VALUE FOR RATE MAKING PURPOSES BY HENRY EMMETT BARTLETT B.S. in C.E. University of Illinois, 1893 THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF CIVIL ENGINEER IN THE GRADUATE SCHOOL OF THE UNIVERSITY OF ILLINOIS, 1922 URBANA, ILLINOIS Digitized by the Internet Archive in 2015 https://archive.org/details/valueforratemakiOObart IITTRODUCTIOI 1 Reasons for Present Confusion in Appraisal Methods ... 2 Actual Cost as '’Natural” Method of Appraisal 3 Experience of Author 3 PUBLIC UTILITIES 6 Defined 6 In Illinois 7 Regulation hy Public Authority in General 7 Discussion of Paving in Street Railway Tracks 8 Reed of Regulation 9 Discussion of Early Railroad Abuses and Their Effects . . 9 Regulation in General 11 Regulation by Municipalities 12 Evils of Limited Eranchises 13 Regulation by State Authority ...... 16 Regulation by Eederal Authority 18 PUBLIC UTILITY RATE MAKIUG 19 Underlying Principles 19 Rate Making by Municipal Authorities 21 Organization of Stp«te Regulatory Coirmiissions 24 Req.uireirients for Membership on State Commissions .... 24 Regulation by Federal Authority . 26 VALUE 29 General Discussion 29 Values for Various Purposes 29 Condemnation Value 31 Taxable Value 32 Special Values 33 Rate Making Value 34 Ascertainment of Rate Making Value 35 Elements of Value 42 Appraisals 42 Practical Making of Public Utility Appraisals 44 Method of Appraise.,1 of Portsmouth Street Railroad & L't . 44 Bases of Appraisals 47 Origins,! Cost to Date 43 Historical Reproduction 49 Cost of Reproduction at Present Prices 51 Cost of Reproduction Using Average Prices 55 Rate Base 58 Value of Land 52 Overheads 54 Intangibles 55 VALUE: (Oont'd) Page Depreciation 66 Other Elements of Va.lue 69 Bases of Valuation Used hy State Commissions 70 Questionnaire sent to State Commissions hy H. E. Bartlett . 71 Sunmiaries of Replies to Questionnaire 73 to 81 General Discussion of Replies from State Commissions ... 81 Tabular Statement of Valuation Bases used by Commissions . 83 Synopsis of Replies to Questionnaire Arranged by Groups , . 84 Argument for Undepreciated Actual Cost as True Rate Base. . 86 Inconsistencies in Reproduction Valuations 91 Example of Railroad Constructed through Large City .... 92 ■ Example of Street Railway in Paving 93 Inconsistencies of Average-Price Valuations 94 Example of Obsolete Type of Pump 95 Example of Recently Purchased Article such as Duplex Exciter 95 Relative Costs by Several Methods of Appraisal. ...... 97 TRUE RATE BASE 98 Considered as Undeprecia.ted Actual Cost 98 Property Included in True Rate Base 99 Reasons for Advocating Actual Cost as True Rate Base ... 99 Possibility of Ascertaining Actual Cost from Books .... 101 Actual Cost Reflects Sacrifice of Ov-mers 102 Keeping of Books by Reproduction Appraisals 103 Suggestion of Unity of Action among State Commissions . . . 104 Synopsis of Attitudes of Commissions on Bases of Appraisals 105 Quotation from Letter of Texas Commission ... 108 Conclusions from Synopses of Bases of Appraisals 109 Court and Commission Decisions Concerning Rate Base .... 110 Argument for Liberal Treatment of Public Utilities .... Ill CITATIOITS AERA 40 DES MCIITES GAS CASE 66 MIMESOTA RATE CASES 37-54-63-93 SMYTH V.AI.IES 36 SPRIITGFIELD GAS CASE 38-66 IIEW JEItSEY BOARD OF PUBLIC UTILITY COMMISSIOITERS 110 WESTERII ADVANCE RATE CASE 110 VALUE FOR RATE MAKIFG PURPOSES By H, E* Bartlett 1447 East 66th Place Chicago -cOo- lUTRODUCTIOlT The regulation hy governmental authority of corporations fur- nishing public services has become an accepted part of the econom- ic system of the united States. Beginning shortly after the Civ- il War, and at first progressing slowly, the idea novir has spread until nearly every state in the union has a commission with regu- latory powers of greater or less extent. Many of these comniissions ha,ve wide authority over the rates charged by public service cor- porations, and the principles governing the determination of such j rates are fairly well understood. I One of the basic principles of rate making is that a public I utility enterprise is entitled to a reasonable rate of return upon the fair value of the property which it necessarily devotes to the public service. This principle is so well settled by commission practice and by decisions of our highest courts as no longer to be open to discussion. While the right to a reasonable return is thus firmly established, nevertheless the procedure necessary in determi- ining the fair value of the property remains undecided, and forms one of the most vexatious q,uestions commonly arising during the progress of an inq.uiry into rates. Much of the prevailing confusion in this respect is clearly chargeable to our courts by reason of their failure to lay down specific rules for the determination of fair value. However, back of the failure of the courts to exactly define this value lies the failure of regulatory bodies to come to any substantial basis of agreeuient along these lines. And theirs is the duty in the first instance, for by law they are charged directly with that responsi- bility, The courts can decide ctuestions only in the light of the evidence presented to them, and it is small wonder their decisions lack desirable exactness when there is so little agreement among authorities as to Just what constitutes proper value for rate mak- ing purposes, I have no doubt thax^ if regulatory commissions come to substantial agreement as to what constitutes fair value^that in ! due course of time their opinions will be reflected in decisions of the 00 urts , While there has been a vast aruount of discussion of valuation I q.uestions, and numerous volumes have been written thereon, never- I theless the writer hopes to present certain phases of the subject in such manner as to clearly set forth his convictions in the mat- ter, From the experience gained by him in practical valuation and rate making work he has been forced to the conclusion that the de- termination of the fair rate making value of a property presents no insuperable obstacles, and that, instead of there being * . ^ 3 a nuniber of methods of determining this amount, there really is hut one, and that one the simplest and clearest of all. Briefly, the value to which I refer is the undepreciated actual cost of the es- sential property devoted to the public service. Practically my first experience in valuation work came while I was employed as assistant engineer of terminals by the Chicago Association of Oormnerce Committee of Investigation on Smoke Abate- ment and Electrification of Chicago Terminals, Part of my work in that capacity consisted in making a valuation of the steam railroad facilities that would be displaced in the event of electrification, such as engine houses, coal and water stauions, turntables, certain shop machinery, and similar articles, ¥ot having read the current twaddle on ’'theories” of valuation, 1 q.uite naturally turned toward the ascertainment of the actual cost of the above-named structures as affording the proper basis for the work, and carried it through on those lines. Inasmuch as, under similar circumstances, nearly all other persons engaged on similar work would have done likewise, I have arrived at the conclusion that actual cost forms the natural method of valuation. During the five years immediately following the above-mention- ed work, or, to be eza.ct, from November, 1915, to February, 1921, I was employed as assistant chief engineer of the Illinois Public u- tilities Commission, and during that time I had much to do with the practical, side of making rates for public utility services. This experience was rendered the more varied and extended by reason of the fact that during this time the International War was begun and 4 concluded. This period was marked hy such rapid and abnormal price changes as to sorely tax the facilities of the Commission to care for the numerous rate cases that were brought before it and to give anywhere near the adequate consideration required in many instances . During this period I prepared in behalf of the Comiriission ap- praisals of two small steam railroad properties, one large inter- urban railroad property, and a number of street railways. I also checked scores of a,pprai8p.ls prepared by engineers and submitted to the commission in various rate cases. I'urther, during these years there was completed the principal portion of the field work in connection with the Federal valuation of the steam railroad properties in the United States. Under the provisions of the act of Congress, as soon as the valua.tion of any railroad property was completed in each of the states, the report was submitted to the Governor of that state. In the practical working out of this pro- vision in Illinois, these reports were transmitted by the Governor to the Public Utilities Conimission. By official action of the Com- mission early in 1916, the writer ws,s delegated to check over the reports as received and present the results of the work for such action as the Commission cared to take. In preparation for this work careful study was made of the numerous briefs and other arti- cles submitted in advocacy of, or opposition to, the contentions of the railroads , Aside from the q.uestions arising in connection with the valu- ation of public utility properties, the v/riter also prepared many i' <( 5 opinions and orders of the OorQnission in ra,te cases Involving gas, electric, water, steam and hot water heating, and street and inter- urhan railway services. In addition thereto, he has sat as exam- iner for the Commission in many hundreds of rate and other cases, this work req.uiring a familiarity with regulatory practice. Since leaving the Commission I have "been continuously in charge of the appraisals of public utility properties, prepared at the in- sta.nce of the owners of the properties, and embracing one gas, two street railways, one interurban railway, one steam heating, and three electric light and power systems. In each of the last-named cases appraisals were prepared on bases of historical reproduction cost and the cost of reproduction using either five-year or ten- year average prices . from the foregoing it will be seen that the writer has been engaged on "both sides the fence*' in valuation and rate matters, and, as a result of his experience, has come to have q.uite fixed views concerning the proper values to place upon properties in rate cases, and in the following pa,ges will attempt to justify these conclusions. Briefly, as previously stated, in my opinion, the true rate making value of a public utility property is represented by the actual investment therein. This ainount should not be de- preciated except in rare instances where the management has been wasteful, improper, or where money has been paid out in excessive dividends when it should have gone into the upkeep nf the plant. Inasmuch as the value herein considered has mainly to do with 6 the fixing of the sum upon which a puhlio utility may justly ex- pect to earn a reasonable return in the way of rates for its ser- vices, it appears logical to first inq.uire as to what constitutes a so-called public utility, and what distinguishes it from other business enterprises in a community. PUBLIC UTILITIES A public utility may be defined as a business enterprise fur- nishing a service essential to the public convenience, and of such a nature that it should form a practical monopoly in the com- munity, Commonly a considerable portion of the plant of such a corporation will be located along or under the streets and high- ways or upon other public property, and, as tenant or user there- of, becomes subject to certain control or regulation by the coimnun- ity or by the paramount authority of the state. Usually, too, a public utility aoq.uires certain privileges not granted to other businesses, among which may be mentioned the right of eminent do- main, or of preferment in the allotment of fuel during strikes, war, or other calamity. These privileges logically carry with them the right of control by the public to the end that the enter- prise shall be conducted in the interests of the community, and that all citizens shall be served without discrimination or prefer- 7 ment, and at rates that are just and reasonable to the company and to its consumers. The powers granted the Illinois Commerce Coramissiort and its predecessor the Public Utilities Commission are probably as broad as those of any coinmission in the United States, In the act of June 29, 1921, creating the Illinois Commerce Commission, a public utility is defined as follows: "The term ‘public utility, when used in this Act, means and includes every corporation, company, association, joint stock comp- any or association, firm, partnership or individual, their lessees, trustees, or receivers appointed by any court whatsoever (.except, however, such public utilities as are or may hereafter be owned or operated by any transportation district or other municipality, and except such telephone company or companies which are or may here- after be purely mutual concerns, having no rates or charges for services, but paying the operating expenses by assessment upon the members of such company or companies and no other person or per- sons) that now or hereafter:" ’Ua) May own, control, operate, or manage, within the State, directly or indirectly, for public use, any plant, eq.uipment or property used or to be used for or in connection with the transpor- tation of persons or property or the transmission of telegraph or telephone messages between points within this Sta,te; or for the production, storage, transmission, sale, delivery or furnishing of heat, coal, light, power, electricity or water; or for the convey- ance of oil or gas by pipe line; or for the storage or warehousing of grain; or for the conduct of the business of a wharfinger, or that" " ib ) May own or control any franchise, license, permit or right to engage in any such business," Section 10 of Article I of Act Approved June 29, 1921; effective July 1, 1921). Regulation of utility properties by public authority has been practiced for many years and to varying degrees in different com- munities. Almost without exception, franchises granted such enter- prises by municipal authorities have provided some degree of con- trol over the conduct of the business of the company. Primarily, suoli control arose from the fact that the company occupied streets or other public property with portions of its plant, and q.uite nat- urally the public sought to protect its rights by stringent con- tract regulations. Incidentally it was common practice to drive the hardest bargain possible for the use of the public highways, for, it was argued, the more the public got for the privilege the better off it was. Even today this viewpoint is assumed by mia,ny city officials who, ignorant of the true character of public regu- lation, imagine the amounts they secure from utility enterprises are that much clear gain. They q.uite overlook the fundamental con- cept that, in the end, the consumers of the services (which is the public itself) commonly pay all the service costs, including a profit on the transaction. In other words, they finally reimburse the utility for the sums expended by it for the privileges of using the public property, and, in addition, a return upon those amounts. Thus, when a municipality compels a street car company to pave its tracks for the privilege of using the street, it merely transfers the burden from one set of citizens to another. That is, the abut- ting property owner is relieved of the burden and the oar riders are forced to take it up. Thus is one portion of the community discriminated against in favor of another, for on streets where there are no oar tracks the abutting property owner is reciuired to pay for the paving to the center of the street, while his neighbor, who may own higher-priced real estate fronting on a street car line is relieved of a part of his just burden by the car riders. n'; » 1 r P '7 A A \fi.. ff ^ »*r^ .1 l. 1.-114. ..*UiJ iltV ■ .. ■ '. t • :•: • I .? *- • V r*’if '• tt f< MW .1 ' ' ' ■ ", • I fvn r#! . 'X .'.U v t'af'i .-. ■> j ". f . . . ^ ‘ 1 ", ■■’ ' %; !> ti/. ’ SI , - ' . 'I ■•’ . ':. A .•> ■; ) ^ ^u;i :: Iff'- . ..::■ ' I A: P- I Vi' j - i|s' ll < . V i. 'T 1 ■ 7" '»t ,j. , . O.'O t - 'll V' ♦ « * wlf L<' •' n't X' .."ci'j I) ' J ‘ir ■'I ‘ ■ ; t, 4 .' i.G' ■'.> . -i f :■ f' , {■" ••f : • C.. ’ 't ■• ■ t ' ' .'/io.: * * :t>c‘ " ^P; '■ li 1 >/ ' * ■ 0 '. 4 ’TllV '.'f > V “ I , L '* *» ' ■ f >f ., ^ V ' * • ' - 4. • ■* ' " J 'j\ \ ':;: T ^ C. W.V.. / -I * '}> 9 Heed of Re;;;ulation : That public regulation of the acta and practices of those who serve it is necessary appears well attested by the wide range of such control. To an impartial student of the matter, the regulation of such enterprises by public authority ap- pears a direct seg.uel to the necessity therefor. Many of the older generation are familiar with the early railroad abuses, such as stock juggling, rebates, discriminatory rates, land and townsite promotions, and other evil practices which gave rise to widespread dissatisfaction among the general public. Our forefathers recog- nized that improved transportation facilities formed an invaluable adjunct to the commercial life of the nation, and were extremely liberal in giving aid to the construction of railroads by subsidies la.nd grants, and other agencies. These corporations owed their very existence to the aid thus given and the powers conferred on them by government. ITevertheless , many of the short-sighted per- sons who were then in control of railroad affairs flagrantly abused the confidence the public had reposed in them, forgot their duty to it, and gratitude was a word not in their lexicons. There followed an era of railroad exploitation, and in the end the public turned upon its erstwhile servants, and this generation has not seen the end of the restrictions that have been fastened upon the common carriers of the united States. Indeed, I am of the opinion that early conditions now have been reversed, and the public at present forms the oppressor. In substantiation of my position may be cited the Transportation Act through which Congress has largely deprived the railroads of initiative and efficiency in operation. . 4 T w- ‘ r,| ' I 0 V ‘ ^ 4 *'* ^ V • K .. t.. . . V ■ i ; ■ ■ r , > 1 '. ■ir' O’f': :“ 7 ^ i. C- : ■■•(''■ Xl'^rQ- I :,U fc‘.,-il.i f 4 ' r?. t. '• •K<'‘ ■". ■ ■ ' •« •. 4 :j- . ' r ?ct, .V'H/i . • - ■'-^ ^ : ■■ * ' '• : ' '"' f C *':'; . ■'. ' ;■ iJ,*l ‘ '■■!'■'“ ' ' i.«ii .. i'. f |» 1 ' X. t f(^ ’ -■ ■ . V';,r' J . ^ J \ t *<• ^ ^ •■ V , •/’* ‘ ' 1 , »v> v; ■r- / 10 and, in effect, has turned the transportation systems over to the tender mercies of the labor unions, with the result that the re- mainder of the public now is paying the fiddler the high price of the political buncombe that is so profusely disseminated from Washington. ! The early history of the street rail?my industry in the unit- ! ! ed States is much the same as that of the steain railroads, and many! of the pioneers in that field brought infamy to themselves a wor- thy business, and financial distress alike upon the deserving and the undeserving. What the powers at Washington arrogate to them- selves in the way of mismanagement of steam railroad transportation systems, many petty politicians of lesser calibre attempt in the oases of the street railways. Proof of this statement may be had in abundance right here in Chicago, where the traction q.uestion has furnished the political dust for blinding the electorate by self-styled "saviors of the people" for the past twenty-five years, and the platform on which mayors have been voted into office by an asinine public, ably assisted by the so-called "yellow" newspapers. The history of traction in lew York, Chicago, and other large cen- j ters has been duplicated on a relative scale in nearly every other | city in the country that has a street railway. What wonder, then, that public regulation now has clamped the lid on almost every form of street railway activity and practically throttled the industry? Nearly every municipality of any considerable size has had its pa- rade to mark the opening of a street railway line, and later has , f "f; 4 It I • - - ■■ ^ ^ " / ’.- ii'^u :J.'. '■: ' 5^1 J*:*. C ' . .' > . V* ’V « • ', ' I ‘ . • ^‘ ■ "■ ■ • '■ • »; ‘ ' ' ^ .■ .• ■»'>': ' ■’ !Mt£^ hik;’ ' ' . I' . '.; V , I . .. 