distinction between valuation for rate making and valuation for public purchase. It is recognized that in a condemnation case the value of the franchise must be included. From this it is argued that unless the franchise is included also in the valuation for rate making the value of the franchise is in effect confiscated. If it is wrong and illegal to confiscate the value of the franchise in a condemnation case it is just as wrong and presumably just as illegal to confiscate such value indirectly through the rate making process. Deprivation of compensation for the use of property is no less confiscation than the actual taking of the property. The fallacy arises in a failure to realize that though in a condemnation case the valuation is the all important factor, in the determination of reasonable rates the essential thing is the total net income; and that this net income is not measured by the valuation alone but by the product of the valuation and the rate of return. If the capitalized value of the total net income allowed in a rate case is the same as the valuation for purchase purposes, due consideration will have been given to the franchise in both cases, even though in the valuation for purchase there has been a specific allowance for the franchise and in the valuation for rate purposes there has been no such allowance.

In a rate case due consideration is given to the franchise rights in the determination of the fair rate of return. The fact that the rate of return is fixed on the basis of a return adequate to induce investment in a new enterprise although now that the enterprise in question has been successfully established persons will invest on a lower return basis, is a substantial recognition of the rights that it is the function of the franchise to protect. The franchise having thus been allowed for in the rate of return, it would be duplication to allow for it again in the valuation on which the rates are based.

§ 722. Franchise value in condemnation cases.

It is well established that franchise value must be considered in condemnation cases. The earlier cases indicate that franchise value is to be based largely on a capitalization of present or prospective earnings. Some of the more recent decisions, however, state that such value should be based largely, not necessarily on actual or prospective earnings, but on earnings under reasonable rates. Which of these rules shall finally prevail is a matter of considerable importance. When the earlier cases were decided the possibility of efficient rate regulation was hardly thought of. With the modern conception of the rights and obligations of public service corporations and the modern development of rate regulation it seems probable that certain legal conceptions will have to be modified to conform to these more fundamental principles. The market value of a franchise is of course affected by the fact that rates are subject to regulation. But if there has been no such regulation in the past and there is no present agitation for it, the practical effect on market value of possible future regulation is comparatively small. An investor purchasing the plant will pay something for the probability of excess profits during the years when profits are not kept down by rate regulation to a minimum reasonable return. But because an investor will take this chance is no good reason why it should increase the price to be paid by the public on a taking by condemnation. Condemnation is one method of regulation; rate making is another. It is no more just or unjust to destroy values created by the nonexercise of the rate making power by the right of condemnation than by a subsequent exercise of the rate making power. If it is just to destroy the hopes of the investor for a continuance of exorbitant profits through the exercise of the rate making power it is also just to destroy such misplaced hopes through the exercise of the

right of condemnation. Now as brought out in Chapter 27, the weight of authority and practice is strongly against the inclusion of an allowance for franchise value in a valuation for rate purposes. This rule taken in connection with the rule above stated that in a condemnation case the value of the franchise should be based on earnings under reasonable rates makes it necessary in a condemnation case to proceed somewhat as follows. It is first necessary to determine what the earnings would be under reasonable rates. This is determined by estimating the fair value for rate purposes (with no allowance for franchise) and allowing upon such valuation a fair return. This return should be just compensation for the service rendered. When the property is taken, the thing of value of which the owners are deprived is simply the right to receive this amount of earnings. The question is what is just compensation for depriving the owner of the earnings to which he is justly entitled for constructing the plant and developing the business. Rate making involves the determination of the annual sum which may be deemed just compensation to the investors. Condemnation involves the determination of the total amount which may be deemed just compensation for or a commutation of, these annual payments. If this total amount is greater than the cost-of-reproduction-less-depreciation the difference may be attributed to going concern and franchise value. The permanence of the franchise value is of course directly dependent on the continuance of a rate of return in excess of that demanded for an assured investment. The present worth of the franchise is directly dependent on the length of time such excess rate of return may be reasonably assumed to continue.1

The question of permanency of rate of return is discussed in §§ 794, 799. The above discussion is not intended to cover limited term franchises.

