to the construction account for, perhaps, no better reason than that it has been customary to do so, or in order to cover outlays which it would not be fair to treat as a part of the investment, then they should obviously be omitted from this account.

Whether bonds will have to be sold at a discount, ordinarily depends upon the financial condition and prospects of the company by which they are issued. Companies that are not overcapitalized, whose earnings are large enough to leave a fair margin of safety above the interest charges at present and promise to do so in the future, and whose bonds bear interest at the ordinary rates, have usually little or no trouble in disposing of them. In some instances they sell their bonds above par, in other cases, again, below par, and in still other instances at par. The variation in prices in such cases usually depends on monetary conditions and on the rate of interest which the bonds bear. Under such conditions an equilibrium might be established by charging the construction account with all discounts on bonds and crediting it with all premiums above par. Such methods of dealing with this matter would seem fair, and there are companies by which it has been adopted.

There are also instances where discounts on bonds are charged directly to operating expenses. This practice may also be sound from the company's point of view, especially when the earnings are large enough to permit it. If the results of so charging such discounts should be an increase in the rates for the services rendered to the public, then this method would differ from that under which they are charged to construction only in this, that in the former case the burden of paying them falls upon the present generation of customers, while under the latter method it may largely fall on future generations or be distributed over both. As to which of these methods is the better, would seem to be a question that largely depends upon the life of the plant. Water plants, for instance, which are largely built for future generations, may be in a different position in this respect from plants that are of a more temporary character. The same questions are also involved in writing off costs or losses generally, and should always receive due consideration.

In the case before us, however, the bonds were sold at a discount because they could not be sold on any other basis. The discounts of the first issue were, in turn, charged to the construction account, because there was practically no other place where they could have been disposed of. They could not have been charged to earnings, because these were too low to permit it. The owners of the plant were probably neither willing nor prepared to assume this loss; nor was it, perhaps, their duty at the time to meet this loss out of their own pockets. This item was therefore treated in about the only way in which it could have been treated at the time. It was included in the cost of the plant, but has probably not affected the rates, except perhaps theoretically. Furthermore, under the method of measuring the value of the physical property of the plant by the cost of reproduction, items of this character are probably eliminated from this value, unless some allowance is made for them in other ways.

In 1899 and 1904 there appear to have been additional bond issues and also additional discounts to dispose of. In the case of issues, however, the discounts were not charged to construction, but to operating expenses, thereby reducing the net earnings to that extent. These discounts amounted to $450 for the former year and to $1,250 for the latter, or to a total of $1,700. Of these discounts it must be said that they were borne by the owners of the plant, and that, if they are not included in the cost, their chances of recouping themselves for this loss are not the best.

In the rate case City of Janesville v. Janesville Water Co., 7 W. R. C. R. 628, 639, decided August 17, 1911, the Wisconsin Railroad Commission considers in arriving at fair value for rate purposes certain discount on bonds actually incurred in the original floating of the bonds. The Commission says:

The relation of bond discounts to plant valuation cannot be determined without a knowledge of the circumstances existing at the time of the bond issue. It has usually been con

all future extensions and additions. In view of this fact, and that the cost of these betterments is also included, it would clearly be a duplication of property to make an allowance for the same items in working capital. However, it does seem proper to provide for materials and supplies to meet repairs and renewals promptly.

Taking into account all considerations that are proper, it is the opinion of the Commission that an allowance of $80,000 for working capital for the year 1910 would be ample.

This allowance of $80,000 includes $39,643 for materials and supplies on hand. In 1910 the company sold 580,678,000 cubic feet of gas. Therefore the allowance for working capital amounted to 13.77 cents per thousand cubic feet of gas sold.

§ 346. Chicago gas plant appraisal, 1911.