1 ,’ " i* ■ ' ■ T' ii.K. ,^. Hr A fl \ "f -V*-. ^ 1 li 11 had presented the speotacle of the city officials heating the tom- toms summoning the populace to view the lingering death of the u- tility from starvation, brought on hy inability to secure a just and reasonable rate for the transportation it sells. Regulat ion in Genera l; Regulation of public utility enter- prises is practiced to a greater or less degree by numerous gov- ermnental agencies in the united States. There scarcely Is a pub- lic authority that does not have some degree of control over them, from the district school or township official, who must give his consent to the use of a school ground or highway for a transmission line; the city officials who must grant the privilege of installing a street railway system of more or less magnitude; on up to the Interstate Commerce Commission, which has almost complete control over the vast railroad systems of our country. J'rom the widespread character of regulation it easily may be inferred that it is not only necessary but desirable. To the policy of wise and just reg- ulation of public utilities by comiaissions composed of able and fearless men I am g.uite committed. But to the ordinary type of political regulation, where punishment is meted out to corporations to satisfy the prevalent hatred of them which is born of ighorance and misunderstanding, or where rates are fixed in fulfillment of campaign promises, as sometimes appears the case, I am unalterably opposed. Such actions are not regulation but irresponsible exer- cise of arbitrary power of such nature that t^ey^ are repugnant to both our laws and the innate sense of justice with which the human , 12 ” mind is endowed. Unless regulation Ue fair it can have no excuse for existence. Regu lati on by Municipalities : Regulation of public utilities by municipalities generally has taken the form of embodying in franchise ordinances various provisions regarding the rates which might be charged by the company, or the amount and character of the service it should furnish. Where no superior regulatory authority exercises jurisdiction, municipal control is usually paraiiiount, and still is widely prevalent. This control generally functions through action by the city or village council, but sometimes it is in the hands of designated city officials who, in turn, are res- ponsible to that body. To those who are familiar with the average city council in the United States there is little need to explain why that form of reg- ulation has proved so dismal a failure. Americans are prone to e- lect to public office men whom they would not consider for an in- stant as employes in conducting their private businesses. Later they deplore the lack of results secured, and - elect another set of officials of the same kind. The average member of a city council has no special training for his important duties, and fre- q.uently is not capable of exercising any great amount of intelli- gence in handling technical q.uestions. Sometimes his actions are governed by desire for party success, wish to be re-elected, or the more despicable motive of personal gain. In such oases the 13 evil pesultB flowing from this type of regulation are far worse than the ills against which public control is supposed to protect. For these reasons municipal regulation has become a by-word for political corruption and oppression of the worst sort, render- ed all the more onerous because it is done under cover of the law, | ! indeed, freq.uently by the blatant demagogue seeking office. I’he I I evils forced upon the public by official vendors of franchises, selected by the public to protect its rights, probably were never eq.ualled by the predatory selfishness of those who purchased them in bygone days. For the time easily can be remembered by those not yet old when the possession of a franchise for a street railway or other utility was considered the Midas wand which transformed all the operations of the company into storehouses of gold flowing I from the pockets of the community. Now many of the holders of such franchises have been disillusioned to their financial sorrow, and the corruption wrought through the agencies of this form of specu- lation is far less pronounced than formerly. Born of experience, the conviction is strong within me that the limited term franchise commonly granted by American cities, is an unmitigated source of evil, one of which is stated above, i have spent an entire evening listening to the recital, by an attorn- ey who ha-ndled franchise matters for a traction company, of tables in which corruption money was brazenly solicited by the paid ser- vants of the people. The company and the public officials both were guilty, but of the two I am convinced the public officials were the worse offenders, for, in addition to their other trans- 14 gresBions, they were traitors to those who placed therii in their public positions for a specific purpose - that of protecting the very interests which they so grossly bartered away. It is a fore- gone conclusion the traction company would not have given the mon- ey for the favors it received unless it had been necessary. Hence, E not only did the dishonest officisJs betray their fellow-citizens, but they fastened upon them extortionate rates, for it may be as- sumed that the company who thus secured the favors was out to make money, and that they exacted b , return upon all money paid out by them, including that which was wrongfully used. Franchise provisions also sometimes form sources of discrimi- nation between communities. Examples of this may be seen in the case of an interurban railroad traversing a number of adjacent com- munities. The company may have franchises for varying periods, and when one of these expires it is forced to renew the grant on the best terms it can obtain from the Diunicipality . In such cases the municipa.lity freq.uently considers it good business to impose bur- densome req.uirement-s upon the company in the way of paving, con- struction of depots, or other outlays. The other communities may follow a more enlightened policy and not require such outlays. In this event it is plain that the first-named community not only holds up the company, but it also takes advantage of its neighbors. For the company must earn the money to pay for these outlays, and the earnings must come from its passengers, who live in all the corrmunities it traverses. Hence, if by reason of expiring fran- .♦• w •1. ^i. K,. ,..■ hr." ,' ■■.■. ,;, *■> , r.'< ii 'IJr- * , A 4. . '/?■ - ■■ ’. i.j'. L> ■V ■ . .vi 15 chises a ooimniinity is enabled to take undue advantage of the comp- any, it at the same time takes an unjust toll from its neighboring citizens . A further vital feature that greatly limits the usefulness of municipal regulation is the relatively small territory in which it | f can be made applicable, for the city can exercise no jurisdiction outside its boundaries. How8,days , through the construction of tel- ephone and telegraph lines, railroads, and transmission circuits, there are numerous cases in which a utility may operate in num^arous municipB-lities, For example, the Public Service Company of North- ern Illinois supplies electric service in more than 150 comiuunities in the northern part of that stave, while the Western United Gas Compa.ny furnishes gas services in about 65 cities and villp,ges in the vicinity of Aurora, Illinois. If each of these communities at- tempted to fix the prices for which those services should be sold, it is manifest there would be a great variety of ideas on the sub- ject, and it well might happen that persons living on opposite sides of the line separating vwo adjoining municipalities would be receivJ ing the same service at different rates, clearly an unjust and dis- criminatory condition of affairs. Consider also the case of a street railway company such as the Chicago & West Towns Railv;ay Company which serves 11 cities and villages closely adjacent to each other and to the ?/est boundary of Chicago. It is not conceivable that there could be such unificar- tion of ideas among the eleven that a just and proper fare could be placed in effect, or that any one of therii could, of Itself, perform v"y ■ \ . .. ■ /' I •; ' i> 4 **''' >■ H ' '*'■ ■< - <'“ ' ■ "it '*B *“ 'T “ v ..'T* ’ T* ‘i • V V^JUl . 1 . Ca . .. 1 ?V Jl •■ ' ■ .)•: t ]. r 1 I ...f; j[ •• c-t ; iva^Vf'iV' ^I‘'k If’- t ■f * I, ‘4 • ’- ' ■- ' . -•• v;-. " . ,:. : ■' ,' , . - xtj M'. * I. - ; •■ 1 '1* • ,-.. * ♦ «.. . • " -; ' -'• - ••■ '< • '* » ' ■ U ,:\M * ,- ■■n.i t, :i'-i r 1- . , < A i .1 ) <• *■■■■ " . ;. '• •. : *1;' :-.i.'^ r • • ’ % n ,. »» , .k. ^ ;'4‘- . T ^ » ••4.- ■ f ■ 'j !: i*. ■ ii'1 , • >1 <1 - , - - « I'O { 7 Vi ! X « - 1 ' r , ,(1 , ^ f ' V- • . I . •r •• •: ru .: J- -;i ■■ t ' 1 ’ « , •' 3 •:g^ fi ■ 'H. '-y i ■ -V . ■ i ; ■ ' f ' ■ ■> A :»V-‘ '. '; ■■ ‘ ^ *' f’ iT'o !! ■‘■.t ■%,’u' ■ '^^*1 jJ.'SwI "i'li i ’ <■ . ,^Ar .'ta >.a' ■ : i •■ * ■• tay>dt '>tWt •■■ « , i ;• ' j ■' 2 ' * ' No’ ' • . V. -'‘i f ■'’ f'£ ; H ■m: ■fi ■ , > *' ■ v.\>rr'j -.. ., yojL- ''{l , n.y'r. ^.ju: 16 the work. As another example of this weakness in municipal regu- lation the writer calls to mind a small street railway system in southern Ohio which traverses two municipalities, one about seven times the size of the other. In that state the Public utilities Commission has no direct control over the rates charged by street railway companies, and it caiTie about that the management of the company secured the consent of the larger community to an increase in fares. Ho?/ever, the increase, justly deserved by the company, was blocked by the refusal of the smaller community to approve the higher fares. This certainly constituted a case of the tail wag- ging the dog, and, in effect, presented the spectacle of seven persons being governed or coerced by one, for that was the relative popula-tions of the two places. Regule.tion bv State A u thori ty; To overcome the defects in- herent in municipal regulation, ajid to insure a uniformity of prac-' tice not otherwise obtainable, most of the states have enacted laws providing for state coirunissions having jurisdiction over the rates, services, and practices of public utility corporations. Herein- after there is presented a table showing certain facts about these commissions. Prorn this table it will be seen that the first state comuTiission was organized about two years after the close of the Civil ?/ar. Most of the early commissions had powers solely relat- ing to steam railroads, but, as the idea spread, the jurisdictions were increased until, at the present time, many of the state com- 1 ? miBBione have exceedingly hroad powers over the corporations furn- ishing public utility services. The creation of such coiardssions certainly forms a progress- ive step, inasmuch as the control of rates and services passes in- to the hands of an organization of sufficient magnitude to enable j it to make a special study of the va-ried problems presented. These j I q.uestions thus finally come to be handled by persons well q.ualified| for the task, and also largely beyond the malignant influence of petty politics. While it is true that some sts.te commissions oc- casionally so far forget themselves as to stoop to political rate miaking, nevertheless I ani of the opinion such cases form the ex- ception and do not detract from the value of the general principle of regulation by staue authority. It is obvious that the cure for this type of commission is q.uite simple, and the remedy consists in electing the chief executive Uf the appointing power be in him) frorii a class of men who will not stoop to the criminal folly of appointing upon such oommlssions men other than those who fearless- ly will decide cases upon their merits regardless of the political exigencies of the time, I am of the opinion that the general results secured through state regulation are fairly satisfactory. As many of the present disputed q.uestions of principle become better settled it is cer- tain their usefulness will increase, and the science of rate mak- ing will become more standardized than it now is, A great step in advance will be taken when laws will be enacted that req.uire per- 18 sons serving as meralDers of such ooBinilssions to q.ualify for their po- sitions through some form of examination that will demonstrate their special fitness for the work. The farther such commiesions are re- moved from politics the better it will he for the members themselves the corporations over which they have jurisdiction, and for the pub- lic. There is no phase of economic life in the united States that is so wasteful as politics, or any agency that has as great a per- centage of loss between input and output. There should be no "un- derground connection" between such comiriissions and political lead- ers. I do not have any fear of corruption of the membership by the so-ce-lled "interests". The la,ck of efficiency in such organizations is almost invariably due to the meddling of political lea,ders, Eegulation by federal Authority : Principally to enable due provisions to be made for the regulation of interstate traffic on common carriers (these powers being beyond the authority of the states) the Congress created the Interstate Commerce Commission in 1887. At first the organization was weak in many ways, possessed but little authority, and did not exercise that to its full extent. But of late years the Commission has grown in magnitude and juris- diction until it now overshadows anything of the kind in the United States, possessing, as it does, powers that are almost plenipotent- iary. Congress and the courts have stretched the meaning of what comprises interstate traffic until now it includes practically all transportation for profit or pleasure. However, to the credit of rn the Interstate Corriinerce ComirdsBion, it may he said that in the main its powers have been exercised with circumspection and that the work done hy it is praiseworthy* its control over rates and ser- vices furnished hy interstate carriers now is practically absolute, the Esch-Cummins Transportation Act having removed practically the last vestige of authority from the state commissions insofar as the railroads are concerned. PUBLIC UTILITY RATE MKIIG Underlying Princinles ; The general theory underlying the regulation of the rates charged hy a corporation furnishing util- ity services is the protection of the public against unreasonable oha.rges, secure freedom from discriminatory practices, and to in- sure a uniforiTiity of fair dealing that was not had under the form- er competitive sysuem. It has been found by sad and costly exper- ience that competition in public utility services is unprofitable to the public and disastrous to the corporations which engage in it. The writer has in mind a small city in v/estern Illinois that at one time had two gas companies, although the population 20 years later was only 3,500, a cotimunity too small to support even one concern of that kind. The result of such competition was financial disaster for both companies, although they managed to exist in a 20 state of semi-starvation until alDsorlDed "by a large oompany having 1 a centralized management and affording inter-community service through one controlling organization. Even under the more favor- able circumstances thus surrounding the operation of the plant it | could scarcely exist. In such a case the functions of a regula- 1 tory commission could have been exercised with profit to the public j for had such a commission been in existence it would have been dif- ficult, if not impossible, for a second company to have secured the necessary permission to operate in the town. Hence the public would have been better served by the one oompany, and the stock- holders of the second oompany would have been saved from loss thus occasioned by wasteful competition. But the public is not the one which needs all the protection in the dual relation of corporation and public. Eor it frequently happens that the corporation would become the prey of conscience- less politicians were it not for the protection afforded by the wise provisions of a public utilities law administered by a fear- less and upright commission. Should the commission prove recreant to its duty, then the corpora.tion has its redress in the courts. However, it is plain that the controlling principle of rate regu- lation by public authority is the protection of the public against rapacity on the part of the corporation, and to stand as a barrier * between the latter and the selfish schemings of political grafters. Protecting the corporation against the oppressions of politicians is but another form of defending the public against itself, for, 81 were it not for fa,lthless putlic servants there would he little need for such protection. Pate Making hy Municinal Authorities ; Regulation hy munici- j pal authorities is about the oldest form of governmental control. j I This arises principally from the fact that about the oldest public | utilities were gas and water companies, both of which have more I than a century of history. Naturally these companies operated in the beginning well within the limits of incorporated places, and q.uite as naturally it was seen that it would be of advantage to the citizens if the compa,nies were permitted to make use of the streets in order to lay their mains. As a matter of fact, there was little alterne^tive, as it readily is seen that it would have been a prac- tical impossibility to have constructed the distribution on priv- ate property. Quite properly the municipality retained control of the streets, and also thriftily drove the best bargain it could in the way of low rates or payments for the use of the public proper- ty. The plan worked q.uite well at the beginning, as the enterpriset were new, and it could not be foretold just what the results would be in a financial way. In many cases the oompa.nies were prosperous from the outset, some of them unduly so, and this circumstance a- roused the envy of those companies who were less fortunate, or the cupidity of the greedy. In the end either one or the other, or oc- casionally both, proved the destruction of the unfortunate company. The envy of competitors produced rate fights which were as disas- trous to the instigators as to the defendant, and the greed aroused I o 'c ■ . Ihi . . Y • ‘ ' . J '' '"iv 4.7 ) ‘ 1 ' , , A • ^ ■ u ’:■ , ' ■; ir;.' • '•f' ' " ' t rr* . V 'y X , ^i'W . c Wt;{'v/ y*' ' * .'10 • J * r* * V »» ^ -■ .4 f *tae ^ o M :• X .> ^'7 ; , V o *■ 'lO. ;.7’.' . ! i; V J J. nivr.,'. . 0 ■:\'i tf iA '■■V u, 0 . — • t ^ V. . ^ I. '. :. ■, r. ,< ■-_ . J.-' •■..• «-;V , •: ... j 0 /tr V ’ “Iv • . .. -‘ „; „ "" '"’i ^ 37 orders relative thereto. The ITorthern Pacific, the Chicago & North Western, and the Chicago, Burlington & Quincy railroads brought an action in the courts to restrain the enforcement of the acts and of the orders of the Commission. The matter found its way to the Supreme Court of the United States, which, in an opinion down in October, 1912, among other things, stated: “We concur with the court below in holding that the value of the property is to be determined as at the time when the inq.uiry is made regarding rates. If the property which legally enters in- to the consideration of the q.uestion of rates has increased in value since it was acq.uired, the company is entitled to the bene- fits of such increases. This is, at any rate, the general rule." (Minnesota Rate Cases, 230 U. S. 352). The above excerpt forms a portion of the famous Minnesota Rate cases decision, and while the general principle thus laid down appears explicit, nevertheless some of the collateral issues involved have caused endless speculation as to just what the court meant. This is particularly true of that portion of the decision relating to land values, for, from the words of the court there have been so many meanings drawn that it is evident the matter was not explicitly decided. A recent decision of the Illinois Supreme Court also deals at length with many q.uestions involved in fate making valuations. In 1916 the Public Utilities Commission of Illinois entered an order reducing the rates for gas services furnished by the Springfield Gas and Electric Company. This order was entered after exhaustive evidence had been taken by the Commission covering costs of oper- s.tion and the value of the property. In its order the Commission i; , t • , « • i- A ■' ';,o I: ^ ■, “ j::- ' ., t ' ^ i . ,' 1 ' \ • ./ ^ . . . ' ' «J »>?*.'■ . .. i"' w 'IS/ % • - • • * 1 ^ 1 '*■ i ., .-4 ■ , , :, . . 'a/' j ^ Ff 1 ' ■'• ,' * ’^.'4- ■ ■ , \ l» ■» • . 4 »«► ( , . >.^^Lvr -i? - '. '■,. £ { ' '' ' i1 ' .% ' * t> -'fW X :. It' ^ ,10C ! ■’" h O'. rto ioi- N "} 'io A ■■fT > . t .' ’ ‘.'li: '. ; /f.Agrf(^£ ■•' •• ‘ '• ‘i"? v.i tM -’oO ■ ' ,,\*t «. *' C^.' ' '■', . ,'\a- m •- •. il j:' •. f I : ■ ■ ,: j vr ' rv, 'a '■ i;'.-;’ a.,; ':r>rui '•? ^ r; v a. rj: ^ -1 : J , ;, ’/ ■ ■ ■'■ *t ■ ■'■ >• ■ « I. - • r . . • . ■A < 3 - V O'!' /" ■"'■ 0 ''. '■ 'i^r^r r, ;■ Xp V. a A .'.i.f ive;'\ ' ■ 1 ' V,''' >A ;•'- *1 38 fixed a value (PulDlio Utilities Reports, Annotated, 1916A, page 281) which the company considered unreasonably low, approximating rather closely the depreciated original cost of the property, sjid the matter was appealed to the Sangamon county Circuit court, as prescribed by statute. Subseg.uently the case v/as carried to the ^ Supreme Court of Illinois, which, in an opinion handed down in | 1920, among other things stated: \ "Appellee contends that the only equitable basis for determ- [ ining value for rate making purposes is the cost of reproduction * new, less depreciation. This contention cannot be sustained. The [ basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a public utility under leg- ; islative sanction must be the fair value of the property being [ used by it for the convenience of the public, and in order to as- ? certain that value the original cost of construction, the amount I expended in permanent improverients, the present cost of construe- \ tion, the probable earning capacity of the property under the par- I tioular rates prescribed by the statute, and the sum required to | meet operating expenses, are all matters for consideration, and are to be given such weight as may be Just and right in each case."