the basis upon which the complainant is entitled to have its return reckoned, and I feel it is my duty to so state. The physical value as hereinbefore determined is reckoned upon the fact that the plant was in "successful operation" when the ordinance was enacted, otherwise its value would be much less. The "going value" is that enhancement which results from a well developed and paying business. This would result in reducing the estimated deficits for each year $24,000 and yield a return to the complainant of at least 6 per cent. on $2,100,000. CHAPTER XXIII Going Concern as the Value of a Created Income § 580. Definition-Alvord and Metcalf. 581. Definition-Benezette Williams. 582. Going value development period-Water supply. 583. First theory as to development period. 584. Second theory as to development period. 585. Third theory as to development period. 586. Development period for other utilities. 587. Value of earnings during construction period. 588. Income under existing rates v. Income under reasonable rates. 589. Wisconsin Railroad Commission disapproves comparative plant method. 590. New York Public Service Commission, First District, disapproves comparative plant method. 591. United States District Court in San Francisco Water Rate Case rejects comparative plant method. 592. Value of created income bears no direct relation to cost. 593. Summary. § 580. Definition-Alvord and Metcalf. The value of a created income has been defined as: "The sum of the present worths of the annual excess in net earnings, or return, from the existing plant, as compared with those of the comparative plant, in the period of years from the date of valuation to the time when the earnings of the comparative plant can reasonably be assumed to equal those of the existing plant." This theory has been elaborated in detail by John W. Alvord, a waterworks engineer, who has applied it in a number of valuations of water plants for purposes of municipal purchase in which he has served as official appraiser. Mr. Alvord also holds that, put in the language of the theory of reproduction "the value of a created income" is the "cost of reproducing a given income." This theory is ably defended and discussed in the Proceedings of American Water Works Association, 1909.1 The theory has also been defined in a more recent paper before the American Society of Civil Engineers by Leonard Metcalf and John W. Alvord, joint authors: 2 Going value is defined as the value of a created income. While it pertains to the business rather than to the physical plant, it is nevertheless true that in any just determination of the reproduction cost of a property it is as real an element in this reproduction cost as is the cost of reproducing pipe lines, pumping stations, or any other part of the physical plant. As a means of determining going value, the "comparative method" is suggested. This consists in an analysis of the relative net earnings or return to be derived from the existing plant as compared with that from a hypothetical "comparative plant" which is assumed to be built on the date of valuation and to acquire the business of the existing plant, in the territory served by it, as rapidly as possible, under noncompetitive conditions. The sum of the present worths of the annual excess in net earnings, or return, from the existing plant, as compared with those from the comparative plant, in the period of years from the date of valuation to the time when the earnings of the comparative plant can reasonably be assumed to equal those of the existing plant, is then the measure of the going value of the existing plant. It represents the amount which a purchaser could afford to pay for the existing property with its established income, in excess of the value of its bare physical plant. In analyzing the going value of any public service corporation, it is suggested that the investigator place himself in the position of an investor having in hand the necessary capital, 1 Notes on Going Value and Methods for its Computation, John W. Alvord. Paper and discussion, American Water Works Association, Proceedings, 1909, pp. 184-279. 2 The Going Value of Water Works, by Leonard Metcalf and John W. Alvord, Transactions American Society of Civil Engineers, April 5, 1911, vol. 73, pp. 326, 354. either to buy the existing going plant with its established business, or to build a new comparative plant to replace it and its established business under noncompetitive conditions, and then determine the return which he would receive upon his capital in both cases. § 581. Definition-Benezette Williams. The fundamental principle of the above theory was perhaps first worked out and applied by Mr. Benezette Williams in the Dubuque Water Works appraisal. He has defined going value as follows: 3 Going value is the potential business value, the amount of which must be determined by the net income which a plant in operation can produce, in excess of that which a substitute plant of like character can produce, the construction of which is begun at the time of valuation; the annual excess income being reduced to present worth. . . . Thus, while going value on one side depends upon the earnings of the plant being valued, it is dependent on the other side upon the rate at which it would be possible for a new, or substitute plant, to acquire business in the same, though a clear field, beginning with the time the valuation takes place. In other words, it is the difference in earnings of the plant in question, and the probable earnings of a substitute plant, with all its business to acquire, between the time of valuation and that time in the future when their revenues are supposed to become equal, that constitutes and measures going value. This theory has been further explained by Messrs. Benezette Williams and C. B. Williams in a report to the city council of Peoria, Ill.: 4 Physical existence alone does not, and can not, bring value. Value emerges only when earnings or services, are rendered by 3 Proceedings American Water Works Association, 1909, p. 247. Report to the Mayor and City Council on water rates for the plant belonging to the Peoria Water Works Company, Peoria, Illinois, by Benezette Williams and C. B. Williams, September 8, 1910, pp. 11-13. the operating plant. Hence, the value of any plant is necessarily made up of two fundamental and inseparable elements; the value of the physical plant, or "structural value," and the value of its business, the "going value." .. The proposition that a plant without service to perform, and without earnings, present or prospective, would be devoid of value, except to be dismantled and sold as real estate, secondhand machinery and junk, is no more apparent than that its value is due to service to be performed and earnings to be made in the future, and not to what has been done in the past. It is equally clear that the structural value of an operating plant must be ascertained by comparing it with a similar new or substitute plant, produced as of to-day, but operating tomorrow, under the limitation of future requirements, and that it is the revenue which the plant in operation can produce in the future, that could not be obtained or produced by such a substitute plant, that constitutes "going value," and measures its magnitude. It follows from the foregoing propositions, that there is no vital distinction between the controlling principles applicable to determining structural value and going value. In each case a substitute plant is hypothecated, which is a substantial duplicate of the operating plant in function and mechanical detail. The hypothecation is carried to the extent of building it, mentally, not only at the prices of to-day, but of doing the work under the conditions and environments of to-day. If pavements cover the street pipes, the expense of taking up and relaying them forms a part of the cost of the hypothetical distribution system, even though they were not in existence when the pipes were originally laid. . . ... In like manner, having the past earnings and cost of operating the present plant, and its probable future net earnings fixed upon, its going value is obtained by a comparison with the probable operating results which the substitute plant could give, if it were to be built to-day according to the hypothesis. . In computing going value as in determining structural value, it is necessary to distinguish between cost and value. . . . |