Under the same special inquiry 18 at page 112 et seq., in the Louisville & Nashville Case, the master reports the cost of reproducing the railroad and other properties, including equipment used as a common carrier, after making deductions from complainants' estimates of $674,673.92, for the years named, as follows:

The respondents urged before the master all the objections now set up in the exceptions filed to his reports as to these values, and they were noticed seriatim, discussed, and disposed of by the master as shown in his reports. After considering the exceptions, I approve and confirm the findings of the master on the questions of values and cost of reproduction, and overrule the exceptions in that regard of respondents and complainants, and approve and confirm the master's reports thereon.

One of the objections of the respondents is that the estimates were based on the prices of 1907 when they were made, and that they were then unusually high. This is disposed of by the point that present values are required to be taken and used in determining present and prospective rates. Cotting v. Kansas, 183 U. S. 91, 22 Sup. Ct. 30, 46 L. Ed. 92; Wilcox v. Consolidated Gas Co., 212 U. S. 19-52, 29 Sup. Ct. 192, 53 L. Ed. 382, 15 Ann. Cas. 1034; Stanislaus County v. J. C. & I. Co., 192 U. S. 215, 24 Sup. Ct. 241, 48 L. Ed. 406. And by the fact that the proof satisfactorily shows that the reconstruction could not have been effected from 1907 to 1910 at less than the estimates used. Record, S. & N. A. 116, 118, 368, 417, 430, 432, 497, 501; Record, L. & N., 365-367.

It is insisted that in reproduction estimates the enhanced value Correct of property between the time of the original location of a railroad through a wilderness or marsh, it may be, is not to be taken into account 40 or 50 years afterwards, when civilization, perhaps largely the result of the expenditures and operations of the road, has increased original values a hundredfold. Suppose a road is located when original cost is fabulously inflated, and the course of events brings things down to their intrinsic worth, upon whom does the loss fall? It is usually understood that the state does not make up such losses to its citizens. And, vice versa, when minerals are discovered, or oil wells developed on lands, does not

Very good

the owner of the land own its product? And how are tax values estimated? Do the officers take the value when land is first entered and cleared or when it has been improved and become a town site? The law is perfectly settled, with the obvious view of the matter, that increments and losses alike attach to ownership as to duties and rights pertaining to property. Willcox v. Con. Gas Co., 212 U. S. 52, 29 Sup. Ct. 192, 53 L. Ed. 382; Stanislaus v. Irrigation Co., 192 U. S. 215, 24 Sup. Ct. 241, 48 L. Ed. 406; San Diego Land Co. v. National City, 174 U. S. 757, 19 Sup. Ct. 804, 43 L. Ed. 1154. And this just rule has its balances and adjustments making it not oppressive to the public in any case. It is to be noticed, too, that the rates in fact usually diminish with the increase in property values, because the increase of business dominates values and justifies lower rates; but, be that as it may, the rule of giving to the owner the increments of value and subjecting him to the losses in values has the unequivocal sanction of the law.2

2 See Denver v. Denver Un. W. Co. (1918), 256 U. S. 178, 191; Lincoln Gas Co. v. Lincoln (1919), 250 U. S. 256.

In Consolidated Gas Co. v. Newton (1920), 267 Fed. 231, the master reported "that the complainant company has shown itself, clearly and beyond all reasonable doubt, entitled to relief from the statutory limitation on its rates, but that its rate of return should be calculated, not upon the present high reproduction cost of its property, with or without the deduction of observed or actual depreciation, in whatever manner computed, but upon the actual, reasonable investment in the property devoted to the service of the complainant's consumers." (See the report in 258 U. S. 165, 172.) Learned Hand, J., also holding the statutory rates confiscatory, said (pp. 236 to 238): "It must be owned that much of the discussion shows either a timidity or an inability to grasp any principle in dealing with the 'rate base.' With deference, it appears to me to be merely an abandonment of any attempt to deal intelligibly with the question to say that cost of reproduction and the original cost are each elements to be considered. The recurrent appeal to a just rate and a fair value assumes that the effort is to insure such a profit as would induce the venture originally and that the public will keep its faith so impliedly given. That, I think, implies a tacit comparison of the profit possible under the rate with profits available elsewhere; i. e.. under those competitive enterprises which offer an alternative investment. Certain risks in ordinary competitive enterprises can be reasonably anticipated, and business practice includes them in an amortization account. New processes and machines are constantly appearing which make the old obsolete; ordinary wear and tear makes replacements necessary. The return to make these good is commonly carried in a separate account by all prudent business men, and does not come out of the rate. It is true that individual misfortunes cannot be foretold, and these a given company must bear, just as any single competitive venture would have to bear them. Among these, however, is not a general rise in prices, which, affecting all alike, at least after a time, enables each to raise his price, not only because of his costs in labor and in materials, but to obtain a proportionate increase in his profit, based upon the increased value of his plant and machinery. All competing producers who give the same service must keep invested an increased number of dollars in capital to do so. The risk of the depreciated dollar is not one which industry in general will bear; it is, indeed, no risk at all. Moreover, a profit based upon the enhanced value of the capital adds nothing in truth at all to the company's wealth. Though its capital be measured in more dollars, and so, too, its profit, that profit is still paid in the fallen

