the arbitrator was Judge Robert W. Tayler of the United States District Court, and in his decision he says:

I allow nothing for going value. Going value raises a question of definition, and it is sufficiently disposed of according to my view by saying that it only has a value as applied to a street railroad enterprise because of the expenses incident to organization, superintendence, administration, legal expenses and interest during construction; it is involved in the general subject of necessary overhead charge and arises only out of and is to be defined and limited entirely by the money necessarily expended to put it into shape where it has value as an operating instrumentality. Beyond that I recognize no value to going value or no such thing as going value to be applied to a street railroad enterprise.

In Consolidated Gas Company vs. City of New York (157 Fed. 849), District Judge Hough disallows good will value, which he treats substantially the same as going concern value. His remarks upon this subject are too long to quote, and it is only necessary to say that when the case came before the United States Supreme Court (Willcox vs. Consolidated Gas Company, 212 U. S. 19), the court said:

We are also of opinion that it is not a case for a valuation of good will.

In the case Knoxville vs. Water Company (212 U. S. 1), the court below had added to the appraisal $60,000 for "going concern," as well as $10,000 for "organization, promotion, etc." On this the court said:

The latter sum [$60,000 for "going concern"] we understand to be an expression of the added value of the plant as a whole over the sum of the values of its component parts which is attached to it because it is in active and successful operation and earning a return. We express no opinion as to the propriety of including these two items in the valuation of the plant for the purpose for which it is valued in this case, but leave that question to be considered when it necessarily arises. We assume without deciding that these items were properly added in this case.

This language can be construed in no way except that the court was of the opinion that going concern value was a subject yet to be passed upon by it as a proper element in a rate case.

In the case Cedar Rapids Gas Light Company vs. Cedar Rapids (144 Iowa 426), involving the valuation of a gas plant for rate purposes, the court said:

Also the sum of $100,000 was included by this witness as enhancement of value by reason of being a "going concern."

It follows this statement with some discussion which is not as logically perfect as might be desired, but does make the statement:

Save as above indicated the element of value designated as "going concern" is but another name. for "good will" which is not to be taken into account in a case like this where the company is granted a monopoly. The witnesses for plaintiff took into account "good will" in giving their opinion of the enhancement in value because of being a going concern, and we have no means of separating these so as to ascertain their estimate of the separate advantage of completion so as to earn a present income.

This case went to the Supreme Court, which affirmed the action of the state court in sustaining the rates in question. The case is reported in 223 U. S. 655, and was decided in March, 1912. At page 669 the court uses the following language:

Then again, although it is argued that the court excluded going value, the court expressly took into account the fact that the plant was in successful operation. What it excluded was the good will or advantage incident to the possession of a monopoly, so far as that might be supposed to give the plantiff the power to charge more than a reasonable price. An adjustment of this sort under a power to regulate rates has to steer between Scylla and Charybdis. On the other side, if the franchise is taken to mean that the most profitable return that could be got, free from competition, is protected by the Fourteenth Amendment, then the power to regulate is null. On the other hand, if the power to regulate withdraws the protection of the Amendment altogether, then the property is naught. This is not a matter of economic theory, but of fair interpretation of a bargain. Neither extreme can have been meant. A midway between them must be hit.

In the Des Moines Gas Case the Special Master in Chancery excluded going value, saying:

In my judgment, after considering the able and thorough arguments of counsel, it is decisive of the question and holds that "going value" should not be considered in determining the basis upon which the complainant is entitled to have its return reckoned, and I feel it is my duty to so state. The physical value as hereinbefore determined is reckoned upon the fact that the plant was in successful operation when the earnings so indicated. otherwise its value would be much less. The "going value" is that enhancement which results from a well-developed and paying business.

In the case Mayhew vs. Kings County Lighting Company, decided by the Public Service Commission of the First District of this State, "going value" was disallowed except so far as it was represented in construction costs, including promotion and organization, contractor's profits, engineering, supervision, etc.

The same Commission, in the case of the Queens Borough Gas and Electric Company, decided in 1911, had under consideration the proper treatment of early losses or the cost of establishing business, and its conclusions are stated in the following language:

But it ordinarily happens during the first few years of operation that the company does not earn a fair return. How, then, are the investors to be made whole?

There are two solutions.

