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§ 31. Iowa Supreme Court in Cedar Rapids Gas Case, 1909—

Reproduction-cost-less-depreciation the controlling factor. In Cedar Rapids Gas Light Company v. Cedar Rapids, 144 Iowa, 426, 120 N. W. 966, 968, decided May 4, 1909, upon an appeal from a dismissal of a complaint to enjoin the enforcement of an ordinance of the council of the city of Cedar Rapids fixing the price of gas, the Iowa Supreme Court, in affirming the dismissal said, at page 432, per Judge Ladd:

There is no controversy, however, if we understand counsel rightly, but that the company is entitled to have its property appraised at its fair value in December, 1906. What such an enterprise was then worth cannot be determined by the mere addition of the separate values of its component parts, nor from the cost alone, nor from what it formerly might have been sold at if such price were influenced by excessive rates, nor from what it might cost to replace alone, for this, in view of its use, would involve mere estimates of depreciation and contingencies incident to construction. . .

Any person or corporation contemplating the purchase of such a property quite naturally would inquire into its history, the character of its management in the past, and the amount expended in its construction. . . . A careful review of the entire record, which has been repeated, has led to the conclusion that a fair valuation of the entire plant is somewhere between $300,000 and $350,000. This is largely in excess of its cost, but, according to the record, the value of material as well as the cost of labor has greatly increased since much of the plant was constructed. On the other hand, to put the value above the limit mentioned would require us to ignore the depreciation due to age, decay, inadequacy, and the like, on account of which defendant has been, charging off its books large sums, and which the proof shows should be taken into account.

This decision was affirmed by the Supreme Court of the United States, March 11, 1912 (223 U. S. 670). Jus

tice Holmes states that the attitude of the state court was "fair" and that it had "fixed a value on the plant that considerably exceeded its cost."

§ 32. Oklahoma Supreme Court in Pioneer Telephone Case, 1911-Reproduction-cost-less-depreciation the control

ling factor.

In Pioneer Telephone and Telegraph Company v. Westenhaver, 29 Okl. - 118 Pac. 354, decided January 10, 1911, an appeal was taken by the telephone company to the Supreme Court of Oklahoma from an order of the Corporation Commission directing the restoration substantially of certain telephone rates which had been increased by the company. In the course of the proceeding before the Corporation Commission a valuation was made of the company's plant. In reversing the Commissioners' order, the court, per Judge Hayes, says (at pages 355, 356):

The basis of all calculations as to the reasonableness of the rates to be charged by public service corporations is the fair value of the property used by the corporation in rendering the service to the public. The rate is fair when its application will yield a fair return upon the reasonable value of the property at the time it is being used for the public. It is unfair, when it does not yield such return. . . . No inflexible method for the ascertainment of the value of the property used in the service has been fixed by legislative bodies dealing with rates, or by the courts in determining the validity of rates, and from the nature of the subject no inflexible method can be fixed. Sometimes the present value is arrived at by ascertaining the original cost of construction and all betterments, and deducting therefrom for depreciation; but this method does not always prove to be fair and just. If there was extravagance and unnecessary waste in the construction, or, as is often the case, fictitious stocks and bonds issued, the proceeds of which did not go into the original construction, such method would prove unfair to the public.

On the other hand, where the market price of the physical units or of the labor entering into the construction of the plant has advanced since its construction, the original cost may be much lower than the present value; and for that reason be to the owner of the plant an unfair determination of its present value. The method most frequently used is to ascertain what it will cost to reproduce the plant or the cost of its replacement at the present time, and deduct therefrom for depreciation in the existing plant. Both methods may be used and considered in ascertaining the present value, and both are often resorted to as was done in this case.

§ 33. District Judge Evans in Cumberland Telephone Company Case, 1911-Fair value not determined by construction cost.

