under the laws of this State, proper items for consideration in this connection. The Company claims for this $709,000, and presented expert testimony in support of its claim, based on the theory of cost of reproduction new of the Company, but its witnesses included in this item many elements of expense which do not seem applicable to this case, or indeed proper elements of charge as part of this item. The amount of the Company's claim is fixed arbitrarily at three and one-half per cent. of its valuation of all the balance of its permanent investment. We fail to see any relation between this item of expense and the value of the Company's investment, and no reason was given for thus determining its amount. It appears to be simply an arbitrary method of arriving at the amount of this expense. We consider that an allowance of $125,500 is ample to cover this item. Interest is allowed specifically upon this item, inasmuch as such expenditures generally precede the operation of the plant by a considerable period of time. In this case the company also requested an allowance of $428,509 for time and expense of permanent organization force during construction period. The Commission disallowed this item, stating that (Report, page 33) “As a matter of fact, as is often the case, the operating officials and the engineering officials, were to a great extent identical, and in making an allowance of 5 per cent for engineering on all the items of construction, the Commission considers that it has made allowance to cover the cost of the time of officials paid for as operating expenses but really devoted to engineering." § 301. Promotion-New York Public Service Commission, Second District, 1908. The New York Public Service Commission, Second District, in the matter of the application of the Rochester, Corning, Elmira Traction Company, 1 P. S. C. 2d D. (N. Y.) 166, decided March 30, 1908, lays down the principle that in determining the amount of securities that may be issued by a new enterprise a fair allowance will be made for services in promoting the organization of the enterprise. Such allowance will be placed upon a basis of just payment for valuable and indispensable services. Chairman Stevens in his opinion says (at page 177): Another subject of great interest and importance is the compensation, if any, to which the promoters of the enterprise should be entitled for their services. Promotion has been so extensively abused and has been so universally used as a cover for abuses in capitalization that it has come to be regarded as a term of reproach and as a device to work schemes of robbery upon the investing public. No reason is apparent why this should necessarily be so. The honest services of a capable promoter are indispensable to the flotation of every comprehensive and far-reaching scheme of development in the railroad world, or elsewhere. A clear vision to see opportunities, ability to demonstrate them to others, and energy to push to completion works untried but of great moment, are indispensable to material development and should be fairly and even liberally rewarded by the public which receives the benefit of those works. Such rewards, however, should be put upon a clear basis of business principle, should be of sufficient magnitude to encourage rather than discourage enterprise, and should not be so great as to make an exorbitant demand which is perpetual in its nature, upon the community to be served. They are to be treated simply as just payments for services performed for the corporation, which services are valuable and in many cases even indispensable. Such services should be paid for upon the basis of what they are fairly worth, having regard to all the circumstances of the case. In the case under consideration the Commission fixed the allowance for promotion at 5% on the estimated cost of the railway. § 302. Promotion-New York Public Service Commission, First District, 1912. Re The New York Public Service Commission for the First District has included an allowance for costs of promotion in various rate and capitalization cases. Metropolitan Street Railway Company Reorganization, 3 P. S. C. 1st D. (N. Y.) 113, 165, decided February 27, 1912, relates to capitalization after reorganization. The Commission discusses development expense as follows: There are certain expenses connected with every undertaking which are not represented by physical property, but which must be incurred before the undertaking is operated. Lawyers and engineers must be consulted. Permits must be secured. Interest and taxes during the period of construction must be paid, and as there are no earnings, they must be included as part of the cost of the undertaking. There are also other expenses connected with the experimental and trial operation of machinery and the adjustment of various parts of the enterprise, which antedate operation. Ordinarily, one would expect that the company itself would have data upon which to base an estimate of a reasonable allowance for these items; but no such data have been produced. In other cases decided by the Commission, when an estimate has been necessary, the amounts allowed for promotion of the original scheme, the securing of rights and permits, experimental operation, adjustment of system, preliminary legal fees and technical advice have varied from 51⁄2 to 8 per cent. of the reproduction cost of the plant plus the cost of the land. These were small plants compared with the Metropolitan system, and as many expenses are nearly the same in amount regardless of the size of the company, a percentage basis is not the correct standard. Seven per cent of the cost to reproduce the physical property in this case would be nearly $5,000,000. The whole question of preliminary and development charges is so bound up with another subject, to which much attention was given "going value" or "going concern value"-that the two cannot well be separated, and it is necessary to consider the testimony upon this subject before a final estimate is made. After considering all of the opinions and peculiar facts relating to this system it is the opinion of the Commission that a sum of from $5,000,000 to $7,000,000 for development expenses in addition to the amounts already allowed and in addition to the payments to be made out of the fund of $7,300,000 is ample to cover promotion expenses, preliminary legal fees and technical services, adjustment of plant and all other elements which should be included. CHAPTER XIII Discount on Bonds § 320. Definition. 321. Treatment in uniform systems of accounts. 322. Treatment in connection with capitalization. 323. Treatment in public purchase cases. 324. Cleveland and Chicago street railway settlements. 325. New York subway contract. 326. State railroad appraisals. 327. Valuation for rate purposes. 328. Washington Railroad Commission-Rate Case. $320. Definition. Two elements may be present in bond discount: (1) brokerage, (2) deferred interest. Brokerage has been defined as "the expense necessary to be paid a reputable broker for making a full and complete investigation into the cost and prospects of an inviting public service enterprise and a reasonable compensation for inducing his clientage to invest in well secured bonds and securities of such corporation." If bonds are sold to a broker at 95 who takes them with the expectation of being able to dispose of them to the public at 100, the 5% discount is purely a brokerage charge. If, however, the bonds are sold to a broker at 85 who in turn disposes of them to the public at 90, there is in addition to the brokerage charge of 5% a deferred interest charge of 10%, making a total discount of 15%. But both brokerage and deferred interest or discount proper are a part of the amount that |