The rule by which the utilities are seeking to measure the return is, in essence, reproduction cost of the utility or prudent investment, whichever is the higher. This is indicated by the instructions contained in the Special Report on Valuation of Public Utilities, made to the American Society of Civil Engineers, October 28, 1916, Proceedings, Vol. 42: "So long as the company owner keeps a sum equivalent to the total investment at work for the public, either as property serving the public, or funds held in reserve for such property, no policy should be followed in estimating depreciation that will reduce the property to a value less than the investment, . . .” (p. 1726). "Estimates of the cost of reproduction should be based on the assumption that the identical property is to be reproduced, rather than a substitute property" (p. 1719), - "although such a substitute property, much less costly than the existing plant, might furnish equal or better service, it is not reproduction of service, but of property, that is under consideration; and clearly the estimate should be of existing property created with public approval, rather than of a substituted property" (p. 1772). If the aim were to ascertain the value (in its ordinary sense) of the utility property, the enquiry would be, not what it would cost to reproduce the identical property, but what it would cost to establish a plant which could render the service, or in other words, at what cost could an equally efficient substitute be then produced. Surely the cost of an equally efficient substitute must be the maximum of the rate base. if prudent investment be rejected as the measure. The utilities seem to claim that the constitutional protection against confiscation guarantees them a return both upon unearned increment and upon the cost of property rendered valueless by obsolescence.3 3 See Pennsylvania R. R. Co. v. Philadelphia County (1908), 220 Pa. St. 100, 115; People ex rel. Kings County L. Co. v. Willcox (1914), 210 N. Y. 479; Re Indianapolis W. Co. (Ind. Pub. Serv. Comm., 1918), P. U. R. 1919A, 448, 464; Re St. Joseph Ry., L., H. & P. Co. (Mo. Pub. Serv. Comm., 1919), P. U. R. 1920A, 542, 546; Advance in Rates Western Case (1911), 20 Í. C. C. 307, 337; Brooklyn Borough Gas Co. v. Public Serv. Comm. (N. Y., 1918), P. U. R. 1918F, 335, 347 (Opinion of Charles E. Hughes, Referee); Notes (E. C. Goddard), 18 Michigan L. Rev. 174, 19 Michigan L. Rev. 848. See Interstate Commerce Act, 19a, added by act of March 1, 1913, 37 Stat. 701. LONG BRANCH COMMISSION v. TINTERN MANOR WATER CO. 70 N. J. Eq. 71. 1905.1 PITNEY, V. C. . . . This brings us to the cost of the new plant in producing proof of which a large amount of time and space were occupied. They were commenced by a contracting company under specifications of the work given in detail and were to be paid for in $1,200,000 in first mortgage bonds and divers shares of the capital stock of the par value of $100,000. Difficulties were encountered in carrying out this contract according to its terms, and the plans were changed. The result of this was that the contractors were not held to their bargain, but were paid in bonds and stock according to the actual amount of their expenditures. In order to ascertain those expenditures an inventory of the work done was taken, and the cost was ascertained by the vouchers and checks furnished by the contractors. The defendant estimates the cost including the Takanassee and Deal works at $1,500,000 and upwards, without counting the shares of stock which were issued and which may be here treated as a mere bonus. Several distinct criticisms and objections are made to the details given of this valuation. First, it is said that the cost of the site for the reservoir, amounting to $76,000, is too great. The land itself, consisting of several hundred acres, cost $40,000 and the cost of clearing, $35,000. In fact, only about one-third or one-half of this land has been so far covered with water, and much more than the amount covered has been cleared. The fact is that the original plan provided for a very large reservoir, including a very high dam, but in carrying it out a lower dam and smaller reservoir were adopted. It is admitted that the present supply is ample for many years to come. I shall deduct from the total $25,000 on this account. The next item criticised is the cost of the dam itself, the total cost of which was $89,500. The objection to this is that it was laid out and erected to its present height of a width sufficient for a dam two or three times as high, and that such construction cost nearly or quite twice as much as it would have done for a dam of its present height. I 1 Part of the opinion is omitted.-ED. think this objection is well taken, but not to the extent claimed by complainants. I shall deduct $30,000 on account of the excessive cost of the dam. The next objection is to the size of the principal main laid, viz., about 42,000 feet of 36-inch main, which was much too large and expensive, and that complainant ought not to be charged with an income on so great an outlay. Defendant admits that its plans were adapted to a future estimated growth of 50 years. Mr. Sherrerd says, and I agree with him, that 50 years is too long for a forecast. He fixed 30 years as the usual limit. Now it is readily perceived that the difference in cost between a 36-inch main and a 24 or 30-inch main is, or may be, so great that if it be saved and invested it will with the accrued interest in a period of 30 years reach a sum sufficient to lay an additional main if the first shall at that time prove to be insufficient. . . . I conclude, then, that a thirty-inch main from the dam to the pumping station (nearly two miles), and from thence to the town (over six miles), is ample, flanked, as it is, by an eighteen-inch main from Little Silver to Seabright, each of these aiding the other in the case of an emergency of fire. Besides, I am entirely satisfied that the estimate for seventy-five gallons per head per day would be reduced below fifty gallons per day by the general introduction of meters, and such reduction of consumption, or rather of waste, will result in the saving of fuel for making steam. This, I think, it is the clear duty of the defendant to accomplish as soon as practicable. By the use of the same hydraulic tables showing the relative