57. Capitalization of present and anticipated net earnings.— By this method the present value of the physical plant is determined in the manner described above, and the value inherent in the plant as an operating concern is determined by finding what has been called the market value of the property wherein recognition of all of the special conditions surrounding the plant are considered which will tend to affect the value of the property as a producer of income. The exact value to be thus assigned to the property due to its strategic position is arrived at by a more or less arbitrary exercise of judgment after a careful consideration of all favorable and unfavorable conditions affecting the property.1

Such a method is reasonable and fair for a valuation for taxation or sale provided it is possible to arrive at a proper figure which will be just to the community and to the undertaking by a simple exercise of judgment and without a formulated procedure, whereby results can be obtained for all cases with accuracy and without controversy. It does not seem as if it was one that could be of general use owing to the fact that it requires values to be assigned on the basis of the judgment of the appraiser rather than of the court. It is probable that there would be many different values assigned depending upon the personal bias of the appraiser.

This method is introduced simply to show the recognition, which has been held in some of the most important appraisals which have been made in this country, of definite values inherent in property, both present and anticipated. This method tacitly accepts the continuance of the prevailing rates.

58. Value not dependent upon cost alone. The above two methods illustrate the real value, the market value,

1 Valuation of Railways in Washington, Railway Age Gazette, Vol. 48, p. 359.

of a property in active operation. If the undertaking is successfully earning a return, the owners feel that they are entitled to such return and that it is due to natural value inherent in the property which they have created. They incurred the hazard of starting in upon a new enterprise, in many cases in a community or with a utility more or less unknown. The community itself had the right to provide the same utility, but did not dare or care to undertake the risk. obtain money to finance the enterprise. In most cases it was necessary to issue common stock as a bonus, upon which dividends were to be paid when the return became sufficient. They argue that no progress can be made if an ample reward is not afforded to the men who have the means, skill and courage to enter upon such pioneer work and make it successful. To them this value in a "live" plant, either present or prospective, is their reward and should be made a distinct element in the value of their property.

The owners had to borrow or

This line of reasoning has been used in the determination of the value of several water companies in cases of condemnation, and is of great interest as exemplifying the recognition of this inherent value in a successfully operating property.

59. Capitalization of profits. The fact that the undertaking is furnishing the service presupposes that the community preferred to grant the privilege to operate to others rather than itself incur the financial risks involved. At some time prior to the date of the appraisal, the undertaking had raised the money required to build the plant and to operate it, had constructed the plant and taken the risk involved by investing its money in a new enterprise. The money which has thus been tied up in the new utility could have been expected to earn a normal rate of interest if invested in some manner involv

ing less hazard. The undertaking can expect properly and is entitled legally to a profit over and above the normal interest charges on the money which had been expended in the new enterprise.

The question which is involved in any special case, therefore, is what should be the proper ratio of profit to the interest normally required on bonds or loans on the property of enterprises of this character. Probably in most cases, the answer to this question must be given by the court. The appraiser can present figures for interest and profit, determined by the methods described in another chapter. If, for any particular case, it has been found that the interest rate upon the bonds of this undertaking or a similar undertaking is properly 5 per cent and that a return of 7 per cent is justifiable for an enterprise of this character in the locality where it is situated, then the ratio of profit is 40 per cent.

Following out this line of reasoning, it would appear that, in a case where the enterprise itself has provided all of the money required, the value of the property when completed was greater than the actual cost by an amount equivalent to the capitalization of the profits. Thus, for the above case, if the property had cost $100,000.00, its value could be considered to be $140,000.00.

At the time of an appraisal it will not be the original cost which will be taken as the basis of the profit increment, but rather what it would cost at the present time to reproduce the property of the undertaking; in other words, it would be the replacement cost from which no depreciation is deducted, as it is the value of the property new as of the present time.

Thus the replacement cost plus the profit increment may be considered as showing the maximum value that can be given to the property of an undertaking as it fur

nishes a value equal to the cost at the present time of the same plant new and to such value is added an amount which can be considered as the maximum which it is fair and right to award to an undertaking for its skill and enterprise in providing the utility for the community.

As just stated, the figure thus derived is a maximum; it must be reduced by amounts representing the diminution in value of the plant arising from its depreciation and from its inefficiency. This reduced value is presented as a tentative present value of the "live" property of the undertaking.

60. Analytical methods of determining value inherent in a live plant. — In the methods thus far discussed, the value inherent in a live plant has been derived without any attempt being made to assign definite values to the characteristics of the plant which operate to make the operating organization successful and capable of producing an adequate return. The operating organization is there and has been developed, is furnishing service to the public and the live plant is of more value than it would be if it were not furnishing service.

But in many cases appraisers have attempted to analyze the value inherent in the life-giving characteristics of an operating property, and by such dissection to assign definite values not only to the dead plant but to the organism which may be claimed to give it life. Thus the physical plant, called the tangible property, is distinguished from the vitalizing factor, called intangible property, and intangible property, when dissected, is claimed by many to be composed of special life-giving attributes, such as good will, franchise rights and going value.

Good will and franchise values will be considered more in detail later. It is sufficient here to say that the courts have ruled that for a public utility no value can be as

signed to good will, and that except where there is a definite agreement, beyond the right to operate, franchises have no value that can be capitalized except what may have been paid for them or may have been allowed for them by some prior decree of the court.

Going value or value as a going concern has been regarded by many experts simply as what it had cost the undertaking to establish a profitable business or what it would cost to-day to reproduce its present business. It is seen that as a result of this analytical treatment there can be presented a figure representative of the value existing in but one enlivening attribute of a successfully operating property, that of value as a going concern. Two methods have been evolved for finding this value and will be briefly described.

61. Wisconsin method. The method about to be described is called the Wisconsin method for the reason that it is the one which has been used by the Wisconsin Commission in all valuations made by it for all purposes.

In explanation of this method, a portion of one of the decisions of the Wisconsin Commission may be quoted:

"If property is devoted to the public use, and reasonable care has been exercised in all the phases of its management, but the owners have not received a fair return during the earlier years of the operation of the plant in which the property is used for the convenience of the public, the deficit thus incurred must be made up out of later earnings, in so far as this is commercially possible and expedient. In other words, every effort honestly put forth, every dollar properly expended, and every obligation legitimately incurred in the establishment of an efficient public utility business must be taken into consideration in the making of rates for such business. Collectively the elements just referred to may be designated by the term going value, and in this sense there can be no question regarding the propriety and justice of admitting going value as a consideration in the determination of rates. Whether this going value should be made a part of the permanent capitalization of the