! ! I: "It would be equally a,s unfair to the consumier to fix the j rate at a figure which would produce a reasonable income on a val- f ue determined by the cost of reproduction new at a time when cost | of construction was abnormally inflated, as it would be unfair to g the public utility to compel it to serve the public for a rate \ that would produce a reasonable incoirie on a value determined by ! cost of reproduction new at a time when the cost of construction [ was abnormally low. Therefore, it cannot be laid down as a rule | without qualifications that cost of reproduction new, less deprec- [ iation, is the only basis of valuation for rate making purposes. | It is equally true that the original cost of construction, less g depreciation, cannot be held to be the only proper basis for de- * temination of value for rate m^aking purposes. As we have' pointed . out heretofore in this opinion, the weight of authority is that every element having any bearing on the situation must be consider- ed in the investigation and then sound business Judgment applied to the determination of a valuation that is fair and Just to the con- sumer and the utility. Each case must be considered on its own merits and such result of value arrived at as may be Just and right in each case. It is not a matter of formulas, but there must be a reasonable Judgment having its basis in a proper consideration of all relevant facts. We consider any value a fair value which fair 39 and reasona”ble men would say ought to he attached to the property, under all the circumstances of the particular case, for the pur- pose of measuring a return which the public should pay to the own- er.” (Page 222). Insofar as Illinois is concerned, it is plain that the law as thus laid down hy the highest tribunal of that sta-te must gov- ern. It will be observed that the decision is largely affirma- tion of rules previously laid down by the United States Supreme, and consequently has the sanction of the highest judicial author- ity in the country. While, for reasons laid down hereinafter, I do not fully agree with the court as to what constitutes fair val- ue, nevertheless I am constrained to admit that it is supported by the weight of authority. Particularly do I take exception to the stress laid on the value determined as the result of the judgments of fair and reasonable men. This same theory has produced an a- mount of demorsJLization in the determination of rate making values that is scarcely conceivable, for it frequently has been used as a cloak to mask the ignorance or incompetency of those who fix the aforesaid value. Under this doctrine a property may be gifted with any number of ”fair values”, for they depend upon the person- nel of the commission or other orga.nization which fixes that val- ue. As a practical matter a rate m.aking value should be determin- ed upon premises that leave but a small m.argin for the injection of the element of judgment, for this factor is much too uncertain a quantity and too liable to abuse at the hands of irresponsible political rate fixers. As shown hereinafter, there is one concrete fact that is determinable within very narrow limits for practically 40 all properties, and this fact is the investment in that property. One fact is always worth a hundred theories, and far exceeds in value the "guesstimates" of men having little or no experience in the technical fields of public utility management. Indeed, it has been but a few weeks since the worthlessness of such judgments (?) was strikingly demonstrated in Illinois when they promptly were overruled by the judgment of the Federal court. Perhaps the whole situation may be summed up in the words of Dr* Thomas Conway, Jr., Professor of Finance, University of Penn- sylvania, who, in an article published in AERA for January, 1923, at page 486, states: "The fair value of a property, therefore, is a composite re- sult, arrived at by the exercise of judgment, taking into consid- eration the original cost of construction, the market value of the stocks and bonds outstanding, and the cost of reproduction new, less accrued depreciation, of the property in question. As the Supreme Court has said, each of these elements is to be given such weight as is just and right in each case. In determining the re- production cost new, it is necessary to start with present day prices, deducting therefrom accrued depreciation calculated on the same price basis or, if pre-war prices are used as the basis of the reproduction estimate, it is necessary to determine not only the accrued depreciation but also the appreois-tion which has occurred, thereby, in effect, arriving at the same result," With the conclusions of Dr. Conway concerning the present sit- uation as regpvrds valuations of public utility properties, I agree. But, as above stated, I am far from accord with the general doc- trine that the element of "judgment" should play so prominent a part in the determination of the value of a property. This theory has been advanced by commissions almost from the beginning, in many cases to cover up their own shortcomings in the way of a judgment they do not possess, for many of the persons endowed by law with U'. t t V V ■/ ' X ■ • 'k* ., t ^ '4 ’./T^j ■ l.l.iS jr n^.’iY ’ lv '. : rrl r>.X' ..'d -M • . i.i ; lo. ;1 4 . and* * ■ , ^ '• , V r, // rv* ■ V/ ■ w. •. 4 , I V. _ w V ■ I -■ » \ . ' '• ^ V **• V v'j U 0 * , ‘ X, J. if 5» ' I if • ! < ' ‘ 'I ■ . • k i** ^ ‘ -■'. . ' ciA^rt \’ j !:i \i ':jv : C. ■;,J'r-.? di- ■’.rr, .,!■■,,, V’. V - '\ 0 X.: ' V ‘ V ■ ti ^ ‘ '. . ., ■' .'fv'; Wu'*,) , ,. ;/'■:';••■} 7 .). lA;:', 0 :' tryi'i w . ■ ,, .”i ;, ’ “ fit .‘ v ;'7 r , -. .Ut‘:'i:'’^._ ' ■ '■• ' ' '^ J' :, 1. 1 U .7 da,,l"; 7 . ,c r .’. / j ' . .4 f’ .•■ fk if ^ *• ^' <■■ : : *'■ ,n »r • - ■ 4 . J , , . , ,..J .,( i '.;. *! 5 '“Oi; '.* • '■ . -•' t'i’j :i Is/i ■S i.'tiX ■ • • ’ • ^ ^ ■ tic L‘Jt* rf: ."iq'&'t . - ..V .U:Sj“‘Ti 0 i. .. ■ ^ ■ * '■ .. ;■' , •. dO'ifi.-I.T _ . ^. C ^ ij ii i, ' ' * ■ •’'ja ^ «'■ •' * -Oi.is. 'A ,'■ / ' . o ■• r .’, *■: '• : n'fi r: _ ; ■„; r-i 't 4 V ^ - . ’ ♦ ^ tr»y < \ '■* ■'■ t J y li *. V/ _ >/: t lf• y . Sr^ . c -ar-;. *■ 'levon-T?^ "'1 . 4 . ^ V n >>X , ’*'* ■-' ■ ''' * S ^■•V i L-.ML/j.J 41 with authority to fix values have only the remotest idea of the elements of the subject. They lack the technical training, they lack any experience in the particular line of business over which they are called to preside, and, worst of all, they sometimes lack backbone to give a square deal on the q.uestions that come before them. In such cases how can the results of the "judgment" thus exercised form the groundwork of a just decision in matters so important as the rates which a public utility shall charge for its services? There is a theory, far too prevalent in this country, that election or appointment to public office confers, in some myster- ious way, an infallibility in the opinions and judgment of the official. This mischievous and pernicious theory is largely res- ponsible for many of the gross failures of such officials - fail- ures which go unpunished because the victims are afraid to complain or else because there is no adequate check upon the doings of those who fill the office. If the public could be brought to exercise a fraction of the care in choosing its public servants that it does in selecting employes in private businesses, there would be such a cleaning out of state houses and city halls as never has been wit- nessed in this country. For, after all, the administration of pub- lic office is nothing more nor less than a business proposition, and the persons who fill such offices should be required to devote their entire time to the duties fbr which they are paid instead of building up a political machine or giving their time to their priv- If % I ' 1 !l I { 19 ^ ;,•<> r «(tc. .M,\, .-' f • !►« k’.'i C^, - ‘ ,. ' ■ 0 1 ■ ' *»j. .,■ 1 «? vr Ui-itii'Si, (ity^i ?iiy. ■!» ©8? ^ V. i. ., . J VilV' ;'■%.' 'I-' ‘ * ' ' 'm '*. ! V i ’i !j ■, rt - J M : -V ■ i . ‘;c /Toifceia i . ■» . . I .“.j*. , ft 'T : -i lU' f iV^ I Tv.' ‘*- 1'^ . » ■ fi -■ j a': Lt:i ■ '■ . I'-O: «?i 0 1 • i i , a;.. >t . , ■ . «^' f u c •' ' ■;< L ;r j" ,1 f • 5 1 ** . ' . ' j ^.,r.i :.v’ i:v- I . . ‘‘ , - . •V/'* I ty «. 1 ?f.ni .,i;‘v^' ■. .1 ■ t i- ■ i » V • ■ . ' P===K?*?«Si^ ; «■/ j( . .' •.vfejf i., 0/^' < 42 vate affairs, as is ooimnonly done in the United States. Eleraents of Value : The total value of any property is made up of a number of correlated factors, consisting usually of the physical articles comprising the plant j the costs of installing these articles, particularly those costs which cannot readily be allocated to the article; and certain other elements that are recognized as existing, but which cannot be as readily ascertained as can the preceding costs. For the purposes of this articles these several elements may be conveniently grouped under three heads (1) the physical elements, comprised in the articles which may be seen, inventoried, or otherwise recognized because of their physi- cal attributes, (2) overheads, or costs of engineering, superin- tendence, interest, taxes, injuries and damages, organization, and similar expenses during construction which cannot be readily al- located to particular articles or classes of property, and ^3) in- tangibles, or those elements of value which commonly are recognized as attaching to a property, but which cannot be conveniently seg- regated as can other costs. To this last-named class of values is commonly given such names as going value, cost of attaching the business, or similar name. Much has been written on the nature of intangibles, methods of their ascertainment, and the propriety of including them in rate making values, but an extended discussion of the question is beyond the limits of this article. Aonraisals ; An appraisal of a property consists of an ascer- tainment of the cost of that property at some specified time and upon one of a number of bases of pricing. It will be noticed that 43 I have used the word cost instead of the more common word value . and this has been done after careful consideration of the matter* As commonly used, an appraisal merely lists all the various art- icles comprising a property, together with the overheads and in- tangibles pertaining thereto* io this list of articles are ap- i plied prices that represent the costs of such articles at or dur- I ing a specified time, and the preparation of such data constitutes j the true function of the appraiser* This appraiser cormnonly has no authority to determine value for rate making or any other pur- pose. If the purpose of the appraisal he for rate making, then the regulatory authority fixes the value of the property* Or, if the appraisal is for use in a purchase or sale case, the value of the property may he said to he the amount paid for it, or for which it is sold, depending upon whether the viewpoint of the buyer or the seller he taken. An appraisal of the property is a practical necessity in near- ly every rate making proceeding. From the q.uoted decisions of our courts it is plain the company is entitled to a reasonable rate of return upon the fair value of its property, and this principle pf rate making is so firmly fixed that it no longer is open to aiies- tion. True, there occasionally may he a property on which a comp- any could not earn a return upon any value which might he fixed for the property, and in such oases the preparation of an apprais- al is of secondary importance. But in the great majority of such cases the company will protect its interests by having prepared 44 a proper appraisal of its property, and access to such will enalDle the commission or other regulatory authority to act upon the mat- ter with due intelligence. Many companies have suffered financial- ly "by reason of their failure to make proper showing of their needs in the way of increased rates, and at the hottom of the inq.uiry rests the determination of the value of the property, for a return upon this value forms one of the major earnings to which the cor- poration is entitled. Hence, in any well-conducted rate inq.uiry, an appraisal of the property is of vital importance. usually an appraisal is made showing the costs of the property at some specified time, generally near the time of the inq.uiry. In many oases it is of advantage to compile the appraisal as of the "beginning of the year for the reason that this time coincides with the beginning of the fiscal ’year of most companies. However, the appraisal may be made as of any definite time, but it usually will be found of distinct convenience if it be made as of December 31st of the year preceding the inq.uiry, and any additions or betterments made to the property from that time to the beginning of the inq.uiry shown separately. Practical Making of Utility Aouralsals ; In the making of ap- praisals of public utility properties various methods are followed by appraisers, and the limits of this article preclude their des- cription. However, it may not be amiss to describe a concrete case in point, and for that purpose there will be selected the street railway property of The Portsmouth Street Railroad and Light Comp- any, of Portsmouth, Ohio. This company operates a street railway 45 and electric power and lighting business in Portsmouth and the ad- joining village of lew Boston, and an interurhan railway from New Boston, Ohio, to Ironton, Ohio, a distance of S3 miles. On June 81, 19S1, the city council of Portsmouth passed an ordinance in which it is sought to provide street railway service at cost, and on August 85, 1981, the village of Uew Boston passed a similar ord- inance, These ordinances followed the lines of the modern "service at cost” franchises, and Section l-o of the Portsmouth ordinance reads in part as follows: "That after the effective date of this ordinance, and not lat- er than December 31, 1981, The Portsmouth Street Kailroad and Light Company, at its own cost and expense, shall cause an appraisal to be made and completed of all its properties and eq.uipment which are actually used and are necessary in conducting that portion of its street railway permitted by existing and effective franchises of the city of Portsmouth, Ohio, and the village of lew Boston, Ohio, The values to be used in making said appraisal and the allowances for depreciation shall be arrived at in the same manner as such i- tems are arrived at in making appraisals of properties of similar public utilities of the State of Ohio," The appraisal thus required was prepared under the supervis- ion of the writer, and copies were duly filed as provided in the ordinance. In the preparation of the appraisal one of the first q.uestions necessary to be decided was the basis upon which it should be made, For this purpose the Ohio Public utilities Com- mission was consulted, this body being considered as constituting the highest authority on the matter in the state, under date of November 17, 1981, Mr, L, G, White, chief engineer of the Commis- sion wrote as follows: "It has been the practice of this Commission since the rapid increase in prices due to the war to instruct the Commission's en- gineers to use the fair price obtaining during the five years pre- ceding the date of inventory of the case in hand," « I ' : .'. ‘. HU. <.Vv • • ' • . « 4 ■f vi V ■ ' '• , . ' . ’ 4 ■■ r: v ^ or '. Iv ^iU <9 ^ t ►- V • ' t • ; y.. , T.t« j:- < 1 ... ^ '-i; "S / ^ • ■ \ . 1 » O' -j ’ .: \ *« V . 1 jiT SI v*tj,i,'u£ E . .t X ’-J" ii .- #•' ■” ■• . • : ^ 1 l’ - - 1.:' ^ > . * ' . I . »- i’ “■■ ’ ■ ' j f /' r f. •!:•!-•:<.’ . * 4 . , , . Jl- i , , < ■ *.. s ■r. : .V:,:: ;. ■Xf « v'j;.' ‘s • f rt: • '* j aci(; -■- * •T 5 UiC*'; •!.». .i •: n'X 'i.;. i.: ■•‘ r -1 V ' J 5 L' '. ' ■ ‘ _j -J * fi ■ '’. ■ '■ 'f' > '• " .' . r ‘•f '•, ■ ‘ fi'. I , r , . , •'f ^ ,..r ^ ' ,y,'' * • !' *' j> !. r ‘ ’P n r. ■ J a 'If r./o . •» : ; ■i.-i ’. ., 1 ^ ; ■ “ i A Vr. .) f.riA 0.' .‘.-.t :K"‘ ■' ■; • • • * , , , I • 4, . 1 • ' ’ . * .'. V' : - :'f 1 ' *• ■', pi.'r M V .T f 1 ‘ ' ■ ' . . - ;j ’.x-T ', . ^ i ’^>.1. ' . yf *, • * » * •' rv ' f * , s! *;c' ■ Ts'^'r o^r ':,, •.<-i\, - i ' ' ;■ , , * i r , .. ' Uijyr ■ ' 1 .'j L I.- « « ■ .> • . ■ V V- • ,.!M, . • ,♦ : ;, T , OiOfr- '•* ' ■ •■‘^ *• ‘ '• ■■ ri , . , ■ ! » , ;/ • r !, 0'r.tt a. * • . , »' ? • -1 *• .. » ••/;:; : ■ V'* - *- 'tr C* : : .1 ■ ■';],>• ' •'f > f-A- - ■ - * , • 1 . t t '■ ' '..- I •* I • *"* •• .* ■ .H. . ' ' J ■ , ■ • >' . 1.. . o; ■; ;•, '-■ v:. . ' ■ , r :1 ' • ' • V . N : ■; f K J . K . 1 ^ Ji ' *1 J r ' - ■ ? , ■ - , • ^ J i'‘r ' ’ ' * ' ff ; : t . _ ■ ' ; - » *• r> r * ■ • t % • « . .-.-i 1 1 f: • ;.•/- ''- I .. 1 , i-wr ■. *\: iy^\h:L (.. i : tji*.:) 0 %^ > : £,■ '. ,. ■’ .. ■ ■> ■■ :X . 46 The foregoing information decided the "basis of the appraisal, and the next step was the preparation of an inventory showing all the articles belonging to the street railway department. As a pre- liminary to this work, all the trolley poles were numbered. Then a party was sent into the field which carefully measured the tracks with a steel tape, at the same time making note of the location of all poles, frogs, switches, paving, and other fixed physical prop- erty, These notes were made in the same manner as commonly done on chainage surveys of steam railroad lines. The oars were inspect-- ed, and notes made of their condition, particularly the bodies, trucks, and motors. Buildings and their contents were enumerated, and finally a mass of data was compiled which gave the q.uantities and kinds of all articles comprising the physical property. These articles then were separated into the various classes req.uired by the uniform System of Accounts for Electric railways, prescribed by the Interstp-te Commerce Commission, and officially adopted by the Ohio Public Utilities Corrimission on July 1, 1914, In order to ascertain the conditions of the rails and ties, S5 holes were dug at random along the tracks, and careful inspec- tion made of the rails, ties, ballast, and paving. Holes were drilled through the webs of rails in order to ascertain whether rust had decreased the thickness, and the wear on the heads of the rails due to the passage of cars and vehicles was measuredto the nearest l/64th of an inch by means of an apparatus designed spec- ially for the purpose. The wear of the trolley wire was measured by calipers at various places . Prom the measurements thus made f * ' r' T-"*" ' . ■ " j" ^ ’j'’ .’. Ww V /*, '/'-iiT) J< .V..* XiU.1 i.' i'. 0 ” 'Xv - rv) efjo v"^ '* r .';. ■ no «v ■, ^ '' ■ mj.