weight of thirty and thirty-six inch mains and the difference in weight in lead used in joining the same, I conclude that the reduction of cost of the thirty-six inch main laid, if a thirty-inch main had been used, would have been one-quarter. The total cost of the eight miles of the thirty-six inch main, with the appliances, was $300,000. One-fourth of that would be $75,000, which I shall allow on that account. . . . The next objection is to the amount paid ($425,000) for the old works. No reliable statement was made as to what those works originally cost the old company. All that was said was that the present proprietors would not sell them for less than $325,000, besides the bonded debt. But, then, we must consider that there was not an actual sale for cash, but a merging into a new corporation. On the other hand, there was some actual loss in the abandonment of the old plant and the amount spent in and about the dam and pumping station at Takanassee. I estimate it at $100,000. I deduct, then, from the $1,500,000, as follows: Whole cost of works $1,500,000; loss on Takanassee, $100,000; overcost of thirty-six inch main, $75,000; overcost of dam, $30,000; overcost on reservoir, $25,000; total loss, $230,000, leaving $1,270,000 as the amount upon which defendant ought to receive dividends.2 . . . ... CHICAGO, MILWAUKEE AND ST. PAUL RAILWAY CO. v. TOMPKINS. 176 U. S. 167. 1900.1 MR. JUSTICE BREWER delivered the opinion of the court. It may be premised that the books of the plaintiff, showing its business for the four years, were examined, and so much as was deemed necessary admitted in evidence. From those books was disclosed with mathematical accuracy the gross receipts of the company on all its business in all the States during each of the four years and the actual cost of doing that business during each of those years; also the gross receipts from the business done in South Dakota, and separately the amount which was received in that State from interstate business and that from local. If the schedule of rates prescribed by the defendants had been in force during the four years, and the same amount of business had been done by the company, the reduction in gross receipts from the passenger business would have been fifteen per cent, and from the freight business seventeen per cent. Of course, the cost of doing the business would be substantially the same. The court found the value of the plaintiff's property in South Dakota to be $10,000,000, although, according to the testimony, it was bonded for over $19,000,000. It held that it was not fair to consider that sum, $10,000,000, the value of the property employed in doing local business, for it was also used in doing interstate business; and that the true way to determine the value of the property which could be regarded as employed in local business was by dividing the total value of $10,000,000 in the same proportion that existed between the amount of gross receipts from interstate business and that from local business, each of which amounts was, as we have seen, accurately shown by the testimony. Upon that basis of division it found that the value of the company's property employed in local business was 2 Compare Mayhew v. Kings County L. Co. (1911), 2 P. S. C., 1st D. of N. Y. 659, 683; San Diego L. & T. Co. v. Jasper (1903), 189 U. S. 439, 446. As to abandoned property see Kansas City So. Ry. Co. v. United States (1913), 231 U. S. 423; Note, 27 Harvard L. Rev. 369. 1 Only an extract from the opinion is here reprinted.- ED. for the first year, $2,200,000; the second year, $2,600,000; the third year, $2,100,000; and the last year, $1,900,000, and also that the gross receipts from local business were for the first year, 18.5 per cent of the valuation; for the second year, 12.7 per cent; for the third year, 15.6 per cent, and for the last year, 16.3 per cent. In other words, for these several years the company received as compensation for doing its local business the per cent named of the real value of the property used in doing that business. Then, proceeding on the supposition that the defendant's schedule had been in force and the rates reduced as therein prescribed during these four years, it divided the valuation of $10,000,000 on the like proportion of the receipts from interstate business to the receipts from local business as thus diminished, and upon such division found that the valuation of the plaintiff's property engaged in local business would have been, for the first year, $1,900,000; for the second year, $2,300,000; for the third year, $1,800,000; and the last year, $1,600,000; and upon such basis that the gross receipts from local business would have amounted to 18 per cent of the value of the property for the first year, 12.1 for the second, 15.3 for the third, and 16.2 for the last. Upon this it held that the difference between the per cent of receipts in the two cases was slight, and that there was no change in what may rightfully be called the earning capacity of the property sufficient to justify a declaration that the reduced rates prescribed were unreasonable. In other words, it was of the opinion that the earning capacity was so slightly reduced that it could not be affirmed that the new rates were unreasonable. But that there was some fallacy in this reasoning would seem to be suggested by the fact that although the defendants' schedule would have reduced the actual receipts 15 per cent on the passenger and 17 per cent on the freight business, the earning capacity for the last year was diminished only one tenth of one per cent. Such a result indicates that there is something wrong in the process by which the conclusion is reached. That there was, can be made apparent by further computations, and in them we will take even numbers as more easy of comprehension. Suppose the total value of the property in South Dakota was $10,000,000, and the total receipts both from interstate and local business were $1,000,000, one half from each. Then, according to the method pursued by the trial court, the value of the property used in earning local receipts would be $5,000,000, and the per cent of receipts to value would be 10 per cent. The interstate receipts being unchanged, let the local receipts by a proposed schedule be reduced to one fifth of what they had been, so that instead of receiving $500,000 the |