KNOXVILLE v. 'KNOXVILLE WATER COMPANY.

212 U. S. 1. 1909.1

MR. JUSTICE MOODY delivered the opinion of the court. This is an appeal by the city of Knoxville from a decree of the circuit court of the United States for the eastern district of Tennessee. The appellee is a public service corporation, chartered for,

dollar, and has no greater buying power than it had before. The increased valuation of the capital will for the years of the depreciated dollar leave the company exactly as it was; it will merely prevent its being compelled to share its putative fair profit with its customers, which by hypothesis it should not be asked to do. The company gains nothing; the customers lose nothing. . . . The rule of the present reproduction cost, which is a necessary consequence of the foregoing argument, appears to me to have been either expressly or implicitly recognized in all the cases in which the Supreme Court has passed on these matters. Willcox v. Consolidated Gas Co., 212 U. S. 19, 41, 29 Sup. Ct. 192, 53 L. Ed. 382, 15 Ann. Cas. 1034, 48 L. R. A. (N. S.) 1134, Des Moines Gas Co. v. Des Moines, 238 U. S. 153, 35 Sup. Ct. 811, 59 L. Ed. 1244, Knoxville v. Knoxville W. Co. 212 U. S. 1, 10, 29 Sup. Ct. 148, 53 L. Ed. 371, The Minnesota Rate Cases, 230 U. S. 352, 434, 454, 455, 33 Sup. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18, San Diego etc., Co. v. National City, 174 U. S. 739, 757, 19 Sup. Ct. 804, 43 L. Ed. 1154, San Diego etc., Co. v. Jaspar, 189 U. S. 439, 442, 23 Sup. Ct. 571, 47 L. Ed. 892, Darnell v. Edwards, 244 U. S. 564, 568, 37 Sup. Ct. 701, 61 L. Ed. 1317. It is true that its application has not distinctly arisen since the recent rise in prices, but it is not possible that it should have general application, and yet not cover this, its most glaring illustration." The determination that the legislative rate was confiscatory was affirmed without any discussion of the rate base. Newton v. Consolidated Gas Co. (1922), 258 U. S. 165. See Note, 21 Columbia L. Rev. 166.

"In estimating the cost of reproduction of this equipment, the cost of pumps equivalent to those actually in use was used by the engineers. To replace the existing pumps with others having the same specifications would cost, according to the testimony, $3,500 more than the figure used by the engineers. With a depreciated condition of 50 per cent. the difference in cost new less depreciation would be half of this amount. The point at issue with regard to the estimated cost of reproduction of the pumps is one of the theory upon which the valuation of the physical property is made. With one conception of what is meant by cost of reproduction, the engineer, in arriving at his estimates, would have to determine the cost of reproducing the identical property which he finds in the plant. With a different understanding of the meaning of the term, the engineer might estimate the cost of building an equivalent plant but not necessarily having the same details of construction as the existing plant.