-? /. ' i- k J ,. ■' . ” » 1 . . , " v» « £ . , r. ’ IK*. ^ . t vJ.,. )(^' ^ 47 deductions were drawn concerning the prohahle remaining lives of the various articles, thus comprising a determination of deprec- iation upon the basis of inspection. To the (quantities thus ascertained there were applied prices ! representing the avercvge costs of the various articles during the j five years preceding the time of valuation. Inasmuch as the ap— I E praisal was miade as of December 51, 1921, this period comprised the five years, 1917 to 1921, inclusive. These average prices were deterirdned by ascertaining from the records of the company the cost of a given article in each of the five years, and the a,ritlui:etical average of these costs formed the price applied in that case. In some instances where the article was not purchased in each of the five years, correspondence was had with manufacturers or dealers who customarily supplied the company with that class of eq.uipment. The appraisal included all property possessed by the street rail- ws,y department, and this was subdivided into that actually used in I the operation of the road, and that which was not used in the pro- duction of the service, that is, into operating and non-operating property. The appraisal also showed the present or depreciated cost of the property, this being determined by deducting from its cost new the depreciation which had accrued to the time of valua- tion. Bases of AuT)r8.isals ; In seeking to deterraine the fair value of a public utility property there have arisen great differences of opinion aiuong authorities as to just what constitutes the prop- er bp-sis of ascertaining that air.ount. Discussion of the reasons for siioh differences are "beyond the scope of this article, and it mnsT; suffice to present certain prominent features of some of the more viridely used methods of appraisal. Of first rank among these, in my opinion, is that which seeks to determine the actua-1 invest- ment in the property* 5 Original Cdso to Date; This ha.8is of appraisal may he de- fined as the ascertainment of the actual investment in the prop- erty to the time of the valuation, excluding from consideration articles that have been retired or incapacitated for further ser- vice for other reasons. That is, under this method, the object sought is the determination of the actual cosu of the plant as it exists at the time of tlie inq.uiry. This cost could usually be readily found from the Plant and investment account if the books of the company had been carefully kept and proper corrections made from time to time for retirements and for additions and better- ments , unfortunately, however, the books and records of the company j usually do not afford direct inforrmtion concerning the actual cost j of the property as it exists at any particular time, and for this I condition of affairs there a^re a number of reasons. In the first place most present-day companies are the outgrowth of much smaller concerns, the Increase in size being effected through consolida- tions or the natural growth of the business. During this period of evolution the property iriay have changed hands a number of times, the system of bookkeeping may have been altered to suit the ideas of different men, or proper corrections may not have been made for 4:9 changes in the property during the years that have passed. During the process of evolution hooks and records have become lost or des- trtjyed hy fire, flood, or other mishap, have been misplaced, or become no longer available for other reasons, in brief, the record has not been kept up to daue and no longer reflects the actual con- | dition of the property. Then, too, the books may have been opened in the beginning upon some amount assumed as reflecting the actual worth of the property, the amounts of stocks and bonds issued, or upon some basis other than the actual cost of the property at that time. If this has been done, as fre(iuently is the case, it is ev- ident the Plant and Investment account 7/ill not show the actual in- vestment in the property. In any event, it may be said that the amount carried in this account seldom reflects the actual cost of the property. Were the opposite of this statement true, 1 am of the opinion there might I never have arisen other methods of valuation, for it appears the : general opinion of the ordinary citizen that the actual cost af- fords the true basis of appraisals. Inasmuch as the reasons for this opinion are subseq.uently presented in detail, further discus^ i i Sion of the matter at this place need not be indulged. Historical Reproduction ; Palling to ascertain the actual in- vestment in the property from the books, recourse may be had to its ascertSwinment as nearly as possible by means of so-called histori- cal reproduction. This basis of appraisal may be defined as the determination, as nearly as possible, of the actual investment in the property. Por this purpose an inventory of the articles comi- r ^ to , iJii ■ to c'v'ivM. i ' ' . t , :.' a?< . * ' » ‘ V 1 1 ■ ~ ■ ' . <"J, ♦ \ ' -Y • 1 1 - r J ; ' ' •■ • : '■! ( ■ , V ' -r • . ’ - ■ ' ,* f' * . .'.-t V ■ * '* ‘ I :"i ' • 0 - T- ' :.\ 4.1 lit * ‘ f/' «. * w > .. .. ■fA r 1 r • f '.r * -X'lO' ' ■ : - ■ • ■ t -' 6 v, ' ■ + V .. ■'■ 'Xtho'' w I ' < ' . ^ ^ * ’’.‘I- " J t.‘ •..! ' : -■ ,it *0 t <. •'f .* K ; ’ '. ’ I : *!.>■ 'i-'.:- f 1 ^. 4 ■ j M O I ■ ' ' tt) t : { V'-^ K'.O'i ''•ir: M • i .; J,ft ' .f • . I • - 1 '; A 0 « : ■ < , « ■* ' 'I . " ..' . vj I * ~ . !•■ ( ■ , J • V ' -tij.O'i'r 7 • • y t .'yA ' ■’’0‘ili' Ci)5 , a.:.r C.- ‘;i'' V >'» 50 prising the property is prepared, and to them are appended prices representing, as closely as possible to determine, their actual cost to install. Of Necessity this method takes cognizance of the history of the property, the methods used in its constructioh, and the vicissitudes through which it has passed, hence the name. The practical procedure of determining the cost of histori- cally reproducing the property is identical with that hereinbefore described for the Portsmouth street Kailroad and Light Company, beginning on page 44, with the exception that, instead of applying the averages of prices during a term of five years, there would be used the actual cost of the article, as determined from the books and records of the company, or by other means. Judging by my experience in the matter, it usually is possible to determine q.uite accurately from the books the costs of about seventy-five per cent of the property, and the remainder must be estimated as nearly as it can be. The costs of the larger articles are q.uite conmionly shown on the books of the company, and it usually is pos- sible to closely estimate the costs of many of the smaller por- tions of the plant. For example, in a street railway system., the costs of the cars are generally reflected on the books, as are the amounts expended for the electrical eq.uipment for the rolling stock, Comionly this portion of the property will account for a- bout one-third of the whole. The costs of carbarns, shops, and power houses are also generally known, and this accounts for a con- siderable portion of the whole. The airiounts of rail, rail fasten- 51 ings , 'ballp-st, ties, "bonds, trolley wire, poles, and similar part- icles are easily ascertained, and the costs of certain q.uantities of these are always shown on the hooks. Tor example, the cost of steel rails was almost constant from 1900 to 1916, hence it is clear that if we know the amount of rail it is easy to fix on a price that shall represent its actual cost within a very small percentage of error. The same is true of the other articles com- prising the plant, and I am of the opinion ^the historical cost of reproducing a property may he ascertained within approximately two percent of the actual cost. For all practical purposes this may he considered the same as actual cost, and for purposes of rate making it is my opinion that the cost of historical reproduc- tion is second in a minor degree only to the value of the actual cost method. Post of Reprod uction at the Present Time : A method of apprais- al having many adherents, and widely used in ra,te oases, is that known as cost of reproduction based on present prices. This method may he defined as the ascertainment of the cost of reproducing an identical property, using prices current at the time of the apprais- al. This method has been much in vogue during Pvnd since the Inter- national War, although it has been in favor almost from the begin- ning of modern valuation practice. Possibly the reason for the favor with which it is looked upon by the owners of utility prop- erties arises from the somewhat higher costs it gives as compared with the actual costs of the various articles. To some extent the 53 greater amount o^btained by using this method of appraisal is offset by the fact that accrued depreciation is commonly deducted there- from in determining the rate base. This practice appears in strict accord with the commonly accepted interpretation of the rule laid down by the United States Supreme Court in the famous Minnesota Rate cases, and q.uoted in part herein on page 37. Under normal con- ditions this deduction usually brings the rate making vsilue of the property some?/here in the vicinity of the actual investment there- in, and therefore, insofar as amount of money is concerned, does no great violence to the writer’s contentions for undenreoiated original cost as the proper basis for rate making. However, the difference in principle is very great, and it is upon principle that I oppose the reproduction theory above outlined. Moreover, during war time, the costs of all articles have so enormously in- creased as to render excessive the costs of reproduction of prop- erties when those prices are used. In sub8eq.uent pages this mat- ter will be more fully discussed, hence will not be considered at greater length in this place. In the practical procedure observed in making an appraisal upon this basis there is no substantial departure from the methods already described for inventorying the property of the Portsmouth Street Railroa,d and Light Company, as set forth on page 44, except that, for pricing, costs applying at the time of valuation are used. Wherever the company has made recent purchases of an article — i- - trra.’c-' V * 7 ' i n '■\ A ? •■■ 4 . ■ :'.l ••r;j ■si'i 'I ■”■? V i-C.iJ" ■ \ J . ' ,, G .-sM ■ < ■ --■- •: J ■' ^ -- '* ‘ :■ '.t v+-' / I :. V' , •! iAfj i?v ♦ ■> ■ • ; . ^ ■ .• ' ■ 7 ■ I .-.. -w .%.? 'tr!*'. Cw... '• J ^ -'.'I , . U.. , » ' ' > V . f :: . U M .•■'L'iff <>v .^w . '■©ftj .a”* J"oo<: C r. .iJi; >?:•'*■ ,) ; ■ U '■ : • i. *• rv,. .v*f^ ;..l ■ Ofif- 3 *j£*-';ri;:;- '.'"I. v.-» w r p : / J :, • .'X > i b tj- V 0 ;r , .'j • ■- • d . : i' f * .) 'I ,t dd ^ c-'- . ••' j ~ \j . .0 ‘ . . 'trd 'i'j'I' 'K' ' aoc. , V ■ vX.0' 'r)I'',v 'i >v.j 1-^ L/^aAD» ■ ^ V'C.'^ •;< ■ . ILX'9 'xr^t '. ’-A ' . ' r 4 ' ,. 1 » 4 r.-'llT 'bii'' ',1 ■ . iS c- X , 7 ./ y '• . ' T F. • 1* \ • • <* 'At# A;». . j ^ .u. ^ 1/ t - w < ‘ - * • ^ ' •'.' ‘' 7 Jl 53 the price paid therefor is used in the appraisal, and this usually can he done in the oases of articles which are freq^uently purchas- ed, such as ties, copper wire, poles, or similar articles. However, it freq.uently happens that the company has made no recent purchase of certain articles, either because they have not been needed, or perhaps it is a machine, a car, or similar class of eq.uipment that has a comparatively long life and therefore is seldom bought. In such oases correspondence may be had with manufacturers of the same or similar articles, and the costs of sma.ll articles ma,y be obtain- ed locally in many cases. For many articles of trivial importance the prices may be deduced with sufficient accuracy from catalogues of firms dealing in that class of merchandise. Ascertainment of cost of reproduction calls for wide experi- ence by the appraiser if the resulting product is worthily made, for it calls for the exercise of mature judgment in determining the numerous q.uestions that arise. It should be borne in mind that reproduction of a plant on other than an historical basis us- ually involves assumptions as to manner of doing the work, method of pricing, or other factor in the appraisal which it is impossible to reconcile with conditions existing at the time of the appraisal. For example, there may be involved the q.uestion of reproducing an old-style pump which no longer is made. It is evident that no as- sumption as to present conditions can exactly fit the circumstances surrounding the pump, and that either we must assume the cost of actually reproducing the pump at a cost that would be prohibitive. I u ir - > I ’ , Ct'tolip O' :".i. ,h - '.• . 't. .. ..;*■ vo^r: ; 1 ..- ^ , i ■■ ^ J • 'is' <■: :._ L > »■■.'■ Atjfji , , 'I ■ ■, •: : (..:4 ^ 1 : i-*' ,.l 'i;U 'f (., • . u.L ■, ■ , ■ ■ i. ' t '". V I t ’ 'i.Mi -’’.•T'! f*r*« 3 L :'.v ‘i »* :i !. , ■ 1 ' ‘ ^ i j - : I .•U '' I'i h;rHJ: ' i; C f» Vo ^ 'It. uA . .) ' -■ ^ t );{;*■ ^(f r -• V' <*• ■ c/OfC ^1. r.’j '. *'<.■ • . f' , , t. r I \ i to , ^ ft ^W w»>. W *W‘.A S, i '. .•■ I • '■#1 f * ■• " ■ ^ ' Vv)(tit tr^;: i _ ' • ", -4 • M i ;:;^[ .L* 'v'' . \ , 1 > .,• > r>i .C -■ b — J I v’V A X ' CiK ' ,w ^oi' -i^u ii; & /- 'i‘- •I:. ,?vS v-- !• f V ; : V /I i? V ;i Ki '.J ori- !'.... .iJi. - ; r ..fP, J.i . ■' ^ '■ :•. ■ ‘v V "r- ' o;,.- . i ; V -Jjjv «..!. .J.’ 0‘r J..C4Jajt4r^ .'• 'K>i fr , *. L,.{:^i:•^ ^ •>( Vii?’?£ *:£ ffiU? :'■!.- t,. Gtv;. I> • • ' ;>•• *1 *. a :., VO : .‘i-rrv: ■*.: i ‘ F>ifjfv( ji' 4 ( ,r.,l -Jt/ i. X.t .' V/ ‘V.’ ■ : t ■•.. •• '. •» ; :■• ■ t v; ■ V'f o',*. :;,.* 'cl- V _ . ) * ) ' . ' ' . ■ ■ ' >-■•' ■ .i .* • ''• ■ I ■ s'* J .fi ^r. . '■ : :i , n til i?i '■**-.»*.. . '■ • ISiJ vU ' *-1 .n. . v)C -•.' '. •■ » : ,;.v 'f- s ' ‘•V, * V ■: •■ , I "■ t . v' 0.:; •; ; ■ti- w 'tu' ■• ,.. «v: v 'M f It.:. -: s3ga»Me£j— 1-. - - ■:■ 55 When compared with the actual cost of a composite property, its cost of reproduction, using present prices, varies greatly v/ith the time of the appraisal. If we take a property that was 15 or 30 years old in 1915 and had made an appraisal of that prop- erty in 1916, we should have found a toxal cost-new about ten per cent in excess of the actual investment therein. Had we valued the same property in the same way in 1919, the time of peak prices, its cost of reproduction would have been at least double the act- ual investment. Ihe writer has in mind a good-sized street rail- way system in Illinois wherein the cost of reproduction in the lat- ter part of 1919 was found to be more than twice the investment in the property, How that the era of falling prices has set in, the difference between actual investment and the actual cost of such a property is less marked, although in the early part of 1923 it still would have been about 60 percent greater. Reoroduot i on at Average Prices : To overcome some of the objections made to appraisals prepared upon reproduction bases and using war-time prices, there has been devised the plan of substi-^^ tuting for those prices unit costs that represent averages of a- mounts paid for articles during a term of years. This period, of course, may be for any particular time desired by the appraiser, but commonly is for a term of either five or ten years next pre- ceding the time of appraisal. As shown on page 45 a term of five years next prior to the time of valuation is favoiedby the Ohio Public Utilities CoiMiission, in many cases valuations prepared upon the basis of ten-year average prices have been used in other > j- IT a... s* i^n:i ‘ .. ■ * " ■" • '•^'' ■' *- .\ -- '• ‘ • . ■' ‘ .... » . ,.'rr*, \ n~ " ' A'tf S: orfc V LX-^ ><■ A. , -r ^ ill i .A- ii I ..’'!" , .. ‘.Vt :.« ijtr, I J., :Tm .*< :p-. jRv'-. ^■■'3 «,r. ft iiv ./■ ' I V , .j \ V r>,jtof< L.CX)! *;'.-■ o*'.:. i ‘j'lX' Of i) ' *■ vX^X lo '.' (' I’ . 7 / » ' ■ V ' ' ' ^ I, i- ■ ^ il ’H. .1.. • • • •• ,. • • L ' ■j.: f:-. X ^ ;. PlKfZ rr... .J V'r ’ i I -rV 'i; 3 ‘ -C J> ■■:fv;ri3? rteXolJ'^' ; l A ai/v •*"'• .'.<7 i ■,: '• ^ ( , ■ i-'.;. •.. .V. „.. ' ■P'lU »• .(p N« >: .'io (Si/ iX- 5 (lij:i/w. c .'fl ■V. lx '- >i, ,„ /'.i: 0'./ . 'i ’■• '-V vl. ' <./‘’X‘>J cT'ry^a*** *> l|U. ' ' « l“ ' ?>. • ' wj. , Wv'XO : . 0 !-r „ •’'S 1 ■ •«*■ X-. » . i e.- » ■• - ‘t^y 5 r'. '■•: ;■. -;- ■'• D V- ,> J ^ o;: ^}. X L-' ' > V ; . i '. ■ h '*\i ■ ■.I*' i:*.' .■'•^ .C '' ■ -fc t 1 * \ . • • • . ' i '. . . . . f' i. . n - . ^ ^ 4 - .*. ,.. vj — *• '. ■rii • X 4 j vfn If O ’ /“ ) ■ ^r... ti ; 'vr)- I'iX a£?r 1 xV. 1 -. ' 3 'i 1 X ‘ '1 0 • i. X ■ c: -ciJ.-' r-rit. ^.'r Of?^ :rhi6r,.M'l of:/''.:'; . - r/i rty. /rr '.a ffl ‘ - '-■ • -Oi :■■ . '.'VO- ■ '•■••''’ ' ■' »/'..■ k) J. i t' 'I ‘ ■“ ■ > , • ' V , .'.ivx- !:'• ■ V f.' ' .Vl ki i.'.. !i i. '<^ ' ‘ • -/if <* ' - ** a , • 't ’^1 vr i’. .*>'’ !■ . *'4 i ": '... oX; ?.l' . 'j S ' .' I i/>V!T»:^ ;. »-J IX ?^‘-:> ' ' iJ 1 !.. .. oi -r‘- B ' V/. J - ■- .’L',. ■‘.roT.-^XO . I ? . 58 oost of the plant. These relative costs will vary, of course, with the difference in utilities, hut will afford an approximate idea of the differences between the several methods of determining reproduction costs. Rate Base ; In a rate-fixing proceeding the rate base may be defined as the amount upon which the utility may rightfully expect a reasonable return in the way of charges for the services it supplies. Such a definition naturally implies that this a- mount is fixed by a state or other regulatory jurisdiction in the matter, and, in reality, is the sum variously called "value of the property”, fair value, or by similar term. Included in the property which goes to make up the fair val- ue are all articles commonly considered as comprising the operat- ing property, that is, the eg.uipment actually used in producing the services which the utility furnishes its consumers. Excluded from the rate base will be the value of articles whicsrh are no longer serviceable or which may have been used at one time but not now needed. Thus, a company may have a boiler pump which it has replaced with a more modern design or one of larger capacity, al- though the old one is still useful. However, usually the value of the old pump would be excluded from the rate base because it is improbable that it will be used again in the service. Also, a street railway track may have been useful at one time, but, ow- ing to a change in routing of oars, it is no longer used. Unless the company could show a strong probability the track might again < M ' , ^ , :, : 9 u .'t.^ '. ', ih, dii V . ■». c?Jj‘:i ti o;iJ } tfibl S j. V . ^ I'D r vr X: L.^' ■!. i,. • ‘ I -^Cc" /j c^^. ;^: ,;> ■■ ... 'ir . . - ' ., * t ~ V- ^ ’4 . ::r'.t. \ . r .j. .'•« '• ;}J -r • ■ ■ !■ . - •; *' f‘ .'* ■ - V ii (f ' r t j:'. w-vt L‘^^' » ■- ' ■• ’ ’..I •'■ t,;'^ , , i'* . *: : V.0 .,1 . . c.'' i. l^xr^Uc: J .'. 'o , ; - ■: i ■''■•• .ri oi' vJiM,./ . ; , ■i'-trl'-.v ‘«vLTvn^' c^^vf• t‘* oojc. ■.eii:.'*'! ■• V / -H. *£j.m':X '. Mi> ii; •■roc e'f-s!, !&x' •■•'■ ^ -I OAri ,tii; - r+-t?jri.i:-rc{. -£f> ■.>^C‘X ■ (.•.•■:■'■■' /oiriw, > 0 ';' c?j V cM) lCJ.y e^iinc ' i; 0 ';rX /: ’.‘fw r •.' ' '.’irrt . •-,•■ f .sU r^■ 4 ->' ' ,• I ,? >x 'M. :“iv _ . , ,'4<" '■ > . r 'i'toti: t. i\'jc •. 'A. • 4 . .-•' 1 '“ r -• V ■ > 4 .’ I. r ,' „/■, V,/ ■ • • '. ^ .j ».Cc ‘ r':^ ■•iv.'.'' v ':. w> : --U P'«i':vCj .4 ''^ ' * V- {y . , r/y* * • - •• ■'J v^“: , it I . "i’*- ic»-. "iarjirr •■r-, 59 be needed, its value would be excluded from the rate base under modern theories of rate making. On the other hand, the company may own a considerable tract of land which is not used at the present time, but which it holds for purposes of future develop- ment, such as the construction of a power station, gas tank, or other necessary facility in its business. In such cases, unless the amount of land so held is clearly excessive, its value is properly includible in the rate base. For the company is bound to use conservative methods in providing against its future needs, and it would be an unwise regulatory authority that would deny the right to provide reasonable (quantities of land for future ex- tensions , Thus is brought out one of the differences between the rate making value of the property and its market value, or possibly the value for taxation purposes. For the rate making value exclud- ing, as it does, all unnecessary property, may be substantially less than the market or tax value, for the two latter values do not distinguish between the operating and non-operating character of the articles unless they no longer have any value whatsoever. That is, in the last example mentioned, the land held in excess of the reasonable req.uirements of the company would not be includ- ed in the rate value, but it could be easily sold, and undoubted- ly taxes are annually paid upon it. Oorimionly the rate base for a particular utility is determined by the regulatory commission having jurisdiction after an exhaust- 60 ive proceeding wherein all interested parties are given the op- portunity to appear and place in evidence all facts having hear- ing upon the q,uestions at issue. OoKimonly the procedure before a regulatory commission is not confinea to the strict lines of legal cases, the intent being to secure any and all facts that may throw light upon the matter. All evidence is presented under oath, and the statute prescribes severe penalties for willful mis- representation of facts by any witness. In a typical rate case before a state commission the matter may arise upon petition of the company, a municipality, or a consumer of the services sup- plied by the corporation. Complaints as to rates or appications for increases are usually filed in prescribed form, although this is not necessary in order to satisfy the statute. Usually there is filed a brief statement supporting the allegations, and within a specified time, usually ten days, the comrrdssion will serve not- ice upon municipal authorities, the utility, or others likely to be interested in the case. The matter is set for formal hearing before the conmiission or some examiner appointed by it, and at these hearings full opportunity is afforded each side in the con- troversy to present all the facts in its possession. These us- ually comprise complete operating statements of the company for a number of years preceding the time of the inq.uiry, together with an appraisal of the property, the amounts of outstanding securi- ties, and, in short, a complete history of the company and the results of its operations. After the close of the hearing each side is privileged to file briefs stating its particular views 61 upon the matter. Thereafter the Commission takes the oase under advisement, and in due time renders its decision. Statutes com- monly provide right of appeal to the courts through specified chan- nels, and the issues in any particular matter have the same right of final determination hy high courts as do other like causes. In placing in evidence facts concerning the value of the prop- erty of a public utility there generally is engendered a spirited controversy, the utility seeking to secure as large a valuation as possible, and its opponents exerting