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ment of appreciation in land value as income, and this very greatly simplifies the problem of land acquired in advance of present needs. He says:

As to the amount of land which should be appraised at a fair value, two solutions may be suggested. One cause for the appraisal of the land that is actually needed at the present time, leaving the company free to carry additional land, or to make no such provision, as it chooses. If this solution were followed and if the company did purchase land that was not needed, any profit or loss which would thereby arise would not be a factor to be considered in a rate case. The company would be entitled, however, to earn a fair return from some source upon the fair value of the land actually and necessarily used.

The other method requires the appraisal of all land whether used for gas purposes, held in reserve or purchased for other reasons. If this plan were followed, the income from all land, whether through the sale of gas, rentals or the increase in value from year to year, would be a part of the income of the company and considered in determining the rate to be charged for gas.

Prudent management may require that land shall be purchased in advance of actual needs, for it may be clearly impossible to secure adjacent property just as it is needed at reasonable terms. Upon the other hand, it would be unwise for the Commission to adopt a policy that would encourage a company to speculate in land ad infinitum and to call upon the gas consumers to pay its losses. Even if they were to share in the profits, it would be unwise, for the purpose of a gas corporation is not speculation in land, but to supply gas to consumers. The distribution of gas is a quasi-public function, and for this reason gas corporations have been given unusual powers. Speculation in land is not such a function. But if a company does acquire more than is immediately necessary, and if such acquisition is reasonable and wise, the consumers, who, under such circumstances, must carry the burden, should also share whatever gains may accrue from such ownership. It is the opinion of the Commission that a company should be allowed reasonable lat

itude, that it should not be penalized for purchasing land somewhat in advance of its needs and that the resulting revenue or profit, being a necessary adjunct of the distribution of gas to the extent that the property itself is a part of the gas property, shall be considered part of the income of the company.

Applying these principles to the facts in this case, it is clear that the land which is not used even in part for gas purposes should be excluded from consideration; it should not be included among the property upon which a fair return is to be earned, and the income therefrom should not be treated as part of the income of the company for the purposes of this case. Probably the other parcels contain more land than is needed. However, if these be included in their entirety in "fair value," and if all rentals, increase in value and other income therefrom be placed in the income account, the result will not vary materially from that obtained from the strict application of the above principles. In view of this fact, and the fact that fewer complications are encountered in applying this plan, the simpler method has been followed in this case.

215. Land-San Francisco Water Rate Case, 1908-1911. In the case of Spring Valley Water Co. v. San Francisco, 165 Fed. 667, 697, decided October 7, 1908, District Judge Farrington said:

It is not just to compel consumers to pay for more than they receive, or to pay complainant an income on property which is not actually being used in gathering and furnishing water. If in this case the company, in anticipation of the growth of the city and its future needs, acquired property for future use at a cost of hundreds of thousands of dollars which is now worth millions, it has acted wisely, but it should be satisfied with the goodness of its bargain and the enhanced value of its property, without asking in addition gratuities from its customers in the way of higher rates. When the property does come into necessary service, the company is entitled to have it credited at its then fair and reasonable value for ratefixing purposes.

As a result of the above hearing a preliminary injunction was granted against the enforcement of the ordinance of fixing water rates. The same judge in 1911 made the injunction permanent and in the valuation approved these unused lands and water rights were again excluded.2

§ 216. Excessive investment in plant.

Every plant when constructed is designed to meet the requirements of a number of years growth. Every improvement and extension is designed with the same purpose. This is a rudimentary principle of economical construction. Unless growth is adequately provided for, the loss from inadequacy will be enormous. In a starting plant the necessity for a much larger investment than that required to take care of immediate business is one of the chief causes of low returns during the first years. This is sometimes referred to as the cost of establishing the business (see below, § 636). It is not considered wise or practicable to fix rates so high that the enterprise will pay a fair return on the entire investment from the start. It is believed that with increased business the reduced per unit cost will permit the investors to make up for the low returns of the first few years. In any live plant there must always be room for growth-always capacity to take on more business. The investment necessary to secure this surplus capacity is a reasonable part of the present cost of service.

The case of Des Moines Water Company v. City of Des Moines involves the valuation of a water plant for rate purposes. The master in his report of September 16, 1910, says: 3

2 Spring Valley Water Works v. San Francisco, 192 Fed. 137, October 21, 1911.

3 Des Moines Water Co. v. City of Des Moines, No. 2468, in equity, United States Circuit Court, Iowa Southern District, Central Division, Report of George F. Henry, Master in Chancery, filed September 16, 1910.

In ascertaining this actual or reproductive value, the company has the right to anticipate the growth of its business and to be allowed a proper return on a plant of sufficient capacity for such growth.

Sometimes, however, expectations in regard to future growth are not realized and the enterprise has been saddled permanently with a much larger investment than the business warrants. In such cases the consumer ought not to be required to pay profits on capital thus unwisely sunk. Under our theory of private ownership the investor takes the responsibility of determining the amount and character of investment. If he constructs a plant where it is not needed or seriously misjudges future growth, he should stand the loss. Considerations of this nature are involved in the case of City of Racine v. Racine Gas Light Company, 6 W. R. C. R. 228, 229, decided January 27, 1911. This case involved the valuation of a gas plant for rate purposes. The engineers found after a thorough investigation that the plant was larger than the demands of the business required and that the increased investment not for the most part result in more economical operation. Under these conditions it was held by the Wisconsin Railroad Commission that the situation in this respect is such that it is far from clear whether it would be equitable to all concerned to fix rates in this case, the receipts from which would return interest and profit on the cost of reproduction of the plant at as high rates as those which might ordinarily be regarded as adequate in cities of this

did

size.

In San Diego Land and Town Company v. Jasper, decided April 6, 1903, the United States Supreme Court clearly decides that excessive investment shall be excluded. Justice Holmes says: *

4

San Diego Land and Town Co. v. Jasper, 189 U. S. 439, 446, 447, 23 Sup. Ct. 571, 47 L. ed. 892, April 6, 1903.

If a plant is built, as probably this was, for a larger area than it finds itself able to supply, or, apart from that, if it does not, as yet, have the customers contemplated, neither justice nor the Constitution requires that, say, two-thirds of the contemplated number should pay a full return. The only ground for such a claim is the statute taken strictly according to its letter. . . . If the original company embarked upon a great speculation which has not turned out as expected, more modest valuations are a result to which it must make up its mind.

$217. Excessive investment-New Jersey Chancery Court, 1905.

The case of the Long Branch Commission v. Tintern Manor Water Company, decided November, 1905, involves the valuation of a water plant for rate purposes. In this case the water plant had been constructed with a view to the demands of a fifty-year growth. The court deducted $130,000 from a total cost of $1,400,000 in view of the fact that certain portions of the plant were larger or more expensive than was reasonably required. The court does not hold, however, that the company is not entitled to a return on an investment large enough to take care of growth for a reasonable period. The court says: 5

It is admitted that the new works are supposed to be amply sufficient, both as respects the supply of water and the size of the principal mains, to supply the region within its reach for 50 years to come. Indeed, the size and costliness of the plant is a matter of complaint by the complainant, and it insists that it should not be called upon or required to pay rates for water sufficient to pay a fair return for so great an expenditure. There is a measure of soundness and justice in this contention. The inhabitants of the borough of Long

5 Long Branch Commission v. Tintern Manor Water Co., 70 N. J. Eq. 71, 62 Atl. 474, 477, 479, 480, November, 1905, Court of Chancery of New Jersey.

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