the methods used in such valuations. In the earlier days toll bridges were occasionally taken by condemnation or purchased on agreed terms. Later, numerous private water plants were transferred to the municipalities, usually by voluntary agreement but occasionally by formal arbitration, under the authority of a court. Several gas plants have beef municipalized in the same way. Many small electric light plants and a number of larger ones have more recently been purchased by the municipalities. The purchase of private water plants is still a frequent occurrénce.

§ 3. Valuation for rate purposes.

The valuation of property for rate purposes is a recent development. The right of the courts to restrain the enforcement of an act of a legislature regulating the rates of a public service corporation was not fully established by the United States Supreme Court until 1889, and careful valuations for the purpose of determining just rates of charge have for the most part been developed since the decision in the leading case of Smyth v. Ames in 1898. The question of rate regulation first came before the United States Supreme Court in the so-called Granger Cases decided in 1876.1 In these cases the acts in question regulating rates were upheld on the ground that the property was affected with a public interest and the regulation of the rate of charge was solely a legislative power and the courts were powerless to prevent the abuse of such power by the legislature. This doctrine was soon modified and later completely reversed. In 1884, in Spring Valley Water Works v. Schottler, Chief Justice Waite hinted at a modification of the doctrine, and in 1886, in the Railroad Commission

1 Munn v. Illinois, 94 U. S. 113, 24 L. ed. 72, October, 1876, and other cases reported in the same volume. See, also, Wyman on Public Service Corporations, Vol. II, §§ 1427 to 1430.

2 110 U. S. 347, 4 Sup. Ct. 48, 24 L. ed. 173, February 4, 1884.

cases, Chief Justice Waite remarked: "It is not inferred that this power of limitation or regulation is itself without limit. This power to regulate is not a power to destroy,and limitation is not the equivalent of confiscation." In 1888, however, in Dow v. Beidelman,1 Justice Gray said: "The court has no means, if it would under any circumstances have the power, of determining that the rate of three cents a mile fixed by the legislature is unreasonable." Nevertheless, in 1889, in Chicago, Milwaukee & St. Paul Railway v. Minnesota," the court held that it is necessarily within the power of the courts to declare illegal and unreasonable a rate fixed by a legislature or commission. However, it was not until 1898, in the leading case of Smyth v. Ames, that it was clearly decided that a fair return on the fair value of the property used for the convenience of the public was the chief basis for the determination of the reasonableness and the constitutionality of a rate.

6

§ 4. Valuation dependent on purpose.

A fundamental question is whether the identical valuation can serve for all of the four general purposes (see § 1) for which public valuations are made. Is valuation the same regardless of the purpose or is valuation meaningless unless used with reference to some specific purpose? Upon the answer to this question depends the use that can be made of precedents concerning the rules and elements of valuation as laid down by courts and commissions. As a matter of fact the courts and commissions in their opinions

3 116 U. S. 307, 331, 6 Sup. Ct. 334, 29 L. ed. 636, January 4, 1886. These cases, reported under the title of, and cited as "Railroad Commission Cases," are: Stone et al. v. Farmers' Loan & Trust Company, Stone et al. v. Illinois Central Railroad Company, Stone et al. v. New Orleans & Northeastern Railroad Company.

125 U. S. 680, 8 Sup. Ct. 1028, 31 L. ed. 841, April 16, 1888. 134 U. S. 418, 10 Sup. Ct. 462, 33 L. ed. 970, March 24, 1890. '169 U. S. 466, 18 Sup. Ct. 418, 42 L. ed. 819, March 7, 1898.

often recognize that valuation or specific elements of valuation may vary with the purpose. The best-considered decisions are undoubtedly those in which the problem of valuation has been worked out solely with reference to what was just and reasonable, with reference to the specific purpose for which the valuation was made. The result has sometimes been less fortunate when the reasoning has been influenced by the fact that because it was just and reasonable to adopt a particular rule in a valuation for a different purpose it was consequently proper to adopt the same rule for the purpose at hand.

§ 5. Same subject-Report of Committee National Association of Railway Commissioners.

