Another purpose is to establish the proposition that it is the service which the physical structure will perform in the future, not the work it has done in the past, that determines its value as an operating mechanism; and that it is the net earnings which it will produce in the future, not what it has produced in the past which determines its value as a revenue producing agency. In other words, that the value of a public utility is based wholly upon its future power of service, the past and present cost of construction and operating being used only as an aid to forecast the future.

In the above case a going value of $856,096 was found based on a total investment of $1,950,000 and a going value of $665,096 when based on an investment of $2,150,000. This amount is secured by assuming a construction period of 2 years and a development period of 18 years. However, although under the method used there was a going value of $600,000 to $800,000, the amount actually recommended to be included in the valuation as going value was but $316,020. No explanation is given as to why the full estimated going value is not taken for the purposes of this case.

Mr. Williams agrees with Messrs. Metcalf and Alvord that going value is the value of a created income, but takes exception to the assumption that "the value of a created income" is the same thing as "the cost of reproducing a given income." 5

§ 582. Going value development period-Water supply.

Obviously under the comparative plant method of determining going value, the longer the period assumed as necessary in order that the business of the comparative plant may overtake the growing business of the existing plant, the greater will be the going value of the existing plant. In the case of a water works, the amount of going

5 Proceedings American Water Works Association, 1909, p. 245.

value found will vary greatly according to which of the following methods of determining the development period, is adopted. First, it may be assumed that no water works has existed and the inhabitants are getting their supply from wells. Under this supposition it would of course take many years for the people to abandon their old methods of supply and to adopt new. Second, we may assume that the public is educated to the use of water under pressure but that it is still using the old methods. This would result in a much shorter development period than the above. Third, instead of assuming something contrary to fact, we may take the existing situation, which is that the prospective consumers of the new plant not only do not have to be educated to the use of water under pressure but have their houses and buildings already piped for such use. They have a large investment in house fixtures, plumbing and sewer connections and the continuance of the service is absolutely indispensable to them. This reduces the going value development period to a negligible quantity.

§ 583. First theory as to development period.

The first of the above theories in regard to the development period is stated by Benezette Williams in a minority opinion filed in the Proceedings and Findings of the Board of Arbitration in the matter of the Dubuque Water Company and the City of Dubuque, 1899, page 39:

In Dubuque the "going value" should be determined by what new works of like capacity would accomplish during the period considered, beginning in a city of the present size, but which had had no water works, and in which all the inhabitants were provided with the usual domestic methods of getting water, compared with what the old works would accomplish during the same period, that has been in operation twentyeight years. With the new works, the acquirement of new

business would be necessarily slow. It would take many years for people to abandon their old methods of supply and adopt the new.

§ 584. Second theory as to development period.

The second theory in regard to the development period is stated by Leonard Metcalf and John W. Alvord in their paper on the going value of waterworks: 6

The past history of water-works, many of which were built during the Eighties, is not a fair criterion for the period required for the acquisition or development of business by waterworks to-day, principally for the reason that the public is now educated to higher standards of living, and to the use of water under pressure, which would result in much more rapid development of income by water-works now than formerly. While some have urged that a water company is entitled to be credited with the cost involved in educating the public up to modern standards, was not this cost rather in the nature of an operating cost, than of a capital expenditure, inasmuch as this advantage immediately accrues, without cost, to any newcomer in the field, and cannot be held as a monopoly or asset by the existing company? It is usually assumed, therefore, that the public is educated to the use of water, and that the cost of that education is lost to the existing plant.

§ 585. Third theory as to development period.

The third theory of the development period is stated by Clinton S. Burns in a discussion of the paper by Messrs. Metcalf and Alvord before the American Society of Civil Engineers: 7

The reason offered for this statement, that the public is now educated to higher standards of living, and to the use of water under pressure, which would result in much more rapid

• Transactions of the American Society of Civil Engineers, vol. 73 (1911), pp. 326, 336.

7 Transactions American Society of Civil Engineers, vol. 73, pp. 326, 358.

development of income by water-works now than formerly, is undoubtedly true; but this is by no means the principal reason. Of far greater influence is the fact that property is invested in house fixtures, plumbing, and in sewer connections.

Some experts maintain that were it not for the past existence of the water-works system, none of these vested property interests would be in existence, and that therefore these must be ignored in estimating the length of time required for the acquirement of the business. This, however, seems to be an assumption entirely contrary to pure logic, and not warranted by the facts. A corporation can not take control of the vested property of an individual, nor claim any assets or benefits accruing therefrom. Hence, when considering the comparative plant, all property other than that belonging to the water company itself must be assumed to remain intact, and any computation of going value that fails to take these conditions into account is not in accord with correct logic. These plumbing fixtures, house connections, bath-rooms, sewer connections, lawns that demand water service, and all kindred metropolitan conditions that compel the uninterrupted continuance of the water service, are factors the existence of which can not be denied. They are present actualities, and just as much to be considered as any local factor affecting the cost of reproduction of any of the physical property.

§ 586. Development period for other utilities.

The above theories as applied to the going value development period may with variations be applied to gas, electricity, telephone, railroad, street railway, and other utilities. The analogy in the case of gas and electric lighting is quite close. The railroad, however, is a different proposition. It is such a fundamental part of the industrial structure that it is a great tax on the imagination to picture the present population and industrial structure as existing without the railroad. First, we may assume the stage coach, mule team and canal boat and an industrial, commercial and social world that knows

nothing of better methods, and estimate how long it would take for a railroad to get a business equal to that of the existing road. Or, second, we may assume that the people while still using the old methods of transportation have been educated to prefer the new, but that before using the new to the fullest extent will necessarily have to readjust or reconstruct existing methods of production and distribution. Factories and warehouses will have to be constructed along the line with side track connections. Much time will have to elapse before the enormous new business made possible by the new and cheaper method of transportation can be developed. Or, third, we may put aside such vagaries and suppositions contrary to fact and take the present social and industrial organization with its absolute necessity for railroad transportation. There can be no development period, for the business is at hand and must use the railroad.

The railroad is a necessity. Urban transportation is a necessity. A public water supply is a necessity. A lighting system is a necessity. They are utilities that can not be permitted to stop. The consumer must use them or suffer irreparable injury. It is fanciful to speak of a development period for the new plant under these conditions. If the old plant were wiped out, the new plant would have the business at once if already constructed, and otherwise as soon as completed and ready for operation.

§ 587. Value of earnings during construction period.

In estimating the value of the created income, in addition to the excess net earnings during the assumed development period there are the total net earnings during the assumed period of construction. This often forms the larger part of the estimate of going value. Not all estimators using the theory of the created income consider