In appraising the property of the People's Gas Light and Coke Company of Chicago for rate purposes, William J. Hagenah, in his report of April 17, 1911, to the City Council Committee, allows $3,200,000 for working capital. In this case the total value of the physical property was $49,023,947 and the gross operating revenues, $14,302,447. Mr. Hagenah says (at page 42):

The best information as to what constitutes a reasonable allowance for working capital is supplied by the balance sheets showing the current assets and the current liabilities.

There is no fixed rule by which the amount of working capital can be computed. The range of maximum and minimum. allowance can be ascertained with reasonable accuracy, but there are numerous demands on the company which are not reflected in the balance sheet, but must be arrived at through the application of a reasonable judgment. Among such items mention may be made of cash requirements to guard against contingencies, the allowance for temporary financing of plant extensions, the cost of gas which has been consumed by the customer since the last reading of his meter and also the cost

limits its position in regard to the inclusion of bond discount in a valuation for rate purposes. The Commission says:

The president of the water conpamy testified that he was unable to state the exact amount of the cost of marketing the first of these issues of bonds, but stated as his belief that that first $200,000 were sold at about 922 per cent of their par value. The $6,872.50 given as the cost of marketing the last $100,000 of these bonds was stated to be the exact cost.

As indicated in previous decisions of the Commission, the discount or cost of marketing bonds is an element to be considered in arriving at the value of the property of a utility. This does not mean that all discounts constitute proper additions to physical value. If this were the case a company with poor credit, which had been obliged to allow a large discount on its bonds, would have a higher value and be entitled to a return on a greater valuation than a utility owning precisely similar property, but whose credit was good enough so that it was not obliged to issue its bonds at a considerable discount.

Similarly, a company would probably find it necessary to offer a greater discount on 4 per cent bonds than on those earning 5 per cent, and more on 5 per cent than on 6 per cent bonds. In the present case the bonds bore 6 per cent interest, which seems to be as high a rate as was ordinarily paid on bonds of similar nature. Owing to the inability of the utility to furnish definite data concerning these bond issues, it is not possible to state what effect the condition of the company's credit had upon the bond discounts. It may be that some allowance should be made for the cost of marketing these bonds in arriving at the value upon which rates should be based, although it is questionable whether the total amount of discounts on bonds constitutes a legitimate addition to the physical value of the plant.

The bonds of 1890 matured on March 1, 1910, and the authorized bonded indebtedness was then increased to $500,000, of which $381,000 was issued and outstanding at the end of the fiscal year. The cost to the utility of this new issue appears

$347. Iowa Gas and Water Rate Cases.

The case of Cedar Rapids Gas Light Company v. Cedar Rapids, 120 N. W. 966, 969, decided May 4, 1909, Supreme Court of Iowa, involves the valuation of a gas plant for rate purposes. In regard to working capital the court

says:

The witnesses for the company estimated that $25,000 would be required as working capital, aside from the supplies ordinarily carried, which included 1,000 tons of coal and 10,000 gallons of oil, but were unable to sustain their opinion save by dealing in probabilities for .its use, in the main speculative. It appears that collections for gas sold are made monthly, and, as these amount to about $8,000 per month, it is evident that, after the first month, enough would be on hand to meet current expenses. As supplies on hand were sufficient for immediate use, and for some months in the future, about all essential would be enough to take care of the pay roll for the first month, and $2,500 would be ample for that purpose and other possible contingencies. Even this much appears to be more than the company in its experience has found it necessary to reserve.

The opinion does not include the estimated value of materials and supplies on hand, which information is necessary in order to determine the total allowance of the court for working capital. In 1907, the company sold 103,079,190 cubic feet of gas. The decision in this case was affirmed by the Supreme Court of the United States in Cedar Rapids Gaslight Company v. Cedar Rapids, 223 U. S. 655, decided March 11, 1912. Justice Holmes states that the attitude of the state court was "fair." There is no direct reference, however, to the subject of working capital.

The case of Des Moines Water Company v. City of Des Moines, involves the valuation of a water plant for rate purposes. In this case no mention or allowance is made

Des Moines Water Company v. City of Des Moines, no. 2468, in equity,