rate regulation rather than the original cost.55 This "value," as has been stated by one writer, is not the market or exchange value of the entire property of the company, since on that basis no reductions in anticipated net earnings would be permissible, as an investor who is considering purchase of the property or of a share of it will value the property by capitalizing the anticipated net earnings at a rate which varies with the risk.56 Actual cost may sometimes be equivalent to present value, it seems, where the construction is very recent, and it is not improvident nor extravagant,57 but actual cost is not a proper basis of value where the cost was dishonest or extravagant.58 Reproduction cost is sometimes figured as the present value, or at least in connection with other items.59 So the value of the service to the patron is often a matter to be considered.60 In order to ascertain the "fair value," Justice Harlan said that "the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the 55 Minnesota Rate Cases, 230 U. S. 352, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916 A 18; Willcox v. Consolidated Gas Co., 212 U. S. 19, 53 L. Ed. 382, 48 L. R. A. (N. S.) 1134, 15 Ann. Cas. 1034; San Diego Land & Town Co. v. National City, 174 U. S. 739, 43 L. Ed. 1154. 56 See article by Robert L. Hale on "'Value' in Rate Cases" in 18 Columbia Law Review 208, 211. 57 See 4530, supra. 58 Stanislaus County v. San Joaquin & K. River Canal & Irrigation Co., 192 U. S. 201, 48 L. Ed. 406; San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 47 L. Ed. 892; San Diego Land & Town Co. v. National City, 174 U. S. 739, 43 L. Ed. 1154. 59 See $4543, infra. * * # constant use of the word 'fair' or the supra. value of the property." 61 The ascertainment of the "fair value of the property" is not "controlled by artificial rules," nor "a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts." 62 "It is because the valuation of a utility cannot be reduced to absolutely fixed rules, or to the mere appraisal of parts whose sum equals its value, that the subject is one upon which honest and competent men differ. In the last analysis, it is the exercise of a sound and competent business judgment upon many elements of uncertain and debatable value considered as a business entity. Hence grave errors in arriving at and seriously affecting the final result must be shown before a valuation of the commission can be set aside." 63 In determining the value of the property of a public service company, it has been said that "each case must depend very largely upon its own special facts, and every element and every circumstance which increases or depreciates the value of the property, or of the service rendered, should be given due consideration, and allowed that weight to which it is entitled. It is, after all, very much a question of sound and well-instructed judgment." 64 No inflexible 61 Smyth v. Ames, 169 U. S. 466, 547, 42 L. Ed. 819. "Among the proper matters to be considered are the original cost of construction; the amount expended in permanent improvements; the amount and market value of stock and bonds; the present, as compared with original, cost of construction; the probable earning capacity of the property under the particular rates prescribed by the ordinance for each of the years in question; the sums required to meet operating expenses; what it will cost to obtain water, equal in quantity and quality to the present supply, from the next most available source; the depreciation suffered by that portion of the plant which is worn by use or action of the elements, or shorn of its value by newer, cheaper, and more efficient appliances and machinery; the fact that the plant has a franchise and is a going concern, with an established business and thousands of customers, whose buildings are con nected with the distributing system; and appreciation in value since the various properties constituting the plant were acquired. To each of these factors just and proper weight must be given; and, finally, the result must be the reasonable and fair value of the plant as between the company and the public." Spring Valley Waterworks v. San Francisco, 192 Fed. 137, 143. Supplies on hand should be included in estimate of value of property. Cumberland Telephone & Telegraph Co. v. Louisville, 187 Fed. 637, 647. 62 Simpson v. Shepard, 230 U. S. 352, 434, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916 A 18; Marquis v. Polk County Tel. Co., 100 Neb. 140, 158 N. W. 927. 63 Per Justice Vinje in Oshkosh Water Works Co. v. Railroad Commission, 161 Wis. 122, L. R. A. 1916 F 592, 152 N. W. 859. method for the ascertainment of the value of the property used in the service has been fixed by legislative bodies dealing with rates, nor by the courts in determining the validity of rates, and from the nature of the subject no inflexible method can be fixed.65 The fair return is to be based on the reasonable value of the property and not upon the monopoly value.66 On the other hand, it has been held that the property should be appraised at its fair market value, not what it would bring at a forced sale, but at what it is fairly worth to the seller, under conditions permitting a prudent and beneficial sale,67 although it is submitted that this is merely reasoning in a circle so far as holding the value to the seller the test, as it depends upon a capitalization of the rates. A like criticism is applicable to a holding that the actual rates which have been charged by a public service company in the past are evidence of the value of the plant, provided the rates which have been charged have been reasonable.6 68 The property of a public service corporation must be considered as a single thing to which certain characteristics belong which affect its value and the property cannot be valued separately from its inherent characteristics.69 But what is the value of a plant at the time of the fixing of rates cannot be determined by the mere addition of the separate values of its component parts, nor from the cost. alone, nor from what it formerly might have been sold at, nor alone from what it might cost to replace.70 The value of water rights is an item to be added in valuing the property of a water company.71 65 Pioneer Telephone & Telegraph Co. v. Westenhaver, 29 Okla. 429, 38 L. R. A. (N. S.) 1209, 118 Pac. 354. construct a plant which will bring an adequate supply from the Tuolumne. Your right to regulate does not extend to value." 