more than eighteen months would be required to construct so much of the plant as might be necessary for the beginning of operation according to the testimony of the engineers of the company. This does not mean that the whole undertaking with all its lines, from the very beginning to the end, would be built in that period, but that the equated period would not exceed that time. The period of construction of the initial unit practically determines the limit. As soon as an operating unit and a few lines are completed, operation of that portion may begin, and when operation may begin the construction period for that portion ends, and when the construction period ends, interest and taxes may no longer be charged to construction cost. They then become charges against income and should be paid out of operating income. As other lines are built and additions made, it is proper to charge interest upon them to capital, but only until the property is ready for use, provided good management has been had throughout. Thus the equated period becomes not the time from the initiation of the idea to the completion of the last remote branch (that may be many years or decades), but the weighted average time for the completion of each operating unit, due allowance being made for the cost of such unit. A pure average is not correct, for the amount of interest to be paid has relation not merely to the period but to the cost of the work. In this case the equated period of construction would not exceed eighteen months. The rate of interest would be about six per cent. per annum, and the taxes would be small.

It is obvious that the whole cost would not bear interest for the equated period, as funds would be provided only as needed. Certain apparatus would be purchased just before the beginning of operation, and therefore it would not be unfair to the company to compute interest for the full period upon one-half of reproduction cost, plus the cost of land and other preliminary and development expenses. Upon this basis, $120,000 would be ample.

This subject is also discussed as related to street railway construction in Re Metropolitan Street Railway Reor

ganization, 3 P. S. C. 1st D. (N. Y.) 113, 173, decided February 27, 1912.

$297. Interest-State railroad appraisals.

In the Minnesota railroad appraisal of 1908, interest during construction was allowed at 4% per annum for one-half of the estimated time required to build the respective lines, which according to their mileage, varied from one to eight years. Thus the total allowance was from 2% to 16% (see § 252). In the Michigan railroad appraisal of 1900, the rate of interest was fixed at 6% per annum, the construction period at one year, and interest was allowed for one-half of the estimated construction period. Accordingly, there was a uniform allowance of 3% for interest during construction. In speaking of the Michigan allowance, Henry Earle Riggs says: 30

The corporate history of the Ann Arbor Railroad, in Michigan, shows that it was built in sections of from 25 to 30 miles, and that each section was put into operation as soon as built, so that, while the actual period of construction of the complete property extended over 15 years, no section was under construction much more than one year. This is typical of much of the railroad building of the past, and on such a property the interest charge would be comparatively small.

A proper charge in such a case would clearly not be sufficient in the case of a road several hundred miles in length, through mountains, with tunnels, heavy bridges, and other structures which would extend the actual construction over periods of from 3 to 5 or 6 years, and this is particularly true where the road is a main line or artery, and where local traffic is of minor importance.

In the Wisconsin railroad appraisal of 1903, the allowance for interest during construction was also 3% (see § 261).

30 See his paper on Valuation, in Proceedings American Society of Civil Engineers, November 1910, p. 1512.

In the Washington railroad appraisal of 1908, the allowance was from 3% to 72% (see § 258). In the South Dakota railroad appraisal of 1910 the allowance was 3% (see § 257).

§ 298. Interest-Massachusetts appraisal of N. Y., N. H. & H. R. R., 1911.

George F. Swain in his appraisal of the New York, New Haven and Hartford Railroad for purposes of capitalization discusses interest during construction as follows: 31

Interest and Commissions.-This item covers interest on the capital required prior to the opening of the road. It is based on an assumed rate of 6 per cent. per annum, and the further assumption that it will take four years to complete the road, making an average charge of 6 per cent. for two years on the entire cost, including the present overhead charges, but not including equipment, which would be the last thing purchased. This is the same figure which was used by Price, Waterhouse & Co.

With reference to this charge, it must be remembered that the rate of interest to be assumed is not that which the New York, New Haven & Hartford Railroad Company to-day would have to pay for money. It is, on the contrary, the rate which a new company intending to build a road would have to estimate upon. On this basis, 6 per cent. is certainly not too high. This item also includes the legitimate charges of marketing the securities, not including, however, any discount on those securities, except so much as may be the legitimate commission to the bankers for the expense of marketing.

§ 299. Promotion and organization.

Most appraisals contain a small percentage to cover

31 Report to the Joint Board on the validation of assets and liabilities of the New York, New Haven and Hartford Railroad under Chapter 652, Acts of 1910, by George F. Swain, Engineer in Charge. Published in Report of the Massachusetts Joint Commission on the New York, New Haven & Hartford Railroad Company, February 15, 1911, pp. 51, 87.

legal and other expenses connected with the organization of the company. In some cases this is included in an allowance for general and legal expenses. A few appraisals in addition to making provision for company organization include a substantial allowance for promotion. The New York Public Service Commission for the First District has included such an allowance under the term "preliminary and development" expenses (see also § 302). In re Queens Borough Gas and Electric Company, 2 P. S. C. 1st D. (N. Y.), decided June 23, 1911, Commissioner Maltbie in delivering the opinion says:

There are certain expenses connected with every undertaking which are not represented by physical property but which must be incurred before the plant is operated. These relate to the initial promotion of the scheme and the organization of the company. Investors must be interested, lawyers and engineers must be consulted, and franchises and permits must be secured.

In the case of Cedar Rapids Gaslight Company v. Cedar Rapids, 144 Ia. 426, 120 N. W. 966, 970, decided May 4, 1909, involving the valuation of a gas plant for rate purposes, the Iowa Supreme Court ruled against an allowance either for organization or promotion: 32

Nothing can be allowed for the promotion and organization of the company, for it is immaterial by whom the plant may be owned in estimating its value.

In Knoxville v. Water Company 33 the Supreme Court of the United States refers to but does not decide this ques

32 The company carried this case to the Supreme Court of the United States and the decision of the state court was sustained. (Cedar Rapids Gaslight Company v. Cedar Rapids, 223 U. S. 655, decided March 11, 1912.) Justice Holmes in delivering the opinion of the court does not, however, refer in any way to the question of promotion cost.

33 Knoxville v. Water Company, 212 U. S. 1, 29 Sup. Ct. 148, 53 L. ed. 371, January 4, 1909.

tion. In this case the court below had included $10,000 on a total cost of $608,000 to cover "organization, promotion, etc." Justice Moody says "we express no opinion as to the propriety of including" this item "but leave that question to be considered when it necessarily arises." "We assume, without deciding that" this item was "properly added in this case." The above seem to be the only court decisions that refer to this question. Promotion considered as the cost of prospecting and securing the financial backing necessary to the initiation of a new enterprise does not appear to have been allowed for in the various appraisals considered, except in those of the New York Public Service Commissions as shown in §§ 301, 302.

§ 300. Promotion-St. Louis Public Service Commission, 1911.

The valuation for rate purposes contained in a report of the St. Louis Public Service Commission to the Municipal Assembly on rates for electric light and power, February 17, 1911, contains an allowance of $125,000 for expense of organization and of $32,944 for interest on the organization expense. In this case the total estimated cost of organization and construction including overhead charge was $15,030,505. The Commission says (Report, pages 31, 32):

In addition to the value of its physical property, the Company is entitled to have recognized as part of its assets on which it is entitled to earn a return, such amounts of money as have been expended by way of fees paid to the state, legal expenses, etc., in the formation of the corporation and the legitimate expenses of obtaining the franchise by the corporation, if any; but expenses preliminary to the organization of the corporation in prospecting the field, interesting prospective stockholders, and promoters' profits are not, in the opinion of the Commission,