Cumberland Telephone and Telegraph Company v. City of Louisville, 187 Fed. 637, decided April 25, 1911, United States Circuit Court, was a suit to enjoin the enforcement of a rate ordinance. District Judge Evans in granting the injunction asked for, says (at page 642):

The ascertainment of the present value of the company's plant is therefore a matter of prime importance, and the subject, speaking generally, may be viewed from many standpoints, as to which it may suffice for present purposes to suggest that if the expenditures in the construction and equipment of a public utility corporation have been absurdly extravagant and wasteful it would not be admissible to say that such outlays fairly indicated the real value of its plant nor in such a state of case that rates should be fixed upon a scale that would pay ordinary dividends upon a licentiously extravagant cost of property, and similar considerations might apply if fictitious values were the result of "watering" the stock. On the other hand, if property had been obtained at a price far below its real value in better hands, or if some one of the many accidents or unsuspected reasons for a large increase should fortunately operate to double the value of a plant it would not be just nor reasonable to confine ourselves to the lower or former value not to say that such

former value continued to be the real one. The value of a plant may depend upon good fortune, upon good management or upon fortuitous circumstances, but in every event the reasonable value of the property "at the time it is used for the public" is the value we are to ascertain for the purposes of this controversy.

§ 34. Wisconsin Railroad Commission in Manitowoc Water Case, 1911-Elements of physical valuation.

In re Manitowoc Water Works Company, 7 W. R. C. R. 71, 74, decided June 27, 1911, the Wisconsin Railroad Commission says:

In determining the value of the physical property of a public utility several elements must be taken into consideration. The three elements of greatest importance in fixing the value of such plants are the original cost, the cost of reproducing the plant, and the present value. As to which of these elements shall be given the greatest consideration, must depend upon the circumstances in each case and must also depend upon the purpose for which the valuation is made. See Hill et al. v. Antigo Water Co.. 3 W. R. C. R. 623, 631; In re Menominee and Marinette Light and Traction Co., 3 W. R. C. R. 778, 785-787; State Journal Prtg. Co. et al. v. Madison Gas & Electric Co., 4 W. R. C. R. 501, 557.

§ 35. District Judge Farrington in Spring Valley Water Rate Case, 1911-Elements of fair value reviewed.

In the case of Spring Valley Water Works v. San Francisco, 192 Fed. 137, decided October 21, 1911, District Judge Farrington gives a comprehensive and carefully considered opinion in regard to the elements of fair value. This case is a continuation of the case by the same title reported in 165 Fed. 667 and decided October 7, 1908, and in which the opinion was also by Judge Farrington. In the 1911 case a permanent injunction was granted against the enforcement of rates, fixed by municipal ordi

nance. In that case District Judge Farrington said (at pages 145, 146):

8. What the company is entitled to demand in order that it may have just compensation, is a fair return upon the reasonable value of the property at the time it is being used for the public. . . .

9. The public has a right to demand that no more shall be exacted than the services rendered are reasonably worth. The public cannot be subjected to unreasonable rates in order simply that stockholders may earn dividends. . . .

10. Cost of reproduction is not a fair measure of value, unless a proper allowance is made for depreciation, because all constructive portions of the plant are subject to decay, and to be worn out or consumed by use. . .

11. Original cost is not always a fair criterion of present value, because the plant may have cost too much, or it may be of unnecessary dimensions. If it has increased in value since its acquisition, the company is entitled to the benefit of such increase, if such increased valuation does not require a return so large as to be unreasonable and unjust to the public..

12. The aggregate value of bonds and issued capital stock of the company at present market prices is not a reliable index of the value of the plant, because such prices often rise and fall from the operation of causes which have little or nothing to do with the real intrinsic value of the property, and the bonded or other indebtedness of the company may exceed the actual value of its property.

The most important fact to be determined is the value of the property. The value to be ascertained is the value at the time of the inquiry. Only that property is to be considered which was then used and useful in supplying San Francisco with water. Among the proper matters to be considered are the original cost of construction; the amount expended in permanent improvements; the amount and market value of stock and bonds; the present, as compared with original, cost of construction; the probable earning capacity of the property under the particular rates prescribed by the ordinance for each of the years in ques

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