very difficult problem of valuing the property, for the complainants used as a basis of valuation the assessment of their property for taxation by Arkansas made by the State Board of Railroad Assessors, the reasonableness of which was of course conceded by the defendants. 12

§ 11. Value for rate purpose and for public purchase.

It is doubtless true that there is a very close relation between valuation for rate purpose and valuation for public purchase. Perhaps when the rules governing these two kinds of valuation are finally worked out they will be found to be not so very far apart. But in the meantime it is doubtless best to treat each as a distinct problem and to apply with great caution precedents to one that have been made with reference to the other. As the valuation committee of the National Association of Railroad Commissioners has pointed out there is one fundamental distinction between fair value for rate purposes and fair value for purchase, or condemnation: 13

The thing of real importance in a rate case is not the fair value of the property alone or the fair rate of return alone, but the product of the two. This product is the net return that the owners are to receive for the use of their property. If the total net return is adequate, it is immaterial, in so far at least as the justice of the result is concerned, whether, for example, there is allowed a 7 per cent. return on a valuation of $1,000,000 or a 5 per cent. return on a valuation of $1,400,000, as the net return is $70,000 in either case. In a case of condemnation or municipal purchase, however, the valuation is final and all important. In fixing commercial value, market value, or fair value under con

12 The valuation, as determined by the State Board of Railroad Assessors of Arkansas, is quoted infra, § 62.

13 Report of committee on railroad taxes and plans for ascertaining the fair value of railroad property, submitted to the Twenty-third Annual Convention of the National Association of Railroad Commissioners, October, 1911, p. 146.

demnation for the purchase of a plant operating under a perpetual franchise the net return under legal or reasonable rates is often the chief determining factor. The net return is capitalized at the rate considered fair for the purpose, and the result is taken as the fair market or commercial value. Thus, recurring to the above illustration, a net return of $70,000 capitalized on a 5 per cent. basis gives a valuation of $1,400,000. And if in this case the present value of the physical plant has been found to be $1,000,000, the difference, $400,000, is attributed to franchise and going value. Owing to the fact that the rate of return ordinarily deemed reasonable in a rate case is in excess of the rate of capitalization that determines commercial value, the commercial value will ordinarily exceed the fair value for rate purposes.

The Wisconsin Railroad Commission in In re Manitowoc Water Works Company, 7 W. R. C. R. 71, 72, decided June 27, 1911, says:

The valuation placed upon utilities depends, to some extent at least, upon the purposes for which it is intended. For instance, in valuing utilities for the purpose of condemnation and purchase, many elements must often be taken into account which should not be given any consideration in valuations made for the purposes of rate making.

That a fair value for rate purposes is not necessarily the same as fair value for condemnation or purchase is also recognized in the following cases:

Re gas and electric rates charged by the Queens Borough Gas & Electric Co., 2 P. S. C. 1st D. (N. Y.), decided June 23, 1911. Mayhew v. Kings Co. Lighting Co., 2 P. S. C. 1st D. (N. Y.), decided Oct. 20, 1911.

Willcox v. Consolidated Gas Co., 212 U. S. 19, 29 Sup. Ct. 192, 53 L. ed. 382, decided Jan. 4, 1909.

Omaha v. Omaha Water Co., 218 U. S. 180, 30 Sup. Ct. 615, 54 L. ed. 991, decided May 31, 1910.

Ames v. Union Pacific Ry. Co., 64 Fed. 165, decided Nov. 12, 1894.

Spring Valley Water Works v. San Francisco, 192 Fed. 137, decided Oct. 21, 1911.

There are other cases that seem to hold that fair value for rate purposes is substantially the same as fair value for condemnation or purchase.14 In Spring Valley Water Works v. City of San Francisco, 124 Fed. 574, 594-595, decided June 29, 1903, Circuit Judge Morrow refers to a number of cases including Monongahela Navigation Co. v. United States, 15 and says:

It is true that this was a condemnation proceeding, and the question was to determine what was just compensation for the appropriation of corporate property to a public use, while the case before this court relates to the fixing of water rates which shall be a just compensation for the appropriation of complainant's property to a public use. It is not perceived that there is any difference in the principles applicable to the two cases, and this appears to have been the view of the Supreme Court in San Diego Water Company v. San Diego, supra (118 Cal. 556).16

§ 12. Capital value and rate and purchase value.