their efforts to keep the fig- ure as small as they can. Quite freq.uently evidence takes the form of seeking to disprove the claim of one or the other side as to the value of a particular article, as a gas tank, engine, bridge, or other article of property. Also, there freq.uently is controversy as to whether a particular piece of equipraent is useful or neces- sary in the conduct of the enterprise, and much testimony is given in support of the various contentions. In general, it may stated that the best interests of ail parties are served where valuations upon two or more bases are placed in evidence. At least, such is the present status of the matter, although hereinafter attempt will be made to show that one only is necessary, provided, always, that that one is the actual investment in the plant. Included in the property of practically every public utility there will be found articles composing the physical plant, hence designated as physicals; other elements of value which may or may not directly form a portion of the costs of the physical items, commonly called overheads, and a third class of values forming 62 elements of value not includi'ble under either of the foregoing heads. These elements, such as going value, cost of attaching or developing the husiness, and similar values, are generally known as intangihles, and constitute the most difficult class of values to ascertain. While extended discussion of the various elements of value is outside the limits of this article, never- theless "brief mention may he made of some of the more salient features. Appraisal of most of the physical items of the property is usually made without much difficulty, and consists principally in applying unit prices, determined upon some one of the bases here- inbefore described, to the several articles which go to make up the plant. Controversies concerning these articles coirmionly are limited to the question as to whether a particular piece of equip- ment is useful in the conduct of the business of the company, or whether it is not. Occasionally the value assigned to a paruicu- lar unit may be attacked, but this forms the exception to the rule. Frequently disputes will arise as to the physical condition of the article, however, but this forms another question, though one that is directly related to the value of the equipment. Land, however, forms an exception to the general statements contained in the paragraph next above, and commonly forms the ob- ject of violent controversy. As is well known, land is one of the most difficult physicals there is to value, principally be- cause it largely forms a matter of opinion and because there is no 63 standardized market value for particular classes or parcels of real estate, as is the case with other plant eq_uipment, in other Y/ords, each parcel of land is a law unto itself, and so many elements of uncertainty enter into its makeup of value tat no one has been able to lay down any rules for ascertaining its worth. Apropos of the wide differences of opinion that may exist among reputable and disinterested persons, the writer recalls one tract of land along the Mississippi river which entered into a matter that came before the Illinois Public utilities Coirmission. Testimony was offered in support of values for this tract that ranged all the way from nothing to $15,000 an acre I Among other things, in the famous Minnesota Rate Cases, the United States Supreme Court stated: ’^Assuming that the comipany is entitled to a reasonable share in the general prosperity of the comr.iunities v;hich it serves, and thus to attribute to its property an increase in value, still the increases so allowed, apart from any improvements it may make, C9.nnot extend properly beyond the fair sC- ■ ► V . t ■ ;:C • I t .. .■f W 5 ' <1 i ; ti . < ,.v , i : ‘i • :/ lo eJi.Zj V ’ ’tv. ,7 . . ' • Ti '• ‘ X • v«.'W/v v'*^' ',i. to r.i » ■{ f - ,' jL' , .^T'Crsalo E- ' ‘ 1.-^ '’"O-. '4/ii •.> C L 4' V r i irt 6.1: > r. ^7 j Aii «r . . . w . ■ t '. .. v ^ . ii i ■ V. * ^ V U. J f.';l , . 'H -...idJ. - • • * ' * • . J ‘ J J. w , 'l'* £ ^ .Ji.ti '. .5 ',:'.F '.:(.T ■ ' ^ "1 *'; . .. -iJi.:.’ 1 •> -*. ■• 1 : ■ 1 LT8 •■ C I'j' ‘ i - • -> 7 . 7 ; i.i': . 'j i . ... o:^ ■.tyjj' ■ > j . 'f r. r, '": .-i i. . 'UV...X Tt. .. T'i -. *J ’.7v ■. .1 ‘-I ^ ‘J -i- ^ ' ^J-' ‘: i, ■>• ,• , "Tu.'* 1^0 t V J , ‘ ’^ . E’ L 0 ? ' ■' ; i) * '• ^ '-’■ ^ t’"'.' Ow J:‘ei . re •.»,■)' ’ * i,w \ iSiHoo ’{'j’'", i,\ j‘i. • r J - o » V ? - ^ \ - w- 'ir • l.y 0^.- «c ■. " '.0 i'.7 ■■ "', X.To'Jtr "Q I. '- n-,; • . ■■i-c •.» * i. X 7 0 7- wl-' r’i^rj" t».' ,./r %■ ,-j ' ? ) • . i ':C l- J-. i 1 c r. X7 ti i*’ J l> * L7i.y. 0*fif t ■ ; •: Itc ' { ■ ; .,'.7.'= »'*.l f f- ■ • •I citify. ..’r,: P,i ,*/*, Ti f; ' ^ - "i ■ ' ; i ‘ -' V"- »o „ c- fi t,. . ■ , 1 ' _ ■' '1 . ' r.:*'- n ^ "-..oUrs^ c is It! .20 t£>)l0 f.^ •it- ■ )V tJ.I -ifli ai- • • • ^ ! 1 ■ ♦ • ' v: i £J.Ji r\: i ■' * ■ - Oil ^ >• '. : ^._ cMj :.iV ir 1 eeof '. '"70 •:* • . * . « J, ^ - >;.jj • '•- ■• ■ • .v'n'c »;;;> v"*- ' •^hH' l-.-i jrr-.ri »• /r ■ «.. *■' ' * ' « , j.axWOlU -■•^X v: •;..: I .v 5 7D' , ij: j! ( 68 prolDalDle serviceable lives of various classes oi* eq^uipinenx under noriueil operating conditions, these lives "being "based on the ex- periences of engineers, operators, or others having to do with the particular articles involved. The age of a particular unit is us- ually easily ascertained frorn the records of the company, and this age, compared with the pro"ba"ble life of that article, at once furn- ishes its percentage condition, when the loss in value may "be com- puted as in the preceding case. Fre(iuently a combination of the two methods is of service, es- pecially in those cases 7/here an article is su"bjected to unusual wear. Thus, ordinary lap-welded steel pipe may have a service life of eight or ten years when used under normal operating conditions for, say, water service. But the water may contain su^bstances that q.uickly corrode the pipe, and it may fail to "be of use during more than a fraction of its estimated pro"ba"ble life as disclosed "by ta"bles. Hence it always is the part of wisdom to inspect articles whose depreciated condition is to he ascertained in order tha,t in- consistent results may he avoided. The experience of the writer strongly inclines him to the use- fulness of the life-tahle method, supplemented hy inspection. In practice there freq.uently arises the case of an article which ap- parently has a long life when judged hy the inspection method a- lone. Thus, a turbine engine may he apparently performing satis- factory service after the lapse of ten years, and the inspection method would place upon it a high percentage value, nevertheless. 69 the general experience of manufacturers, engineers, and operators of such engines show that such machines are superseded after per- iods ranging from ten to uwenty years. In this case, then, the use of life tables would give more consistentresulxs , As an ex- ample of the absurdities to which the ill-advised use of inspec- tion may sometimes reach, the v/riter has in mind the case of a steel water tank in which the appraiser fixed a value, determined by inspection, that would have given the tank a life of EOO years, clearly revealing a lack of understanding of the matter that was larr-en table . Other Plements of Value ; In addition to the elements of val- ue above set forth, there are certain others commonly included un- der the general heading of intangibles. Among these may be men- tioned good-will, cost of establishing the business, financing the enterprise, value of strategic location, solidif ica>tion of railway embankments, and others of similar nature. In a large sense these elements may be considered as merely modif ica-tions of the element of going value, hereinabove discussed, and they commonly are sub- ject to the same legal and engineering rules of determina.tion as that value. There is not space in this article to even attempt a discussion of the relative merits of their inclusion or exclus- ion from an appraisal, hence none is given. In his personal ex- perience the writer has preferred to ’’lump” all these elements of value into the one general allowance of ten percent, described on page 66, this method probably performing as efficient service as would more elaborate treatments based on assumptions that rendered 1.1. .0 T! ' ■ f’ ... .k 1 ' , ;. .t'ln : if- Jj. a . . •••■ , • •. -V i r; .? I'ai.iy ; ' tjxa t ...' L’ ;.r :x’ .■ . :..'..lgvv; 'v iv to ■:■ : j - : i'.,.*.. c ,i L .i.’ f*' it.!:', to .i. ‘i./P ,. to 4 X <1 . T-ttij :j; .JO ttolc* '* / • f.'.t ..' r . : M . . •: . * Iff. >£ 00 1 ; « :i *■ ■'.! ;t. !, i*;r'T ,y '-j - 'k ' ^ . J . 4 1 ' , •t.’ft' :■ I'-' lr;.s •#.*• 0 ' i V -o;;/rj &..V 0 * ... . V , ■ r • - t -■,i VI ' irtoO-’x.-'O o' ‘i . ^ ^ ,tO' ovodn v/r.', ' i-n.'v ' . • •n^r-^tr»;. ij % ’ I>'t-io:V, ''p'!"* v , ,’r- 5 . o‘ : , ■ iO Ir.J.r . •* : v.f> **, o t '.*1 U'l .k* 4 ' , 'u' Ol;. ••.•*■') ti 70 ^ ■ c: n,^ 'wll Mv lO '-^.*0 t -■- " f . ' ■ . V'^ n C'^ V.l-«>u'ir 6 k Ci ■V • •-: t ...■• trf.-? , - : JJ' . '*'• ^..v: "> ■ >’.''‘r^ t J • P’ . . • : '■ u . 0 / -ft r? .; o y 1 o ;• V '; 10 t .. •' VI ;i..V . .'i^- C: I ci V .. i. ;..' ! • .':• ^e-.'.L; i:> '■. . -t* ‘10 f:‘ inr ' V ?'■'. ('. ■■-" . < 'Y V' '....! . t ■' . '?* ■ *'( ,;0S4 w rcrf ft ; Hf . A-K‘i •'•' ^ ■* ■ f-^W (I'V* '. 8 * 70 1ii e results no more relia-lDle or accurate than does the simpler process thus used. Commission Bases of Valuation : In pra.ctically every state of the Union there is now a regulatory commission having more or less jurisdiction over the rates and services furnished hy public service corporations. It is to he expected these organizations should have the expert experience and knowledge req.uired for the successful determination of the issues presented to them in rate matters and others involving complaints of service. The writer therefore undertook to acq.uire a general idea as to the relative practices of the various commissions, especially as they concern- ed the valuation of property coming under their scrutiny. T’or the purpose of affording comparative data there was prepared the fol- lowing letter, a copy of which was forwarded to each state and ter- ritorial commission: 71 "In support of my application for the degree of civil en- gineer from the University of Illinois, 1 am preparing a thesis on VALUE FOR RATE MAKING PURPOSES, and desire to incorporate therein data concerning the attitudes of the several state com- missions towards various bases of appraisals used for public u- tility properties. With this purpose in view, I should greatly appreciate answers from your Commission to the following q.uestions: 1. When was the Commission first organized? 2. Please check off on the following list those utilities over which the Commission has rate making authority: 3. Has the Commission officially adopted any particular basis of appraisal for public utility properties, and if so, what? 4. if none has been adopted officially, does the Commission advocate or give preference to a particular basis? If so, what? 5. is accrued depreciation deducted when determining the rate base? 6. What value is acceptable for land? (Present value of adjacent similar lands, or other) Thanking you for your trouble in the matter, and assuring you of my appreciation of your courtesy, I rema.in. Street Railway Electrical Water Telephone Interurban Railway Gas Heat Warehouse Very truly yours. (Signed) H. E. Bartlett 1447 East 66th Place, Chicago. January 16, 1922 72 Courteous replies to this letter were received from nearly all the commissions addressed, and many of them forwarded printed opinions and orders in which the answers to certain of the ques- tions were amplified, it is, of course, impraoticahle to repro- duce these letters in full within the limits of this article, and therefore the following surmuary has been prepared which briefly presents the various views and data as nearly as possible. It is, of course, clear that due latitude must be exercised in placing constructions upon the answers, as each commission necessarily is compelled to be governed by particular facts in a given case, so that no iron-clad rule for restricting its freedom could be adopt- ed, For example, many commissions accept as evidence appraisals made upon any common or accepted basis, and from these appraisals and supporting evidence finally determine the rate making value of the property. During the course of the hearing it is quite possi- ble that appraisals made upon two or three bases mpvy be submitted, and in such cases the corimiisslon must entertain them. Thus, the writer has in mind cases arising before the Illinois Public utili- ties Commission in which, during the course of the hearings, ap- praisals of the same property were filed in evidence, these having been made upon the basis of original cost, or reproduction at ex- isting prices, and upon ten-year average prices. These several el- ements were considered, and each was given due consideration, after which the Commission fixed the rate making value. r ; ■ i ! • i -1 ’ - • 1 r. 0 I I ‘ ~ :'l ■■ - . •. ■ V » ii . . : ■:,>•'/ :f ivb I* ,k •■ : '. ' ■ 1 ' J} ' - ‘ -o '.i ,r> W/J' 73 Alabama t Uo information. Arizona : Arizona Corporation Oomiriission organized April 28, 1912. It has Jurisdiction over stej-im, street, and interurhan railroads, electrical, gas, water, telephone, warehouse, and heat- ing utilities, although there is none of the latter in the state at present. The Commission has not officially adopted any basis of appraisal. Reproduction value has been given preference as a rate base. Accrued depreciation has been deducted where same has been found to exist. Values of land are based upon the Judgment of those familiar with real estate in the particular locality, Arkansas : Arkansas Railroad Commission; By act of the gener- al assembly of 1921 the Corporation Commission (created by act ap- proved April 1, 1919) was abolished and was superseded by the first-named commission. The Arkansas Railroad Commission has no Jurisdiction over public utilities within incorporated cities ahd towns, and therefore has very little to do with making rates for any public service corporation. Calif or nia; Railroad Commission of the Sts-te of California: Commission originally organized in 1897, with Jurisdiction over railroad corporations only, but on March 23, 1912 assumed control over other utilities, including steam, street, and interurban railroads, electric, gas, water, telephone, steam heat, warehouse, water carriers, telegraph lines, oil pipe lines, cold storage warehouses, and automobile stage lines. The Commission has not officially adopted any basis of valuation, but in general for rate making inq.uiries it determines the depreciated reproduction value, and adds intangible values decreed by court. Accrued deprecia- tion is deducted, as is also obsolescent or useless property. For land the Commission usually adopts the actual value as determined by recent transfers of adjacent similar real estate, Colorado : Public Utilities Commission of the State of Color- ado; Commission created in 1913, superseding the Colorado Rail- road Commission, organized in 1885. Commission has Jurisdiction over steam, street, and interurban railroads, and electric, water, telephone, and gas utilities. Has not officially adopted any bas- is of appraisal. Generally an original cost basis has been s^uth ^ in establishing rate base, and freg.uently both reproduction cost new and original cost have been used in evidence. In several rec- ent oases reproduction cost new appears to have been favored. In general, accrued depreciation has not been deducted from the fair value of the property in determining rate base, but some devia- tions have been made. For land there generally has been used the evidence of prominent local real estate men. i 1 t i ^ I' ► / 'f- J •3 £ i U r ■: .< r' » 1. L £( . ■’" ' ; • J'\ ,.'. ‘ ‘.'.•,.ci; 'It V ; . ... Jjt. * .■ V.' I ' . .K. ..•A> < > ' ) ■. I an . . , ) . ; * ’ A' •.) ; •: . .' .■ L ■' J f ■ **« .1 ► ! •it l-^XiXT TrW^StSlSSK^^ • r-'T ■ '.:i. i- t;rr:3r!sw.i i 74 Connecticu t ; Ho inforraation. Delaware; Has no commission. District of Co lum'bia; PulDlic Utilities Commission of the District of Columbia cree,ted by Ac^t of Congress, approved March 4, 1915. Commission has jurisdictioniover street railways, electric, gas, telephone, bagga,ge transfer, tojcicab, and motorbus utilities. As nearly as can be determined from the printed opinion of the Com- mission in its opinion in the matter of the valuations of the Cap- ital Tra,ction Company and the Washington Railway a.nd Electric Comp- any, the cost of reproduction less accrued depreciation is favored, with la,nd values approximating those of similar adjPvCent real es- tate, Elorid a: Florida Railroad Commission v/as first organized in 1887; was abolished in 1891; and reorea>ted in 1897. The Commis- sion has jurisdiction over steam and street railroads and telephone utilities. Ho official basis of valuation has been adopted, but Commission is inclined to give more weight to actual investm.ent. In some cases accrued depreciation is deducted. For land usually original cost is most acceptable. Georgia ; Georgia Railroad Commission. Ho information. Hawaii ; Public Utilities Commission of Hawa-ii first orgs • 'v‘ 1 i, o w .i. i r' .M n. ■’ . '1C. ’I'. L''. b': ' C » . . ^ • .Tl' ' ^ • . > ■ - ^ ' . ... 1 . C.*'V ■ . . ' ' . r-v , . r. .. t i.' V UJ. /[ 76 MassaohusettB : The Department of Puhlic utilities of Massa- chusetts was first organized in 1669, thus forming one of the earliest commissions. It has jurisdiction over steam, interurhan, and street railroads, and electrics,!, water, telephone, and gas utilities. The Commission has adopted "the honest, original in- vestment” as the "basis of valuation. Accrued depreciation is not deducted. Michigan ; No information. Minnesota : The Hailroad and Warehouse Conmiission of Minne- sota was organized, and has jurisdiction over steam, street, and interurhan railroads, and telephone and ?/arehouse utilities, from printed matter furnished hy it the conclusion is drawn that it favors actual investment as a basis for rate making. Mlssissinni : The Mississippi Railroad Oor/imission exercises jurisdiction over steam railroads, telephone and telegraph comp- anies, and to a limited extent over street railway, light, heat, and power companies serving municipalities. The law creating and governing the activities of the coirmission has been declared ob- solete and a new law is now being prepared for submission to the legislature. The oonmiission has adopted no basis for valuations, Missouri : The Public Service Commission of Missouri wa,s or- ganized in April, 1913, It exercises a,uthority over street and interurhan railroads, and electric, water, telephone, gas, and heating utilities. The Conmission has not adopted any basis of axj- praisals, but has given preference to those prepared on basis of actual cost. Accrued depreciation is deducted, which forms an ex- ' oeption to the practice of most commissions in not deducting de- preciation when appraisPvls are made on investment cost. Present value of land, as measured by worth of similar adjacent lands, is used. Montana : Wo information: l^ebraska : The Nebraska State Railway Commission was first organized in 1907. It has jurisdiction over steami and street rail- roads and telephone and telegraph companies. In making valuations the Commission's engineering department determines the original cost and the original cost less depreciation . As nearly as I can determine from the information furnished, the Commission values land in accordance with its present v/orth, as measured by similar ad j accent real estate. ii }' H. ‘S 1 . • 4 \ r > „ S’Z . ' \ >■' t ' ' 1 • ■ 1 1 1 1 J - ) I' f I . . . f c ■ c >. : , i, f-..,: V ; e '• r . i "i I I .1 y ■•'.V •. \ I I i) I ‘ v«< V 77 Nevada ; The Public Service Commission of Nevada was first organized in 1907 } and since 1911 has had jurisdiction over steam and street railroads, express companies, private oar lines, elec- tric, water, and gas utilities, and automobile common carrier lines. The Commission has not adopted any particular basis of ap- praisal, and ’’account is taken of accrued depreciation and the present value of adjacent similar lands”. New Hampshire r The Public Service Commission of Ne?