This subject is treated in the 1911 report of the Valuation Committee of the National Association of Railway Commissioners: 7

Prior discussions of valuation both within and outside of this association have usually maintained that valuation should be the same regardless of the purpose for which the valuation is to be used. How, for example, can a State commission recognize four different kinds of value and make one valuation for municipal purchase, another for taxation, another for rate making, and another for capitalization? To do so seems at first thought inconsistent. On the other hand, a little consideration will show that value is meaningless unless made with reference to some particular object. To be sure, it may happen that fair value for one purpose is the same as fair value for another, but in order to determine what is fair value for any specific purpose, it is necessary to think it out with reference to this purpose only, and when we discuss the theory and elements of valuation, it seems necessary that we should have in mind a specific purpose that the valuation is to serve. It appears to us that considerable confusion in the discussion of the subject of val

7 National Association of Railway Commissioners, Proceedings of the 23d Annual Convention, October, 1911, p. 145.

uation has arisen either from lack of attention to this fact or from the false assumption that value may be ascertained without reference to purpose.

Some of the trouble doubtless arises from a confusion of the terms "cost" and "value." Cost is a definite amount regardless of purpose. The actual cost and the reproduction cost of any structure may be determined without reference to the purpose for which such estimates may later be used. This is what is often meant when it is said that valuation should be the same regardless of purpose. All that is really intended is that actual cost or reproduction cost should be the same. But cost is not necessarily value for any purpose, though it is an element in estimating fair value for almost any purpose. Thus fair value • for rate purposes may be based largely on actual cost or on reproduction cost or on a composite of actual cost and reproduction cost. Considerations of equity may, as to certain elements of cost, lead to the acceptance of actual cost as the fairer basis, while as to other elements the cost of reproduction may be a better indication of present fair value for rate purposes. Take for example the question of promotion and other preliminary development costs. In a valuation for rate purposes, though cost of reproduction may be used as a general rule, it may seem more equitable to use actual cost of promotion; that is, the necessary cost of promoting the small initial plant, rather than the cost to-day of promoting a plant of the size of the present one, may be taken. Or, on the other hand, promotion cost may be entirely excluded from a valuation for rate purposes and considered only in fixing the fair rate of return.

§6. Same subject-Report to Massachusetts Joint Board on N. Y., N. H. & H. R. R.

George F. Swain, Engineer in Charge of Appraisal, in his report to the Massachusetts Joint Board on the validation of assets and liabilities of the New York, New Haven & Hartford Railroad Company, states that the

Published in Report of the Massachusetts Joint Commission on the New York, New Haven & Hartford Railroad Company, February 15, 1911, pp. 51-154.

physical valuation of a property may be undertaken for any one of a number of different purposes, and that the principle. upon which such a valuation should be made will differ according to which purpose is in view. Mr. Swain says (at page 55):

1. Whether the physical valuation is a proper basis for taxation will depend upon the tax laws.

2. Physical valuation does not, in general, appear to be a fully adequate basis for justifying existing capital, for such capital generally depends upon the historical development of the property, and some or much of it may represent property which has been abandoned, or machinery which has been made useless, by necessary relocations, or by improvements in mechanical appliances.

3. Neither is a physical valuation a fair criterion for justifying or not justifying the further issue of securities. If actual improvements are needed upon a railway property in order to enable it to render proper service, or in order to effect operating economies, it would seem that new capital to meet those requirements should be authorized, independent of the existing capital. .

4. If the physical valuation is to be used for the purpose of aiding in fixing rates for service, earning power is not to be considered. Rates and earning power are interdependent, and one cannot be considered an element in fixing the other.

5. The physical valuation is not a scientific basis for an estimate of the public wealth, because that wealth depends upon the value of the property as a "going" concern, and this depends upon its earning capacity, not its physical valuavion.

6. The treatment of depreciation, and of abandoned property in particular, should reasonably differ according to the purpose of the appraisal. . . .

If the object is to justify existing capital, or to serve as a basis for the issue of new securities, or to fix rates of service, it seems reasonably clear, however, that depreciation should not be allowed for.