In the Washington railroad appraisal of 1908, the allowance was from 3% to 72% (see § 258). In the South Dakota railroad appraisal of 1910 the allowance was 3% (see § 257).

§ 298. Interest-Massachusetts appraisal of N. Y., N. H. & H. R. R., 1911.

George F. Swain in his appraisal of the New York, New Haven and Hartford Railroad for purposes of capitalization discusses interest during construction as follows: 31

Interest and Commissions.-This item covers interest on the capital required prior to the opening of the road. It is based on an assumed rate of 6 per cent. per annum, and the further assumption that it will take four years to complete the road, making an average charge of 6 per cent. for two years on the entire cost, including the present overhead charges, but not including equipment, which would be the last thing purchased. This is the same figure which was used by Price, Waterhouse & Co.

With reference to this charge, it must be remembered that the rate of interest to be assumed is not that which the New York, New Haven & Hartford Railroad Company to-day would have to pay for money. It is, on the contrary, the rate which a new company intending to build a road would have to estimate upon. On this basis, 6 per cent. is certainly not too high. This item also includes the legitimate charges of marketing the securities, not including, however, any discount on those securities, except so much as may be the legitimate commission to the bankers for the expense of marketing.

§ 299. Promotion and organization.

Most appraisals contain a small percentage to cover

31 Report to the Joint Board on the validation of assets and liabilities of the New York, New Haven and Hartford Railroad under Chapter 652, Acts of 1910, by George F. Swain, Engineer in Charge. Published in Report of the Massachusetts Joint Commission on the New York, New Haven & Hartford Railroad Company, February 15, 1911, pp. 51, 87.

legal and other expenses connected with the organization of the company. In some cases this is included in an allowance for general and legal expenses. A few appraisals in addition to making provision for company organization include a substantial allowance for promotion. The New York Public Service Commission for the First District has included such an allowance under the term "preliminary and development" expenses (see also § 302). In re Queens Borough Gas and Electric Company, 2 P. S. C. 1st D. (N. Y.) —, decided June 23, 1911, Commissioner Maltbie in delivering the opinion says:

There are certain expenses connected with every undertaking which are not represented by physical property but which must be incurred before the plant is operated. These relate to the initial promotion of the scheme and the organization of the company. Investors must be interested, lawyers and engineers must be consulted, and franchises and permits must be secured.

In the case of Cedar Rapids Gaslight Company v. Cedar Rapids, 144 Ia. 426, 120 N. W. 966, 970, decided May 4, 1909, involving the valuation of a gas plant for rate purposes, the Iowa Supreme Court ruled against an allowance either for organization or promotion:

32

Nothing can be allowed for the promotion and organization of the company, for it is immaterial by whom the plant may be owned in estimating its value.

In Knoxville v. Water Company 33 the Supreme Court of the United States refers to but does not decide this ques

32 The company carried this case to the Supreme Court of the United States and the decision of the state court was sustained. (Cedar Rapids Gaslight Company v. Cedar Rapids, 223 U. S. 655, decided March 11, 1912.) Justice Holmes in delivering the opinion of the court does not, however, refer in any way to the question of promotion cost.

33 Knoxville v. Water Company, 212 U. S. 1, 29 Sup. Ct. 148, 53 L. ed. 371, January 4, 1909.

tion. In this case the court below had included $10,000 on a total cost of $608,000 to cover "organization, promotion, etc." Justice Moody says "we express no opinion as to the propriety of including" this item "but leave that question to be considered when it necessarily arises." "We assume, without deciding that" this item was "properly added in this case." The above seem to be the only court decisions that refer to this question. Promotion considered as the cost of prospecting and securing the financial backing necessary to the initiation of a new enterprise does not appear to have been allowed for in the various appraisals considered, except in those of the New York Public Service Commissions as shown in §§ 301, 302.

§ 300. Promotion-St. Louis Public Service Commission, 1911.

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, contains an allowance of $125,000 for expense of organization and of $32,944 for interest on the organization expense. In this case the total estimated cost of organization and construction including overhead charge was $15,030,505. The Commission says (Report, pages 31, 32):

In addition to the value of its physical property, the Company is entitled to have recognized as part of its assets on which it is entitled to earn a return, such amounts of money as have been expended by way of fees paid to the state, legal expenses, etc., in the formation of the corporation and the legitimate expenses of obtaining the franchise by the corporation, if any; but expenses preliminary to the organization of the corporation in prospecting the field, interesting prospective stockholders, and promoters' profits are not, in the opinion of the Commission,

under the laws of this State, proper items for consideration in this connection.

The Company claims for this $709,000, and presented expert testimony in support of its claim, based on the theory of cost of reproduction new of the Company, but its witnesses included in this item many elements of expense which do not seem applicable to this case, or indeed proper elements of charge as part of this item. The amount of the Company's claim is fixed arbitrarily at three and one-half per cent. of its valuation of all the balance of its permanent investment. We fail to see any relation between this item of expense and the value of the Company's investment, and no reason was given for thus determining its amount.

It appears to be simply an arbitrary method of arriving at the amount of this expense. We consider that an allowance of $125,500 is ample to cover this item. Interest is allowed specifically upon this item, inasmuch as such expenditures generally precede the operation of the plant by a considerable period of time.

In this case the company also requested an allowance of $428,509 for time and expense of permanent organization force during construction period. The Commission disallowed this item, stating that (Report, page 33) “As a matter of fact, as is often the case, the operating officials and the engineering officials, were to a great extent identical, and in making an allowance of 5 per cent for engineering on all the items of construction, the Commission considers that it has made allowance to cover the cost of the time of officials paid for as operating expenses but really devoted to engineering."

§ 301. Promotion-New York Public Service Commission, Second District, 1908.

The New York Public Service Commission, Second District, in the matter of the application of the Rochester, Corning, Elmira Traction Company, 1 P. S. C. 2d D. (N.

Y.) 166, decided March 30, 1908, lays down the principle that in determining the amount of securities that may be issued by a new enterprise a fair allowance will be made for services in promoting the organization of the enterprise. Such allowance will be placed upon a basis of just payment for valuable and indispensable services. Chairman Stevens in his opinion says (at page 177):

Another subject of great interest and importance is the compensation, if any, to which the promoters of the enterprise should be entitled for their services. Promotion has been so extensively abused and has been so universally used as a cover for abuses in capitalization that it has come to be regarded as a term of reproach and as a device to work schemes of robbery upon the investing public. No reason is apparent why this should necessarily be so. The honest services of a capable promoter are indispensable to the flotation of every comprehensive and far-reaching scheme of development in the railroad world, or elsewhere. A clear vision to see opportunities, ability to demonstrate them to others, and energy to push to completion works untried but of great moment, are indispensable to material development and should be fairly and even liberally rewarded by the public which receives the benefit of those works. Such rewards, however, should be put upon a clear basis of business principle, should be of sufficient magnitude to encourage rather than discourage enterprise, and should not be so great as to make an exorbitant demand which is perpetual in its nature, upon the community to be served. They are to be treated simply as just payments for services performed for the corporation, which services are valuable and in many cases even indispensable. Such services should be paid for upon the basis of what they are fairly worth, having regard to all the circumstances of the case.

In the case under consideration the Commission fixed the allowance for promotion at 5% on the estimated cost of the railway.