by the investment may be neither necessary nor presently useful for the public service; but upon the fair present value of that which is used for the public benefit, having due regard always to the reasonable value of the service rendered. Each case must depend very largely upon its own special facts, and every element and every circumstance which increases or depreciates the value of the property, or the service rendered, should be given due consideration, and allowed that weight to which it is entitled. It is, after all, very much a question of sound and well-instructed judgment.” 1

These figures derived and presented in accordance with the rules formulated in the succeeding pages provide the tribunal with complete and accurate information as to possible values of the property. With the information afforded by these figures carefully and logically determined, a decision can be formed as to a present value which will be fair to all parties concerned. In some cases one figure representative of value may be given more weight than it would be in another case. In many cases the present value will be a compromise figure for the reason that a public service corporation differs from a private undertaking in that the tribunal must consider what is fair to the public as well as to the undertaking. Likewise in a case of sale, the present value must be a fair one looking to the interests of the public as well as to those of the buyer and seller.

15. Figures showing value independent of purpose of valuation. It is the tribunal which determines which figure representative of value must be given weight or by how much such a figure should be modified. The experts, engineer or accountant, cannot change the method of valuation by means of which the figures which they are to present to the tribunal are to be derived in order to produce their conception of present value. The orig

1 Spring Valley Water Works v. San Francisco, 165 Fed. 680. See also Ames v. Union Pacific R. R., 64 Fed. 165.

inal cost can be but one definite figure. It may be a figure difficult to obtain, and two accountants may derive different results, but each is seeking the same result working along the same lines and their results can be checked in most cases. The same is true of replacement costs. In most cases two experienced engineers will agree with reasonable accuracy upon the replacement cost of the physical plant. The principles to be employed in determining overhead charges and the intangible values must be formulated so carefully that there can be little or no possibility of controversy as to the total replacement cost.

Likewise the loss in value of the property due to age, that is to say the depreciation of the property, should not be subject to controversy, provided it is determined by experts familiar with the art employed by the utility, with the condition or age of the perishable property and with the fundamental principles relating to depreciation. The same is true of the other figures which experts must develop and present to the tribunal.

16. Necessity of presenting all figures indicative of possible present value. The difficulty of obtaining original cost in the cases of many of the older and larger undertakings has tended to cause this item representative of value to be neglected. In fact, in very many cases of valuation, the entire efforts of the appraisers appear to have been concentrated upon a determination of the reproduction cost-new at the present time, even in some cases neglecting entirely the depreciation in the value of the property which has resulted from its years of service. As will be seen later, cost-new at the date of the appraisal cannot be accepted, in many cases, as a proper criterion of value, at least theoretically. Moreover, no practical business man would accept as reliable a figure purporting to represent value which gave no indication

of the earning capacity of the property. All of the sets of figures, which have been noted above and will be considered more carefully in later portions of this treatise, should be presented, for what they may be worth, to the tribunal whose duty it is to give to each what may seem to be its proper importance as evidence of a fair present value.

CHAPTER II

REPLACEMENT COSTS OF PHYSICAL PROPERTY

17. Definition of replacement cost.

18. Present or original conditions.

19. General assumptions as to replacement.

20. New plant identical with old or one of modern design.

21. Effect upon replacement cost of increased difficulty in placing plant. 22. Period of construction.

23. Unit costs.

24. Mean unit costs developed from curves showing trend of market prices.

25. Use of weighted mean prices during period of construction.

26. Piecemeal v. wholesale construction.

27. Piecemeal construction. Effect of changes and enlargements on

cost.

28. Pavement over construction.

The replacement

17. Definition of replacement cost. cost of a plant may be defined as the sum of money which would have to be expended at the present time to construct a plant similar in all respects to that which is already in service.

Replacement cost is the cost to-day of a plant substantially identical with that which is in use and useful to the public at the time of the appraisal.

Replacement cost, or, as it is frequently termed, cost of reproduction or cost-of-reproduction-new, has been given various meanings in the past, most of which are due to an attempt to make replacement cost accord with the original or actual cost. Original cost and replacement cost must be entirely divorced from each other. If the original cost cannot be determined from the books or records of the undertaking, an attempt may be made to derive the original cost by studies based upon past

prices and conditions, but the replacement cost must be the cost at the present time under existing conditions.

18. Present or original conditions. It is frequently argued that the cost of reproduction to-day is not fair, in many instances, to those who constructed the property originally under more adverse conditions than would be found at the present time. This difference may be perfectly true but such increased cost would be included in the figures representing the original cost. The original cost is the cost under past conditions. The replacement cost is the cost under existing conditions. There may be a wide divergence between these two figures, but both are presented to the court or commission and that tribunal will decide which figure, taken in connection with the others presented to show present value, will represent most nearly the true and fair present value.

19. General assumptions as to replacement. Replacement cost of a plant cannot be determined without making certain general assumptions which are fundamental to the entire work of an appraisal. It is important that these assumptions should be fully recognized and so defined that all appraisals, by whomsoever made, should follow as far as possible the same methods. In determining the replacement cost of a plant the following assumptions must be made:

1. That it is perfectly possible at the present time to construct a similar new plant in the same position as that occupied by the plant now in existence and under process of valuation.

2. That the new plant can be constructed in some definite period of time.

3. That the fair present costs can be obtained for the land, material and labor used in the plant.

The first of these assumptions involves two questions, one, shall the replacement cost be figured upon new