by the master for the purposes of this case was based chiefly on cost of reproduction plus intangible elements and there was apparently no allowance for discount.

§ 331. Lincoln, Neb., Gas Rate Case, 1909.

The case of Lincoln Gas and Electric Light Company . City of Lincoln, 182 Fed. 926, 929, decided April 6, 1909, is an action to enjoin the enforcement of an ordinance reducing the price of gas from $1.20 to $1.00 per thousand cubic feet. The application was denied. District Judge Munger said:

It appears from the evidence in this case that complainant's outstanding bonded indebtedness is $1,129,000, and that its stock is $2,500,000. The stock and bonds are each grossly in excess of the value of complainant's plant and grossly in excess of the cost of construction. Complainant's construction account shows that the entire cost of the plant to June 30, 1907, was $603,278.14. The evidence shows that complainant and its predecessor, to obtain money with which to construct the plant, sold its bonds and stock at an enormous discount, and I do not think that, in determining the reasonableness of rates, the amount thereof should be considered.

On appeal to the Supreme Court of the United States the decree of the lower court was reversed and the case remanded (223 U. S. 349, February 19, 1912). But Justice Lurton in delivering the opinion of the court does not refer to bond discount.

§ 332. Minnesota Railroad Rate Cases, 1910.

Judge Otis, Special Master in Chancery, in the Minnesota rate cases, in his report of September 21, 1910, takes strong ground against the admission of bond discount in determining the original cost of construction. Judge Otis says (at page 89):

There is also included items aggregating $24,709,164 for discounts made and commissions paid in disposing of its bonds.

Company v. City of Louisville, 187 Fed. 637, 646, 648, decided April 25, 1911, is a suit to enjoin the enforcement of a rate ordinance. In a decision granting the desired injunction District Judge Evans says:

(4) It seems to us that a proper amount of working capital should have been included in any estimate of the present value of the plant. In normal cases (and we may assume this to be such) it would play a very important part in enterprises like a telephone company. No association of prudent business men probably would attempt to conduct a large business, such as that involved in this case, without keeping a considerable working capital on hand devoted to that business and which would really be embarked in it. It would seem to be quite essential to the successful operation, of any great plant that some working capital should be kept on hand and available for immediate uses, and such capital would seem to be a very proper and important part of the property which, it may fairly be said, is "being used for the public." It may be difficult, however, to say in this case, as in all others, precisely what the amount of such working capital should be.

Very similar considerations apply to what are called "supplies on hand." We think prudent management demands that a reasonable quantity of articles certain to be called for in the operation of the plant should be kept on hand, and, if on hand, should be included in any estimate of the present value of the property which is "being used for the public." . . . In their exclusion from the estimate we think the Special Master proceeded upon an erroneous theory, and we have concluded that their valuation should have been fixed as follows: The working capital at $33,000 and the supplies on hand at $18,000-a total of $51,000. We incline to think that the term "working capital" might embrace both items, as supplies on hand may fairly be regarded as part of the working capital in another form.

§ 350. New York Special Franchise Tax Case, 1911.

People ex rel. Manhattan Railway Company v. Wood

bury, 203 N. Y. 231, 96 N. E. 420, decided October 17, 1911, is a special franchise tax case. The value of the special franchise was determined by the net earnings rule which provides for the capitalization of the surplus net earnings after allowing a 6% return on the value of the tangible property. The court included with the tangible property an allowance for working capital. Judge Gray in delivering the opinion of the court says (at page 234):

I think, also, that there should have been included in the tangible property the sum of $537,139, consisting in cash and other cash items on hand. This item may, properly, be considered as a part of the relator's working capital, which it was entitled, in the prudent management of its business, to keep on hand. Whether or not it was, in fact, essential to the operation of the railroad is not material; but it was, nevertheless, an item of its property, which it may fairly claim to have considered with the rest of its tangible property, upon which the return should be estimated.

Just what sum represents a fair amount for working capital is nearly always a matter of judgment. From the amount of working capital usually carried by such companies, and from the amount that is required by other similar public utility corporations, it appears that, as an average for the year, a sum equalling the accounts receivable and cash on hand less the accounts payable and consumers' advance payments, is a reasonable allowance. The cash on hand, however, should be considered as that which is ordinarily required for the operation of the plant and the conduct of the business, including contingencies and emergencies, and should not include the capital or ready cash necessary for the construction of extensions or enlargement of the plant, or balances resulting from the sale of bonds or stock, or in any case exceed the amount normally needed and used by the company as an operating property.

In many rate cases no mention is made of working capital and it does not seem to have been included at all except as covered by the allowance for stores and supplies. No rate case has been found, however, in which there is recorded a refusal to allow for working capital. The failure to give more attention to the matter is doubtless due to its comparatively small influence upon the total value.

§ 341. Capitalization of working capital.

Under the Massachusetts stock and bond law as it existed prior to 1909, the State Board of Railroad Commissioners refused to allow the issue of stocks or bonds to cover working capital. The Legislature of 1909 passed an act authorizing such issue by street railway companies. This act (Laws of 1909, chapter 485) authorizes a street railway company, after securing the approval of the Board of Railroad Commissioners to issue shares to an amount not exceeding 5% of the par value of its total share capital or to issue bonds to an amount approved by

2

the Board of Railroad Commissioners "for the purpose of supplying itself with working capital." Under the above act the Boston and Worcester Street Railway Company was authorized to issue shares to the par value of $102,000 for working capital. The decision of the Board does not state the basis of the allowance for working capital. Based on the returns of the company for the year ending December 30, 1909, the allowance was approximately 5% of the share capital and the share capital amounted to approximately one-half of the total capitalization (shares and bonds).

The New York Public Service Commission, Second District, In re Application of the Rochester, Corning, Elmira Traction Company, 1 P. S. C. 2d D. (N. Y.) 166, 176, decided March 30, 1908, states that upon an application for capitalization of a newly organized railroad company the Commission will make an allowance for a proper amount of working capital. The Commission says: "The operation of the company can be conducted with far greater efficiency, more to the satisfaction of the public and with better results to the stockholders if it has at all times in its treasury a working capital sufficient and adequate to meet the requirements of the road."

§ 342. Working capital as estimated for tax purposes in Great Britain.

Under the tax laws of Great Britain, taxes are assessed on the rental value of real property. As gas and water undertakings are not usually held on a tenancy, the rental value has to be found by assuming a hypothetical tenant and inferring the rent from the available evidence. This involves among other things an estimate of the structural

2 Petition of the Boston and Worcester Street Railway Company, decided February 18, 1910. 42d Annual Report of the Railroad Commissioners, p. 102.