/ Hamp- shire was organized June 17, 1911. It has jurisdiction over steam, interurban, and street railroads, and electrical, water, telephone, and gas utilities, ’’The Cormiission gives a good deal of weight to the actual cost of construction of the properties when it is definitely known; also to reproduction cost and reproduction cost less depreciation when the actual cost is not known. The unit prices used in valuation are usually an average of 5 or 10 consec- utive years, variously selected so as to give the approxim.ate cost of the property in the Instant case.” ’’The fair value as above determined is used as a rate base. If a sufficient amount has been earned to pay a fair return on tne prudent investment and a fair amount for accrued depreciation, then the depreciated value is used as the depreciation reserve and the depreciated value is the whole property and the depreciation reserve should take care of itself. Present value of adjacent and similar land is considered, but the land may have a special value for the purpose for which it is to be used." New Jersey ; No Information. New York : Pirst District : The Transit Commission of New York was created by act of 1921, superseding the former Public Service Coiffiiission, organized in 1907, To the present time the new Com- mission has made no decisions, but is now engaged in working out a plan of readjustment and rehabilitation of railroad properties in the greater city of New York, Secon d District ; Public Service Commission of New York was organized June 6, 1907 and has jurisdiction over steam railroads and to a limited extent over interurban and street railways. Also over electrical, gas, water, and telephone companies. The Commis- sion requires appraisals to be submitted on bvasis of original cost where it can be determined or upon estimated original cost when the records showing actual cost are not obtainable. Accrued de- preciation is deducted. Por land values the "actual cost plus consideration of appreciated value on same.” 78 North Carolina ; The North Carolina Corporation Commission was organized in 1899. It has jurisdiction over street and inter— urban railways, and elec'trical, water, telephone, and gas utili- ties. Its methods oi appraisals are prescibed by the state Reve- nues and Machinery Act, which practically amounts to actual cost less accrued depreciation. North Dakota : The Board of Railroad Commissioners of North Dakota was first organized in 1885, at which time it had jurisdic- tion over what is now both North and South Dakota, The present board took over the control of public utilities in 1919, and now exercises jurisdiction over steam, street, and interurban rail- roads, and electrical, water, telephone, gas, and heat utilities, and limited authority over warehouses. The Commission has adopted a so-called historical cost for rate making purposes. Accrued de- preciation is not deducted from the historical cost. Both the historical and the peesent costs of land are submitted to the Com- mission for such use as it desires to make, Ohio ; The Public Utilities Commission of Ohio was organised August 9, 1913, succeeding the Public Service Commission, The first public regulation of utilities in Ohio was enacted April 5, 1867, thus forming the oldest Commission of which I have record. The Coimrdssion has jurisdiction over steam and interurban rail- ways, telephone, telegraph, electric, water, heating, artificial and natural gas companies, and package carrying companies. Since March 29, 1917, the Corrmiission has used for determining the rate base the fair price obtaining over the five-year period preceding the date of the appraisal. Effective January 23, 1922, the basis of pricing will be changed to reproduction as of the date of the inquiry. Accrued depreciation is deducted. Land is valued upon the present worth of adjacent similar real estate, Oklahoma: Corporation Conmiission of Oklahoma: No informatior Oregon : No information, Pennsylvania : The Public Service Coirmiission of Pennsylvania was created in 1914, succeeding the Pennsylvania Railroad Commis- sion which had been in existence for a number of years. The Com- mission has jurisdiction over steam, interurban, and street rail- roads, electric, gas, telephone, water, telegraph comx^anies. It has not adopted any particular basis for appraisals. In the pre- sentation of rate oases the Coimraission inVvariably has before it both the reproduction cost and the reproduction cost less accrued depreciation. Present vs-lue of land, as determined by the worth of adjacent similar lands, is used. Rhode Island : The Puhllo Utilities Commission of Rhode Is- land was organized in May, 1912, and has oontrol over all the so- called public utilities, except water companies owned and operated by municipalities. As determined from the report of the Special Commission appointed by the Governor to investigate the affairs of the Rhode Island Company, it appears to me the Commission takes cognizance of the cost of reproduction new and the cost of repro- duction less accrued depreciation. Land values appear to be based upon the present worth of adjacent similar real estate, South Carolina : South Carolina Railroad Commission. ITo in- formation. South Dakota ; The Bop.rd of Railroad Commissioners was orig- inally created in 1885, as stated under ’MTorth Dakota". The pres- ent commission exercises jurisdiction over steam railroads and telephone and warehouse companies. The Commission has not offici- ally adopted any basis of valuation, but favors cost of reproduc- tion-^ deducting accrued depreciation. Dor land the present market worth is used. Tennessee : The Tennessee Railroad Commission wa,s created in 1897 with jurisdiction over steam railroads only. In 1919 there was created the Railroad p.nd Public Utilities Commission, with authority over all public utilities not municipally owned, such as street and interurba,n railroads, electrical, water, telephone, gPvS, and heating compp^nies. In fixing a value the Commission is con- trolled by the principles laid down by the courts, and ascertains the original cost and the cost of reproduction. Accrued deprecia- tion is not deducted when determdning rate base. Lands are valued on the basis of the worth of similar adjacent rep.l estate, Texp .s : The Railroad Coumiission of Texas was firt organized in 1393. It has jurisdiction over steaim railroads, oil pipe lines, and natural ga.s utilities, the latter authority being conferred in 1920, The Commission has p.dopted no definite basis of valuation. Mr. R. D. Parker, chief engineer of the Coinraission states: "The writer is inclined to the belief that the value which nearest ap- proaches to justice to all concerned is that value which nearest approaches the legitimate actual investment, that is, the money which has gone into the creation of the property. The courts do not sustain such judgiment if such value does not represent the ’value at the time of the inquiry’; but what the vp.lue p.t the time of the in(iuiry is is not defined." ^ "The cost to reproduce the property is a fluctuating base, rising and falling with the costs of labor and materials; yet it is advocated ?*s the best meas- ure of the value at the time of the inquiry. A rate should be reasohably stable and it cannot be so and follow a fluctuating base," 80 Utah ; The Public Utilities Gonmiission of Utah was organized April 1, 1917. It has jurisdiction over steam, interurhan, and street railroads, and electrical, water, telephone, gas, heating, and warehouse utilities. The Oominission has not officially adopt- ed any particular basis of appraisals, nor does it favor such. Ac- crued depreciation is deducted in determining the rate base. Land is appraised on the basis of the fair present market value of ad- jacent similar lands. Vermont : The Vermont Public Service Oonmiission was first or- ganized in 1908. It has jurisdiction over steam, interurban, and street railroads, and electrical, water, telephone, and gas utili- ties. The Commission has not adopted any particular basis of ap- pr sal, nor does it favor such. Accrued depreciation is deducted in determining the rate base. The value of land as compared with similar adjacent real estate is considered as one of the elements of the worth of land. Virginia ; The State Corporation Commission of Virginia was organized March 1, 1908. It has control over steam, interurban, and street railroads, except where city charters provide for local control of the latter. Control is also exercised over water comp- anies other than those municipally ovvned, and over telephone, gas, and heating utilities. Por determining the rate base the Ooirmis- sion uses principally appraisals based on the cost of reproduction at pre-war prices, deducting accrued depreciation. Land is valued on the basis of the fair present worth of similar adjacent lands. Washington : The Department of Public Works of Washington was created in 1921, succeeding the Public Service Commission, organ- ized in 1911, which, in turn, superseded the Railroad Commission, created in 1905, The Commission has jurisdiction over steam, in- terurban, and street railroads, electrical, water, telephone, gas, and warehouse utilities, except those municipally owned. The De- partment has never officially adopted any particular basis of ap- praisal, but it is the practice of its engineering and auditing section to submit [a.) the cost of the property as shown by the company records, (b) estimated cost of construction, determined by the split inventory method, Co) estimated cost of reproduction, us- ing prices averaged over a reasonable construction period, or as of the date of the report, and Cd) cost of reproduction less theor- etical accrued depreciation. The Department does not deduct ac- crued depreciation in fixing the rate base. "Ordinarily the rate base fixed by this Department is very close to the estimated cost of construction, with a reasonable allowance for intangible wle- ments, such as water rights, development costs, etc." Value of land is determined by value of adjacent similar la.nds, at least to a large extent . 81 • West Virginia : Ho information. WlsoonBin; The Wisconsin Railroad Commission was organized in 1905 with control over railroad, express, Pullman, and tele- graph companies . In 1907 the law was changed so as^o give juris- diction over the foregoing and also telephone, electric, water, street and interurhan railways, gas, heating, and toll bridge util- ities, The control over gas, electric, water, telephone, heating, and toll bridge utilities extends alike over municipally and priv- ately owned. The Commission has not officially adopted any par- ticular basis of appraisal, ”In general, however, it uses a ba^sis designed to reflect as nearly as possible the actual investment. During recent years it has used a ten-year average of prices prior to the war for property which was in existence s.t the beginning of the wpj? and actual prices so far as determinable for property put in during the war,” Accrued depreciation is not deducted in determining the rate base where properties have been properly main- tained, Land is valued on its present day value subject to the rule in the Minnesota rate cases, Wyoming ; The Public Service Coinmission of Wyoming was organ- ized April 1, 1915, It has jurisdiction over steam street, and in- terurban railroads, and electrical, water, telephone, gas, and heating utilities. The Commission has not adopted any particular basis of valuation, and does not favor such. Accrued depreciation is not deducted in determining the rate base. Land is valued at its actual worth, as determined by appraisement or otherwise. -oOo- Based upon the information contained in the foregoing synop- ses, it is seen that public regulation of utilities began in Ohio in 1867, closely followed by the enactment of somewhat similar legislation in Massachusetts in 1369, Then followed a lull until 1878 when the Iowa Commission was organized, Prom that time on the growth of the idea has been comparatively constant, both in the number of commissions and the extent of their powers. The jurisdiction of the early cormnissions was confined practically to steam railroads and telegraph lines, but at the present time con— 88 trol is exercised over the activities of practically all utilities, as instanced hy the Wisconsin, Illinois, California, and other com- missions. However, a numher of them even now have hut little au- thority, inasmuch as their jurisdiction formerly extended mainly over the steam railroads. By reason of Federal legislation and decisions of the United States Supreme Court, the state comriiissions now have hut slight authority over the steam railroads, and, inas- much as the legislatures of many states have not seen fit to confer the necessary authority over other utilities, the commissions in those states are extremely limited in their functions. This is particularly true in the South, as represented hy Mississippi, Tex- as, Kentucky, and Florida. In Kansas the Utilities Commission was abolished and superseded hy the Court of industrial Helations, and this organization has been the storm center of labor agitators and others during the past year. In many of the states the salar- ies paid the members of the commissions are so siriall as not to at- tract competent men, with conseq.uent loss to the public and the utilities, and instances could be given of where employes of the commissions are paid more than are members of the organization. Perusal of the synopses shows a wide diversity of opinion con- cerning the proper basis for race making purposes , and in order to enable a somewhat q.uicker grasp of this phase of the matter than can be given by the summaries above, there ha,s been prepared the following tabulation, briefly showing, as nearly as possible in the limited space available, the attitude of the various comirds- sions on this important question: 83 1 . State • Cre- ,ated Alabama Arizona 1912 Arkansas 1921 California 1897 Colorado 1885 Connecticut Delaware D.of Columbi£ 5 . 1913 Florida 1891 Georgia Hawaii 1913 Idaho 1913 Illinois 1914 Indiana 1913 Iowa 1878 Kansas 1921 Kentucky Louisiana 1898 Maine 1915 Maryland 1910 Massachusetts 1869 Michigan Minnesata Mississippi Missouri 1913 Montana Hebraska 1907 Hevada 1907 Hew Hampshire 1911 Hew Jersey Hew York 1921 II 11 1907 Horth Carolinal899 Horth Dakota 1885 Ohio 1867 Oklahoma Oregon Pennsylvpjiia 1914 Rhode Island 1912 S. Carolina S. Dakota 1885 Tennessee 1919 Texas 1893 Utah 1917 Vermon^r 1908 Virginia 1908 Washington 1905 W, Virginia Wisconsin 1905 Wyoming 1915 Coimnission Basis of Valuation for Rate Making ^To inforriation Cost of reproduction less depreciation favored. Has little to do with utility rates Depreciated reproduction value Generally seeks undepreciated original cost ITo information ITo regulatory commission Appears to favor depreciated reproduction cost Prefers actual investment Ho information Pavors undepreciR,ted original cost !l !» II II Appears to favor undepreciated actual cost; Has shown no preference; deducts depreciation Ho Jurisdiction over utilities other than R.R, Court of industrial Relations Ho Jurisdiction over utilities Ho preference; has not valued any properties Prefers depreciated reprod’n on 5~year average How making valuation on reproduction hasis Has adopted undepreciated "honest investment" Ho information Appears to favor actual investment Has hut little Jurisdiction over utilities Prefers depreciated actual cost Ho information Commission engineers find depreciated actual in Ho particular preference Gives weight to actual cost Ho information Has made no valuations Req.uires valuations of property on original cos Practically eq.uivB,lent to depreciated actual " Has adopted "historical cost" undepreciated Depreciated 5-year average costs Ho information II It Req.uires both actual and reproduction costs Appears to favor depreciated reproduction cost Ho information Favors depreciated reproduction cost Appears to favor original cost Favors actual investment Appears to favor depreciated reproduction cost It II II It « Favors reproduction on pre-war prices Kate base usually near undepreciated actual " Ho information Favors undepreciated actual investment Ho particular basis favored 84 The tahulatlon on page 83 contains 50 names, and from this summaary and the discussion beginning on page 73 general conclus- ions may he drawn as follows: 1. The earliest attempt at regulation was the enactment in Ohio in 1867 of a law to control railroads and telegraphs. 3. All states except Delaware have a regulatory cormiassion with greater or less jurisdiction. 3. 10 states furnished no information in response to my re- q.uest, Alabama, Connecticut, Georgia, Michigan, Montana, Hew Jersey, Oklahoma, Oregon, South Carolina, and V/est Virginia. 4. 8 state oonmiissions have practically no jurisdiction over the rates of utilities, viz., Arka,nsas, Florida, Iowa, Ken- tucky, Mississippi, Hebraska, South Dakota, and Texas. 5. Wisconsin appears to have conferred upon its commission the broadest powers possessed by any. However, this statement cannot be made with certainty owing to the fact that some commis- sions did not answer my req.uest, and others may have broader pow- ers than disclosed by the answers to the q.uestionnaire. Person- ally I know of no other possessing powers over as many forms of utilities and also including those municipally owned. Wisconsin is popularly considered a high-grade commission. 6. Two states only have adopted a basis of valuation for rate making purposes. Massachusetts has adopted the "honest, o- riginal investment", and Perth Dakota has adopted the undepreci- ated historical reproduction cost. 7. Pine states appear to favor the cost of reproduction less accrued depreciation, viz., Arizona, California, District of Oo- lumbia, Maryland, Rhode Island, South Dakota, Utah, Vermont, and Virginia. This statement cannot be made with certainty because there are a number of modifications brought about by various con- siderations in particular cases, so that in some instances the some commiission may appear to favor this basis, while in other cases some other basis may be considered best. However, the above is as near as I can come to segregating the preference. 8. Two states prefer depreciated reproduction cost based upon five-year average prices, viz., Maine and Ohio. 9. 15 states or commiission appear to strongly favor the un- 85 depreciated original cost of the property, or its eq.uivalent, as the proper "basis of rate making. These states are Colorado, Flor- idPv, Hawaii, Idaho, Illinois, liassachusetts , Minnesota, ITehraska, Hew IlaTupshire, Hew York (up-stp.te ) , Horth Dakota, Tennessee, Tex- as, Washington, and Wisconsin, This statement cannot he made with certainty for the reasons given under (7) on preceding page, hut it appears to coincide with the facts as nearly as I can determine from the facts submitted to me. 10, Two states a,ppear to favor depreciated original cost, viz,, Missouri and Horth Carolina. The latter is accounted for hy the fact that the valuations are largely for taxa-tion purposes, 8.S req.uired under the Revenues a,nd Machinery Act. 11. Hive states appear to have no preferences in the matter, viz., Indiana, Louisiana, Hevada, Pennsylvania, and Wyoming. Per- haps a better statement of this would he that these coriimissions consider valuations on any basis. 18. In general, deprecis,tion is deducted hy the commissions when the valuations are based upon reproduction cost. When the rate base is determined by the actual investment, depreciation is cormionly not deducted. "Exceptions to this rule appear to be the sates of Missouri and Horth Carolina, as shown in ilO) above, 13. Without exception, the conmiissions accept the value of lands as that measured by the fp.ir present worth of similar ad- jacent land. This may have been determined in various ways, such as ox)inion values of local persons familiar vjith such values, or by comparison of transfer values in the locality, or by other method. As nearly as can be determined from the information furn- ished me, it probably is not too broad a statement to say that this value is fixed upon in compliance with the decision of the United States Supreme Court in the Minnesota Rate cases. 