67 Kennebec Water Dist. v. Waterville, 97 Me. 185, 60 L. R. A. 856, 54 Atl. 6. 68 Kennebec Water Dist. v. Waterville, 97 Me. 185, 60 L. R. A. 856, 54 Atl. 6. 66 Spring Valley Waterworks v. San Francisco, 192 Fed. 137, in which Judge Farrington says (p. 153): "Having secured all available reservoir sites, water rights, and watershed lands within fifty miles, the water company says to the city: You must have water. If you do not take ours, you will be compelled to go to the Sierras for an adequate supply. It is the only available source; consequently our property, for the purpose of determining what we are entitled to charge you for water, is worth as much as it will cost you to 69 Brunswick & T. Water Dist. V. Maine Water Co., 99 Me. 371, 59 Atl. 537. 70 Cedar Rapids Gas Light Co. v. Cedar Rapids, 144 Iowa 426, 48 L. R. A. (N. S.) 1025, 138 Am. St. Rep. 299, 120 N. W. 966, aff'd 223 U. S. 655. 71 San Joaquin & K. River Canal § 4533. Valuation for taxation. In determining the value of the property, the valuation placed upon it for the purpose of taxation may be considered in some cases,72 but is generally untrustworthy since it may have been based on methods of appraisement which do not meet the sanction of the courts. In any event, valuations of property by state assessors for taxation are not a fair basis to determine the fair value of the property for rate-making purposes.73 So a rate is not necessarily unreasonable as based on an unfair valuation of the property because the property is assessed for taxes at over half again as much as its valuation for rate purposes. 74 § 4534. Valuation of lands owned by company. The general rule is that the land of a public service company, as well as its other property, should be valued for rate-making purposes, at its present value rather than its original cost.75 In the Minnesota Rate Cases decided in 1913, the Federal Supreme Court, in deciding the proper valuation of the right of way, yards and terminals of a railroad company, was confronted with this question: Is the company entitled to a valuation of such property not only in excess of the amount invested in it, but also in excess of the market value of contiguous and similarly situated property? Put in another way the question was whether, for the purpose of making rates, the land, irrespective of improvements, should be treated not only as increasing in value by reason of the activities and general prosperity of the community, but as constantly outstripping, in such increase, V. & Irrigation Co. v. Stanislaus County, 233 U. S. 454, 58 L. Ed. 1041; Murray Public Utilities Commission, 27 Idaho 603, 619, L. R. A. 1916 F 756, 150 Pac. 47, holding original cost not conclusive as to value. 72 For instance, a return by a railroad company of a valuation of its property to the board of equalization, although not an estoppel, is evidence of value. Southern Pac. Co. v. Board of Railroad Com'rs, 87. Fed. 21, followed in Louisville & N. R. Co. v. Brown, 123 Fed. 946. The valuation of a plant for purposes of taxation may be considered in determining its value, especially where the valuation was sworn to by the officers of the company. San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 47 L. Ed. 892. 73 Knott v. Chicago, B. & Q. R. Co., 230 U. S. 474, 57 L. Ed. 1571. 74 Duluth St. R. Co. v. Railroad Commission, 161 Wis. 245, 152 N. W. 887. 75 Willcox v. Consolidated Gas Co., 212 U. S. 19, 53 L. Ed. 382, 48 L. R. A. (N. S.) 1134, 15 Ann. Cas. 1034, and see extended note on this subject in 48 L. R. A. (N. S.) 1196. Annual increase in the value of the land of a corporation is not income. People v. Willcox, 210 N. Y. 479, 495, 51 L. R. A. (N. S.) 1, 104 N. E. 911. all neighboring lands of like character devoted to other than public uses. In regard to this matter, Justice Hughes, in delivering the opinion of the court, said: "It is not admissible to attribute to the property owned by the carriers a speculative increment of value over the amount invested in it and beyond the value of similar property owned by others, solely by reason of the fact that it is used in the public service. That would be to disregard the essential conditions of the public use, and to make the public use destructive of the public right. The increase sought for 'railway value' in these cases is an increment over all outlays of the carrier and over the values of similar land in the vicinity. It is an increment which cannot be referred to any known criterion, but must rest on a mere expression of judgment which finds no proper test or standard in the transactions of the business world. It is an increment which, in the last analysis, must rest on an estimate of the value of the railroad use as compared with other business uses; it involves an appreciation of the returns from rates (when rates themselves are in dispute) and a sweeping generalization embracing substantially all the activities of the community. For an allowance of this character there is no warrant." 76 If a water company voluntarily devotes to the mere catchment of water lands which are much more valuable for other purposes, it is unreasonable, in fixing rates, to appraise such lands for more than they are worth as watershed areas.77 § 4535. Value of property not used. The value of property of the public service company which is wholly unnecessary or not used, or has been abandoned, cannot be considered.78 Thus, in determin 76 Minnesota Rate Cases, 230 U. S. 352, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916 A 18. 77 Spring Valley Water Co. v. San Francisco, 192 Fed. 137, 160, following same case 165 Fed. 667, 698. 78 Cedar Rapids Gas Light Co. v. Cedar Rapids, 144 Iowa 426, 48 L. R. A. (N. S.) 1025, 138 Am. St. Rep. 299, 120 N. W. 966. In case of a water company, the only property which can be valued is that used at the time of the inquiry and useful for supply purposes. Spring Valley Waterworks v. San Francisco, 192 Fed. 137, 142. "The value of property is the value of its uses. If but half complainant's land is used, a return on that half only should be exacted. The value of that half would be the reasonable value of the property in use. If complainant's land is susceptible of two equally advantageous uses, each of which may be exercised without detriment to the other, and only one of them is taken for the public, half the value of the property again would be the reasonable value of the property in use. When watershed lands are used for grain raising, under proper restrictions, neither use materially in T |