proper to assume that the figures, obtained from experts to show the market value of the naked land at the present time, show the entire present value of the land. Nor would it be proper to add to such value what had been paid originally for the buildings found upon the land and for removing the buildings. The entire character of the buildings in that locality may have changed between the time of the original purchase and the time of the appraisal. The replacement cost being what it would cost at the present time to build a similar plant must be based, in this instance, upon what it would cost for the land encumbered by such a building as would in all probability have been found upon the land at the present time, if it had not been utilized by the undertaking. The determination of such a figure is not a difficult matter in most cases. It must not be based necessarily upon what it would cost to purchase and remove the existing structure nor must it be based upon the cost of such a structure as would be likely to be built upon land similarly situated at the present time. The best method to pursue is to determine the mean cost of buildings in that locality, that is to say, within the same or adjacent blocks, and use this mean figure, plus the probable cost of their removal, as the sum which must be added to the cost of the land as previously determined, in order to show what it would cost at the present time to acquire the land needed for a utility of the character of that under appraisal, i.e., the replacement cost of the land.

It should be noted that the above method cannot be rigidly followed in all valuations, but must be modified to meet the special conditions presented by each special case. The method above outlined could be followed safely in the case of most telephone buildings, as the economies produced in the operation of a large telephone system demand that the central office building shall be

situated at a point as nearly at the centre of distribution of its system of wires as possible. Moreover, the saving to the telephone company would be, in most cases, of such an order as would exceed the assumed cost of buildings which might have been found upon that site, or at least be commensurate with such cost. Conditions will be found, however, in the valuation of public utilities wherein a rigid adherence to such a method would lead to absurdities. Thus, a gas plant may still exist upon a site which has become surrounded with buildings of the highest grade. Every condition of the business may indicate that it would have been wiser to have utilized land situated elsewhere. The value of the naked land will be its fair market value, but it would be manifestly absurd to contend that such a value should be increased still further by the cost of assumed high grade buildings which might be found upon the land, and would have to be destroyed to make way for the gas plant.

Probably the best possible illustration of such an extreme case is found in a recent case before a Public Service Commission. The Metropolitan Company (a street railway company) owned a whole block upon which it had built a one-story car barn employed in large part for the storage of cars not in use. This property was surrounded by land which had been greatly improved by the erection of large and valuable buildings. The Company, following the principles of valuation above enunciated, claimed that the value of the naked land should be enhanced by the value of such higher grade buildings as would probably have been found upon the land if the same property, as now existed, had to be replaced to-day. In answer to this claim, the Commission said, "If this theory be sound, then when the block comes to be entirely surrounded with buildings of fifteen or twenty stories (that is the tendency in that district), the capitalizable

value of that land will be not only the fair market value of the land itself, but that value plus the cost of these ten, fifteen or twenty story buildings, upon the assumption that 'such buildings would be cleared off.' . . The Commission does not accept any such theory as proper or as affording the basis for determining the reasonable value of the land, and no precedents or court decisions have been cited to support it. . . . Even from the standpoint of a new company which would undertake to reproduce a system like the Metropolitan, it is inconceivable that a thrifty company would recommend the purchase of a whole block and the removal of fine, expensive buildings in order that it may be used in large part to store cars not in use.'

It may be contended that, as the prices of land have increased in most places in the United States very greatly, the cost of land as determined by the method described above will not bear any relation to its original cost, particularly if the cost of the naked land is enhanced by the cost of buildings, possibly of a high grade of construction, which may be characteristic of the development of real estate in that locality.

This argument was presented in the report of the Railroad Commission of Minnesota, wherein it was said:

"Another important work in connection with valuing the properties, to be undertaken by the Commission, is to establish the original cost of the lands to the railway companies. It must be apparent to all that if the constantly increasing value of railroad properties is to be taken as the basis for computing proper returns, without regard to the original cost of the same, it is only a matter of time when transportation companies will, by absorption, own a disproportionate share of the wealth of the country."2

1 In re Metropolitan St. Ry. Co., N. Y. P. S. C. Rpts., 1st Dist., Vol. III, p. 139. (1912).

2 Report Railroad Commission of Minnesota, 1908. Supplement, p. v.

It is true that there may be a great enhancement in value in some cases but, because this higher value is made a part of the replacement cost, it does not mean that this is the figure which is to be used ultimately as the true present value of the plant. The court will be furnished with the original cost and the undertaking is entitled to the normal increment which has arisen from the increasing values such as have just been discussed "within reason." The replacement cost must represent what it would actually cost the undertaking or the public to-day to acquire this same land, if it had to do so at the present time, and this replacement cost is the figure to be presented to the court for what, in the opinion of the court, it may be worth as evidence toward the final true present value.

52. Cost of buildings. The value of buildings should be determined by experts familiar with costs of constructing similar buildings in that locality and should be determined by an inspection and detailed inventory and appraisal of all the material and labor which would be required to construct a new building identical with that in existence.

CHAPTER IV

VALUE AS GOING CONCERN

53. Value inherent in an operating plant.

54. Value of plant in use dependent upon purpose of appraisal. 55. Fundamental conception of value inherent in “live plant.” 56. Capitalization of present net earnings.

57. Capitalization of present and anticipated net earnings.

58. Value not dependent upon cost alone.

59. Capitalization of profits.

60. Analytical methods of determining value inherent in a live plant. 61. Wisconsin method.

62. Reproduction of net earnings method.

63. Doubt as to inclusion of going value in rate cases.

64. General consideration of value inherent in a live plant.

65. Practical usefulness of methods of determining value in live plant.

53. Value inherent in an operating plant. The replacement cost, as derived by the methods which have just been described, shows simply the cost of the physical plant new as of the present time, that is to say, the present cost of reproducing the "bare bones" of the plant. That the value of the property of an undertaking is greater than this has become generally recognized, as was shown by the decision of Judge Lurton already quoted. There have been many decisions of the same tenor, a few of the more important of which will be quoted: Mr. Justice Brewer said:

"The original cost of the construction cannot control, for 'original cost' and 'present value' are not equivalent terms. Nor would the mere cost of reproducing the waterworks plant be a fair test, because that does not take into account the value which flows from the established connections between the pipes and the buildings of the city. It is obvious that the mere cost of purchasing the land, constructing the buildings, putting in the machinery, and laying the pipes in the streets in other