real estate is valued, not on account of its present power to produce an annual income, but because it is believed that it will be still more valuable in the future. The owner of such property cannot expect to eat his loaf and still have it. He cannot expect that the property will pay a full-sized annual dividend, and at the same time double or treble in value every 10 or 20 years. He expects his dividends to accumulate in the form of increase in value. Thus, according to the railroad company's own showing in the present case, much the greater portion of the terminals which it now values at $14,000,000, were originally procured for the sum of $381,117. If this is true, the company has already realized some tremendously large dividends on these terminals. Again, if it and the owners of other property similarly situated have anticipated the future too much, and have set too high a value on their property, so that, in the opinion of the public, there is no prospect of any material increase in its value in the near future, that does not prove that the property should produce greater annual dividends. It simply proves that this property cannot be sold on the market for what they pretend to value it at, and that before sales can be made the price asked must be reduced, so that there will be a prospect of future increase in value sufficient to warrant investment, because the public, who fix the market price, do not and cannot expect that the annual income derived from such property will ordinarily be sufficient to pay interest on the investment. The market price of such property is not controlled, or, at most, is controlled only in part, by its power to produce immediate annual income. Again, the public, and not the court, must be the judge of whether or not such property will increase in value in the future, and, if so, how much. Whether the conditions warrant the opinion of the public in the matter is a question which the courts cannot go into, in such a case as this, any more than in many other cases where public opinion establishes market prices. And, where such property cannot be made to produce a reasonable annual income on the present market price of the same, it is clear that the public have anticipated a future increase in such market price. It is no answer to this argument to say

that the railroad company may not want to speculate, and is entitled to more definite, and perhaps more substantial, returns on its investment. It necessarily becomes a speculator when it invests in such property. It has so invested, and profited enormously by its speculations. The investments of a railroad company in this class of property are no more sacred in the eyes of the law than the investments of private parties in the same class of property. For the purpose of determining what is a reasonable income to a railway company from its investments in this class of property used for railroad purposes, we have a right to consider what is a reasonable income to private persons from their investments in the same class of property when used for private purposes.

...

There is another consideration which, it seems to us, adds most conclusive proof that our position here is correct. The traffic on these railroad terminals will not bear any such excessive and unreasonable charges as it would be necessary to make in order to produce full-sized dividends on the enormous valuation placed on the terminals. In this case the cost of reproducing the terminals is, as we have seen, one-third of the cost of reproducing the whole railroad system within the State. . . . Then, from all of these considerations, it is clear that where real estate outside of the business center, and in the outlying districts of a city, has been given a large speculative or prospective value, it cannot, whether used for railroad terminals or other purposes, be made, ordinarily, to produce a reasonable annual income on the investment, and the profits which are expected from such investments are not' annual, but accumulated profits, to be realized by future increase in value. Neither do these considerations deter railroad companies from investing liberally in such property. They, as well as other investors, have always been desirous of taking advantage of any such expected increase in value, and it has been quite common for companies having the means to acquire terminals in a growing city far beyond their present needs. It is not necessary to determine here what rate of annual income on the cost of reproducing these terminals is the lowest which the court would uphold before declaring the rates fixed by the commission

confiscatory. But we are of the opinion that, exclusive of taxes, 21⁄2 per cent. per annum is a liberal income on such cost, and that is as far as it is necessary to go for the purposes of this case. § 121. Appreciation should be set off against depreciation.

In the brief of the City of New York before the special master in the 80 cent gas case, the theory that appreciation in land if allowed should be set off against depreciation is set forth as follows (at pages 230, 231):

That if the Court is going is allow the company appreciation on its land and the paving over its mains and services, this should be set off against the claim of the company that it should be allowed depreciation on renewals and repairs equal to or greater than the 10.6 cents per thousand feet spent for that purpose during the last twenty-one years.

