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guide. This point is whether the greater cost naturally incident to a plant, built at first smaller than that now found in existence and later enlarged, should be taken as the actual original cost; or whether the reasoning employed in section 27 relative to replacement cost, i.e., that the increased cost must be due to work or material that has been abandoned, should hold good when applied to original cost.

There can be no doubt whatever that, if a unit had been too small and had to be completely removed and a new and larger one substituted, the cost of the original smaller unit of plant could not be made a portion of the original cost. But taking as an example of a more doubtful nature the case of an underground conduit originally composed of, say, ten ducts, which had been increased at some later time by ten more ducts: to place the second group of ducts, the pavement would have to be reopened, the trench redug and refilled and the street repaved. If the conduit had been constructed originally with twenty ducts, the cost of paving, excavating and filling would not have been much greater than it was for ten ducts.

There is but little doubt that most undertakings have charged the cost of each group of ducts, when laid, to plant cost and, naturally, they would desire to have the original cost figured as the sum of the two operations. The undertaking can argue with perfect justice that it had been wise in thus constructing in a piecemeal manner and that it might have placed the second line of ducts possibly equally well somewhat away from the first for substantially the same cost and have had recognition made in the valuation of their proper and legitimate expense. This line of argument is based on very practical considerations and any objection to it must be largely of a theoretical character. But the fact remains

that there is at the time of valuation a twenty duct conduit and that to place the second section of ducts the pavement placed over the first section of ducts was destroyed and abandoned and the same is true of the labor entailed in the first excavation. It was the right and duty of the undertaking to charge off from its construction account the cost of the labor and material thus abandoned. There seems to be no more reason for including the cost of abandoned work in the original cost than there was reason for including it in replacement cost.

79. Pavement over construction. This question has been conspicuous in most appraisals of public service undertakings where there is property in large cities, and in most decisions the actual cost to the undertaking has been the figure which has been required by the court or commission for its consideration. It is probably one of the most difficult portions of original cost to be found with the desired accuracy but its importance demands special effort.

It is true that the undertaking may have laid its underground system originally in unpaved streets somewhat before it was needed in order to avoid the cost of the high grade pavement to be laid somewhat later by the city; or, what amounts to the same thing, that the city had obliged the undertaking to lay its underground pipes much before they were required in order that a new high grade pavement might not be broken into later when the pipes were actually required for the service of the public. There can be no doubt that the undertaking was involved in some expense for interest and maintenance upon a plant somewhat larger than the actual requirements of the service at that time, but such expense cannot be made properly a portion of the plant cost. Such expense is a portion of the annual cost of operation and should not be capitalized. The public pays a fair return upon the

plant in use and useful to it. Plant, wisely prematurely built or placed on the demand of the public authorities, must be considered as virtually useful to the public. The courts have held invariably that the public service corporation "is under obligation to the public to keep in advance of the present demand and take liberal account of the probable increase of demand due to increase of population."

80. Overhead charges. -The overhead charges, ruled as proper in a determination of replacement cost, — viz., interest during construction, engineering, organization and legal expenses, are to be determined from the books of the company and made a portion of the original cost, following the general principles enunciated when the subjects were discussed as a portion of replacement cost. It is not at all improbable that some of the overhead charges will be different for different years, depending upon the amount of construction work of each year. Figures representative of overhead costs, however, can be obtained in every case without inordinate difficulty, provided the engineer and accountant have a definite knowledge and appreciation of the expenses which should be made a part of these charges.

The item of contingencies should be given special consideration in each particular case. If the books and records are in such form that the actual costs can be determined and the inventory of the plant and the ages of the units have been prepared with proper care and skill, it is difficult to see good reason for making this item one of any importance.

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81. Sale of securities. In the discussion of the replacement cost of a plant, it was stated that "the discounts or losses which an undertaking might incur in order to sell its stocks or bonds, together with such expenses as may be incurred by underwriting an issue of

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the securities" should not be made a portion of the replacement cost of a plant. It has been contended, however, that no new undertaking can obtain money for the construction of a plant and the development of a new business without some expense and that such expense should be included as a legitimate portion of the original cost of its property. It has been argued, further, that, if the money required for the construction and operation of the plant had been obtained as cheaply and economically as possible, and if all the money thus obtained had been used in the construction of the plant and in its operation during the development period of the business, the cost of obtaining funds, the discounts between par value and the price obtained, was properly a portion of the original cost.

Here again the instructions of Mr. Justice Harlan must be recalled. He ruled that the original cost of the property should be found and presented to the Court as well as figures showing the amount of the bonds and stocks of the undertaking. The Court has, thus, before it information which will show by how much the capitalization exceeds the original cost. Any attempt on the part of the engineer or expert to add, to the original cost of the property, figures representing what in his opinion the cost of obtaining money originally may have been and including such cost in the original cost of the property is unnecessary and an assumption of the functions of the Court.

Thus the economic arguments which have been made so often, that the management of the undertaking showed good business judgment in the sale of securities at a larger discount at a low rate of interest rather than at a higher price at a higher rate, need no special presentation on the part of the appraiser. The facts are presented to the Court in the statement prepared by the appraiser showing the character of the securities and the rate of interest which they bear.

Moreover the interest during the construction period is based upon the rate of interest the undertaking had to pay for the money required in the construction of the plant and this rate should be made to cover the losses practically applicable to that period.

82. Cost of developing business. — The cost of the physical property is but a portion of the original cost of the entire property, as has been fully explained in the chapter dealing with "the value inherent in a live plant." The original cost of developing the business must be determined and added to the original cost of the physical plant in order that a complete comparison can be made between the original cost of the property and its replacement cost at the present time. The original cost of developing the business should be determined by the method employed by the Wisconsin Commission and briefly described in section 61. In ascertaining this cost, care should be taken to see that only such figures are included as can be considered reasonable and proper expenses in the conduct and development of a utility of the kind under appraisal. It must be appreciated by those whose duty it is to determine this cost that the results of their work will be scrutinized by the tribunal to ascertain whether the character of the plant was suited to the needs of the community, whether its cost as related to similar plants elsewhere was too high, whether the operating expenses in the past had been usual and reasonable, and whether undue charges, in the way of salaries or as cost of replacement of faulty construction, had been made to operating expenses. In order to enable such a scrutiny to be made, the figures should be presented in such a manner and in such detail that there can remain no doubt in the minds of the court or commission as to the propriety of their admission as a portion of the cost of developing the business of the undertaking.

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