gross earnings of the combined gas and electric plants amounted to $323,000 so that the Commission's allowance for working capital is a little over 10% of the gross earnings. In its opinion the Commission tabulates current assets and current liabilities for various periods and obtains the difference between the assets and the liabilities, but what consideration, if any, is given to this factor, is not stated.

§ 344. New York Consolidated Gas Case.

In the New York City Eighty Cent Gas Case, the Special Master made an allowance of $3,616,000 for working capital. This allowance was reduced by District Judge Hough to $1,616,000. The Special Master in his report says (at page 179):

4

This is found in the shape of current supplies, cash and bills and accounts receivable. According to Mr. Carter, complainant's material and supplies, consisting of coal, coke, oil, lime, etc., aggregated $616,470.08, as of October 31, 1905. In addition to this he testifies that $1,000,000 in cash was a fair conservative amount of working capital for the current purposes of a Company like complainant, besides its accounts receivable outstanding to the extent of $2,000,000. His total estimate, therefore, aggregates $3,616,000. Dr. Humphreys testified that a fair allowance for working capital, including cash, accounts receivable and material, would be about 30 cents per thousand cubic feet of annual sales. On the basis of annual sales amounting to 13,283,000,000 feet (the complainant's sales for 1905), this would represent a working capital of $3,984,900....

Although the necessity for working capital is conceded by the witnesses for the City, the subject is not discussed at

4 See Consolidated Gas Company v. Mayer, Report of Arthur H. Masten, Master in Chancery, United States Circuit Court, Southern District of New York, May 18, 1907, as printed in United States Supreme Court Complete Record, Volume 1, pp. 151-205, in case of Willcox v. Consolidated Gas Company.

length in counsel's brief excepting that in summarizing the cost of property devoted to the gas business, there is included $1,303,000, being the same amount set aside for working capital at the time of the consolidation in 1884. No testimony on the subject was offered by the State authorities and counsel in their brief include no allowance for working capital in their statement of the maximum amount which they claim as the value of complainant's property devoted to the public use on December 31, 1905. As the sales of gas for 1885 were approximately 4,000,000,000 feet as against approximately 13,000,000,000 feet for 1905, it is manifest that a much larger working capital is now required than that conceded by the City, and nothing is found in the evidence to justify the conclusion that the sum of $3,616,000, claimed by complainant, is excessive.

District Judge Hough in reviewing the Master's report says: 5

Upon this subject I am unable to agree with the report, further than to express my belief that the complainant usually has on hand about $3,000,000 worth of bills receivable and cash, and some $616,000 worth of bills payable outstanding. But it does not follow that so large a proportion of its capital account should be entered as working capital. That phrase means the amount of cash necessary for the safe and convenient transaction of a business, having regard to the owner's ordinary outstandings, both payable and receivable; the ordinary condition of his stock, or supplies in hand; the natural risk of his business, and the condition of his credit; and unless these matters, and perhaps others, be looked into, no comparison can be drawn between one business and another, or even between those of the same general nature. The security of complainant's business is fairly shown by the fact that for the time of inquiry, in a gross business of over $13,000,000, bad and doubtful debts amounted to less than $83,000, and final profit and loss adjustment less than $30,000.

5 Consolidated Gas Company v. City of New York, 157 Fed. 849, 859, December 20, 1907.

Complainant's credit is of the highest, and its own comptroller should, I think, be the best judge of its own necessities; and his measure of working capital in the sense of cash is $1,000,000. Six hundred and sixteen thousand dollars is taken as a fair average of outstanding bills payable, and the aggregate of these two sums is as much as the comptroller claimed, until, on suggestion, he added $2,000,000 thereto, to represent the average amount of outstanding bills receivable. To assert that a concern with such credit as complainant, with small percentage of loss, and a plant completed and paid for, needs as working capital not only the amount of its average outstandings payable and $1,000,000 in cash, but enough more to make its average bills receivable equal to cash, is going too far. A fair working capital for complainant is $1,616,000, and that figure is adopted.

