In ascertaining this actual or reproductive value, the company has the right to anticipate the growth of its business and to be allowed a proper return on a plant of sufficient capacity for such growth.

Sometimes, however, expectations in regard to future growth are not realized and the enterprise has been saddled permanently with a much larger investment than the business warrants. In such cases the consumer ought not to be required to pay profits on capital thus unwisely sunk. Under our theory of private ownership the investor takes the responsibility of determining the amount and character of investment. If he constructs a plant where it is not needed or seriously misjudges future growth, he should stand the loss. Considerations of this nature are involved in the case of City of Racine v. Racine Gas Light Company, 6 W. R. C. R. 228, 229, decided January 27, 1911. This case involved the valuation of a gas plant for rate purposes. The engineers found after a thorough investigation that the plant was larger than the demands of the business required and that the increased investment did not for the most part result in more economical operation. Under these conditions it was held by the Wisconsin Railroad Commission that the situation in this respect is such that it is far from clear whether it would be equitable to all concerned to fix rates in this case, the receipts from which would return interest and profit on the cost of reproduction of the plant at as high rates as those which might ordinarily be regarded as adequate in cities of this size.

In San Diego Land and Town Company v. Jasper, decided April 6, 1903, the United States Supreme Court clearly decides that excessive investment shall be excluded. Justice Holmes says:

4

'San Diego Land and Town Co. v. Jasper, 189 U. S. 439, 446, 447, 23 Sup. Ct. 571, 47 L. ed. 892, April 6, 1903.

If a plant is built, as probably this was, for a larger area than it finds itself able to supply, or, apart from that, if it does not, as yet, have the customers contemplated, neither justice nor the Constitution requires that, say, two-thirds of the contemplated number should pay a full return. The only ground for such a claim is the statute taken strictly according to its letter. . . . If the original company embarked upon a great speculation which has not turned out as expected, more modest valuations are a result to which it must make up its mind.

§ 217. Excessive investment-New Jersey Chancery Court,

1905.

The case of the Long Branch Commission v. Tintern Manor Water Company, decided November, 1905, involves the valuation of a water plant for rate purposes. In this case the water plant had been constructed with a view to the demands of a fifty-year growth. The court deducted $130,000 from a total cost of $1,400,000 in view of the fact that certain portions of the plant were larger or more expensive than was reasonably required. The court does not hold, however, that the company is not entitled to a return on an investment large enough to take care of growth for a reasonable period. The court says: 5

It is admitted that the new works are supposed to be amply sufficient, both as respects the supply of water and the size of the principal mains, to supply the region within its reach for 50 years to come. Indeed, the size and costliness of the plant is a matter of complaint by the complainant, and it insists that it should not be called upon or required to pay rates for water sufficient to pay a fair return for so great an expenditure. There is a measure of soundness and justice in this contention. The inhabitants of the borough of Long

5 Long Branch Commission v. Tintern Manor Water Co., 70 N. J. Eq. 71, 62 Atl. 474, 477, 479, 480, November, 1905, Court of Chancery of New Jersey.

Branch ought not to be compelled to pay water rates adjusted to pay an income on a greater outlay in a plant than is reasonably needed for its supply. . . . The supplying company is, as we have seen, under obligation to keep in advance of the present demand and take liberal account of the probable increase of demand due to increase of population. ... These considerations lead to the conclusion that the water company when it starts with new works, or a large addition to the original supply, is entitled to an income therefrom somewhat greater than what is due to the cost of work sufficient merely to meet the present demands. I say "somewhat greater" for I do not mean to be understood as holding that capitalists ought to expect an immediate compensatory income from an enterprise of this character. But on the other hand it would be manifestly unjust to expect them to invest their money in a plant necessarily larger than present demands require and take as income therefor such a sum as would satisfy an investment sufficient to meet present demands. For here comes

in again, with great force, the consideration previously mentioned, that the municipality cannot bind itself for more than 10 years; and, in fact, need not bind itself at all for any period, and it holds in its hand the absolute power to oust the water company at any time it shall so choose and may exercise that power as soon as by the increase of population and demand, the investment by the capitalists shall have become actually profitable. This is one of the risks spoken of and provided for by the Supreme Court of Maine. . . . Defendant admits that its plans were adapted to a future estimated growth of 50 years. Mr. Sherrerd says, and I agree with him, that 50 years is too long for a forecast. He fixed 30 years as the usual limit.

CHAPTER XI

Average Price v. Present Price

§ 230. Method followed by Wisconsin Railroad Commission.

231. Michigan and Minnesota railroad appraisals.

232. Rule that neither the highest nor lowest prices should govern. 233. Average price for period equal to construction period.

234. General considerations.

§ 230. Method followed by Wisconsin Railroad Commission. The general method followed in the appraisals of the Wisconsin Railroad Commission is described by Prof. Wm. D. Pence, Engineer to the Wisconsin Railroad Commission and Wisconsin Tax Commission, as follows (at page 51): 1

In order to avoid extreme variations in unit prices due to the fluctuations in market quotations and also with a view to approximate as closely as practicable the conditions which usually prevail in building up public utilities properties, it has been the practice of the staff to use average prices for a term of years rather than to apply the current quotations or unit costs prevailing at the actual date of inventory. For this purpose the average price for the five-year period immediately preceding the date of valuation has been used whenever in the judgment of the staff such rule was practicable.

The Wisconsin Commission discussed this matter at considerable length in Hill v. Antigo Water Company, 3 W. R. C. R. 623, 639, 640, decided August 3, 1909:

While there is thus a great deal to be said in favor of using current prices in determining the cost of reproduction new

1 "Work of the joint engineering staff of the Wisconsin Tax and Railroad Commission," by Wm. D. Pence, in Engineering Record, Vol. 59, pp. 10, 49, 73, January 2, 9, 16, 1909.

and the present value of the plant, it would seem to be clear that what has thus been said would apply with greater force when the plants are valued for the purposes of being taken over by the municipality, than when privately owned plants are valued for rate-making purposes. Rates based upon valuations that rest on current prices, would necessarily have to be changed with all changes in these prices. .

In order to secure the greatest possible permanency in the rates, it is necessary that the valuation upon which they rest should be subject to the fewest possible fluctuations. This desired stability in the valuation can usually be obtained by carefully computing it upon the average prices for a term of years of the various factors that enter into the plant. Just how long a period should be chosen for this purpose cannot be stated offhand. But a little investigation will readily disclose the usual or normal price in each case.

In City of Appleton v. Appleton Water Works Company, 5 W. R. C. R. 215, 229, decided May 14, 1910, the Commission says:

If the standard by which the reasonableness of charges is to be determined should fluctuate with the market prices of material, labor and land, no schedule of rates could be established for any length of time, for, under the circumstances, a rate that would be reasonable to-day might be very unreasonable tomorrow. The principles of the law applicable to the subject certainly involve no such absurd consequences.

In this case the Commission includes an extended statement from its engineers as to the basis they have used in determining unit prices. This statement contains a chart showing fluctuations in prices of cast iron water pipe and a comparison of monthly prices with one year, five year and ten year averages. The above were both rate cases but in 1911 the same principle is applied to the valuation of a water plant for purposes of municipal purchase. Re Manitowoc Water Works Company, 7 W. R. C. R. 71, 85,