CHAPTER XXX

Rate of Return

§ 730. Relation of rate of return to fair value for rate and purchase pur

poses.

731. United States Supreme Court, 1894-Railroad entitled to some

profit.

732. California Supreme Court, 1897-Some margin over lowest rate for borrowed money.

733. Minnesota Supreme Court, 1897-22% on terminals and 5% on other railroad property not confiscatory.

734. United States Circuit Court, 1898-42% return confiscatoryStreet railway.

735. United States Circuit Court, 1902-6% a fair return-Street rail

way.

736. Iowa Supreme Court, 1902-4.4% to 5%% not confiscatory— Water Company.

737. United States Circuit Court, 1903-5% minimum rate-Water. Company.

738. United States Circuit Court, 1903—Legal rate of interest the minimum rate-Railroad.

739. United States Supreme Court, 1904-6% return is not confiscatory -Irrigation Company.

740. United States Circuit Court, 1904-5% minimum return-Water Company.

741. Maine Supreme Court, 1904-Reasonable rate dependent on cir

cumstances.

742. New Jersey Court of Chancery, 1905-5% minimum returnWater Company.

743. United States Circuit Court, 1906-Legal rate of interest (6%) the minimum rate-Electric Company.

744. United States Circuit Court, 1907-7% a fair return-Telephone. 745. New York Appellate Division, 1907-Saratoga Springs Gas and Electric Rate Case.

746. Pennsylvania Supreme Court, 1908-Legal rate of interest (6%) the minimum-Consideration of rate necessary to induce original investment.

747. United States District Court, 1908-Legal rate of interest (8%) the minimum fair return-Railroad.

748. United States District Court, 1908-5% a reasonable returnWater Company.

749. Consolidated Gas Case-State commission holds 8% a fair return. 750. Consolidated Gas Case-District Judge Hough holds 6% a fair

return.

751. Consolidated Gas Case-United States Supreme Court holds 6% a fair return.

752. United States Supreme Court, 1909-Not decided whether 4% return would or would not be confiscatory-Water Company.

753. Interstate Commerce Commission, 1909-Railroad entitled to considerably more than 4%.

754. United States District Court, 1909-6% a fair return for railroad. 755. United States District Court, 1909-6% a minimum return-Gas plant.

756. New York Court of Appeals, 1909-Legal rate of interest (6%) a fair return-Water Company.

757. United States Circuit Court, 1909-6% a reasonable return-Water Company.

758. United States District Court, 1909-6% a reasonable return-Tele

phone Company.

759. Iowa Supreme Court, 1909-5% to 6% a reasonable return-Gas Company.

760. Oklahoma Corporation Commission, 1911-8% a fair return

Telephone.

761. Chicago Gas Rate Report, 1911-6% v. 7% as a fair rate of return. 762. United States Circuit Court, 1911-7% the minimum reasonable

return-Railroad.

763. United States Circuit Court, 1911-7% the minimum reasonable

return-Telephone.

764. United States Circuit Court, 1911-6%, plus 12% for lean years, a fair return-Railroad.

765. Nebraska State Railway Commission, 1911-8% a fair return— Street railway.

766. United States District Court, 1911-3.97% return is confiscatory -Water Company.

767. Arkansas Supreme Court, 1911-6% to 10% a fair return-Legal rate of interest-Electric Company.

768. Missouri Supreme Court, 1911-6% a reasonable return-Telephone. 769. Washington Supreme Court, 1911-7% a fair return-Electric railway.

770. United States Circuit Court, 1911-8% a fair return-Water Company.

771. New York Court of Appeals, 1911-Fair rate of return a question of fact to be determined by lower court-Tax Case.

772. New York Public Service Commission for the District First-72% a fair return-Gas Company.

784. Review of attitude of Supreme Court of the United States