There may also be a close relation between correct principles of valuation for accounting and capitalization purposes and valuation for rate purposes and for public purchase. This will be true if valuation for the latter purposes is based on actual cost. If, however, valuation for rate purposes and public purchase is based chiefly on reproduction cost the similarity in principles will be comparatively small. Correct accounting principles aim to show the actual cost of the enterprise. Conserva

14 See E. C. Bailly, The Legal Basis of Rate Regulation, in Columbia Law Review, June, 1911, p. 334. See also Reagan v. Farmers' Loan & Trust Company, quoted in § 60.

15 148 U. S. 312, 13 Sup. Ct. 622, 37 L. ed. 463, March 27, 1893. 16 50 Pac. 633, 38 L. R. A. 460, decided October 9, 1897.

tive principles of capitalization would keep capitalization close to the actual cost. The valuation committee of the National Association of Railway Commissioners expresses this situation as follows: 17

The books of a company kept from the start in accordance with a correct accounting system would show a capital account that would be closer to what seems a just fair value for rate purposes than any other single basis. But owing, perhaps, to lack of accounts kept as above, the court decisions have given greater weight to cost of reproduction or cost of reproduction less depreciation than to actual cost in determining fair value for rate purposes. Capitalization, or the amount of stock and bonds issued (which may be a very different amount from the book assets), might also if issued under strict supervision from the start be a most important element in fixing fair value for rate purposes. If the bonds, however, were issued either at a premium or at a discount this fact would have to be taken into account. Whether bonds are issued at a premium or a discount, it is the actual amount in money received therefrom that is of importance in fixing value for rate purposes. The same may be said of stock issued at a premium.

However, the fundamental distinction for present purposes between accounting and capitalization and valuation for rate purposes and for public purchase is that the rules as to accounting and capitalization are subject entirely to the control of the various commissions and legislatures. They involve no constitutional rights. The basis of valuation for rate purposes and public purchase on the other hand will necessarily be fixed by the Supreme Court of the United States.

17 Report of committee on railroad taxes and plans for ascertaining the fair value of railroad property submitted to the twenty-third annual convention of the National Association of Railway Commissioners, October, 1911, p. 148

CHAPTER II

Fair Value for Rate Purposes

§ 20. Earlier decisions.

21. Justice Brewer in Union Pacific Railway Cases, 1894-No hard and fast rule of valuation.

22. Circuit Judge Ross in San Diego Land and Town Case, 1896Present value, not cost, the true basis.

23. Circuit Judge Thayer in Kansas City Stock-Yards Case, 1897-Cost plus appreciation in value.

24. Justice Harlan in Smyth v. Ames, 1898-Fair value of property used and how ascertained.

25. Justice Harlan in San Diego Land and Town Case, 1899-Reasonable value at time used.

26. Justice Holmes in San Diego Land and Town Case, 1903-Reasonable value at time used.

27. Circuit Judge Morrow in Spring Valley Water Case, 1903-Reasonable value at time used.

28. Justice Peckham in San Joaquin Irrigation Case, 1904-Present value. 29. Columbus, Ohio, Electricity Rate Case, 1906-Fair present value of

tangible and intangible property.

30. Justice Peckham in Consolidated Gas Case, 1909-Fair value generally includes appreciation.

31. Iowa Supreme Court in Cedar Rapids Gas Case, 1909-Reproduction-cost-less-depreciation the controlling factor.

32. Oklahoma Supreme Court in Pioneer Telephone Case, 1911-Reproduction-cost-less-depreciation the controlling factor.

33. District Judge Evans in Cumberland Telephone Company Case, 1911-Fair value not determined by construction cost.

34. Wisconsin Railroad Commission in Manitowoc Water Case, 1911Elements of physical valuation.

35. District Judge Farrington in Spring Valley Water Rate Case, 1911Elements of fair value reviewed.

36. Trend of decisions on fair value.

37. No authoritative determination of standard of value.

38. Recent decisions.

39. Valuation standards.

§ 20. Earlier decisions.

The discussion of fair value for rate purposes is of recent origin. As we have seen above (§3), the courts have