for example, a property which cost $100,000, and which is allowed to earn 8% or $8,000 per annum. Assume that the bonds bear 6% interest, but not more than $4,000 gross interest charges per annum; then it will appear that the stock has earnings as follows:

The bond issue amounts to $66,700 and the stock issue to $33,300. The stock earns $4,000 per annum or 12%, and on an 8% basis each share of stock would be worth $150.00 on a par value of $100.00. This would apparently produce a total going value, based on earnings, of $16,700; but obviously this would not be a value which could be added to the cost of the tangible property for rate making purposes. It is also essential to recognize that the bonds represent a first lien on the property and the net earnings; the preferred stock would come next and the common stock last. Thus the stock represents to some extent a speculative margin where the financing is done in this way. It would be the first part of the investment to feel the effect of a falling off in net earnings and thus the market value of the stock might fluctuate, making it unwise to capitalize the going value which apparently exists. . .

The clear intent of the cost of service theory of rates is to limit values to the fair cost of all the tangible property. Thus there can be no going value, under this theory, which is supported by net earnings in excess of a reasonable rate of return on the property. If this were not the case, the modern theory of regulation would fail to accomplish its purpose, and rates founded on the value of service theory, under former conditions, would continue to be impregnable. . . .

Whichever way we conclude in the matter, selling cost, or the cost of building up and holding a going concern, is a legitimate outlay which we must recognize under the cost of service theory. In the case of an adjustment of rates at this time,

the form or manner in which we recognize it is not so essential as the fact. Again, we may observe that this is not going value in the broad sense, but simply an element of cost which demands recognition.

CHAPTER XXVI

Franchise Value in Purchase Cases

§ 660. Pennsylvania Supreme Court in Toll Bridge Condemnation Case, 1885-Value based on earnings.

661. New York water plant condemnation, 1893.

662. Monongahela Navigation Company v. United States, 1893-Company entitled to compensation for loss of franchise to take tolls. 663. Massachusetts Supreme Court in Water Plant Purchase Cases, 1897, 1901-Right to lay pipes of no value to city.

664. Rhode Island Supreme Court in Water Plant Purchase Case, 1901– Town's option to buy does not extinguish value of unexpired franchise.

665. Connecticut Supreme Court in Purchase Case, 1904-Earning value but not franchise value considered.

666. Maine Supreme Court in Water Plant Condemnation Cases, 1902, 1904-Rules to govern appraisers.

667. Wisconsin Railroad Commission in a purchase case under the indeterminate permit.

668. Pennsylvania Supreme Court in Water Plant Purchase Case, 1909— Value of right to charge reasonable rates.

669. Summary.

§ 660. Pennsylvania Supreme Court in Toll Bridge Condemnation Case, 1885—Value based on earnings.

The case of Montgomery County v. Schuylkill Bridge Company, 110 Pa. St. 54, 20 Atl. 407, decided May 25, 1885, involves the condemnation of a toll bridge. Judge Paxson in delivering the opinion of the court says (at page 408):

The defendant contended, as appears by their eleventh point, "the measure of damages is the cost of the construction of a new bridge at the time of the taking by the county, similar to the present one, diminished by an amount in proportion to such cost equal to the depreciation of the old bridge from wear and decay." The learned judge very properly declined to

affirm this point. The vice of it consists in the fact that it substituted one of the elements of damages for the measure of damages itself. The bridge structure, the stone, iron, and wood, was but a portion of the property owned by the bridge company, and taken by the county. There were the franchises of the company, including the right to take toll, and these were as effectually taken as was the bridge itself. Hence, to measure the damages by the mere cost of building the bridge would be to deprive the company of any compensation for the construction of its franchises. The latter can no more be taken without compensation than can its tangible, corporeal property. Their value necessarily depends upon their productiveness. If they yield no money return over expenditures, they would possess little if any present value. If, however, they yield a revenue over and above expenses, they possess a present value, the amount of which depends in a measure upon the excess of revenue. Hence it is manifest that the income from the bridge was a necessary and proper subject of inquiry before the jury. . . . Nor is the value of the bridge to the county a material inquiry. The county may have made a mistake; the bridge may not be worth to the county what the jury have fixed as the damages. The county might perhaps have built a new bridge at another street for half the money, but it did not do so; it elected to take the property of the bridge company, and the inquiry under such circumstances is not what it is worth to the party taking, but its value to the company that is deprived of its property.

§ 661. New York water plant condemnation, 1893.

Under a special act of the Legislature, the City of Brooklyn purchased in 1892 the property and franchises of the Long Island Water Supply Company. The franchise had about thirty-eight years to run and the company claimed that it was an exclusive franchise and that it was entitled to the present worth of all future increased net earnings throughout the unexpired term based upon the present rates of charge. The commissioners of appraisal

appointed under the statute determined that the company did not have an exclusive franchise and state in their report to the Supreme Court that they have fixed the value of the franchise on the following assumptions: 1

(1) That at present the water company alone has the right publicly to purvey water in the Twenty-sixth Ward; (2) that the exclusiveness now incident to its right may at any time be taken from it by the legislature, or by local authorities acting under legislation, but (3) that neither the legislature nor local authorities would, in determining whether to take from the company the exclusiveness of its right, fail to have such due regard as is demanded by ample and fair public policy, to the past investment, risks and services of the company, and to the reasonably just expectations which those who invested money in its work had in mind when so investing. The water company has insisted that by reason of its supposed right to exclude competition, it could and would earn over and above all investment and outlay and interest thereon during the remaining life of its charter more than $6,000,000. In our opinion the public authorities would not be justified, unless the water company had rights of a contract nature, to continue its freedom from competition in order to secure its returns so much in excess of anything reasonably due its former risks or investments or public services. The profits which the company has supposed it would earn in future years are based upon specific rates for its supply of water. If any protection of the water company from competition would at these rates produce such very excessive profits, it would clearly, in our opinion, be the duty of the legislature, or, under its permission, of other public authorities concerned, whether of the Town of New Lots or of the City of Brooklyn, to take care that such competition should be permitted as should

1 This is quoted from the Transactions of the American Society of Civil Engineers, vol. 38, December, 1897, p. 179. The case is reported on appeal In matter of City of Brooklyn, 73 Hun, 499, decided December, 1893; affirmed 143 N. Y. 596, 38 N. E. 983, 26 L. R. A. 270, November 27, 1894; affirmed 166 U. S. 685, 17 Sup. Ct. 718, 41 L. ed. 1165, April 16,