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included in the fair value upon which rates should be based may depend somewhat upon the conditions affecting special cases but, speaking generally, it would seem as if the tendency of courts and commissions was to eliminate them from the fair value, and rule that all legitimate expenses of this character should be amortized. This does not mean that the cost of getting money is not a legitimate portion of the cost of the property, but that it is wiser to allow a rate of return higher than would otherwise have been assigned, and to require that a portion of such return be turned into a fund to amortize such losses. Thus the expenses of this character are made a charge against revenue rather than a portion of the fair present value of the property.1

This treatment as far as the undertaking and the public are concerned is fair and just. It makes no difference to either whether a higher rate on a lower capitalization or a lower rate on a higher capitalization is allowed. This treatment avoids the more or less theoretical controversy as to whether the cost of raising money is a portion of the cost of construction and, in consequence, increases the value of the property in use and useful to the public. That money, in such quantities as are required for most public utilities, cannot be obtained without some expense, in many cases, must be admitted and, if the cost of such money is reasonable, clearly it is only just to the undertaking that it should recover the legitimate expenses to which it has been put in providing the public with a needed service. But that the cost of obtaining money with which to construct a property increases the value of that property appears to be considered by most rate making bodies in this country as questionable.

Thus, "If rate-making is to be based upon actual cost, it would seem that such cost must be measured by the money necessa1 See N. Y. P. S. C., 1st Dist., Case No. 1305 (Dec. 10, 1912).

rily expended in producing the construction without regard to whether those undertaking the enterprise have the same or must borrow for the purpose a matter in which the public has no concern. If allowed interest during construction on the money invested, more should not be asked; otherwise, the rate would be directly affected by the good credit or otherwise of those undertaking the work." 1

On the other hand, in the decision in the case of sale of National Telephone Company to the Postmaster General of England, Mr. Justice Lawrence said:

"Whoever raises the money necessary to pay for the materials, labour, &c., &c., is put to the expense of raising that money. Every necessary cost must appear in value, otherwise no sane person would ever knowingly construct; for, if it does not appear in value, it must result in loss, and to say it should be relegated to loss is to deny the principle upon which we are agreed, that value should be ascertained by finding what it would cost to construct the plant. Unless, then, it can be affirmed that money, unlike other commodities, can be procured without expense, it is clear that this item must be included at its proper amount. In other words, we must either refuse to follow the formula approved by the House of Lords and agreed to by the parties, or find, as a fact, that money can be procured for nothing." 2

In a dissenting opinion in the same case, Sir James Woodhouse said:

"The cost, therefore, of the thing constructed must, by the hypothesis, differ according to whether a man has to pay for raising the money, or is in a position to find it without incurring that expense. I fail utterly to see how this can be right, when we bear in mind that cost is only material as a step to ascertain the value of what is constructed. It is, in fact, making the

1 Report Special Master in Chancery, Sept. 21, 1910, Shepard v. No. Pacific R. R., 184 Fed. 764 (1911).

2 Decision Mr. Justice Lawrence, The Nat. Tel. Co., Ltd. v. H. M. Postmaster General (1913).

value of the thing constructed vary with and be dependent on the financial ability or credit of the constructor." 1

It would seem that, even in a case of sale, the exclusion of the cost of raising capital from the fair value was wise and just provided the rate regulating authorities recognized that rates should be maintained sufficiently high to amortize such cost within a resonable time.2

160. Tendency of later decisions to establish a fair cost-new. In what has been said above an attempt has been made to state somewhat absolutely the fundamental principles which underlie valuations and to show what values may be expected if these fundamental principles of valuation are rigidly carried out. In early cases bearing upon rates, the courts unquestionably adhered to the doctrine that the province of the court was simply to determine whether statutory rates were confiscatory or not. In later years state commissions have been formed, composed of men capable of careful analysis of all factors affecting value. These commissions, in most cases, have determined value not along the lines of a rigid or arbitrary theory, such as has been outlined above, but "with the well informed judgment" with which the courts have said the determination of present value should be made.

The result has been that the figures derived by commissions have not been strictly original cost but figures which under all of the special conditions of each particular case seemed to them to be fair. They have taken the several sets of figures which have been described in the preceding pages and determined what in their judgment might be considered a figure which would be fair to the undertaking

1 Dissenting opinion Sir James Woodhouse, The Nat. Tel. Co., Ltd. v. H. M. Postmaster General (1913).

2 For possible exceptions to this doctrine see reports Wisconsin Commission.

and to the public. Some commissions have gone still further than this and have used cost of reproduction-new rather than original cost as the basis. Thus in a recent decision a commission said,

"We do not think that the original cost of construction, whatever that may have been, . . . is a proper standard to determine the value of the plant and equipment for which the company is entitled to receive a fair income, but that the cost of reproduction at the present time in this particular case is a more accurate standard." 1

Likewise the tendency of the courts has been to depart from the strict question as to what the value of the property was and what rate would be confiscatory but, recognizing the work of the commissions, to review their decisions as to a figure fair to both parties affected.

Courts have given of late decisions defining fair rates of return. If this practice is to be continued, clearly the basis of fair value will be changed and courts and commissions will adopt a basis of fair value in many cases probably somewhere between the original cost and cost-new as of the present time.

Thus in course of time conventions or rules may grow up as to what may or may not be included in the fair present value. Thus the cost of repaving seems to be almost universally excluded. The present value of land rather than original cost seems to be recognized in cases where the unearned increment is not so large as to affect rates unduly.

161. Depreciation. The courts have held that "what the company is entitled to demand in order that it may have just compensation is a fair return upon the reasonable value of the property at the time it is being used by the public."

1 Conn. Pub. Utilities Com., Pet. H. O. Bowers et al., March 7, 1912.

The investment in a portion or the whole of the physical property of the undertaking will have depreciated in value due to its years of service and consequently, at the time of the appraisal, have a value less than the fair value-new whatever that figure may have been found to be. The depreciation which the plant has suffered must be presented in such form that the court, having determined the reasonable value of the plant new, can find the reasonable value of the property as it exists at the time of the appraisal.

162. Method of figuring depreciation in cases involving rates. — In the last chapter, two methods of figuring the loss in the value of a property were described. One, the so-called straight line method, was held to be applicable to such cases as plant alone formed the property of the undertaking, and the second, the sinking fund method, when the property consisted both of plant and of reserves invested in outside securities.

As stated in the last section, the undertaking is entitled to a fair return upon the reasonable value of the property at the time it is being used by the public. It is necessary now to see whether these two methods of determining loss of value will operate equitably in all cases.

As was demonstrated in section 137, if there is plant alone as representative of the property of the undertaking, the straight line method when age and life have been determined with accuracy will show the absolute loss in value and, consequently, this loss in value gives the true depreciation of the property.

If the property of the undertaking consists of plant and reserves, the sinking fund method will likewise show the loss in value if properly applied. But the equity of this method has been the subject of much doubt. It has been argued that, if the straight line method is proper for use when applied to property consisting of plant alone, it

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