.

Co. v. City of New York, 438 U.S. 104 , 98 S.Ct. 2646 , 57 L.Ed.2d 631 (1978) (sustaining the constitutionality of an ordinance preserving historic buildings which was in effect when the condemnee purchased an historic building and which prevented the condemnee from increasing the height of the building). In that context the Court said that “[t]he economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are, of course, relevant considerations.” Id. at 124 , 98 S.Ct. at 2659 , 57 L.Ed.2d at 648 . WSSC also points out that whether a condemnee has a property interest in the subject of the condemnation is a matter that is determined by state law, see Phillips v. Washington Legal Found., 524 U.S. 156, 164 , 118 S.Ct. 1925, 1930 , 141 L.Ed.2d 174, 183 (1998) (quoting Board of Regents of State Colleges v. Roth, 408 U.S. 564, 577 , 92 S.Ct. 2701, 2709 , 33 L.Ed.2d 548, 561 (1972)), and argues that, under Maryland law, UIM has only a bare legal and non-beneficial title in the CIAC. Both of WSSC’s arguments rest on Hagerstown, 217 Md. 101 , 141 A.2d 699 , reinforced by the presumption that enactments of the General Assembly are constitutional.

Department of Natural Resources v. Linchester Sand & Gravel Corp., 274 Md. 211, 218 , 334 A.2d 514, 520 (1975). The City of Hagerstown had extended its municipal water system beyond the municipal limits, thereby bringing the extension under PSC jurisdiction. The extension incorporated mains and hydrants which had been built by developers of real estate subdivisions who contributed their privately owned ²⁵ systems to Hagerstown. Hagerstown, 217 Md. at 108 , 141 A.2d at 702 .

Pursuant to a predecessor statute to present Maryland Code (1998), § 4-305 of the Public Utility Companies Article, Washington County had caused the PSC to set the rates in the extra-municipal area for water furnished by Hagerstown. The City petitioned for review of the PSC order, contending that, by excluding CIAC from the rate base, the PSC had violated the mandate of Maryland Code (1957), Article 78, § 69 that rates be “ ‘[j]ust and reasonable’ ... yielding ... a reasonable return upon the fair value of the company’s property used and useful in rendering service to the public.” Hagerstown, 217 Md. at 108 , 141 A.2d at 702 . The PSC argued “that the customers of a public service company should not be called upon to pay rates which would yield a return to the company on property for which they or others, but not the public service company, ha[d] paid.” Id. This Court sustained the PSC’s exclusion of CIAC from the rate base, reasoning as follows: “The rationale of the Commission’s exclusion from the rate base of (CIAC] in the instant case and in [a prior PSC case] decided shortly before the present case, and the rationale of the many decisions of Commissions of other States reaching a like result is, in essence, that it is inequitable to require consumers to pay to the utility a return on property which they, not the utility, have paid for.” Id. at 112 , 141 A.2d at 704 .

The Court in Hagerstown advanced two additional theoretical reasons for the exclusion from the rate base, progressing from a contractual theory to a trust theory. It is the following passage from Hagerstown on which WSSC relies: “Such a result may be supported, not only as a matter of rather obvious fairness, but also as a matter of perhaps somewhat technical theory, in spite of the fact that the utility holds legal title to the contributed property, on the ground that the contributed property is subject to contractual rights in favor of those who furnished it (treating a developer as if he were the agent of those who buy lots served by the contributed facilities), which place the benefi ²⁶ cial use of the property in those who, from time to time, own the lots, houses, factories or lands which the water company (in this case the City) has agreed to serve, so that the value of the water company’s bare legal title to the property is nothing. In other words, the water company (here the City) is simply in the position of a trustee, holding legal title to the contributed property for the benefit of those with whom it has contracted, or their successors in interest.” Id. at 112 , 141 A.2d at 704-05 . The terms of the contract between the developer, as agent for homeowners in the development, and the water company, owned by the developer, are not articulated in Hagerstown .

We infer that, in consideration of the payment to the developer-controlled water company by the homeowners, acting through the developer as their agent, of some portion of their purchase prices, the water company agreed that it would not utilize an amount equal to the contributions in computing the fair value of the company’s property, used in rendering the water service, on which a reasonable return would otherwise be allowed. Thus, for rate-making purposes, the value of the CIAC is nothing. The Court in Hagerstown , then explained the practical result of the contract theory by an analogy (“[i]n other words”) to a trust. We shall hold (see Part II.C.2, infra) that the trust theory cannot be transported from rate-making into eminent domain. 1 WSSC begs the question when it argues that the mere presence of § 3-107(a) on the statute books at the time that UIM purchased the Systems from First Maryland means that UIM had no reasonable investment-backed expectation that it could value the CIAC in condemnation.

