It strengthens the company's credit, enabling the company to make its interest and dividend payments uniform and dependable.

It enables the company on the strength of this credit to obtain its capital requirements on the most favorable terms.

It enables the company to ride out commercial and financial disturbances which might otherwise cripple or destroy it.

It enables the company to maintain at all times the highest state of efficiency in its operation, which would be impossible for any company which is obliged to adjust its more or less inflexible operating expenses to the constant and inevitable fluctuations of business.

It is a reservoir, as it were, which, supplied by a fluctuating stream of gross revenue, enables the company to maintain even and uniform disbursement for service, maintain a uniform operating organization, and that high state of efficiency which can result only from a permanent operating force.

To reduce rates as fast as any surplus is created, to forbid any application of revenue to the betterment of plant, to insist that new capital shall be provided for such purposes, would never be thought of in any private business and should not in any corporate business, particularly public utilities, subject to other regulation and control than that of actual ownership. In individual or partnership business all revenue beyond stipulated amounts is left in the business, is a reserve, and in addition there is that reserve consisting of the entire assets of the individual. This is the basis of business credits.

The only sound conclusion that can be reached after full consideration of all the various phases and factors of the problem is, that ample reserves should be provided to meet not only probable happenings but possible happenings, and that such reserves should be so invested that whatever increment or revenue is to be derived from the amounts unexpended or not used for the purposes intended will go to the public in reduction of charges for or in improvement of, service, and that the value of a public utility plant should be represented by a relatively small percentage of outstanding securities calling for fixed charges.

211. Discarded property-Wisconsin Railroad Commission. 212. Inclusion of river intake and filter galleries, Wisconsin.

213. Discarded property-Des Moines Gas Rate Case, 1896.

214. Land acquired in advance of present need-New York Public Service Commission.

215. Land-San Francisco Water Rate Case, 1908-1911.

216. Excessive investment in plant.

217. Excessive investment-New Jersey Chancery Court, 1905.

§ 210. Discarded property.

Usually in any large public utility enterprise that has been in operation for a considerable time there are various items of discarded property. A certain station site has been abandoned and is being held until it can be disposed of to good advantage. A car has been discarded but has not actually been sent to the scrap heap. The Wisconsin law provides that the commission shall value property "used and useful for the convenience of the public." This is a good statement of the principle, whether the valuation is for rate purposes or for purposes of public purchase. Property that has been discarded and is no longer "used or useful for the convenience of the public " should not be included. Though the principle is clear it is rather difficult of application. A certain degree of use may be claimed for any piece of property. A valuable lot may be used for storage. An old car may be used in an emergency. In so far as such claims are true they must be allowed for. The value allowed, however, should not be based on cost of reproduction but on the actual value to the company of the service rendered. A valuable lot used for storage

purposes when a cheaper lot would answer the purpose should be included at the value of the cheaper lot. A power plant not used but held for a possible emergency should be included at the value of such emergency service.

§ 211. Discarded property-Wisconsin Railroad Commission. In the LaCrosse Gas and Electric Company Case, 8 W. R. C. R. 138, 164, decided November 17, 1911, the Wisconsin Railroad Commission holds that when unused property may be disposed of without affecting the business, the only warrant for its retention is expected savings and additional net income. This being the case, an addition to the physical value of the plant for non-operating property can be justified for rate-making purposes only when the income expected therefrom is added to the actual income or is deducted from the operating expenses. The Commission says (at page 164):

No evidence was furnished that shows that anything included in table II is required for the operation of the applicant's plants. While it is claimed by the applicant that certain items, especially the ammonia concentrator, may be used in the near future, we do not find that the present business nor its immediate prospective growth would in any way be materially affected by the disposal of this equipment. If the ammonia concentrators are retained by the company and are operated at some future time, then the saving or profit that may be derived therefrom should offset the interest, depreciation and operating costs of the same. When such non-operating property is held by a utility, the only warrant for its retention is expected savings and additional net income. being the case, an addition to the physical value of the plant for non-operating property can be justified for rate-making purposes only when the income expected therefrom is added to the actual income or is deducted from the operating expenses. Therefore, whether or not this non-operating equipment may profitably be kept on hand, is a matter which need not

This

be passed upon for the purposes of this case; the relative economy of holding non-operating property as against purchases at such time as the equipment in question may be needed, is a matter concerning which the management must use its own judgment. The simplest equitable method would be, it seems, not to consider these investments in the determination of rates. In the case of the application of Darlington Electric Light and Water Power Company, 5 W. R. C. R. 397, decided June 17, 1910, involving the valuation of an electric light and power plant for rate purposes the Commission held as follows: 1

Where equipment not actually part of the producing plant has been retained and serves as an emergency or reserve unit, it is properly included as property used and useful in serving the public. Equipment, however, which has been cast aside for larger units, more adapted to the present use of the plant, or which has been abandoned as impracticable, cannot be included as a part of the valuation serving as a basis for adjustment of rates.

The case of City of Appleton v. Appleton Water Works Company, 5 W. R. C. R. 215, 240, decided May 14, 1910, involves the valuation of a water plant for rate purposes. The Commission says:

The wells in question appeared to have been the original source of water supply for respondent's plant, but their use seems to have been discontinued when the river intake, filters and reservoir were added to the plant. As these wells are no longer used or useful for service, they must be eliminated from the valuation. The statute limits the scope of the investigation to ascertaining the value of the active property of the utility.

§ 212. Inclusion of river intake and filter galleries, Wisconsin. Re Manitowoc Water Works Company, 7 W. R. C. R.

1 For a discussion of this general problem, see also City of Beloit v. Beloit Water, Gas and Electric Co., 7 W. R. C. R. 187, 234, July 19, 1911.

71, 80, decided June 27, 1911, involves the valuation of a water plant for purposes of municipal purchase. The city objected to the inclusion of the value of the river intake as inadequate for the purpose intended and at present neither used nor useful. The Commission, however, inIcluded the intake in the valuation. The Commission says (at page 80):

The company was required and compelled by the city to build this intake. From the point of view of fire protection its construction was also a step in the right direction.

It further appears that the city built or authorized to be built the sewers which empty into the river above the river intake. In short, while compelling the company to build the intake, the city seems to have made no effort to protect the water above it from becoming contaminated and from rendering the use of the intake a menace to the public health. The presence of the sewer outlets and the consequent pollution of the river water is a matter over which the company had no control and for which it is in no way responsible.

As a matter of simple justice it would hardly seem fair to deprive the company of the value of property which it installed at the order of the city and which the city failed to protect and rendered valueless by its own actions. In other words, if the intake is of comparatively little value to-day, it is so because of conditions for which the city is in a large measure responsible. To entirely exclude it from the valuation would, for these reasons, hardly seem fair.

In this same case the city objected to including the value of filter galleries, claiming that these galleries were not a necessary and useful part of the equipment of the plant. The Commission says (at page 79):

Some effort was made by the city to have the value of the galleries excluded from the valuation of the plant, on the grounds that they were not useful or valuable as part of the system. It appears that the original plans called for the con