tion of the replacing or comparative plant can be put into service until the entire plant has been completed, that is to say, until the end of the construction period. It is not the way the original plant was constructed nor would any new undertaking contemplate such a plan. On the contrary, every effort would be made by the management to get such portions, as could be completed, into service at as early a date as possible. The result of this is that, for portions of the plant, the period of construction is less than the period of construction of the plant as a whole. The time of construction is one of the most important assumptions which must be made in a determination of replacement costs. It enters as an important consideration in a decision of the unit costs, interest during construction and other factors entering as a portion of the work of valuation.

23. Unit costs. — In forming a decision on this question, the real object of the investigation must be kept constantly in mind: it is to determine, with the least possibility of controversy, what it would cost at the present time to construct a plant substantially identical with that in existence and similarly placed. It is easily conceivable that a large plant could not be constructed in a relatively short period of time without producing an abnormal increase in cost due to the unusual demand for labor and material. It is clear that any such abnormal enhancement in cost would be contrary to the purpose of the investigation. It seems clear, therefore, that quotations as of a special day for all of the units of a plant would not be a satisfactory method of obtaining the costs to be used in a valuation. On this question the Wisconsin Commission has ruled:

"Average or normal costs, however, are not always easily determined, and this for the reason that the prices of the various elements that enter into this cost vary very greatly from

time to time. Plants built when the prices of material, labor and other elements are high will cost much more than if constructed when these prices are lower. In the case of the original cost of construction of plants which have been extended from year to year, such fluctuations in prices are apt to be of less importance because the additional cost of extensions made. when prices were high are likely to be offset by lower costs for extensions made when prices were lower. In the case of the cost of reconstruction the effect is apt to be greater. If this cost is figured on the prices which prevailed at the time of the appraisal, it may differ greatly from the cost that would have been obtained from the prices that prevailed either a short time previously or a few months later, as well as from the cost that would have been obtained from average prices. Owing to these variations cost-values based on prices as of the date of appraisal would not seem to be equitable for either rate-making or condemnation purposes. In order to be fair for the former purpose it is more than likely that the rates would have to be changed with every change in prices and consequently in the cost, and such changes would not only be impracticable but contrary to public policy, which ordinarily requires the greatest possible stability in the rates. In the latter case they might result in either abnormal losses or abnormal gains to those from whom the property was taken. While there may be something to be said in favor of using the prices which prevail at the date of the appraisal in computing costs, it appears that when taken as a whole present prices for these purposes are much less satisfactory and equitable than average or normal prices. What is thus true for the cost of the physical plant, may also, to some extent, be true of the cost of building up its business." 1

The most definite ruling on this subject is probably that of the Maine Courts relative to the valuation of water companies. This ruling is that present costs shall be based on "prices prevailing at a time in advance of or prior to the date of taking, corresponding to the probable period of construction."

1 Wis. R. R. Com. Rpts., Vol. 3, p. 624. See Cedar Rapids Gas Light Co. v. City of Cedar Rapids, 120 N. W. 966 (1909).

This ruling defines a method which is logical, reasonable and fair. It would seem, therefore, that, for an appraisal made at or prior to the date of taking, the mean costs of labor and material entering into the plant during a period in the past equal to the construction period, as above defined, should be used as the fair present cost.

As a matter of interest, the methods of determining fair present costs which have been used in some of the largest appraisals made in this country are given below:

In appraisals of railway property made for the State of Michigan, "the basis of unit prices varied somewhat according to circumstances. The underlying principle appears to have been to use the average prices for a term of years for such commodities and items of property as had been and would probably continue to be subject to large fluctuations in market prices; as, for example, the price of copper wire, which was taken as an average of the market quotations for the preceding seven years, and the price of the steel rails, which was taken as an average of the prices for the preceding ten years. . . Other items of property, not subject to extreme fluctuations within brief periods of time, current prices were adopted." 1

The Wisconsin Commission has adopted "a five-year average basis for unit prices as far as consistent with circumstances.'

" 1

The Texas Railroad Commission in a valuation made by them in 1903 of the property of the railroads within that. State used costs based on current market prices.

A valuation of the railroad property in the State of Washington made use of unit costs based upon prevailing prices of material.

24. Mean unit costs developed from curves showing trend of market prices. In order to obtain an accurate estimate of replacement cost, there is need of figures showing normal prices of material and labor at the present time or during a time in the past equal to the period of construction. There can be no doubt that quotations

1 Wis. R. R. Com. Rpts., Vol. 5, p. 231 (1910).

as of one day for all of the material required for the replacement of the plant of a large utility would be unfair and would give no indication whatever of the normal prices which are required in estimating the replacement cost. On the other hand, even the prices, which have prevailed in the past during a period equal to the period of construction, may have been so influenced by market conditions as not to afford a perfectly fair mean cost for use in a valuation. This condition is very conspicuously presented in the case of copper. The market fluctuations of copper have been such that wide variations in the unit costs for that material would be found depending upon the date and length of the period of construction.

To eliminate as far as possible such market fluctuations and obtain the normal prices as of the present time, the prices which have prevailed in the past for material subject to wide market fluctuations have been plotted. By drawing a line between the high and low prices such as will represent a fair mean price, it is possible to determine a figure freed from market irregularities. This method has been employed by the Wisconsin Commission in several recent cases1 as a means of checking the accuracy of figures obtained by the use of the mean prices during a period of construction, usually assumed by that Commission as five years. It is a method which should be used as a check, at least, for all material subject to wide variations due to market conditions.

25. Use of weighted mean prices during period of construction. In one or more important valuations, claims have been made for costs of material based on the weighted mean costs of material purchased by the undertaking in the past during a period equal to the assumed period of construction. It was claimed that higher

1 Wis. R. R. Com. Vol. 7, p. 84 (1911). Cast iron water pipe. See also Floy, Valuation of Public Utilities, p. 65.

prices for material and labor are found usually at times of greatest industrial activity and, as a consequence, the money expended by the undertaking could not be measured by the mean of the prices alone. These prices should be weighted, it was claimed, by the amounts of material actually paid for and used in the property under valuation.

It must be apparent that such a contention is in direct contradiction to the principles underlying replacement costs which have been enunciated in the preceding sections of this chapter. It may have cost the undertaking more than would be shown by the replacement cost based on mean figures, but the cost to the undertaking is indicated by the figure representing original cost. If large portions of the plant had been constructed when prices were abnormally high, the tribunal weighing the figures showing original and replacement costs may give such weight as it deems proper to that fact as revealed by the original cost figure. But the replacement cost must be evolved from prices based on mean normal costs, as of the present time, without reference in any way to what may have been done by the undertaking in the past.

Moreover, if such a contention were accepted, it would be recognizing a figure based upon prices paid for only a portion of the plant, that portion built within the period of construction. In many cases this would represent only a fraction of the entire plant.

26. Piecemeal v. wholesale construction. In almost every appraisal the question arises as to whether the costs, principally of labor and transportation of men and material, should be based upon what it would cost to replace the plant in a wholesale manner or whether the plant should be considered as being rebuilt portions at a time, substantially in the same manner as the original plant was built. This difference can be made clear by a consideration of one or two practical cases.