The argument assumes the constitutionality of § 3-107(a). Less superficially, WSSC’s argument is that, because CIAC is excluded from the rate base, UIM could have no expectation of any return on that portion of the investment in the Systems represented by CIAC so that the Systems should be considered valueless in eminent domain to the extent of the CIAC. This argument is ²⁷ practically indistinguishable from an argument that the fair market value in condemnation of utility-owned property that has been acquired in part by CIAC is capped by the valuation determined by a capitalization of the regulated income. That cannot be correct.

Considerable doubt on the validity of the underpinnings of WSSC’s argument is cast by 2 L. Orgel, Valuation Under the Law of Eminent Domain § 204 (2d ed.1953). Discussing “Condemnation Value versus Rate-Making Value,” the author states: “The distinction between rate-making value and condemnation value on the ground that the latter was based on exchange value while the former was measured by cost could be accepted only with reservations as to what it implied in actual valuation practice. In the first place, the tribunals in condemnation cases, as in rate cases, paid scant attention to the market value of outstanding securities. In the second place, the inference that capitalization of earnings would be accepted in condemnation cases but excluded in rate cases was unjustified.

It is true that courts and commissions had come generally to recognize that the capitalization of earnings as a basis of rate making would involve a vicious circle and that earning power could be given weight in condemnation cases without falling into this fallacy.[ 8 ] But as we shall point out in a subsequent section, while earnings were considered, capitalization of earnings was uniformly rejected as the measure of value in condemnation cases.” Id. at 71 (footnote omitted). 4A J.L. Sackman, Nichols (3d ed. rev.2000), presents the following summary of the elements to be considered when a public utility, as a going concern, is taken in condemnation. “When the plant of a public service corporation is taken by eminent domain, the corporation is not limited to the ²⁸ value of its physical property, or to the cost of reproducing the same, but it is entitled to be paid for the value of its property and franchises taken together as a going concern and as parts of one working system. In reaching that value there are a number of tests, no one of which is conclusive, but each of which sheds some light upon the subject of the investigation. The elements ordinarily considered in ascertaining the value of the utility are the current value of the tangible property of the company, the earnings, both present and future, of the company, the ‘going value’ of the plant, and the amount of money required to put the plant in good condition.” Id. § 15.07, at 15-48 to 15-49 (footnotes omitted). See also Onondaga County Water Auth. v. New York Water Serv.

Corp., 285 A.D. 655 , 139 N.Y.S.2d 755 , 762 (1955) (no one method of valuation in condemnation of private water company is determinative). 4A Nichols also points out another distinction between valuation of a utility in rate-making cases and in condemnation cases. The commentator states that “when determining value in condemnation matters, greater weight seems to have been placed upon the factor of cost of reproduction, while in the rate-making cases, original cost is given predominant consideration.” Id. § 15.06[2], at 15^7 (footnote omitted). Justifying § 3-107(a) on the ground that the investment return value of the Systems establishes a ceiling excludes from the valuation in eminent domain not only CIAC but also utility property that is recognized in a fair market at values that are higher than those recognized in rate-making. In 8 P. Rohan & M. Reskin, Nichols (3d ed. rev.2001), the authors give the following explanation: “Even though such physical additions lie., CIAC] to the plant are typically deeded over to the utility, and add value to the plant, they are not added to the rate base and thus do not generate additional rate charges.

The modern theory of rate setting requires not ‘market’ or ‘fair’ value, but rather, a ‘fair return to the investors.’ As such, contributions from ²⁹ customers are not direct investments of the utility owner, and are therefore excluded from rate base. “Note here that the property excluded from rate base (but which must be included in fair value) may be significant: fully depreciated machinery still functioning and useful; valuable assets, which have been depreciated on the books, but which may have appreciated in market value; and large amounts of contributed infrastructure owned and used by the utility owner, but not included in rate base. The importance of this point is that a utility valuation by whatever approach, premised on a regulatory rate base that excludes significant utility assets, almost without exception results in less than full or just compensation for all property taken.” Id. § 14A.06[1][6], at 14A-17 (footnotes omitted). In the instant matter land utilized by the Systems was acquired by First Maryland from Hylton Enterprises, Inc. in 1965 and was carried in PSC reports as part of the CIAC. We take judicial notice that land values in the vicinity of Upper Marlboro have appreciated since 1965.

