On the other hand, where the market price of the physical units or of the labor entering into the construction of the plant has advanced since its construction, the original cost may be much lower than the present value; and for that reason be to the owner of the plant an unfair determination of its present value. The method most frequently used is to ascertain what it will cost to reproduce the plant or the cost of its replacement at the present time, and deduct therefrom for depreciation in the existing plant. Both methods may be used and considered in ascertaining the present value, and both are often resorted to as was done in this case.

§ 33. District Judge Evans in Cumberland Telephone Company Case, 1911-Fair value not determined by construction cost.

Cumberland Telephone and Telegraph Company v. City of Louisville, 187 Fed. 637, decided April 25, 1911, United States Circuit Court, was a suit to enjoin the enforcement of a rate ordinance. District Judge Evans in granting the injunction asked for, says (at page 642):

The ascertainment of the present value of the company's plant is therefore a matter of prime importance, and the subject, speaking generally, may be viewed from many standpoints, as to which it may suffice for present purposes to suggest that if the expenditures in the construction and equipment of a public utility corporation have been absurdly extravagant and wasteful it would not be admissible to say that such outlays fairly indicated the real value of its plant nor in such a state of case that rates should be fixed upon a scale that would pay ordinary dividends upon a licentiously extravagant cost of property, and similar considerations might apply if fictitious values were the result of "watering" the stock. On the other hand, if property had been obtained at a price far below its real value in better hands, or if some one of the many accidents or unsuspected reasons for a large increase should fortunately operate to double the value of a plant it would not be just nor reasonable to confine ourselves to the lower or former value not to say that such

former value continued to be the real one. The value of a plant may depend upon good fortune, upon good management or upon fortuitous circumstances, but in every event the reasonable value of the property "at the time it is used for the public" is the value we are to ascertain for the purposes of this contro

versy.

§ 34. Wisconsin Railroad Commission in Manitowoc Water Case, 1911-Elements of physical valuation.

In re Manitowoc Water Works Company, 7 W. R. C. R. 71, 74, decided June 27, 1911, the Wisconsin Railroad Commission says:

In determining the value of the physical property of a public utility several elements must be taken into consideration. The three elements of greatest importance in fixing the value of such plants are the original cost, the cost of reproducing the plant, and the present value. As to which of these elements shall be given the greatest consideration, must depend upon the circumstances in each case and must also depend upon the purpose for which the valuation is made. See Hill et al. v. Antigo Water Co.. 3 W. R. C. R. 623, 631; In re Menominee and Marinette Light and Traction Co., 3 W. R. C. R. 778, 785-787; State Journal Prtg. Co. et al. v. Madison Gas & Electric Co., 4 W. R. C. R. 501, 557.

§ 35. District Judge Farrington in Spring Valley Water Rate Case, 1911-Elements of fair value reviewed.

In the case of Spring Valley Water Works v. San Francisco, 192 Fed. 137, decided October 21, 1911, District Judge Farrington gives a comprehensive and carefully considered opinion in regard to the elements of fair value. This case is a continuation of the case by the same title reported in 165 Fed. 667 and decided October 7, 1908, and in which the opinion was also by Judge Farrington. In the 1911 case a permanent injunction was granted against the enforcement of rates, fixed by municipal ordi

nance. In that case District Judge Farrington said (at pages 145, 146):

8. What the company is entitled to demand in order that it may have just compensation, is a fair return upon the reasonable value of the property at the time it is being used for the public. . .

9. The public has a right to demand that no more shall be exacted than the services rendered are reasonably worth. The public cannot be subjected to unreasonable rates in order simply that stockholders may earn dividends.

10. Cost of reproduction is not a fair measure of value, unless a proper allowance is made for depreciation, because all constructive portions of the plant are subject to decay, and to be worn out or consumed by use. . .

...

11. Original cost is not always a fair criterion of present value, because the plant may have cost too much, or it may be of unnecessary dimensions. If it has increased in value since its acquisition, the company is entitled to the benefit of such increase, if such increased valuation does not require a return so large as to be unreasonable and unjust to the public.

...

12. The aggregate value of bonds and issued capital stock of the company at present market prices is not a reliable index of the value of the plant, because such prices often rise and fall from the operation of causes which have little or nothing to do with the real intrinsic value of the property, and the bonded or other indebtedness of the company may exceed the actual value of its property.

The most important fact to be determined is the value of the property. The value to be ascertained is the value at the time of the inquiry. Only that property is to be considered which was then used and useful in supplying San Francisco with water. Among the proper matters to be considered are the original cost of construction; the amount expended in permanent improvements; the amount and market value of stock and bonds; the present, as compared with original, cost of construction; the probable earning capacity of the property under the particular rates prescribed by the ordinance for each of the years in ques

tion; the sums required to meet operating expenses; what it will cost to obtain water, equal in quantity and quality to the present supply, from the next most available source; the depreciation suffered by that portion of the plant which is worn by use or action of the elements, or shorn of its value by newer, cheaper, and more efficient appliances and machinery; the fact that the plant has a franchise and is a going concern, with an established business and thousands of customers, whose buildings are connected with the distributing system; and appreciation in value since the various properties constituting the plant were acquired. To each of these factors just and proper weight must be given; and, finally, the result must be the reasonable and fair value of the plant as between the company and the public.

§ 36. Trend of decisions on fair value.

In 1898, in the leading case of Smyth v. Ames, decided March 7, 1898 (see above, § 24), Justice Harlan said: "We hold, however, that the basis of all calculations as to the reasonableness of rates . . . must be the fair value of the property being used . for the convenience of the public." This principle was repeated the following year by Justice Harlan in San Diego Land and Town Co. v. National City (see above, § 25) and in 1903 by Justice Holmes in San Diego Land and Town Co. v. Jasper (see above, § 26).

In Smyth v. Ames, also, Justice Harlan pointed out certain elements to be considered in determining the fair value of property being used (see above, § 24). He says that "the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction; the probable earning capacity under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration and are to be given such weight as is just and right in each case." The court, how

ever, is careful to add that there may be other elements besides those enumerated that should be taken into consideration in fixing fair value. The court evidently felt that the equities of each case should determine the weight to be given to these various elements. It evidently agrees with the statement made by Justice Brewer in the Circuit Court in 1894 that "there is no hard and fast test which can be laid down" to determine fair value (see above, § 21). $37. No authoritative determination of standard of value.

In Advances in Rates, Eastern Case, 20 I. C. C. R. 243, 261, decided February 22, 1911, the opinion of Interstate Commerce Commissioner Prouty, after citing Smyth v. Ames (see § 24) refers to the lack of an authoritative determination of a standard of value as follows:

The foregoing are the factors which, in the opinion of the Supreme Court, are to be weighed in determining the value of these properties for rate-making purposes. When it is remembered that information upon one and perhaps the most important of these heads is entirely lacking, that the Supreme Court itself has not attempted to assign a particular value to any one of the above factors, which must be combined to produce the result, that counsel after the most careful consideration, both of the law and of the economic and social problems which underlie this subject, are hopelessly divided as to the relative importance of these respective items, it will be seen that anything like a mathematical conclusion, or one for which a definite reason can be assigned, is impossible. Further reflection confirms what this Commission, having under advisement a similar question, said In re Proposed Advances in Freight Rates, 9 I. C. C. R. 382, 404:

It is plain that until there be fixed, either by legislative enactment or judicial interpretation, some definite basis for the valuation of railroad property and some limit up to which that property shall be allowed to earn upon that valuation, there can be no exact determination of these questions. In the absence of such a standard the tribunal,