The allowance made by the District Court consists of approximately $616,000 for supplies on hand and an additional allowance of $1,000,000, making a total working capital of $1,616,000. Judge Hough refers to the $616,000 as an allowance for "bills payable outstanding" but this as indicated by the report of the master is not the amount of bills payable at all but the value of material and supplies on hand. The annual sales of gas in 1905 amounted to 13,283,000,000 feet. The total allowance for working capital was therefore equal to 12.17 cents per one thousand feet of gas sold. The case then went to the United States Supreme Court on appeal. Justice Peckham, however, in stating the conclusions of the court, makes no mention of working capital."

§ 345. New York Public Service Commission, First District, 1911.

A particularly discriminating discussion of working capital is contained in Commissioner Maltbie's opinion

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

in the case of Mayhew v. Kings County Lighting Company, 2 P. S. C. 1st D. (N. Y.) decided October 20,

1911. He says:

A gas company must purchase materials and supplies, must pay its employees and must distribute its commodity to consumers in advance of payment for such service. This requires a fund ordinarily called working capital. It is reimbursed from operating receipts from time to time, but originally is provided from capital. The amount needed depends upon the advances that must be made and the period for which they must be carried.

The relation of current assets to current liabilities is not a fair index of the amount of working capital needed, for some companies prefer to finance their daily operations through temporary loans; others issue securities to provide the necessary funds. Working capital does not vary with each change in financial methods, but depends for its justification, so far as rate cases are concerned, upon entirely different grounds. Furthermore, current assets and liabilities vary greatly from month to month. If meters are read just before the end of the month, as is the practice of this company, the monthly statement will show a large entry under consumers' accounts receivable. If a date is chosen just before dividends are declared, the cash balance will be large; yet it has no relation to working capital, for it has largely been accumulated out of earnings and not from capital. Cash obtained from the sale of securities for construction purposes has no relation to working capital, but it is a current asset. Likewise a surplus represented by current assets would not be germane, for it is derived from operating income and not from capital.

It has been argued that provision should be made in working capital for new construction, extensions and additions, but this argument does not seem to be well founded. It will be recalled that allowance has been made for interest upon cost during construction, and that it has been computed not merely upon the original initial plant, but upon every extension and addition made to date, and likewise would be computed upon

all future extensions and additions. In view of this fact, and that the cost of these betterments is also included, it would clearly be a duplication of property to make an allowance for the same items in working capital. However, it does seem proper to provide for materials and supplies to meet repairs and renewals promptly.

Taking into account all considerations that are proper, it is the opinion of the Commission that an allowance of $80,000 for working capital for the year 1910 would be ample.

This allowance of $80,000 includes $39,643 for materials and supplies on hand. In 1910 the company sold 580,678,000 cubic feet of gas. Therefore the allowance for working capital amounted to 13.77 cents per thousand cubic feet of gas sold.

§ 346. Chicago gas plant appraisal, 1911.

In appraising the property of the People's Gas Light and Coke Company of Chicago for rate purposes, William J. Hagenah, in his report of April 17, 1911, to the City Council Committee, allows $3,200,000 for working capital. In this case the total value of the physical property was $49,023,947 and the gross operating revenues, $14,302,447. Mr. Hagenah says (at page 42):

The best information as to what constitutes a reasonable allowance for working capital is supplied by the balance sheets showing the current assets and the current liabilities.

...

There is no fixed rule by which the amount of working capital can be computed. The range of maximum and minimum allowance can be ascertained with reasonable accuracy, but there are numerous demands on the company which are not reflected in the balance sheet, but must be arrived at through the application of a reasonable judgment. Among such items mention may be made of cash requirements to guard against contingencies, the allowance for temporary financing of plant extensions, the cost of gas which has been consumed by the customer since the last reading of his meter and also the cost