valuation. It is thus seen that there are two different fair present values for the same property, one value to be determined and used by the State in the regulation of rates and another to be determined and used by the Courts when a question arises as to whether an imposed rate is equivalent to a confiscation of the property of the undertaking. 148. Fair present value. Valuation for state regulation. Strictly speaking, the state legislature, a public utility commission or even the undertaking itself should consider the fair present value, upon which the schedule of rates is to be made so as to yield a fair return, as the money which has been expended in good faith and with reasonable judgment in the construction of the property in use and serviceable for the public at the time of the investigation provided that value has been maintained by proper reserves for renewals. The plant may have cost the undertaking more at the time of construction than it would cost to build the plant anew at the present time; nevertheless, the rates should be based, theoretically at least, upon the money legitimately expended upon the property now in existence. Likewise the present value of the property may have been greatly enhanced by the increased cost of labor and material or of real estate. Such changed conditions can have no effect. It is the money which has been expended for the property in use and useful, and its value maintained by proper reserves, that must be the basis upon which the schedule of rates should be based by the rate regulating authorities. 149. Fair present value. Valuation for court investigation. On the other hand, when a question comes before the court as to whether a rate or schedule of rates, imposed upon the undertaking by the state rate regulating authority, is confiscatory or not, the question before the court is, what is the fair present value of the property? Not what money was expended by the undertaking for its property, but rather what that property then in use and useful is actually worth at the present time. If the plant had cost more than it would cost to-day, it makes no difference. It is its present value that must be considered. In a decision, Judge Walter H. Sanborn, United States Circuit Court, St. Paul, Minn., April 8, 1911, said: "The just compensation secured by the 14th amendment entitles the defendant railroad companies to a fair return upon the reasonable value of their property in Minnesota devoted to the public use of transportation. Such a return is just to the public as well as to the carriers." "Under the evidence in these cases the cost of reproduction new of the Minnesota properties of the defendant companies devoted to the public use of transportation is more persuasive evidence of their values than the market value of their stocks and bonds, or the original cost of their acquisition and construction." 1 If the property has depreciated in value due to time of service, such depreciation must be subtracted from the replacement cost. If the schedule of rates yields a return to the undertaking upon such a fair present value so low as to be confiscatory, then the court will find the imposed rate illegal. On the other hand, if the court finds the present value so small that the imposed rate will yield a return much greater than the usual return obtained upon similar property, the case will be dismissed, as the question before the court is not one of rate making but as to whether the Constitution of the United States had been violated by the imposition of rates which deprive the undertaking of its property. 150. Cost-new of property. State investigation of rates. From what was said above it is apparent that 1 Shepard v. Northern Pacific Railway Co., 184 Fed. 765. the main difference between the fair value of property to be determined in a rate investigation by state authorities and that to be ascertained by a court will be found in the cost-new of the property. The effect of the loss in value due to age will be considered in a later section. Fundamentally, the cost-new to be determined in the case of an investigation by the state must be "the capital invested in good faith and with reasonable judgment" by the undertaking, found represented at the time of the valuation in plant in use and useful to the public plus working capital and what are frequently termed the intangible assets, i.e., value inherent in the plant as a part of a well established business. Considering for the moment only that portion of the property represented by plant, the cost-new will be, as nearly as can be determined, the original cost of that plant now found in use and useful. 151. Increased value of real estate. If the principle above outlined is correct, then the increased value of the real estate owned by the undertaking, the unearned increment which in most cases is found to exist in this country, cannot properly be included as a portion of the original cost. The truth of this assertion will be questioned and various arguments will be raised to show that the unearned increment must be included in any fair value whether ascertained by court or commission in a rate case. Many court decisions may be cited to substantiate the claim that such increase in value is a definite asset of a public utility upon which it is entitled to a fair return. Two cases only need be cited bearing upon this question. "And we concur with the court below in holding that the value of the property is to be determined as of the time when the inquiry is made regarding the rates. If the property, which legally enters into the consideration of the question of rates, has increased in value since it was acquired, the com pany is entitled to the benefit of such increase. This is, at any rate, the general rule. We do not say there may not possibly be an exception to it, where the property may have increased so enormously in value as to render a rate permitting a reasonable return upon such increased value unjust to the public. How such facts should be treated is not a question now before us, as this case does not present it. We refer to the matter only for the purpose of stating that the decision herein does not prevent an inquiry into the question when, if ever, it should be necessarily presented." 1 Another ruling on this point is, "On the other hand, however, when property is valued for the purpose last stated" (legislative control), "it is clear that the owner thereof is entitled to the benefit of any appreciation in value above the original cost and the cost of improvements, which is due to what may be termed natural causes. If improvements made in the vicinity of the property, the growth of the city or town where it is located, the building of railroads, the development of the surrounding country, and other like causes, give property an increased value, the owner cannot be deprived of such increase by legislative action which prevents him from realizing an income commensurate with the enhanced value of his property." "2 Another argument in favor of the inclusion of the unearned increment in the value of land has been that taxes are paid by the undertaking on this enhanced value, and that, having to incur this increased expense, the undertaking should be entitled to a higher basic value for its property. Or again, it has been claimed that the undertaking should be entitled to some offset, in the way of appreciation in the value of its property, to compensate the losses which may have been incurred in the early days of its operation possibly with an art but little known. The answers to the last two contentions are simple. Taxes are a portion of the operating expenses of the com 1 Willcox v. Consolidated Gas Company, 212 U. S. 52 (1909). pany and, as such, are paid by the users of the utility through the rates. This being the case, the imposition of taxes, based upon a higher valuation of land, imposes no burden upon the undertaking, provided such taxes are considered properly by the rate regulating authorities when ascertaining the current expenses of the enterprise. In answer to the last claim, it may be said that early losses should have been cared for through depreciation reserves or, if the earnings had been insufficient to make such reserves possible, the early losses should have been included in the figure representing the value inherent in the plant. The answer to the first contention is more difficult. A strict adherence to the theory, which has been set forth above, demands that the unearned increment should not be included as a portion of the fair present value upon which rates can be based by state authorities. It is, moreover, a legal question as to how far the cases above cited are intended to control the state regulating authorities and whether these and similar decisions have not been made rather from the point of view of a court passing upon a question of whether statutory rates were confiscatory or not. It is best to assume that the theory is correct only so far as justice is afforded by a strict adherence to it. The fair present value can be determined only by "well informed judgment," and the theory above presented is simply a guide as to the direction which a decision should take provided it would result in a figure equitable to the undertaking and to the public. It would seem as if the Massachusetts Gas and Electric Light Commission had followed the theory that the unearned increment in land values should not be included in cases of rate regulation as a portion of the true present value of public utilities coming within its control. |