chance to a certain permanency in the enjoyment of returns commensurate with the original risks of the undertaking. If this right to such larger returns is capitalized and added to the fair value for rate purposes, the fair rate of return on such increased valuation will be based on present risks rather than original risks. The franchise value will in this case represent a capitalization of the difference between a fair return based on present risk and a fair return based on original risk. The original risk, having thus been allowed for in the value of the franchise, should not be doubly paid by including it in the fair rate of return. If we assume as seems more appropriate that neither the cost of establishing the business nor the franchise will be capitalized and included in a valuation for rate purposes, the following considerations will be important in determining the fair rate of return. The original investor is entitled to a return commensurate with the risks of the initial enterprise. This higher rate of return should continue for a reasonable period; which period, however, may be reduced by reason of actual excess profits sufficient to compensate for such nitial risk and including as a part thereof the cost of establishing the business. Public utility enterprises are, however, built up piecemeal, and upon the actual risk incurred in each successive improvement or extension depends the fair rate of return that should be earned for a reasonable period upon each particular increment of the investment. It may be said that in a well established and successful enterprise all the capital needed for improvements and extensions can be obtained at a low rate of interest. This is true. The investor will buy the bonds of such an enterprise on a basis which shows that he considers the risk slight or negligible. But nevertheless extensions and improvements cannot usually be made without risk to the existing profits of the enterprise. The new extension may not pay for a few years and there is also the risk that it may never pay. This risk is borne not by the new investor but by the investors who already have their capital in the enterprise, the returns on which may be jeopardized by the failure of the new extension to develop the expected business. The fair return on new investment should be measured therefore by the actual risk to the profits of the enterprise by reason of the new extension rather than by the rate at which bonds can be sold to secure capital for the extension. The higher rate of return commensurate with the initial risk should be earned on each separate increment of capital for a reasonable period and the rate should then drop to the rate that would be demanded by a new investor in purchasing the securities of the company. § 800. The sliding scale and other automatic methods of securing voluntary rate reductions and of rewarding efficient management. The more one considers the problem of fixing a fair value and fair rate of return for rate making purposes the more apparent it becomes that this furnishes a somewhat unsatisfactory method of securing permanent justice as between investor and consumer. If continuously and effectively applied it would restrict the company's return to a fixed rate and thus tend to discourage enterprise and economy in management. If all profits in excess of a fixed rate of return are devoted to rate reductions there will be no incentive to increase profits and the possibility of securing a reduction in rates will be correspondingly diminished. This presupposes that the method of rate regulation will be continuously and effectively applied; but such efficiency of regulation is hardly practicable. Rate regulation procedure is slow and can not keep pace with changes in cost of service. If cost of service is declining, excess profits will accumulate. The regulation of rates by means of a sliding scale system such as has been applied in England and Boston to the gas supply appears to have evident advantages. Some plans have been proposed to adapt the sliding scale to electricity supply, but no method has yet been worked out for its application to street railways, railroads or telephones. It is believed, however, that in any case a system of profit sharing might be worked out that would place the relations of investor and consumer on a more certain and equitable basis than is afforded by the present system of occasional rate regulation. This problem is referred to by Commissioner Lane in Advance in Rates, Western Case, 20 I. C. C. R. 307, 333, decided February 22, 1911: There is much persuasiveness in the argument that a surplus shall be permitted to accumulate which shall be in a sense a public fund out of which the carrier may create facilities which will produce more efficient and satisfactory service without adding to the liability of the road and without creating an additional value in the road which may call for a greater return in rates. This suggestion has much that is fundamental in it. It looks toward an adjustment between the public and the carriers that will be fair and profitable to both. It is an expression of an appreciation by a public service corporation of the philosophy upon which public regulation of carriers is based. Moreover, some method must be found under which a carrier by its own efficiency of management shall profit. A premium must be put upon efficiency in the operation of the American railroad. Rates can not be increased with each new demand of labor, or because of wasteful, corrupt, or indifferent management. Nor should rates be reduced with each succeeding improvement in method. Society should not take from the wisely managed railroad the benefits which flow from the foresight, skill, and planned coöperation of its working force. We may ruin our railroads by permitting them to impose each new burden of obligation upon the shipper. And we can make no less sure of their economic destruction by taking from them what is theirs by right of efficiency of operation—the elimination of false motion, of unneeded effort, and the conservation of labor and materials. The standard of rates must be so high that the needed carrier which serves its public with honesty and reasonable effort may live. And yet rates should be still so much below the possible maximum as to give high and exceptional reward to the especially capable management, the wellcoördinated force and plant. This is the ideal, unrealizable perhaps, but it points the way. In some parts of our own country as well as abroad, machinery has been devised by which the return to capital invested in a public utility is increased automatically with a decrease in rates. We know of no instance in which this has been applied to a railroad, but it has been successfully applied with respect to so simple a matter as a corporation supplying artificial gas. No doubt it could be applied to a street railway. But whether it is applicable to the intensely intricate business of a commercial railroad is a matter of serious doubt. It would appear that one of the problems of the future in railroad regulation is to discover the machinery by which the railroad may justly take to itself an adequate return for the investment which its stockholders have made and share with the community the advantages of the surplus which it creates. This can not be done, however, by the mere assertion of this Commission that it will adopt a certain policy toward the carriers; that, for instance, we would regard with favor a certain return upon investment and an additional return out of rates to go into surplus which would remain uncapitalized. We are without control over capitalization. It is not within our function to place limitations upon the purposes for which stocks or bonds may be issued, nor to designate what property they shall represent. Furthermore, the establishment of such policy necessarily implies a control over the use of the operating revenues of the carriers which would be a more radical extension of governmental control than any heretofore suggested. CHAPTER XXXI Rules for Appraisers in Maine Condemnation Cases § 810. Kennebec Water District Case, 1902. 811. Brunswick and Topsham Water District Case, 1904. § 810. Kennebec Water District Case, 1902. In Kennebec Water District v. City of Waterville, 97 Me. 185, 54 Atl. 6, Supreme Judicial Court of Maine, decided December 27, 1902, Judge Savage lays down the following rules to govern appraisers in making a valuation of water works: An act incorporating the plaintiff district authorized it to acquire, by the exercise of the right of eminent domain, "the entire plant, property and franchises, rights and privileges now held by the Maine Water Company within said district and the towns of Benton and Winslow." The act further provides that appraisers appointed by the court, "shall, upon. hearing, fix the valuation of said plant, property and franchises at what they are fairly and equitably worth, so that said Maine Water Company shall receive just compensation for all the same," but that, "before a commission is issued to the appraisers, either party may ask for instructions to the appraisers." Both parties having asked for instructions, and the questions of law arising thereon having been reported to the law court, the court is of opinion that the appraisers should be instructed in accordance with the following principles: 1. The plaintiff, if it takes anything, must take all the property held by the Maine Water Company in the Kennebec Water District and in Benton and Winslow, whether specifically named in the act or not. This includes the real estate or |