care of any depreciation in the physical condition of the property and make all needed improvements in roadbed, buildings, and equipment, demanded by the traveling public, shippers, increased traffic, or natural causes, they should be kept to that point.

The Board of Railroad Commissioners in publishing Mr. Witt's report of his appraisal comment on this subject as follows: 7

In making this appraisal, no valuation has been placed upon the good will or intangible assets of any company. We do not believe that the good will of a railway company, the supposed franchise value, the advantage due to strategic location, or the efficiency of the organization of the company as affecting its ability to facilitate the performance of its duties as a common carrier should be taken into consideration for the purpose of arriving at a value of the railway company's property. These are properly matters to be considered in connection with the ability of the company to get business, increase their earning capacity, and perform services to the public at a proportionately lower charge.

The rate charged to the public for the transportation of property should not be based upon any value which takes into consideration any supposed intangible value or any franchise value, nor should it be based upon any charge for the efficiency of its organization of the company to perform its duties to the public.

§ 561. Oklahoma Railroad Rate Case, 1910.

In the case of Missouri, K. and T. Ry. Co. v. Love, 177 Fed. 493, decided February 14, 1910, Circuit Judge Hook applies the theory of going concern in a railroad rate case. He says (at page 496):

7 Report of Carl C. Witt, Engineer to the Board of Railroad Commissioners of the State of South Dakota, containing the report of the appraisal of the railroad properties in the state with comments by the Board, dated November 15, 1910. In Twenty-first annual report of the Board of Railroad Commissioners of South Dakota, 1910, p. 28.

An established railroad system may be worth more than its original cost and more than the mere cost of its physical reproduction. It has passed the initial period of little or no return to its owners which, of greater or less duration, almost always follows construction and is not infrequently marked by default and bankruptcy. The inevitable errors in its building which finite minds and hands cannot avoid have been measurably corrected, time and effort have produced a commercial adjustment between it and the country it was intended to serve, relations have been established with patrons, and sources of traffic have been opened up and made tributary. In other words, the railroad, unlike one newly constructed, is fully equipped and is doing business as a going concern. It has attained a position after many experiences common to railroad enterprises which entail loss and cost not paid from current earnings, and which correspondingly make for value.

§ 562. Des Moines, Iowa, Water Rate Case, 1910, 1911– 10% allowance for going value.

Des Moines Water Company v. City of Des Moines is a water rate case. After discussing the statements of various courts as to going value, all but two of which related to valuations for purchase purposes, the Special Master, George F. Henry, says (at page 43): 8

So far as I have been able to learn, this expression by the Supreme Court of Iowa of seeming doubt as to the right to include this "going value" in arriving at the value of a water works plant in determining a fair rate of profit from the operation of such a plant, is the only expression of this character from any court of last resort. Several of the courts, as will have already been noticed, say that they know of no logical distinction between sale cases and rate cases with respect to the right to include this element of value. I see no such logical

8 Des Moines Water Company v. City of Des Moines, no. 2468, in equity, Report of George F. Henry, Master in Chancery to the Circuit Court of the United States, Southern District of Iowa, Central Division, September 16,

distinction and am of the opinion, in the light of the foregoing authorities, that it must be included.

The special master further states that the highest estimate of going concern value made by any witness was that of Benezette Williams, who appraised this item at $920,000, but considered that only one-half of which, $460,000, should be allowed the company and the other half should be considered as belonging to the city. The lowest estimate made by any witness was $12,445. The special master fixed the going concern value at not more than $168,277 and not less than $167,251. He also determined that the value of the property exclusive of going concern value was not more than $1,685,948 and not less than $1,672,514. The master's allowance for going concern is therefore almost exactly 10% on the physical value of the property.

The above report of the master is approved by Judge Smith McPherson in an opinion filed September 16, 1911.9 Judge McPherson sees no distinction between "good will" and "going concern" and apparently takes the ground that there is no difference between the good will of a newspaper enterprise and the established business of a water plant. Judge McPherson says (at page 197):

The master has found and fixed a valuation upon this property, as a going concern, as distinguished from the naked plant. As to this, both reason and authorities sustain him. Everything of a business character is thus valued. The peanut or news stand on the street corner, the trunk line railroads and the street railroad systems, the city and the village stores, the newspapers, the carriages for hire in the cities, dairies, bus lines, and every conceivable business proposition, has a greater value when the business is established, and it is set going, over and

Des Moines Water Company v. City of Des Moines, 192 Fed. 193, September 16, 1911.

above what such value would be when but ready for operation. A telephone system may have its wires, but before the business can be profitable it must have patrons. It takes effort and money to get patrons. While obtaining patrons, the capital stock is earning but little or nothing. The street car system may have laid its rails and built its power plant, and have bought its cars; but it does not have the value that it afterwards will have when its business has been adjusted, and the people have adjusted their business and their conveniences to work in harmony with the system thus established. The newspaper plant may have its editors and reporters, and its presses, buildings, and offices. The physical valuation in the one case is just the same as in the other. But two newspapers, possessed of equal physical valuation, are not of the same value, as everybody knows. Two merchants may have the same stock of goods, as to value, and may be equally well located, and may own the same amount of real estate, in value. It is not material whether we call it "good will" or the "value of a going concern," but there is an intangible value there, and the owner has the right to have it determined on such increased valuation.

These rules apply with equal force to a waterworks system. It took a long time to build up the system. First, it had to get in touch with patrons, make contracts, and install meters, and establish the business. During that period the capital stock was not earning what it should have earned. Now that it is a going concern, it is entitled to have these values considered, in arriving at the true valuation of the plant. Such reasoning is endorsed by courts, both national and state Supreme Courts, and such conclusions are the result of sound reasoning. Such are the tests in all other vocations and business enterprises.

§ 563. San Francisco Water Rate Cases, 1903–1911.

In Spring Valley Waterworks v. City of San Francisco, 124 Fed. 574, decided June 29, 1903, the United States Circuit Court in granting a preliminary injunction against the enforcement of rates established, quotes with

approval National Water Works Company v. Kansas City in relation to allowance of value for established business (quoted above, § 521). On application for a similar preliminary injunction District Judge Farrington in 1908 considers at length the question of a special allowance for going concern (at pages 693, 695):

It also appears to be the law that whatever discoverable value may attach to the concern as a going business is proper to be considered in determining the value of complainant's plant for rate-fixing purposes.

If the company could be assured of a certain income for a definite number of years, stability would be given to the investment, and probably the franchise and going business would become exceedingly valuable; but this is impossible under a law which requires annual adjustment of water rates. The value of the franchise and going business depends upon their earning power. Their earning power depends on the rates, and the rates at the present time are regulated by the board of supervisors.

The water company's system, in so far as it is now in service, and possibly in so far as it will be presently serviceable, is to be treated as a unit. It probably has a value as a whole which exceeds the sum of the values of its several physical elements and characteristics. That value is affected by the franchise, by the fact that the concern is a going business. The plant operated under a franchise, a legal right to collect waterrates, is more valuable than without such a right; and a plant with an established business, with customers who have connected their houses with the company's distributing pipes, is more valuable than it would be without such connections and without such customers. These facts, as well as all other discoverable elements of value, should be weighed, but it must be remembered that while the rate-fixing agency is in duty bound to establish rates which will afford a reasonable compensation for the use of this plant at a fair valuation as affected 10 Spring Valley Water Co. v. San Francisco, 165 Fed. 667, October 7,