14, In one state, Kansas, the regulatory comrrdssion has been succeeded by the Court of Industrial Relations, and I have before me no statement as to the authority of the latter in the wa.y of rate making. from the foregoing it appears that the state regulatory com- missions overwhelmingly favor the undepreciated actual cost of a utility property as the proper amount for the rate base. This statement is, of course, miodified to some extent by loca-1 condi- tions in particular cases, but appea,rs warranted as a genera-l sum- marization of the miatter. Further discussion will be made in sub- 86 su'bBeq.uent paragraphs dealing with the desirability of a single stfindard for rate making value . True Rate Base : From such experience as he has had, the writer has reached very definite conclusions concerning the true hasie of valuation for rate making purposes, which, in his opinion, is the undepreciated actual cost of the essential property used in supi)lying the service. In the following pages, therefore, attempt will he made to make clear the reasons for this opinion, both by showing certain advantages possessed by this basis and by setting forth various disadvantages of other methods. In assuming the above position concerning the true basis of rate marking, I am, of course, well aware that the method is not in favor with many utility operators and even with many courts and corrjrdssions . The position is tp^ken on principle, however, regard- less of the beliefs of others, and independent of the q.uestion as to how the return will be affected by this basis of valuation. I am far from one of those who believe that public regulation is for the purpose of starving an utility to death. Such procedure is not only morally wrong, but is even worse, for it is economic sui- cide. I cannot bring myself to believe that one group of citizens can be made to suffer financially, or otherwise, by another without injustice to the entire body politic. A case in point is the com- mon union Isbor attitude towards the remainder of the public. By means of combination, coupled with intimidation or actual destruc- tion of property, organized labor has so raised costs of all class- es of articles p-s to bring suffering upon the general mass of the 87 citizenry. In so doing they also have injured themselves, as can he readily detected in the changed attitude of the public towards labor unions. As these have been conducted in the pa,st in Chicago they are little better than holdup men, and the railroad brother- hoods have given two or three striking exaiuples of the same tenden- cies during the past four years. In considering particular merits or demerits of various meth- ods for determining the rate base, it is well to point out that such base is determined from consideration of appraisals of the property mjide upon one or more well recognized bases, generally the actual cost or some form of reproduction method. And looking at the determination of the rate base in this light, it is obvious that, in every case, the one and only aim of the appraisal is to find the cost of the property. That is, no matter what the basis of the appraisal, its ultimate goal is some cost of the property, and in the following discussion this vital fact must be kept clear- ly in. mind. How, in the determination of the r e-producti on cost of a prop- erty it is very clear that the cost which is determined is merely the estimated cost which is found through particular assumptions, such as the time at which the estimate is made, the prices tha.t are used in the estimate, and the theory upon which the work shall be performed. All of these may have little or no relation to the ac- tual cost of the work, the actual time at which the plant was con- structed, or the actual way in which it was built. In no other affair of life is the theoretical substituted for the actual when 88 it is at all possi'ble to determine the latter. Uo man huilding a house could he persuaded that the estimate of a, contractor is as good or reliable as is the signed contract for the construction of the house at a specified price. In the one case he has nothing ux>on which to predicate his financial req.uirements in the matter, while in the latter case he feels secure in going ahead in the full kno?#ledge that he will arrive at a definite place. It is a well- known fact tha,t under a given set of conditions no two men will estimate exactly alike, and it is a freq^uent condition to find the estimates of several men upon the same structure to vary hy from 40 percent to even 100 percent, while 10 percent is commonly con- sidered rather close agreeement. In the face of such conditions how can it he held that reproduction cost forms even an approach to a desirable basis of valuation? Reproduction costs commonly are much higher than actual ex- penditures. in making up a bid for the construction of a proposed building, the contractor must protect himself by making his price high enough to care for any contingencies that may arise. In the same way, an engineer marking an estimate of the cost of reproduc- tion of a property must make it sufficiently high that all elements of expense shall be properly taken care of. In so doing the engi- neer may be actuated by the highest motives, and it is no reflec- tion upon the profession that frequently different engineers m.ay greatly differ in their estimates of the probable cost of a prop- erty. For, in the final analysis, it is a matter of skill and 89 judgment on the part of the appraiser, and these two qualities are as variant in engineers as in plumbers. The sacrifice of the owners of a public utility property for the benefit of the public is directly measured by their actual ex- penditures therefor, and, so far as I am aware, it can be determ- ined by no other standard. Reproduction "value" cannot measure it, for there is little or no relation between the two. The out- lay which the company has mde for the benefit of the public is a fixed amount at any given time, while the cost of reproduction va- ries with the time at which it is made and with the person who per-^ forms the work, I think it must be admitted that the owners of the property are entitled to a reward that is in proportion to the sacrifices they have made, hence there appears a direct connection between that reward and the actual investment in the plant. Costs determined upon a reproduction basis other than histor- ical are subject to continual changes, for logically they must vary with the time of the appraisal, for it would be no more than a co- incidence to have the market prices of all the articles in a com- posite plant the same at two different times. All are farniliar with the rapid price fluctuations that have taken place during the past five years, and these changes are of necessity reflected in the appraisal of any property made on a reproduction basis, wheth- er prices be assumed as at the time of the appraisal, or averages during the preceding five or ten years, it is true that, when av- erage costs are assumed, the fluctuation is much less, and in that 1 90 lies the admitted superiority of such hasis over that of reproduc- tion at market prices prevailing at the time of the inq.uiry. If, then, the greater freedom from fluctuations is afforded hy average prices, it appears logical to assume that a hasis which is still freer from such fluctuations must he more desirable. To me it seems clear that such is the case, and it req.uires no argument to prove that actual cost is less affected hy market fluctuations than are other bases. This is so for the reason that only a comparative-’ ly small portion of a- plant is installed in any particular year, and, while purchases made during any given time undoubtedly reflect market conditions, nevertheless these changes are not applied to such large portions of the property as they are when it is valued on a reproduction basis. Further, it is a coimnon practice among utilities companies to minimize their purchases during periods of high market prices and to expand when costs decrease, and this fact also has a noticeable effect in lessening the variations between the actual and reproduction costs of a property at a specified time, Under modern theories of rate making, among the earnings to which a public utility enterprise is entitled, is a reasonable re- turn upon the "fair value" of the property. It is evident that if by fair value we mean reproduction cost, then the "value" of the property will vary from time to time, or even from day to day, as the market changes. Since rates should be no more than will afford a reasonable return, it then is equally plain that rates should 91 vary with the value of the property. As a matter of practical hus- inees, rates should he as suable as possible, for changes in them cause needless confusion and irritation to the consumiers. Inasmuch as additions and betterments are made gradually, and usually are not made until clearly req.uired by the needs of the business and therefore ’’carry themselves” from the beginning, it seems not to need argument to show that a stable rate base is highly desirable, and that this economic desideratm is best afforded by the actual investment . In the usual application of theories to practical affairs in life, it seems clea,r that assumptions made in the use of the theor- y must be consistent throughout. If this test be applied to the determination of the reproduction cost, other than historical, of a property, it commonly will be found that consistency is not one of the jewels which will be found. Suppose, for exam.ple, we are valuing the property of a steam railroad company on a reproduction basis, assuming conditions as they exist at present. When the i- tern of clearing and grubbing is considered, for instance, we must ascertain the cost of this work only through lands that now are timbered. But it usually happens that at the time the road was built it was constructed through many tracts of timber that since have been removed. Under our assumptions, no credit can be given for the expenditures actually made by the road for cutting that timber. But if credit is not given for this work, which was ab- solutely necessary, we cannot but have the feeling that the car- 98 rier has "been deprived of a portion of the money that rightfully has gone into its property, and no argument, however specious, can convince us otherwise. The thought is there and '.111 not down that the railroad is fairly entitled to a return on the expenditures it thus made for clearing and gruhhing, and the appraiser at once is tempted to change the assumptions so as to permit the inclusion of these costs. Come now to the same railroad where it now passes through a large city, with costly huildings at frequent intervals along its right of way. These structures were not there v/hen the road was constructed, in fact, the land was perhaps raw prairie. What, then is the cost of constructing the road through this territory? If we stick to our assumptions that it is the cost of reproducing the property under present conditions we are forced to determine v/hat it would cost to cut a right of way through this costly land. This might he a fabulous sum, even if it can he conceived that the road could he constructed at all under the conditions now existing. Us- ually it could not, for, as a practical matter, the cost would he prohibitive, even if the road had the power of eminent domain un- der the circumstances, which it usually does not. To include any such enormous sums in the value of the property would he tanta- mount to forcing the public to pay rates which might he highly un- rep,sonahle, and is as repugnant to ordinary, right-thinking men, as would he the deprivation of the road of a return upon the money actually spent for clearing and gruhhing, mentioned in the above 93 paragraph . Speaking of this method of valuation, the United States Su- prerae Court stated: "The cost of reproduction is of service in ascertaining t|ie present value of the plant, when it is reasonably applied and v/hen the cost of reproducing the property may he ascertained with a proper degree of certainty. But it does not justify the acceptance of results which depend upon mere conjecture.” (Minnesota Kate cases, 230 U.S, 352,452). Consider also the case of a street railway in which practical- ly all its tracks are now in paving and have been for several years. Also, that when this railroad was constructed it was nec- essary to remove a considerable hill in order to secure a practi«^ cable grade. If we assume the road to be reproduced at the pres- ent time under existing conditions, the cost of reirioving this hill cannot be included in the appraisal, for it is contrary to our as- sumptions, inasmuch as the hill no longer exists. So much for the hill. If the tracks were reproduced under existing conditions, it would be necessary to remove a grea-t dea.1 of paving in order to lay them, and, if we stick to our assumiptions , this cost could be included in the appraisal. But here we are confronted by the de- cision of the United States Supreme Court in the Des Moines gas cpvse wherein the inclusion of the cost of removing paving above mains was specifically prohibited unless the paving actually was disturbed at the time the pipes were installed. In a case such as that just m.entioned the street railway comp- any would lose in either event, unless the assumptions be changed so as to include the cost of removing the hill. So far as I can see, there can be no justice in thus depriving the carrier of a I' / .1 tor r kv ( J ‘ i V il V - - '! ■ I*' I H '■ f rfj <: Wu l>;E*C-.-r^trr? 4 I'.U; I* i- • - •>. ^ _ • if', • , *••! • * -M.'. ■' ■•» A,':' •»tA‘ ;TV'' w;i‘* • - I ‘ ' • A* f '• ' ’■’ - 'tv* ‘ i ■'’ ■'■..> ' a'I''!.' C '-.I,.! o*/ /osr'- . T' ' ■ ■ .V r ri Pfi ej:- ' ^ f , . '. * ^ I. • : I . ' '' •i':-”; .tf IiXi'c;’' • «w. -- 1 '■ -‘X f .^I •ii'' t?v* j". : M ' ' ' *: ..; !■ ^r:/xir ■ ‘' y-',rv,^ . ,. ' J '.. .■-' j v"> 't',’."'!; ‘. ■ V n- ■v''*' « ' -■ i'::/ '■ vfi; ’.Ij tI ^ o-K iXX:r:- •■ - ' ^ /^:Tcri.; j :r:\’ ! -:,sr s :Ui ■•.„••’• fit. ^ -■■■.'•■ '■' I y ' * * •'«•' r w;: . ^ . r • .. -•’. ,rl ; , , ' '■J.C X’" ^ ■ • ■" ’’ • .-^v^ r ...:, <«r U 4 |rO% ^ ri'' ri tyrt -r-f lU' . I ■ : -y^ — r,:^ .. 7 J 1 94 return on the cost of grading down the hill, for the money was le- gitimately spent. On the other hand, the inclusion of costs of paving that was not disturbed when mains were laid is not only good law hut it likewise is good sense. In such circumstances the corapany did nothing towards paying for the paving, and suffered no outlays necessitated hy the installation of the paving. In passing it may he remarked that the c[uestion of the inclusion of the hill arises in a large proportion of street railway appraisals. Instances of nature similar to the foregoing conflicts of as- sumptions with facts and the equities of particular cases are fre- quent, and many pages might he written giving exan:ples. If no oth- er reasons existed for condemning such reproduction valuations, the above should he sufficient. It is a general rule that when assump- tions lead to ridiculous results the theory must he abandoned. The Ptoleroaic theory of the movements of the heavenly bodies was excel- lent until its assumptions were riddled because they did not square with the facts. The fallacies involved in the assumptions destroy- ed the theory, for the general principles could not he changed at will to suit particular conditions that arose. This stateriient is likewise correct for all other theories, and I am unable to see why the ordinary reproduction theory of appraisa.1 should form an isolated exception. The cost of reproduction of a property based upon average prices prevailing throughout a term of years has the inherent de- fects of which the above exeusiples are illustrative. In addition. 95 they have some oharacteristio faults not possessed hy reproduction costs at present) prevailing prices, ?or example, it may he re- quired to find the cost of reproduction of an article no longer made, such as a pump, a particular type of engine, or other arti- cle, It is apparent that neither can the article he presently re- produced, noi? can five-year avera,ge prices he consistently chosen to represent it. To all intents and purposes it cannot he repro- duced, at least in a reasonable sense. How, then, can average costs of reproduction he compiled? I am free to confess that 1 do not know, unless it so happens tha.t the five years include the year in which the articles were purchased, a condition that seldom happens. I have had the experience a number of times, recently in the case of a steam pump that is still in service, although it is of an ob- solete type, I solved the problem hy applying to the actual cost of the article a ratio representing the average increase of vari- ous similar pumps during the five years included in the price per- iod, However, it is clear the method is a mere approximation to the theoretica.1 assumptions necessary to the basis of appraisal. Pven worse is the case of an article that has hut recently come upon the market. For instance, the writer has in mind the case of a duplex exciter ^driven hy either steam or electricity) that was patented as late as 1919 and put on the market some time in 1930, in determining the cost of reproduction of an electri- cal property there were used the averages of prices prevailing during a 10-year period prior to the time of the inquiry, and in- 96 eluding the year in which the exciter was put on the market, there arises the question of what constitutes the 10-year average price of the article. Clearly there is no such thing. But the article is a fact, and as such must he included in the appraisal, for the company uses it at least part of every day in the operation of the plant. As a practical matter, we must temporarily scrap our the- ory of reproduction and make use of some device which will answer the purpose of giving the exciter its proper place in the apprais- al, Again, we resort to the hooks of the utility, find out the actual cost of the article, and apply to that cost a ratio repre- senting the approximate averages of machines of the sariie class as the exciter, such as motor-generators, engine-driven exciters, or similar units. In this case, two things are very apparent, {!) that our theory of appraisal will not work in this case, and (S) that the average cost of such an article is substantially less than the actual amount paid for it, because it was purchased at the peak of prices. As I perceive it, an injustice was done the company, heca-use it was deprived of a part of the cost of the article, and the general theory underlying the appraisal head to he amended in order to fit a particular case, just as a p^tch must he put on a pair of trousers to cover a particular hole. A patched theory, as I see it, is little better than a pair of patched trousers; neith- er is worth much. The two examples just given show some of the weaknesses of the 97 theory when applied to particular situations, hut further consid- eration thereof cannot here he given. There is, hovfever, a fur- ther injustice that is occasionally wrought hy average-price repro- duction that deserves mention. We may consider the case of a plant largely constructed during the yee,r 19EO, when prices were at the peak. It is a matter of statistics that prices suhseq.uent to that year were much less than obtained during that period, and the dif- ference was much greater during the preceding three or four years, while during 1920 costs were almost double those prevailing in 1912 or thereabouts. Suppose this plant were valued on the basis of 10-year average prices. It is apparent that the actual invest- ment of the company in the property would be nearly out in two, to say nothing of the loss in depreciation, for, if the plant ?;ere appraiaed as of January 1, 1922, there would he a loss of value during at least one year of use. I cannot he persuaded that jus- tice would. he done the company to thus confiscate its investment, for that is the practical result. In other v/ords, the theory has done injustice, and therefore should be abandoned for that partic- ular property. Would it he aiiy more just to the public if the mat- ter were reversed? I think not. In passing, it may he stated that no utility could keep its books on the basis of reproduction costs, and probably none ever tried it. it readily can he imagined the jumble into which the books would fall after even a short trial of such method, and by the end of one year the scheme would produce chaos in the affairs of the company. Expenditures for ca,pital account would become 98 nothing hut a meaningless mass of computed figures, varying with the capability of the man who made them and reflecting nothing on either land or sea. Additions and betterments would become a gro- tesciue collection of amounts from which little of value could be gleaned, and an accountant would have as much difficulty in ascer- taining the condition of the Plant and Investment account as he would encounter in finding the beginning of a circle. If the cost of reproduction is the proper basis of valuation, then it must be regretted that the united States Supreme Court did not exactly define what constitutes a reasonable application of the theory, THuE xiATE BASE Having pointed out certain defects in the ordinary applica- tions of the reproduction methods, perhaps it will be well to see if there is any other method that is reasonably free from serious clashes between assumptions and facts. Based upon his experience in making appraisals and in practical rate fixing, he has come to the conclusion, previously stated, that a fair basis of appraisals, practically free from the major defects hereinbefore discussed, is found in the undepreciated investment, wisely made, in the essen- tial property used in supplying the services furnished by the util- ity, Heasons for this belief will be set forth in detail in the following discussion, and comparisons made with the various inoon- 99 sistenoies found in reproduotlon methods. Amounts deterrained in accordance with the procedure hereinafter outlined, I am convinced, will furnish the true rate base in any rate fixing proceeding. In amplification of the definition of true rate 'case given in the preceding paragraph it may he stated that "essential prop- erty" includes the property actually used and useful in furnishing the services, and reasonable amounts for reserve oa.pacity, such as lands, machinery, and other articles necessary to provide a con- tinuous and reliable service in accordance with generally accepted standards of efficient construction and operation. There shall also be included proper allowe,nces for overhead costs in install- ing the physical plant, together with sums representing any intang- ible values that may exist, the items named in this sentence coi!