One is to capitalize the losses or deficiencies below a fair return and all the other elements which are said to be included in "going concern". This would be accomplished by using the proceeds from the sale of stocks, bonds or notes to pay expenses for "going concern" and a fair return to investors. To use money from such sources to pay dividends would be absurd, dangerous and unjustifiable. If such a practice were started, where would it end? Probably in bankruptcy and dissolution.

The use of capital moneys to pay current expenses after operation has been begun is open to similar criticism. Who is to determine whether a canvasser, an accountant, an engineer, or a laborer is to be paid out of capital or earnings? All are connected with the operation of the plant, but if the theory is sound that "going concern" expenses are to be charged to capital, the wages or salaries paid to certain employees must be paid out of capital. Who is to decide when this shall be done, or when it shall cease after it has once been started? How may one determine when an employee is contributing to “going concern"? It is easy to fix a date when the construction period ends and operation begins, but how may one know when "going concern" expenses cease? To follow this solution of the problem would open the door wide to overcapitalization, financial manipulation and the misappropriation of funds.

The other solution is to charge all such expenses to operation, to attempt to make no fine-spun distinctions and then to permit the company to charge in later years rates sufficient to offset its deficiencies below a fair return in the first few years. This method involves no questions as to capitalization and can not result in the inflation of securities. Ordinarily, the company which is wisely managed follows this very course and works out an adjustment by itself. Questions arise only when the State, through some agency, is called upon to determine whether the rates are reasonable. Then the rate of return to be allowed upon the investment should be such as to offset losses in early years. This principle is adopted in this case, and no further allowance is made for "going concern" in determining the fair

value of the property. When we come to the discussion of a fair rate of return, the other phases of this principle will be considered.

There are other cases which are irreconcilable with the views herein expressed and with the cases cited. They have been given careful examination. The reasoning where any existed, has been carefully analyzed, with the result that the Commission is convinced that the views herein before expressed are the ones which it should follow in rate cases; and therefore going concern value is disallowed in this case as a separate item of property upon which the company is entitled to receive a return except as it is reimbursed in the general valuation of the plant.

What, if any, allowance should be made in the rate to recoup the company for any supposed lack of profits to which it was fairly entitled or expense incurred in establishing the business should now be considered.

SHOULD AN ALLOWANCE FOR DEFERRED PROFITS OR EXPENDI TURES MADE, BE MADE IN THE RATE?

In considering the question whether an allowance should be made in the rate for deferred profits or actual expenditures made, or both, it may be well to consider, first, an assumption which runs through the evidence of the three witnesses sworn on behalf of the respondent that it is almost, if not quite, a matter of course that these elements necessarily exist in the case of any company. This feeling seems to be entertained by counsel for the respondent in their brief in calling marked attention to the fact that "the City has offered no testimony to controvert our claims in this regard [of going concern value]".

Mr. Jackson defines this element of value as "the value that comes from associating or attaching a plant to its business which vitalizes the plant and gives it an earning capacity". He speaks of it as a value additional to the cost of the plant; and as his evidence is understood, what he has in mind is earning power. He indicates, however, one way of ascertaining such value to be the making of calculations or estimates of the cost which a duplicated plant, which he

calls a phantom plant, that is ultimately expected to cover the same territory, for the purpose of ascertaining the cost, would be required for getting the income, the business associated with this phantom plant.

The witness Almert seems to put the value upon the basis of expense sustained in attaching the business, for which the company should be reimbursed, and he says: "I have made an allowance for advertising and soliciting of three-quarters of a cent per watt of the load connected, which in this case amounts to $300,000." He says this is a part of the going value, but not the whole of it.

The witness Metcalf defines going value as the value of the creating or existing income of the plant. He says: "The two methods which have been used might be termed in general way the cost of developing business; and the second, the going value, determined by the method of reproduction.” Further, he says: "Whereas the other method involved the determination of the cost of reproducing the income as of to-day, the idea being to reproduce as of to-day the income in a similar manner to that which you reproduce the cost of the physical plant as of to-day."

While the matter is not entirely clear, it would seem that all of the witnesses have in mind either a method of estimating the actual cost of developing the business or the assumed cost of developing an equal business with a phantom plant. They have different theories or methods for arriving at their results. It is well to compare these theories with the actua! experience of the respondent.

The following table discloses the experience of the respondent for the last six years of its existence, in these respects: