price, the money actually invested by the owner, would be the fair value upon which the rates charged the public should be based. The annual reserves would be figured on the cost-new but at the time of renewal would not be sufficient to pay for the new plant. New money would have to be contributed by the stockholders and higher rates would have to be paid by the public for the same service, a condition unfair to the public and to the vendor. On the other hand the buyer, who invests in the enterprise the full cost-new of the property, would pay to the vendor the fair present value of the property and would hold or invest in plant needed by the public an amount of money sufficient to maintain the proper capital assets of the undertaking. The public is thus guaranteed as to the continuation of the enterprise, and the necessary uniformity of rates is maintained. 177. Present value in case of sale. The present value will be clearly the cost-new less the loss which has accrued to the investment in perishable property arising from its years of service. The question that next arises is how shall this loss in value be determined. To take the simplest case first, let it be assumed that reserves for depreciation have been made by the vendor regularly in the past and have been held by him in outside securities upon which interest has been obtained. In other words, none of the depreciation reserves have been invested in plant. Then, clearly, if at the time of the appraisal it can be shown that the amount in the reserves will equal the cost-new at the end of the life of the plant, the plant plus the reserves will equal the costnew and the price to be paid to the vendor is the cost-new of the property. Or, if the vendor retains the securities representing the depreciation reserves, the price to be paid to the vendor is the cost-new less the value of the securities. Thus, in either case, the vendor obtains the cost-new of his property, thereby obtaining the full value of his investment in the public utility. The vendee either obtains the depreciation reserves of the vendor or invests as a new depreciation reserve a like amount, thereby guaranteeing to the public the perpetuation of the service. Thus it is seen that this method is fair to the seller and to the public. It is fair to the public in that the capital assets of the new undertaking remain the same as those of the older, and, consequently, there will be no changes in rates; the rates, moreover, will be based upon the fair present value of the property in use and useful to the public. The justice of this method to the buyer may be questioned by those who cannot divorce from their minds the usual prices and methods of sale of private enterprises. A public service undertaking cannot obtain any advantage from a purchase made at a bargain price. It is entitled to a fair return upon the investment. If the investment is unduly small owing to the small price paid for the property, the new owner can earn a return based upon that investment only. When this property has to be replaced, new capital must be brought in and, consequently, a new basis of rates established. This increase would go on gradually until all of the property originally purchased had been replaced. Such increases in rates are annoying and unfair to the public. The only proper way of looking at a sale of a public utility is to consider that the sale is simply a transfer of the ownership in a continuing enterprise. The new owner takes possession of the entire property of the former owner and recognizes that the property purchased did not belong necessarily entirely to the vendor but to the public possibly as well. It is, therefore, a necessary prerequisite in a case of sale to have a complete examination made of the past operations of the utility in order to ascertain whether depreciation reserves had been invested in plant or whether new money had been introduced by the undertaking into its reserves for the sake possibly of inflating the value of the property. The above illustrates the principle peculiar to a sale of a public utility. In a practical case the appraiser finds plant of a certain cost-new and of a certain age and life. It is for the tribunal, whose duty it is to assign the fair selling price, to take these figures, and, with a knowledge of the past financial history of the undertaking, determine such a figure as will be fair to all three parties concerned. Justice to the public demands that the price for the property shall not produce higher rates to be paid to the vendee than were paid previously to the vendor. Justice to the vendor demands that he should obtain his original investment in the property provided that the value of the investment has been maintained. Justice to the vendee demands that he shall pay no more for the property than will make it possible for him to obtain a fair return upon his investment and be enabled to renew the perishable property when it becomes no longer serviceable. No definite rule can be formulated as to the method of ascertaining this price. It is evident that the rules, which were laid down as possibly useful in figuring fair value for rates, may not be applicable for such cases as are being now considered, as it is unusual for the vendor to turn over, with the remainder of the property, the reserves that have been accumulating during his ownership. If the previous rule, that the straight line method was to be followed when plant alone without reserves was to be appraised, was adopted, then in most practical cases the straight line method only would be used in ascertaining loss of value in cases of sale. As must be apparent from what has been said in the preceding pages, full justice would not be accorded by a strict adherence to such a rule. Full justice to all three parties interested is obtained only by using such method as will determine what portion of the present cost-new is represented by the investment of the vendor and what portion by the investment of funds contributed by the public, as ascertained by a consideration of the financial conditions presented by the special case under investigation. In other words, the fair selling price can be determined only by a well-informed judgment. CHAPTER XIV GENERAL CONSIDERATION RELATIVE TO THE REGULATION OF PUBLIC UTILITY UNDERTAKINGS 178. Conduct of private undertakings. 179. Conduct of public utility undertakings. 180. Dangers involved in regulation of public utility undertakings. 181. Avoidance of dangers of regulation. 182. Obligations of public to public utility undertaking. 183. Obligation of public utility undertaking to the public. 184. Maintenance of the value of the stockholders' investment. 178. Conduct of private undertakings. A private undertaking, usually in competition with others of a similar nature, is privileged to charge such rates for the commodity or service furnished as will be productive of as great a profit as can be obtained and, at the same time, retain the custom and good will of its customers. There is every possible incentive to a private undertaking for the establishment of a good organization, the employment of the most skillful men and for the development of new methods or devices which will tend to reduce the cost of its product and thus enable it to increase its profits by means of improvements not possessed by its competitors. The profits made by such private undertakings can be treated in any manner that seems best to the owners; dividends may be increased or excess profits can be held in the form of a surplus designed to maintain dividends during less successful years. The reserves for depreciation can be made as large or as small as may be deemed desirable. The reserves, that may be set aside, belong |