in fact been the practice of the Commission at all times, establish depreciation reserves upon the original cost basis, or upon a basis as near thereto as could be ascertained. It was there said:

Current maintenance is likely to fluctuate considerably from year to year, as is also the amount necessary for renewals. Current maintenance, however, will vary with the variation in material and labor costs. Depreciation reserve, however, should be set aside, not on the basis of such variation but with relation to the original cost or investment, any excess cost in renewals and replacements over and above original cost finally to go to capital account. Ibid., p. 31.

This was exactly the practice followed by this Commission in the case of City of Milwaukee, Plaintiff, v. Railroad Commission of Wisconsin and T. M. E. R. & L. Co.; Defendants, pending in the Circuit Court of Dane county, and decided by this Commission on January 30, 1920. (24 W. R. C. 316.)

The next matter to be considered is the compensation for capital employed which forms a part of the cost which should. be met by a schedule of reasonabale rates. In its brief the company has assumed that a rate of 7 per cent upon a value obtained by adding working capital to the cost of reproduction based on average prices for the five-year period ended May 1, 1919, i.e., 7 per cent of $161,559, or $11,309.13, should be provided by the rate schedule. Testimony offered by the city is to the effect that $4,800 per year represents a fair "capital wage based upon the sales."

Following is a summary of the appraisals which have been offered in evidence in this case. The appraisal offered by the city was made by Byron T. Gifford, its consulting engineer, and those offered by the company were made by its consulting engineer, Wm. A. Bachr. The valuations submitted by the company include an estimate of requirements for working capital, for cost. of financing, and for going value.

The valuations summarized above do not afford a fair comparison in all respects without a word of explanation. Neither Gifford's valuation nor that of the Commission's Engineering Staff includes any allowance for cost of financing, nor does the valuation by the Commission's Staff include anything for going value or for materials and supplies or working capital. It is

understood that both Baehr and Gifford intended the amounts included by them for working capital to cover the necessary materials and supplies. Gifford shows nothing for going value or working capital in connection with his estimate of the cost of reproduction, apparently for the reason that he did not consider the cost of reproduction, undepreciated, as a proper basis for rate-fixing value.

The inclusion of estimates of the cost of financing in Baehr's valuations is explained in the testimony of his representative who appeared at the hearings, and should, perhaps, be discussed before the more general principles of valuation are passed upon. As explained by the witness, the cost of financing is not measured by the discount on securities issued, but covers the difference between the amount realized by a company upon the sale of its securities and the amount paid by the ultimate purchaser for the bonds or preferred stock of the company, and covers further items, such as the cost of drawing the trust deed, the cost of engineering, accounting, and legal investigations made for the bankers who handle the securities, the time used in signing bonds, and the services of the entrepreneur devoted to the organization of the enterprise. The difference between the par value of bonds and the amount paid by the ultimate purchaser (apparently the one who buys them from the banker who handles. the issue) would, in accordance with the theory advanced, as we understand it, be charged to a bond discount account to be amortized over the period during which the bonds were outstanding.

[7] There is no warrant for attempting to differentiate between that part of the discount on an issue of securities which is received by the ultimate purchaser and that part which represents the return to the banker for handling the issue. The entire discount and expense is a form of interest, and the expense of its amortization over the life of the securities becomes a part of the interest from year to year. If any part of the discount is to be treated as a capital charge the ultimate effect is of the same nature as it would be if the entire discount were added to the property account, though different in amount. If the discount. on securities issued is added to the property account, each refinancing which involves a discount adds to that account, even though the property may not be growing. As time goes on the unavoidable result of this is to place in the property account an

element of discount for each refinancing, until the element of capitalized discount may become altogether out of proportion to the actual plant and equipment. The fact that only a part of the discount would be treated as a capital charge does not alter the principle. A theory which would result in charging all or a part of bond discount to property is, in our opinion, indefensible.

In the matter of allowances for overhead construction costs the appraising engineers did not reach the same conclusion. In Bachr's valuation 20 per cent was added to the direct costs to cover overhead items. Gifford and the Commission's Staff made an allowance of 15 per cent for these costs. Baehr's representative explained that he had included in unit costs only the bare cost of labor and materials, together with such items as costkeeping and time-keeping, and that a judgment as to reasonableness of overhead allowances must rest, in part, upon the nature of the unit costs. This, of course, is true, but the record does not indicate that there is such difference in the nature of the direct costs as to account for the different overhead allowances.

[8] The question of overhead allowances has been studied very carefully by the Commission and its Engineering Staff in a large number of cases, and the general allowance of 15 per cent has resulted from these studies. The record in this case does not afford sufficient reason for increasing this allowance. The amount to be allowed for overhead costs of construction is, of course, somewhat controlled by the nature of the valuation. A valuation designed to show the original cost of the property under the conditions actually prevailing in its construction would quite likely require a smaller allowance for overhead costs than a valuation representing the estimated cost of replacing the entire property within a limited time. The testimony in this case shows that the valuation submitted by our Engineering Staff represents, in general, an attempt to determine the actual cost of the property as and when built. To a considerable extent the same is true of Gifford's valuation. Baehr's valuations, on the other hand, apparently represent estimates of the cost of replacing the property in its entirety, and not in the manner in which it. was developed.

The only serious question regarding the overhead allowances, as included in the valuation made by our Engineering Staff, seems to us to be whether they are not too high to be consistent

h

with the attempt made to approximate the actual cost of the property. A memorandum has been submitted on this matter by the Engineering Department from which we summarize the following:

The allowance of 15 per cent in connection with the valuation designed to represent the actual investment may be high because, in the actual construction of the property over a period of years, much of the property having been constructed after the plant was put in operation, there was a large proportion of the inventory on which little or no general overhead expense was incurred except as it was included either in the direct costs as charged to the construction jobs for specific items or in the operating expenses of the utility. There is very little in the way of engineering and supervision involved in the purchase and installation of gas meters, and frequently no interest during construction. These meters, as added to the system from time to time, are purchased by the operating management as needed, and almost immediately put into service, some of them, probably, even before the bill for them is paid. The situation is much the same as to service connections. These are installed as called for by new customers, and are in service within a few days from the date of issuance of the order for the work. In many cases they are probably in service even before the wages of the men who put them in are paid. No interest during construction is in. volved and very little in the way of engineering. Even the extensions of gas mains are in much the same class.

The fact that this company has made a practice of charging each work order with a percentage for Kelsey, Brewer & Company does not seem to us to have any bearing on the situation. The existence of such a charge does not establish its reasonableness, and the amount of the charge, it seems to us, has no bearing on the question of the proper allowance for overhead cost. As representative of fair overhead cost actually incurred in the construction of the property under the conditions prevailing during its construction, 10 per cent of the direct cost may be more nearly correct than 15 per cent.

However, the original cost of the property is not the only evidence of value, and while the overhead allowance fixed by our Engineering Staff may not be entirely consistent with the basis upon which the Staff's valuation was made, it would probably not constitute an unreasonable allowance in an estimate of