of gas in the holders and distribution system. A review of all the balance sheet items and other factors materially affecting working capital must lead to the conclusions that an allowance for 1909 of $3,200,000 is approximately correct. This amount is therefore used in the computation of the investment value upon which the stockholders are entitled to a reasonable return. After the above report was submitted, the complexion of the council committee changed and the new committee asked Edward W. Bemis to present a report reviewing the findings contained in the Hagenah report. In regard to working capital, Mr. Bemis says: 7

Mr. Hagenah, in a discussion of working capital, pages 40-43, allows $3,200,000 for 1909. The United States Supreme Court, in the Consolidated Gas Case of New York, indorses the decision of Judge Hough in the United States Circuit Court, which allows for that Company $1,616,000, or 12.17 cents per 1,000 feet of sales in 1905, of 13,283,000,000 feet. Applying this figure to the estimated sales of 17,148,322,000 feet, of the Peoples Gas Light & Coke Company in 1910, would yield a working capital of $2,086,951, or say $2,100,000.

In reaching his conclusions, Judge Hough held that it was not necessary to capitalize the accounts receivable, while the accounts payable, which he did capitalize, were sufficient for supplies and stores on hand. Yet a considerable portion of these accounts payable probably bore no interest.

The Peoples Gas Light & Coke Company increased its cash on hand from $1,322,664 at the close of 1906 to $4,819,934 at the close of 1910, but nearly all of this increase appears to have been accumulated for the new office building and other construction purposes. There appears to be no good reason for allowing for actual working capital for operating purposes in Chicago more than the $2,100,000 obtained by following the precedent of the New York Consolidation Gas decision.

7 Report upon the price of gas in Chicago for the Chicago Council Committee on gas, oil and electric light by Edward W. Bemis, July 1, 1911,

§ 347. Iowa Gas and Water Rate Cases.

The case of Cedar Rapids Gas Light Company v. Cedar Rapids, 120 N. W. 966, 969, decided May 4, 1909, Supreme Court of Iowa, involves the valuation of a gas plant for rate purposes. In regard to working capital the court

says:

The witnesses for the company estimated that $25,000 would be required as working capital, aside from the supplies ordinarily carried, which included 1,000 tons of coal and 10,000 gallons of oil, but were unable to sustain their opinion save by dealing in probabilities for its use, in the main speculative. It appears that collections for gas sold are made monthly, and, as these amount to about $8,000 per month, it is evident that, after the first month, enough would be on hand to meet current expenses. As supplies on hand were sufficient for immediate use, and for some months in the future, about all essential would be enough to take care of the pay roll for the first month, and $2,500 would be ample for that purpose and other possible contingencies. Even this much appears to be more than the company in its experience has found it necessary to reserve.

The opinion does not include the estimated value of materials and supplies on hand, which information is necessary in order to determine the total allowance of the court for working capital. In 1907, the company sold 103,079,190 cubic feet of gas. The decision in this case was affirmed by the Supreme Court of the United States in Cedar Rapids Gaslight Company v. Cedar Rapids, 223 U. S. 655, decided March 11, 1912. Justice Holmes states that the attitude of the state court was "fair." There is no direct reference, however, to the subject of working capital.

The case of Des Moines Water Company v. City of Des Moines, involves the valuation of a water plant for rate purposes. In this case no mention or allowance is made

Des Moines Water Company v. City of Des Moines, no. 2468, in equity,

for working capital either in the report of the master or in the opinion of Judge Smith McPherson confirming the master's report. The physical valuation, however, includes an item of between $28,000 and $33,000 for stock, tools and supplies.

§ 348. Lincoln, Neb., Gas Rate Case, 1909.

The case of Lincoln Gas and Electric Light Company v. City of Lincoln, 182 Fed. 926, 928, decided April 6, 1909, is an action to enjoin the enforcement of an ordinance reducing the price of gas from $1.20 to $1.00 per thousand cubic feet. The application was denied. In regard to working capital District Judge W. H. Munger says (at page 928):

But it is apparent that, for the successful and economical operation of the plant, a certain amount of working capital is required. This amount I find to be $50,000, making the total value of complainant's investment, upon which it is entitled. to a reasonable return, $566,073.59.

While it is true the testimony shows that the complainant has not such working capital but has purchased upon credit the supplies necessary to operate, yet I think that, in determining what is a reasonable compensation, a working capital should be considered.

This decision was reversed and the case remanded by the Supreme Court of the United States in Lincoln Gas and Electric Light Company v. City of Lincoln, 223 U. S. 349, decided March 11, 1912. Justice Lurton in delivering the opinion of the court does not, however, refer to the question of allowance for working capital.

§ 349. Louisville Telephone Rate Case, 1911.

The case of Cumberland Telephone and Telegraph Report of George F. Henry, master in chancery to the Circuit Court of the United States, Southern District of Iowa, Central Division, filed September 16, 1910.

Company v. City of Louisville, 187 Fed. 637, 646, 648, decided April 25, 1911, is a suit to enjoin the enforcement of a rate ordinance. In a decision granting the desired injunction District Judge Evans says:

(4) It seems to us that a proper amount of working capital should have been included in any estimate of the present value of the plant. In normal cases (and we may assume this to be such) it would play a very important part in enterprises like a telephone company. No association of prudent business men probably would attempt to conduct a large business, such as that involved in this case, without keeping a considerable working capital on hand devoted to that business and which would really be embarked in it. It would seem to be quite essential to the successful operation of any great plant that some working capital should be kept on hand and available for immediate uses, and such capital would seem to be a very proper and important part of the property which, it may fairly be said, is "being used for the public." It may be difficult, however, to say in this case, as in all others, precisely what the amount of such working capital should be.

Very similar considerations apply to what are called "supplies on hand." We think prudent management demands that a reasonable quantity of articles certain to be called for in the operation of the plant should be kept on hand, and, if on hand, should be included in any estimate of the present value of the property which is "being used for the public." . . . In their exclusion from the estimate we think the Special Master proceeded upon an erroneous theory, and we have concluded that their valuation should have been fixed as follows: The working capital at $33,000 and the supplies on hand at $18,000—a total of $51,000. We incline to think that the term "working capital" might embrace both items, as supplies on hand may fairly be regarded as part of the working capital in another form.

§ 350. New York Special Franchise Tax Case, 1911.

People ex rel. Manhattan Railway Company v. Wood

bury, 203 N. Y. 231, 96 N. E. 420, decided October 17, 1911, is a special franchise tax case. The value of the special franchise was determined by the net earnings rule which provides for the capitalization of the surplus net earnings after allowing a 6% return on the value of the tangible property. The court included with the tangible property an allowance for working capital. Judge Gray in delivering the opinion of the court says (at page 234):

I think, also, that there should have been included in the tangible property the sum of $537,139, consisting in cash and other cash items on hand. This item may, properly, be considered as a part of the relator's working capital, which it was entitled, in the prudent management of its business, to keep on hand. Whether or not it was, in fact, essential to the operation of the railroad is not material; but it was, nevertheless, an item of its property, which it may fairly claim to have considered with the rest of its tangible property, upon which the return should be estimated.