In reply, the authors, Messrs. Metcalf and Alvord, state that Mr. Gillette has misinterpreted the reconstruction cost method and that that method as applied by the courts does not involve the determination of the reproduction cost of an equally efficient plant, but the reproduction cost of the existing plant reproduced under the conditions existing at the time the property was actually constructed. They say (at page 388): In this he is wholly wrong, if he is seeking to interpret the actual views of the writers, for the Courts have clearly laid down the rule that the existing property shall be valued, and not an equally efficient plant. . . . Without going into detail, it is perhaps sufficient to state that, in a recent joint valuation by the authors, the very elements which Mr. Gillette says should be included in valuation, and could not be included under the reproduction cost theory, were included by the writers, as, for instance, the removal of heavy earth embankments, the existence of which cannot be wholly traced to-day; the removal of trees; and the removal of houses and buildings. The writers conceive that the past history of the works and of their construction is of the utmost importance to the appraiser, if he would render fair judgment on the value of the property. § 83. Present or original conditions-St. Louis Public Service Commission, 1911. The report of the St. Louis Public Service Commission on Rates for Electric Light and Power, made on February 17, 1911, states that, in determining cost of reproduction for rate purposes, the Commission has taken into consideration the actual conditions under which the property has been created. The Commission says: 11 As presented by the Company, the theory of the Cost of Reproduction New means that the value upon which it should 11.At pp. 20, 21, 29. be permitted to earn a fair return should be the estimated cost of reproducing at the present time, the property as it now exists. At first sight this may appear reasonable, provided the estimates are reasonable. In fact the theory is probably as good as many of the various theories advanced for arriving at an estimate of Earning Value, but there are so many and various elements and conditions to be considered in the valuation of a large public service property that a strict adherence to any set theory is likely to produce results which are manifestly unreasonable and unjust. Table VII sets forth the Company's estimate of the Earning Value of its property according to the theory of Cost of Reproduction New. Some of the items entering into this Table are based upon costs as produced under conditions existing in the actual construction of the present property, while other items are based upon purely hypothetical conditions of reproduction. The theory of this presentation of Earning Value is rejected by the Commission on the ground that it disregards the actual conditions under which the property was produced, and sets up a purely hypothetical case which is not analogous to the one under consideration. . . The aim of the Commission in determining the Earning Value of the property of the Union Electric Light and Power Company, has been to arrive at a fair and reasonable present value of the property in the service of the public at the date of this investigation. The theory or rather method by which the Commission has arrived at its final figures differs essentially from the theory of Cost of Reproduction New, as used by the Company, in that the Commission has taken into consideration the actual conditions under which the property has been created, while the Company, as stated before, has assumed a hypothetical set of conditions. The Commission believes its own method to be much the better one for arriving at results calculated to do justice to all parties concerned. In the major item of value, viz: the construction cost, there can be no dispute as to method, as a great part of the property has been recently completed, and in the older parts, through lack of reliable data for old costs, the Commission's engineers have been compelled to a great extent, to use present prices. In fact it has been agreed between the Commission and the Company that the cost prices used are applicable to either theory. In assigning costs or values to elements other than construction or those dependent directly on construction, the Commission has endeavored to arrive at figures which will represent fairly what those costs should have been under all the existing conditions. § 84. Present or original conditions-Conclusion. The treatment of pavement over mains laid at the expense of the city, 12 of piecemeal construction, 13 of overhead charges,11 and of various other elements of valuation depends upon which of the above methods 15 are adopted. Considered from all points of view the method of reproducing the existing plant under the actual physical and other conditions under which it was actually constructed seems fair to both parties. It is a rule that corresponds to the actual equities of the parties while the other rule gives an unfair advantage in some cases to the public and in other cases to the company. 12 See § 169. 14 See § 240. 15 See § 81. CHAPTER V Actual Cost as a Standard of Value for Rate Purposes § 95. Actual cost defined. 96. Actual cost a natural standard. 97. Difficulties of determination. 98. Difficulties pointed out in Louisville Telephone Rate Case. 99. Difficulties overestimated. 100. Fluctuations in cost. 101. Extent to which cost changes offset each other. 102. Justice Brewer in Ames v. Union Pacific Railway, 1894. 103. California Supreme Court, 1897. 104. Pennsylvania state courts in Butler Company and Spring Brook Company Water Cases. 105. West Virginia Supreme Court in Coal & Coke Railway Case, 1910. 106. Wisconsin Railroad Commission in Appleton Water Case, 1910. 107. New York Public Service Commission in Kings County Lighting Case, 1911. 108. Interstate Commerce Commission in Western Rate Advance Case, 1911. 109. Connecticut Public Utilities Commission rejects actual cost in favor of reproduction cost, 1912. $95. Actual cost defined. Strictly speaking, actual cost means cost of original construction plus cost of additions and betterments. It excludes all expenditures for renewals and replacements including supersession due to obsolescence or inadequacy. It includes only construction, additions and betterments that are a proper capital charge under approved accounting principles. This conception of actual cost, however, is one that has in the past been very imperfectly comprehended. Correct accounting principles are of comparatively recent acceptance and application. The references made by courts to actual cost or original cost plus improvements show that in most cases they have loosely interpreted the term to include many things that are not properly a part of the actual cost of the present property. In certain decisions it is apparently assured that actual cost or original cost includes discount on securities issued, exorbitant profits to promoters, cost of replacing worn-out or superseded property, dividends paid out of capital, money sunk in unsuccessful experiments. That is, the term is considered as an equivalent to book value inflated by financial manipulation or loose accounting. Considered in this light, it is little wonder that "original cost" has been discredited as a standard of valuation. $96. Actual cost a natural standard. Actual cost properly considered is the most natural and in many respects the fairest single basis for the determination of fair value for rate purposes. A fundamental principle of public service regulation is that as the public service corporation devotes its property to a public use it may consequently be required to render the service at reasonable rates of charge. Rates of charge to be reasonable may not be in excess of the fair value of the service and may not be higher than necessary to produce a fair return on the property devoted to a public use. The measure of the property devoted to a public use is undoubtedly in the first instance, at least, the money that the company has actually and necessarily invested, i. e., the actual cost. $97. Difficulties of determination. Another obstacle to the acceptance of actual cost as a standard of value, besides the inapt use of the term, has been the difficulty or impossibility of accurate determination. Records have been lost or destroyed. Perhaps the company is not interested in producing records in existence or the representatives of the public do not care to take the trouble to unravel the tangled skein |