The above mentioned appreciation claimed by witnesses for the complainants, of $10,531,781.66, is 6.4 cents per thousand feet. Consequently, if the company is to be allowed by the Court to capitalize its appreciation, which averaged 6.4 cents per thousand feet of sales during the last twenty-one years, then its net depreciation which had to be made up by repairs and renewals was not 10.6 cents, but only 4.2 cents. Since there is every reason to believe that real estate will continue to grow in value as rapidly in the future as it has in the past, the probable need of funds to meet depreciation in the future will likewise be small, if the policy is to be sanctioned. by the Court of allowing the company to capitalize appreciation.

The Consolidated Gas Company in its brief before the Circuit Court states that, as to the suggestion that appreciation should be offset against depreciation, this has in effect been done since from the cost-of-reproductionnew there has been deducted depreciation amounting to over $600,000. This is of course a small sum in comparison with an appreciation of some $14,000,000 but it is contended that "if, through deterioration of localities

where complainant's land is located, such land had become less valuable than its original cost, complainant would have lost instead of gained in the balancing of appreciation and depreciation; and of course defendants would have insisted that this must be endured by complainant." This argument does not, however, reach the contention of the city that if there is to be an allowance in the expense account to cover future depreciation, that such allowance should in justice be reduced by the amount of existing or anticipated annual appreciation. This contention was not discussed in any way in the opinion of the special master or of the court. The court allowed the company eleven cents on each thousand cubic feet of gas sold to cover future depreciation.

§ 122. Appreciation treated as income.

Accepting the rule laid down by the United States Supreme Court (above, § 112) that as a general rule land should be included at its present or appreciated value, the New York Public Service Commission for the First District has adopted a method of treating appreciation as income and thus neutralizing to a certain extent the effect of appreciating land values in the determination of a reasonable rate of charge. In re Gas and Electric Rates of the Queens Borough Gas and Electric Company, 2 P. S. C. 1st D. (N. Y.) -, decided June 23, 1911, Commissioner Maltbie discusses this problem as follows:

Land differs from most property in that it generally appreciates in value, and the question has been raised, whether land should be included in "fair value" in rate cases at its original cost or at its estimated value at the time the rate is to be fixed. It is well settled that other property should be taken at its then value, but it has been argued that in the case of land the original cost should be used. While it is evident, therefore, that each case must be decided upon the facts peculiar

to it, the Commission believes it proper in this case to follow the general rule, as stated by Judge Hough of the United States Circuit Court (Consolidated Gas Co. v. City of New York, 157 Fed. Rep. 855):

Upon reason, it seems clear that in solving this equation the plus and minus quantities should be equally considered, and appreciation and depreciation treated alike. Nor can I conceive of a case to which this procedure is more appropriate than the one at bar.

Thus, land has been taken at its fair value and not at its original cost, and the annual appreciation of land has been treated as a profit. By this method, all property is treated absolutely alike, as Judge Hough suggests. No difference is made, except that as depreciation represents a decrease in assets, it is placed as a debit against operation, while appreciation is placed as credit because it is an increase in assets. Land has sometimes been treated like other property only to a degree; that is, each class has been appraised at its present worth or value. That has been done in this case. But if property is to be taken at its depreciated value where it has depreciated, an entry must regularly be made in estimated operating expenses equal to the average annual depreciation. Conversely, if land, or any other property which genuinely appreciates in value, is to be taken at its appreciated value, then an entry must be made in the estimated receipts equal to the average annual appreciation. Unless this is done, it is obvious that the consumer will be burdened with all the estimated decreases in assets but not credited with the increases in assets. If the principle laid down by the courts is to be followed in part, it should be followed in whole.

It is suggested that the annual increase in the value of land which is treated as income is not actually received. Increase in the value of unoccupied land is not realized until sold or put into use, but it is real, nevertheless, although payment may be deferred. Likewise, payments to the depreciation fund are not actually expended; yet they have been considered legitimate charges in practically every case. Furthermore,