The area has become a “bedroom” for Washington, D.C. Indeed, the record reflects that most of the residents of Marlboro Meadows are employed by the federal government. Although the income approach to value undertakes to value the entire enterprise, including the land, a valuation based upon the regulated income which is derived from a rate base that does not include appreciation excludes a significant aspect of the fair market value of the Systems. For these reasons § 3-107(a)’s requirement that CIAC be deducted from the fair market value of the Systems, valued as going concerns, cannot escape the constitutional prohibition against a taking without just compensation on the ground that UIM had no reasonable investment-backed expectation in the Systems. It is value, not expectation of value, that applies in eminent domain and other actual takings. ³⁰ 2 WSSC also contends that there has been no taking of property because the interest held by UIM in the Systems is not property; rather, it is said to be the bare legal title of a trustee, with the beneficial interest in the owners of homes in Marlboro Meadows, from time to time.

Section 3-107(a) cannot have created this result, because § 3-107(a) operates only within Montgomery and Prince George’s Counties and in favor of WSSC. If the private owners of utilities outside of Montgomery and Prince George’s Counties would not suffer a deduction from fair value in condemnation for CIAC, then § 3-107(a) deprives UIM of equal protection of the laws and is invalid on that ground. Consequently, WSSC’s position must be that Hagerstown is not limited to rate-making but states a rule of the Maryland law of property, i.e., § 3-107(a) simply declares what already was, and is, Maryland property law. As noted above, the actual holding in Hagerstown is that CIAC may not be included in the rate base.

That conclusion is fully supported by the rationale first assigned, essentially, that it is inequitable for the approved rate to include a return on an investment made, in an economic sense, by the homeowners and not by the public utility. The next level of the Hagerstown rationale is an implied contract. Under that analysis, the terms of the contract result in CIAC having no value to the utility for rate-making purposes. But it would extend the contract rationale beyond what was required to decide the issue before the Court in Hagerstown to read into the statement of no value that the CIAC had no value in eminent domain.

Such an extension would also needlessly have injected the Hagerstown Court into deciding a constitutional issue. The same may be said of the third level of the Hagerstown analysis, analogizing to a trust. We have neither been referred to, nor has our research disclosed, any reported decision involving the condemnation of the entire business of a public utility company in which a court held that CIAC was trust property, not beneficially owned by the utility, and consequently unprotected by the constitutional ³¹ requirement for just compensation when property is taken. The cases that have cited and applied Hagerstown have been rate cases.

In North Carolina ex rel. Utilities Comm’n v. Heater Utilities, Inc., 288 N.C. 457 , 219 S.E.2d 56, 59-60 (1975), the court utilized the Hagerstown trust analysis in rejecting a utility’s argument that CIAC could not constitutionally be excluded from the rate base. The utility’s argument was based upon Board of Comm’rs v. New York Tel. Co., 271 U.S. 23 , 46 S.Ct. 363 , 70 L.Ed. 808 (1926), where the Court held that it was unconstitutional to exclude from the rate base property acquired through the expenditure of excessive earnings.

The North Carolina court viewed excessive earnings as “clearly belonging] to the utility with no strings attached,” 219 S.E.2d at 60 , but pointed out that such earnings “are not supplied by the utility patrons pursuant to any contract, express or implied, for the extension of the utility’s service. Property acquired by the use of such funds, therefore, is not analogous to property affected by a trust for the benefit of the patrons from whom the excess profits were derived, nor is it analogous to property acquired by an outright, unrestricted gift.” Id. Accordingly, the North Carolina court held that the United States Constitution did not prevent CIAC from being excluded from the rate base. Indeed, the primary holding of Heater Utilities is that the North Carolina rate-making statute did not, as a matter of legislative intent, include CIAC in ascertaining the fair value of the utilities property for rate-making.

The few cases that have considered CIAC in an eminent domain context have held, or strongly indicated, that CIAC must be fairly compensated. In Dade County v. General Waterworks Corp., 267 So.2d 633 (Fla.1972), Dade County had condemned the defendant’s water and sewerage system. The trial court had construed Dade County’s complaint to limit valuation to “capitalization of regulated earnings as the sole acceptable approach to evaluation.” Id. at 639 . The Supreme Court of Florida held that the “ ‘full compensation’ standard [of the Florida constitution] requires that the method of valuation which is utilized take into consideration the value of ³² the contributed property.” Id.

Adopting portions of the trial court’s opinion, the Florida Supreme Court said: “ ‘The so-called contributed property owned by defendants, and which the County seeks to acquire by condemnation, constitutes property within the meaning of Article X, Section 6(a), Florida Constitution.... “ ‘The manner in which defendants came to own this property does not operate to exclude it from the otherwise applicable constitutional requirements.’ ” Id. at 639-40 . Although the trial court in the Dade County case had based its ruling solely on the complaint, that court had gone so far as to hold that the