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the plant has cost him in addition thereto the use of the capital, or a certain part thereof, invested in the physical properties during the time of construction. A willing buyer could afford to pay, and would pay, more than the actual cost of labor and material, assuming that the plant has been economically constructed, because such cost would not represent the total expenditures the purchaser would have to make in order to construct the plant himself. In addition to such expenditures, he would have to expend the earnings of his capital during the period of construction. No case has been cited, and in our investigation we have found no case, involving this question, where a reasonable amount has not been considered and allowed for loss of interest during construction as part of the cost of construction.

§ 294. Interest-Wisconsin Railroad Commission.

In the case of State Journal Printing Co. v. Madison Gas and Electric Company, 4 W. R. C. R. 501, 541, decided March 8, 1910, the Wisconsin Railroad Commission discusses interest during construction at considerable length:

The cost of interest during construction was the subject of much testimony. The staff of the Commission used 3 per cent under the assumption of one-year construction, but changed it to 4 per cent, because it was estimated that the construction might require more than one open season. Interest at 3 per cent. under a one-year construction period would be at the rate of 6 per cent for the whole amount of capital during half of the period of construction.

The element of interest during construction, theoretically, is the current rate for the use of each item of the outlays during the time which intervenes between each such outlay and the date of the completion of the plant up to the point of operation. The sum of these charges, however, is the minimum amount that should be allowed as interest during construction. As a practical question, it would seem inevitable that the actual interest cost might, in some cases,

be even greater than this, for the money might have to be provided in advance of the installation of the integral parts. of the plant. Land has to be provided, franchises secured, organization effected, bonds marketed and much expense incurred at the start. The opinion, however, seems to prevail that all the money should be figured as under interest for half the construction period. This is equivalent to an assumption that the expenditures involved in construction would follow a uniform curve from the commencement of construction to completion thereof to the point of operation, and that money could be borrowed just as needed or, if borrowed all at the beginning, could be placed at interest at the rate paid for the whole amount and withdrawn as fast as needed in the work of construction. . . .

But whatever the interest rate may be in any particular case, it is likely to be considerably higher for the original plant than for subsequent extensions to it. This is due partly to improvements in the credit of the plant, and partly to the fact that for a plant that is in operation and earning money there are many ways in which the income and the working capital can temporarily be so used as to keep down the interest charges for new additions without materially affecting either the income or operating expenses of the plant.

§ 295. Interest-St. Louis Public Service Commission, 1911. In the valuation for rate purposes contained in a report of the St. Louis Public Service Commission to the Municipal Assembly on rates for electric light and power, February 17, 1911, the Commission allowed $725,780 for interest during construction on construction of physical properties. The entire cost on which this allowance was made was $14,872,061. The company asked for an interest allowance of $2,490,749. The Commission states that the wide difference between its figures and those of the company was the result of the company's assuming a hypothetical set of conditions while the Commission has aimed to consider the actual conditions under which the

work was carried on. page 50):

The Commission says (Report,

As a very marked illustration of the difference in results caused by adopting the Commission's method of considering actual conditions instead of the hypothetical conditions assumed by the Company, we would call attention to the item of interest during construction on real estate. Under the assumed conditions as used under the theory of Cost of Reproduction New, the present value of the real estate as estimated by the Company was taken as a basis, and to this was added compound interest for a number of years to come. It is evident that if such a method of valuation were allowed, the present consumer would be required to pay now not merely on a high present value, but even on a still higher future value.

The wide difference between the Company's and the Commission's figures on this item is due to the Commission's belief that in dealing with interest during construction the Company is wrong in theory, that its assumptions are not in accordance with the real facts in the case, and that the results arrived at are unreasonable.

As indicated above, the Commission's interest allowance on land was based on the original cost of the land and not on its present value. The Commission allowed 6% interest for the mean time over which the expenditures were spread before operation began. The mean time is assumed to be one-half of the actual period of construction except in the case of the real estate.

§ 296. Interest-New York Public Service Commission, First District, 1911.

In the case of Mayhew v. Kings County Lighting Company, 2 P. S. C. 1st D. (N. Y.), decided October 20, 1911, the question of interest during construction is discussed by Commissioner Maltbie:

As to interest and taxes, a close estimate can be made. Not

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more than eighteen months would be required to construct so much of the plant as might be necessary for the beginning of operation according to the testimony of the engineers of the company. This does not mean that the whole undertaking with all its lines, from the very beginning to the end, would be built in that period, but that the equated period would not exceed that time. The period of construction of the initial unit practically determines the limit. As soon as an operating unit and a few lines are completed, operation of that portion may begin, and when operation may begin the construction period for that portion ends, and when the construction period ends, interest and taxes may no longer be charged to construction cost. They then become charges against income and should be paid out of operating income. As other lines are built and additions made, it is proper to charge interest upon them to capital, but only until the property is ready for use, provided good management has been had throughout. Thus the equated period becomes not the time from the initiation of the idea to the completion of the last remote branch (that may be many years or decades), but the weighted average time for the completion of each operating unit, due allowance being made for the cost of such unit. A pure average is not correct, for the amount of interest to be paid has relation not merely to the period but to the cost of the work. In this case the equated period of construction would not exceed eighteen months. The rate of interest would be about six per cent. per annum, and the taxes would be small.

It is obvious that the whole cost would not bear interest for the equated period, as funds would be provided only as needed. Certain apparatus would be purchased just before the beginning of operation, and therefore it would not be unfair to the company to compute interest for the full period upon one-half of reproduction cost, plus the cost of land and other preliminary and development expenses. Upon this basis, $120,000 would be ample.

This subject is also discussed as related to street railway construction in Re Metropolitan Street Railway Reor

ganization, 3 P. S. C. 1st D. (N. Y.) 113, 173, decided February 27, 1912.

§ 297. Interest-State railroad appraisals.

In the Minnesota railroad appraisal of 1908, interest during construction was allowed at 4% per annum for one-half of the estimated time required to build the respective lines, which according to their mileage, varied from one to eight years. Thus the total allowance was from 2% to 16% (see § 252). In the Michigan railroad appraisal of 1900, the rate of interest was fixed at 6% per annum, the construction period at one year, and interest was allowed for one-half of the estimated construction period. Accordingly, there was a uniform allowance of 3% for interest during construction. In speaking of the Michigan allowance, Henry Earle Riggs says: 30

The corporate history of the Ann Arbor Railroad, in Michigan, shows that it was built in sections of from 25 to 30 miles, and that each section was put into operation as soon as built, so that, while the actual period of construction of the complete property extended over 15 years, no section was under construction much more than one year. This is typical of much of the railroad building of the past, and on such a property the interest charge would be comparatively small.

A proper charge in such a case would clearly not be sufficient in the case of a road several hundred miles in length, through mountains, with tunnels, heavy bridges, and other structures which would extend the actual construction over periods of from 3 to 5 or 6 years, and this is particularly true where the road is a main line or artery, and where local traffic is of minor importance.

In the Wisconsin railroad appraisal of 1903, the allowance for interest during construction was also 3% (see § 261).

30 See his paper on Valuation, in Proceedings American Society of Civil Engineers, November 1910, p. 1512.

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