cern. In such a case the present value will be something more than the original cost or the replacement cost plus other proper intangible assets and must be found by a study somewhat similar to that of the artificial determination of going value as a part of the cost of developing the business.

167. Working capital. - Nothing has been said up to the present time relative to working capital, which is naturally an asset of any large undertaking and is essential to the successful and economical operation of its business. This item has been omitted for the reason that it does not enter naturally as a portion of the appraisal but is a sum which must be obtained directly from the books of the undertaking.

The items to be included in working capital are supplies of all kinds, cash for current use in sufficient amounts to insure economical and safe operation of the plant, and the balance between bills and accounts receivable and accounts payable.

"Plants which are running, or in actual operation, must have working capital as well as fixed capital. In this case the latter, or the fixed capital, is largely represented by the cost of reproducing the plants, while the working capital is, in part, represented by the figures given in that table for 'stores and supplies.' The stores and supplies there given, however, do not represent all the working capital the plants require. Plants of this kind, the same as practically all other business enterprises, must have on hand a reasonable cash balance and other current resources in order to operate economically and effectively. That this is the case, is almost self-evident. Just what sum represents a fair amount for working capital, is nearly always a matter of judgment, and to this there is no exception in this case." 1

The proper amount to be allowed for working capital must be decided for each particular case as it arises, by 1 Wis. R. R. Com. Rpts., Vol. 5, p. 316.

a consideration of the character and extent of the operations of the undertaking, the working capital ordinarily carried by it in the past, and the amounts usually carried by similar undertakings of the same size and activity.

Probably the best citation of a court ruling on this item will be a portion of the opinion of the Court in the case of the Consolidated Gas Company v. City of New York.

"The amount of cash necessary for the safe and convenient transaction of a business, having regard to the owner's ordinary outstandings both payable and receivable, the ordinary condition of his stock, or supplies in hand, the natural risk of his business, and the condition of his credit; and unless these matters, and perhaps others, be looked into, no comparison can be drawn between one business and another, or even between those of the same general nature.” 1

one a

168. Fair return. There may be two figures which may be assigned as the return which a public utility can earn upon the fair present value of its property, rate assigned by the state authorities as a fair return, when the hazards and risks incurred by the undertaking are considered, as well as the rate of return to similar enterprises in the same or similar localities; the other, a rate assigned by the court as productive of such a return as would not be considered confiscatory of the property.

Authority for fair rate of return allowed by the state can be summed up best by the following decisions.

"It therefore does not seem that rates producing no more than a reasonable return on their fair value could be unjust to any one. In fixing the measure of return upon property devoted to public use regard should be had to the character of the business, the locality and the risk; whether the return will be uniform and secure; whether the patronage is steady or

1 Consolidated Gas Co. v. City of N. Y., 157 Fed. 859 (1907).

fluctuating and quickly responsive to financial and commercial changes; interest rates legal and contractual and the rates customarily sought and required in like investments in the locality; if a railroad, the character of the traffic, whether largely of a kind dependent upon uncertain conditions, or so diversified that causes affecting part will not greatly affect the whole. The return should be a fair, just, and reasonable one, and not so meager as to repel investment in the property or to embarrass the owner in operating it.” 1

"There is no particular rate of compensation which must in all cases and in all parts of the country be regarded as sufficient for capital invested in business enterprises. Such compensation must depend greatly upon circumstances and locality; among other things, the amount of risk in the business is a most important factor, as well as the locality where the business is conducted and the rate expected and usually realized there upon investments of a somewhat similar nature with regard to the risk attending them. There may be other matters which in some cases might also be properly taken into account in determining the rate which an investor might properly expect or hope to receive and which he would be entitled to without legislative interference. The less risk, the less right to any unusual returns upon the investments." 2

A court, when a question arises as to a fair rate of return, may not "undertake to guarantee the company any fixed or certain return upon its investment" or even say what a fair return might be, but may rather say whether a certain rate is so low as to be deemed by it confiscatory of the property of the company. There seems to be no doubt that, if the principle above outlined is followed, the court might rule that the undertaking has a right to a gross revenue such that it can pay all legitimate operating expenses, pay interest on all valid fixed charges, so far as bonds or securities represent an expenditure actually made in good faith, and, if the return upon the stock is equal to that which is obtained from a govern

1 Missouri, Kansas & Texas Ry. Co. v. Love, 177 Fed. 502 (1910). 2 Willcox v. Consolidated Gas Co., 212 U. S. 48 (1909).

ment bond, for instance, the rates producing such gross revenue could not be considered confiscatory.

That such an extremely low rate should not be considered confiscatory would seem to impose an unfair burden upon the public utility, in view of the special hazards incurred by such enterprises. But on the other hand it must be recognized that such a low rate of return may be figured upon a cost-new in which there has arisen possibly an extremely large unearned increment.

Attention should be called to the fact, however, that as with fair value, though possibly to a lesser degree, the courts have receded in many later decisions from the theoretical requirements above outlined and have either confirmed the fair returns assigned by state authorities or have decided what a fair return should be under the conditions peculiar to each particular case.

169. Fair rate based upon stock only or upon stock and bonds. An undertaking is entitled to a fair return upon the value of the property in use and useful to the public. A fair return has been ruled to be in many cases a percentage varying between 5 and 8 per cent. The question then arises as to whether this fair rate of return shall apply to the entire value of the property or only to the stockholders' investment. In most cases the property has been created by money received from the sale of bonds as well as from money paid in by stockholders. If equal amounts were received from these two sources and the bonds bore interest at a rate lower than the rate ruled by the rate making authorities as fair, then the stockholders would receive a return greater than the fair rate for the property as a whole.

Thus, as an example, a question may arise as to what percentage return can be paid by an undertaking to its stockholders, where the rate regulating authorities have decided that the fair present value of its property is

$1,000,000 and that the fair rate of return is 8 per cent. The undertaking has paid for its property by the issue of four per cent bonds to the value of $500,000 and by the sale of stock of a value of $500,000. The undertaking cannot say that it is entitled to earn $80,000 a year, so that, after paying the interest on the bonds amounting to $20,000, the remaining $60,000 can be paid as a twelve per cent dividend to the stockholders. The fair return, in this example 8 per cent, is to be figured upon the amount actually invested by the stockholders in the enterprise.