ing to 20 per cent. or thereabouts. A return of 10 per cent. thereon would be from $25,000 to $30,000. Upon the basis of actual sales for 1910, this is equivalent to from 4 to 5 cents per thousand. Thus, the net result of counsel's theory is that this Commission is asked to fix a rate higher by 4 or 5 cents than would otherwise be reasonable, and the reason offered in essence is that since the Kings County Company laid its mains and services the City of Brooklyn and later the City of New York has materially improved the paving over those pipes without expense to the company.

The company's counsel apparently relies upon a single thesis to maintain his theory. He may not claim that the pavement is the property of the company, for it is not in any degree. The company may not alter the pavement without the city's permission, nor sell, transfer or remove it, and in case the company does take up its pipes and leave the street, the pavement must be restored. Secondly, the company did not lay the new paving. It was laid by the city after the company's pipes were in the ground. In the third place, the new paving represents no expenditure upon the part of the company. This fact is important, for it is conceivable that a company might not own certain property, might not have actually constructed it, and yet the expense of such construction, if paid by the company, might properly be included in the amount upon which the company would be entitled to earn a fair return. But in this case, the new pavement under discussion does not represent any investment or expenditure by the company. The relaying of the original paving does and it has been included in "net cost," as above set forth.

If one were to estimate the cost to reproduce as new the property that exists to-day, the present paving would have to be replaced when the streets were opened for the laying of mains and services. Apparently this is the only basis upon which the company's contention is founded. The cost-ofreproduction method may be the only method which can be used in some instances, but to follow it to the last extremity in all cases, ignoring all other considerations, not only leads to absurd conclusions, but runs counter to judicial decisions.

There are two other arguments that have not been submitted in this case, but to which reference should be made in this discussion. One is that if a competing company were to build a gas system, it would be obliged to pay for the existing pavement over its mains and services as it would have to replace it during construction. True! But does it follow that gas rates would in practice be based upon the cost of the most expensive service? Even the maximum to be fixed by law would not of necessity be based upon the cost of the most expensive service. However, this argument is irrelevant because it is the policy of this State that public regulation of rates shall take the place of competition and that unnecessary duplication of plant shall be avoided. The State is to protect the consumer against unreasonable rates. But if the State must fix rates upon the basis of competitive supply, it is evident that the consumer has lost the advantages of competition and not gained those of monopoly.

It is also argued that if land should be taken at its present value, mains and services should likewise be appraised at the cost to reproduce; that the increase in the value of the land is a social increment; that improvement in paving is also a social increment; and that if one is to be recognized as belonging to the company, the other should be. Doubtless there is some similarity, and so far as there is, there is equal injustice in allowing the company to make a profit upon that increase. Indeed, it is not yet clearly settled by the courts that in all cases land shall be taken at appreciated value and the company allowed to increase its rates because of such growth. But pavement that is not owned nor laid nor paid for by the company is very unlike land.

In the first place, land is owned or leased by the company; the pavement in question is neither owned nor leased. The company may sell the land it has and buy other land; the company has no such right over pavement, and if it removes its pipes, the pavement remains.

Secondly, the company pays for land; it does not for new pavement. Land is a necessary factor in gas production and distribution; pavement is not. It matters not whether the streets are paved with the most expensive material or allowed

to remain in their natural state. Repairs may cost more in the former case, but such expenses are paid for out of income and not from capital.

Thirdly, the precise land used is selected by the company; the nature of the pavement is fixed by the public authorities. If the company finds its land not well adapted to its needs or too valuable for gas purposes, it may sell and purchase locations elsewhere. Thus, a company may secure the increase in value for itself. But there is no known way whereby a company may sell the pavement over its mains and substitute another kind. Pavement is wholly beyond the control of the company.

$169. Summary and conclusion..

Page 159, § 169:

As to decision of Iowa Supreme Court see correction on page 150. An important decision on the treatment of pavement over mains has appeared since this book came out. In Des Moines Gas Company v. City of Des Moines, 199 Fed. 204, decided August 21, 1912, District Judge Smith McPherson holds that the cost of pavement over mains laid without expense to the company may not be included in fair value for rate purposes.

མཆཅ ལ།

road Commission (see §§ 163, 164). Pavement laid at the expense of the city is of course excluded from an estimate of actual cost. Whether or not it should be included in cost of reproduction depends on whether that term is taken as the actual cost at present prices of labor and materials and under present physical and other conditions of constructing a complete duplicate plant, or the necessary cost at present prices of labor and materials of constructing a plant in the way and under the conditions un

der which the existing plant was in fact constructed. The latter is the more generally equitable interpretation of the cost of reproduction method as is shown above, §§ 81-84. Under this interpretation the cost of pavements laid by the city will not be included in an estimate of cost of reproduction. Of course if in a particular case it is shown that the company put down its pipes or conduits before they were needed with a view to avoiding the cost of cutting through the pavements it might be equitable to include an allowance for interest up to the time that such pipes or conduits were actually put into service. Every actual investment or sacrifice by the company should be considered, but the acceptance of this rule precludes the consideration of any element that is not dependent on cost or sacrifice. Certainly if we accept as governing the equitable rule of a fair reward based on the cost of the service rendered, pavement over mains laid without expense to the company cannot logically be included in fair value.

CHAPTER VIII

Property Donated or Acquired Without Cost

180. State railroad appraisals.

181. Minnesota Supreme Court on railroad grants, 1897. 182. California Supreme Court on water services, 1897.

183. United States Circuit Judge Morrow excludes fences not built by company, 1911.

184. Wisconsin Railroad Commission on services provided at consumer's expense.

185. Opinion of C. L. Corey on services furnished by consumer.

186. State and city aid in grade separation improvements.

187. City's grade separation contribution considered by New York Public Service Commission.

188. Grade separation contributions in appraisal for capitalization. 189. Conclusion as to grade separation contributions.

190. Statement of problem of donated property.

191. Contributions by the company.

192. The more equitable rule.

§ 180. State railroad appraisals.

In the various state railroad appraisals, land has been taken at its present value irrespective of the fact that in some of the states much of the land for right of way was donated by the national, state or local governments or in some cases by individuals. The western trunk lines have received enormous land grants and in addition have been granted a right of way across the public domain. In the Washington railroad appraisal made by the Washington Railroad Commission, an estimate was made both of the original cost of land for right of way and other railway purposes and of the present reproduction cost of such land. The Commission found that for the Northern Pacific Railway the original cost to the company of right and real estate in the State of Washington was

of

way