"In the present case, there is nothing to indicate that the original investment in the pumps was unwisely made, nor that a reasonable degree of regard for the ultimate economy of construction_would have required the installation of different pumping equipment. Consequently, it seems only reasonable to accept the actual cost of the pumps or the cost of replacing them by identical units, as evidence bearing upon their value as a part of the plant to be transferred. What it would cost to replace them by equivalent units of equal capacity, but perhaps of a different design, is also of evidential value in fixing the fair value of the plant." In re Janesville Water Co. (Wis. R. R. Comm., 1915), P. U. R. 1915A 178, 188, 189.

1 Arguments of counsel are omitted and only a part of the opinion is reprinted.- ED.

and engaged in, the business of supplying that city and its inhabitants with water for domestic and other uses. The cause in which the decree was rendered is a suit in equity which was brought by the company on December 7, 1901, against the city to restrain the enforcement of a city ordinance fixing in detail the maximum rates to be charged by the company. This ordinance was enacted on March 30, 1901. The bill contained many allegations, which have become immaterial by the decision of this court in Knoxville Water Co. v. Knoxville, 189 U. S. 434, in which the validity of the ordinance was sustained, except so far as it might confiscate the property of the company by fixing rates so low as to have that effect. The latter contention alone was left open to the company, and to it the remainder of the bill is mainly directed. The allegations in that regard are, that the rates fixed by the ordinance were so low that they denied to the company a reasonable return upon the property employed in the business, and thereby took it for public use without compensation, in violation of the Fourteenth Amendment to the Constitution of the United States. After answer by the respondent and replication by the complainant the cause was referred to a special master, whose report was confirmed by the court. The master found and reported that the value of the plant and property employed in the business at the date of the passage of the ordinance was $608,427.95; that the gross income from the company's business was $88,481.39, and that the operating expenses were $34,750.91. The figures of income and expense are those of the fiscal year ending March 31, 1901, and the valuation was made as of that date. The master found and reported that the diminution of income which would have resulted from the enforcement of the ordinance during that fiscal year was $17,623.64, and that the gross income would have been reduced thereby to $70,857.75, leaving a net income of $36,106.84. This net income was less than 6 per cent. on the valuation. In the opinion of the master 8 per cent., which included 2 per cent. to provide for depreciation, was the minimum net return which the company was entitled to earn. The judge of the circuit court, in his opinion confirming the master's report, adopted the master's valuation of the whole plant and property at $608,427.95 (although he held that it ought to be increased by about $3,000), and the master's finding that the gross income was $88,481.39; that the expenses were $34,750.91; that the effect of the reduction made by the ordinance would be to lessen the gross income by $17,623.64, and that, therefore, the net income under the ordinance would be $36,106.84, or about $400 less than 6 per cent. on the valuation. Upon these assumptions of fact as to its effect the judge regarded the ordi

nance as confiscatory and issued a permanent injunction against its enforcement. . . .

The first fact essential to the conclusion of the court below is the valuation of the property devoted to the public uses, upon which the company is entitled to earn a return. That valuation ($608,000) must now be considered. It was made up by adding to the appraisement, in minute detail of all the tangible property, the sum of $10,000 for "organization, promotion, &c.," and $60,000 for " going concern." The latter sum 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 re

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. The value of the tangible property found by the master is, of course, $608,000 lessened by $70,000, the value attributed to the intangible property, making $538,000. This valuation was determined by the master by ascertaining what it would cost, at the date of the ordinance, to reproduce the existing plant as a new plant. The cost of reproduction is one way of ascertaining the present value of a plant like that of a water company, but that test would lead to obviously incorrect results if the cost of reproduction is not diminished by the depreciation which has come from age and use. The company contends that the master, in fixing upon the valuation of the tangible property, did make an allowance for depreciation, but we are unable to agree to this. The master nowhere says that he made allowance for depreciation, and the language of his report is inconsistent with such a reduction. The figures which he adopts are those of a "fair contractor's price." The basis of his calculation was the testimony of an opinion witness called by the company. That witness submitted a table which avowedly showed the cost of reproduction, without allowance for depreciation. The values testified to by him were adopted by the master in the great majority of cases. The witness's valuation of the tangible property was somewhat reduced by the master, but the reductions were not based upon the theory of depreciation, but upon a difference of opinion as to the reproduction cost.

The cost of reproduction is not always a fair measure of the present value of a plant which has been in use for many years. The items composing the plant depreciate in value from year to year in a varying degree. Some pieces of property, like real estate.