>= monly not being reflected upon the books of utility companies. Un- der this definition there is intended to be excluded those portions of plants built in excess of reasonable req.nirements and also all property not operated by reason of poor physical condition or not having use for it • Principal among my reasons for advocating the actual invest- ment in the property as the true rate base is that that amount is a fact . a statement that cannot be made of any reproduction "val- ue". In my opinion, a truth derived from facts, is far superior to results established through the judgment or opinions of men, no matter how competent or honest they may be. The opinion of no human can possibly be preferable to an actuality established by a 100 seq,uence of events that are heyond controversy, and in just so far as we remove value from the realm of opinion, to just that distance do we go in the ascertainment of truth. The actual cost of the various items of property is the one outstanding fact that can he- determined from the records of the comppvny within a reasonable de- gree of accuracy. Heproduotion costs are never found there, though they may he found in the catalogues in the bookcase. In the determination of the actual investment we are not con- fronted with the necessity of shifting our basis of valuation in order to make it sq^uare with assumptions previously made. Thus, the cost of clearing and grubbing, discussed on page 91, would of- fer no particular difficulty in ascertaining, at least, its approx- imate cost, and this element of cost was an expenditure req.uired of the company just as much as was the grading that still is in the roadbed. And upon that cost the company is entitled to a reason- able rate of return. Again, in the case of right of way through a city, discussed on page 92, it is utterly impossible to determine the reproduction cost of blazing a path through the built-up terri- ■tory, yet we can determine with relative accuracy the present value of the lands as measured by the worth of similar surrounding tracts Determination of the actual cost of placing the street railway track in paving, mentioned on page 93, offers no special difficulty as it will likely be reflected upon the books. Similarly, the as- certainment of the actual cost of the obsolete pump or of the du- plex exciter, recently patented, entails no great amount of troubiej 101 and wreoks no theory heoause of interferenoea "between theory and f aot . Neither would injustice he done a company who was forced to greatly increase its facilities during the peak prices of 1919 and 1930. In brief, the determination of actual cost encounters none of the pitfalls of the reproduction theory. If such is the case, why is not the one fact thus determined much superior to the col- lection of one or several opinions? It is. But, it may he argued, actual cost is not usually shown on the hooks for the entire property. That such is the case cannot he de- nied, hut that the failure of the hooks to exactly disclose the a- mount seriously vitiates the theory or practice of the method can- not, in my opinion, he maintained. The writer has had occasion to consult the hooks and records of many utilities companies, and it is his uniform experience that the costs of most major items of property are clee-rly reflected upon the hooks, For example, the rolling stock of a street railweiy company conmionly comprises from one-fourth to one-third of the investment in the plant, yet I never have experienced any difficulty in ascertaining q.uite closely the costs of such eq.uipment. Paving, which usually amounts to about one-fifth of the cost of the property, generally can he determined within a small degree of error. And so on with the remaining art- icles. As nearly as I now can form general conclusions in the mat- ter, 1 am of the opinion that commonly about 80^ of the cost of the property is directly reflected upon the hooks of the company. The remaining 30^ is easily determinable within about 5^ of the actual cost, and this brings the probable error of the entire determina- 103 tion within about one percent (l,0/o) of the total value of the property. Contrast this with reproduction methods wherein there ooinmonly is a difference at least 25 times as great. That is, it would he more nearly a coincidence than an agreement of judgment for two appraisals made hy two different men to come within 25^ of each other. The actual cost of a public utility property directly reflects the sPvCrifice of the owners for the benefit of the public, and no other method of appraisal does this unless we consider historical reproduction accomplishes the end. However, throughout this dis- cussion I purposely have considered historical reproduction nothing more than a method of ascertaining actual cost, hence do not look upon it as reproduction in the ordinary a,cceptance of that term. The actual cost of the property represents the money spent by the owners, and reproduction cost does not even pretend to do that. Of course the confusion in the minds of courts and commissions arises from lack of differentia.tion between market value and rate making value. In the minds of 99 out of each 100 persons there arises the question of how much a thing v/ill sell for whenever its "value" is brought under scrutiny. But, as previously shov/n, market value has little or nothing to do with rate making value, the former be- ing dependent upon a number of factors that have no bearing upon rates. As I see it, the lack of discernment of the difference be- tween the two values is the underlying error in many of our court decisions, Certain it is that reading many of them inclines me to the belief just stp.ted. - • t: t 1 . 1 . „ , O'- V. : i V*' ‘ »r . % ;V’^ ’ ?•■ ? rt< : .\V- •• ^ t '.V.- j'-f v - "O ^ '•* !\ > ■ -'»fi i(j ^Atl' ■ f •. . . : j,-;OJ:j ’■'', --ui ut7 * ■'.t ' • V-’t ' 'C 0 -i -C I -M 'l*a r»T».C 7 ■/''- C- V : \ * X 0 t \ ■='iCP‘ ^ . ' ■' %■ i . i -!. ' . r. . :i' •. : r* JL’i; t ... v,i i ’ V- .’C n ' ■\ .j, .. *,, 0 ••, V 7 . . — tv ■ r. . ti • f ^ 1 t J KU'i'V-' ‘i ;.-■:• \^V'. ) ^ . . .i : :. iqifiJty t O': Or .Is. ' . , '" Vo / t •) > *• ‘ ^ • .♦ - \. ' ... ‘.X. . . • '/ ' i fii ...a w^af ^ f* ■ ' , itOO'-.Y/O l»J" Jl ni' iSt . €■ .^UO . ' v T ,. '.cjir'** ' . ' 'ic . f »». *^ r ‘ , ^ .c *: ' CO fc 1 >' 1 »vi.-; / . '■ i . '■■' .. i • ft 'o lit i ^ ■■ i;' Cfi :-.a.i ■ *• '■ .. . , •: .Of* X ^ .' '‘' J . 0 t*.! i i. ‘ t/. '-J* '■ ■ , . * ci- j- onaba^iNUiaiBB D». 19 iQS|lM- 103 Many other superiorities of actual cost over reproduction "values" could he discussed with profit, hut a few, briefly stated, must suffice. Books of all firms are uniformly kept upon the bas- is of actual cost. Ho discussion is req.uired to show the bizarre results of undertaking to keep them upon any other basis, and this q.uestion is also touched upon at page 97, hence further comment is not req.uired. Het additions and betterments naturally must be made to figures showing actual cost - any other basis would be ludicrous j and result in endless confusion to the bookkeeping system of the company. As above stated, it is the only basis not subject to gross inconsistencies as between facts and theories, hence gives more un- iform and intelligent results. It affords a basis that appeals to the sense of Justice of the ordinary citizen, for it is the only method which he understands, or upon which appeal con be made to him. The arguments in favor of this or that method of "higher val- : nation" are completely lost upon the ordinary citizen. He neither comprehends them nor oa.res to take the time to master even the rud- iments attached to valuation methods other than the determination of actual cost. This is my Judgment, for 1 have seen numerous at- tempts made to perform the feat, and i never have seen it succeed. He ma.y accept the decisions of courts and commissions which discuss the pros and cons of the various theories, but invariably it will develop that he has only one anchor to his mind, and that is, the mone y inves ted in the enterprise. That he understands and nothing more. And it requires no argument to convince him that the company 104 should have a reasonable return on that amount . But you oannot bring him to admit that the reasonable return should be made upon some other amount, determined upon a set of assumptions for per- forming certain work in a specified way, that never can be per- formed nor will it ever be for the reasons that conditions will never be the same again as they were at the time the article was installed. Why build fancy castles on a sand foundation that is given to change with every blast of the wind? It is a waste of time and money. Outside of the courts there probably is no force of govern- iTient that has as wide jurisdiction in the determination of values of public utilitiy properties as have the state commissions. In- deed, but a very small fraction of the oases reaching the commis- sions are carried to the courts for final settlement of q.uestions of value. Hence, we properly may regard the attitude of the com- missions as of paramount importance in the matter, and it is to be regretted that there exists such a want of uniformity of opinion among them upon this vital subject. I cannot but believe that if the commissions showed a better understanding of the principles underlying appraisals, this greater knowledge would be reflected, in due course of time, in a changed conception of the problem on the part of the courts. For, when all is done and said, the courts can decide issues only upon the evidence presented to them, and if they find no substantial agreement among those who should know what constitutes correct value for rate making, they cannot be 105 TDlomed if their decisions lack the niceties that come from a thor- ough understanding of the fundamentals involved. Por, after all, the cLuestion is highly technical, and we cannot expect our courts to reflect the subtleties of these questions when the members of the bench and bar have but limited experience with them. They must depend upon those trained in that special field to furnish the evidence upon which can be built thoroughgoing and logical o- pinions or decisions, just as the engineer or other citizen must look to skilled lawyers to interpret the statutes or legal pro- cedure. Therefore, in my opinion, the commissions should under- take some line of common endeavor looking to the training of some uniformity of thought ebnoerning issues so vital as that of value of property undergoing rate making inq.uiry. While the basis of valuation in use by each commission hPvS already been briefly stated, nevertheless, in order that no mis- understanding may arise concerning the various attitudes assumed by them on questions of value, I deem it advisable to quote the reply to questions 3 and 4 in full, so that the reader may also be able to judge for himself. The answers received to these ques- tions in my letter of January 16, 1923, are as follov/s: Arizon a: "Reproduction value has been given preference as a rate base." QPvlif ornia : "While the Commission has not adopted officially any particular basis, it generally, particularly in rate fixing proceedings, determines the depreciated reproduction value, to- gether with the present value of the physical used and useful properties of the utility, adding thereto such intangible values as Court decisions have decreed have a value which must be includ- ed in a rate base." 106 Colora do : "Generally, an original cost iDasis has been sought in establishing a rate base, Freq^uently, both reproduction new cost and original cost have been used in evidence and given consideration; and, in several recent cases, reproduction new cost appears to have been favored, Florida : "Inclined to give more weight to s-ctual investment" Hawaii ; Q If none has been adopted officially, does the Com- mission advocate or give preference to a particular basis? A "Original Cost", Hote: "ITo formal valuation or appraisal has ever been made in Hawaii." Idaho : "In general, for the establishment of the physical base, we follow what is sometimes termed the split period method, but which really is an allowance of actual cost, of the time of construction of service property, with present value as to real estate. Intangible elements vary so widely in the oases of differ- ent classes of utilities, as well as between individual utilities of a given class, that no rule can be announced which would be workable to which would not attach more exceptions that would be covered by the rule itself," Indiana: "Ho preference ha.s been given any particular bas- is, each appraisal being made in a-coordance with the particular facts involved in each case. Accrued depreciation is deducted from the depreciable property in determining the rate base," Maine : "Oommission has in the past given preference to re- production cost based on 5-year averages," Maryland: "The Oommission is now engaged in a valuation of the property of Consolidated Gas, Electric Light and Power Company, of Baltimore, which valuation is being made on a reproduction bas- is, at the req.uest of the company. The Commission cannot, of course, say at this time 7/hat weight will be given to this valua- tion in its determination of the final valuation for rate making purposes," Mas s ac h u s e 1 1 s : "The basis adopted is the honest, original investment; tlierefore, it is necessary to go into the history of the property, Missouri : "The Commission gives preference to the appraisal based on actual cost to the company at the time of construction, with the exception of land which is appraised on the basis of its present market value." 107 He'brp-B ka; "In making a valuation of a pu'blic utility prop- erty the Commiosion^s engineering depa,rtment in its report shows the original oost value and the original cost less deprecis^tion value. 5tou, of course, understand that other factors entering in- to present fair values of properties are given consideration by the Commission.” Nevada : ’’This Commission has not adopted any particular has— is of appraisal for public utility properties; each case, as it must, standing upon its ov/n peculiar circumstances,” Uev/ Ham-pshire ; ’’The commission gives a good deal of weight to the actual cost of construction of the properties in use in the public service when it is definitely known; also to reproduction cost and reproduction cost less depreci potion, especially when the actual cost is not known. The unit prices used in valuation are usually an average of 5 or 10 consecutive yesj?s variously selected so as to give the approximate cost of the property in the instant case. Going value, results of opers-tions, and all matters having any relation to value are duly considered and the fair value fixed’.’ ITew l ork: ^Albany) ’’The basis of submission of an inventory and 8>ppraisal to the Commission is required upon the basis of o- riginal cost where obtainable or upon estimated original oost where the records showing same are not obtainable.” IjTorth Dakota ; "This Commission has adopted a so-called His- torical Cost Basis for valuing public utilities for rate making purposes. Historical cost in the sense that It attempts to arrive at the year of installation of any particular part of a utility's property, and to price that equipment with labor a,nd material prices current in tha-t year.” Ohio ; "Since March 29, 1917, this Commdssion has used ’the fair price obtaining over the five yea,r period preceding the date of the appraisal in appraising properties of public utilities for rate making purposes.' Effective the 23rd day of this month ^ Jan- uary, 1922) the basis of pricing will be changed to the date cer- tain price. Accrued depreciation is always deducted in all rate cpJculations . The present value of land is used in all rate calcu- lations." Penns ylvania; "The Commission has not adopted any generval rules relating to appraisal nor has it adopted any particular basis. Each case is decided on its individual circumstances." — 1 1 : Tt::. •.,.. ‘10 ' 3 .?.. - 'C CJ'TO;. '. ' fr\. /.’. CF'f.'iM. v:'-- \ t I fa ^ i ' t''*.', •-' .)>2Til V. '..V rj^U \ i' ' 9L*-f.-^.'r . *rit‘^v i' ' , ■'. :.'i.r-' ; ^ "^c , ; oY ^ '■ ; !■ 1 , . .... ^ JK*' . /V.' .-;rj ; ,v Tt^.: . .[ 97 :^^ -I.': « 'J kllh >■ , ' . I . i ... ' ' •'1 ' 1 « * f 3 • .'j ’.j> t. W - ' ■; .. *i- ‘I'M 'C ^ — ’■ 6 ' C ,j-'i Ic r ' ■■■■\ ■ ' . -/U'/:.. - u .'L- - r'L.:.9F ■ ‘ f*;;- ': . ..... .. . C • vu ’. 'j'.: ‘•,- k'. . « i. .. * ■• » » - *. j i. ; , r / . .. V* .. • ‘t •"’ t -V X li V' . ‘ ■'; Iji S ■ ! , , T'V . v'- 'f ’•> • ■ ■■ '*• -r« .-Jf-’ . r^c*n::, f ai ’ ■ :,U .•'..) --^v Tt. ;:■ >A/.' 0 r. 'v_^. -ii ir . if it;i v.f.^‘. 7 n-- i ^ . "*• - - X, ■■'• 0 '•vf 03 i.^> V' , •*' OjJ PJ- ;>t. 1 .'5 r I •■ • .-«. • ■‘r... -,-. ^ -t- r .. ...rL.. . i"’ " S'. . - X .. . ‘cXjsv . -ii' ■•: . V N.k. . ■ ■ i 9 .;: . . > '^^’n.lXu ru • L.- . Dj‘ ...-.J ...Jl -■■'«, I > ' : 4 , p t IT. s ". ij(f p.*r ^ '• X-’*i ’..^l •l ‘.■^xw^>' V u*t: 'V - .. ' tzvk-'/,v .7 I toq!y \i>-' r A ; ,»v :'';■ .i;;.9a. :r*jc ^ . • . ‘ uc jO»i* .' V -®>- *' L.f'I'.'Dtj'l ':\>i .’" fi i , ' ., • , ft • * ■ '-'’ ■* ■'. J -t '- h .*jr 4 *v> V .'tX-U’*' I! ^ 'I.)!! rl L.r,; is,,r ,.3: u M ' . ^ . .'t i:\ ,<1 c\r :Ar '* ■'' ijs;''] ^f. t.ii ' ' ^ i ‘X'f , .... 7 ‘ . -j, • ’' , ■! '- ’ '. I'i'" . !• HK v'K' f '■ .. f.' . . - ^ . . , . ■ 1 . .'tV :,t h L . •'•' 'V ,' ti’i.r. '.' ^ ‘ x< 5 j. ...V, ;\; 5 |:,:..r ■■- 1 » - tf ' » *, •- a.- i '* i ’ » • V ^ V ^ VI c k" ■ ' -■ V ‘ . -I t <* . • fix .-X, . :: : 75 r-’ e: . ,', >’r.' -r ‘ '4.,' 'ij.f I vX-fc vw- /otf w . • o)..' R';.ircC .4;** ''I ^ ■ ’t'l' . I * ■ I ' . ~ - V. " . ^. \ M. . L < ...» t- t , ' r.: ■ ' ..o' I . .. - A L. I 1^. * ‘ 't ■ -• ,j.;: t I ■■ V' - ’ wmm* * I ^ . ' l-J *. ' ’V. ‘ '■ a ll’j.l I'.'.. 'Jvt 108 South D akota ; "Oost of reproduotion new.” Accrued deprecia- tion is deducted. Tennessee : "In considering Rate Base, the Ooirnnission has en- deavored to follow the recognized principles laid down hy the Su- preme Court of the United States in its decisions and the courts and conimissions of other states, keeping in view the fact decided hy Supreme Court that a Commission, in fixing the value of raue "base is not controlled hy any fixed rules or formulas, hut is gov- erned hy the facts in each case. The Comiiiission exercises a reas- onable judgment after full and due consideration of all relevant facts. In fixing valuation, the Commission ascertains the original or historical cos^, estimates of reproduotion new, estimate of re- production cost new less depreciation, and other elements.” Texa s : We have adopted no defined basis of value for rate purposes ^ ^ are not q.uite sure that a fixed rule can he set UX3 for fixing such values. Such action would limit freedom of judgment of individual oases to a measurement hy a ya,rd stick. It seems to us better to handle this matter ^ ^ With respect to natural gas utilities, jurisdiction has hut recently been confer- red upon this Commission and hut two or three ca.ses have come up to us for decision, our jurisdiction being upon appeal only. In these cases, we hs,ve ascertained the cost of the property, the cost to reproduce at the time of the inq.uiry, a,nd the cost to reproduce less depreciation, From these figures we reach a judgment as to the value to he used as a rate base, which value may not he any of the above bases * * , The writer is inclined to the belief that the Value which nearest approaches to justice to all concerned is that value which nearest approaches the legitimate actual investment, that is, the money which has gone into the creation of the proper- ty, The courts do not sustain such judgment if such value does not represent the ’value* at the time of the inq.uiry; hut what the vsiLue at the tim.e of the iniiuiry is is not defined and must, in the light of decisions, represent the judgment of the tribunal be- fore which a case is heard of the value when all conditions are taken into account. The cost to reproduce the property is a fluc- tuating base, rising and falling with the costs of labor and ma- terials; yet it is advocated as the best measure of the value at the time of the inquiry. A rate should be reasonably stable, and it cannot be so and follow a fluctuating base. The cost to repro- duce, less depreciation, is subject to the same criticism, and, moreover, has the wep.kness of being an estima,te upon opinion, or, to put it bluntly, a guess, as no absolute measure of depreciation Cfin be established; and it further introduces the q.uestion of con- sideration of accrued depreciation. If accrued depreciation has been earned from the rate and there has been set aside a deprecia- tion fund for the amortization of the property, such deprecia,tion may in justice be deducted from the value at the time of the in- (luiry. If it has been earned and distributed to the stockholders in dividends or used in plant expansion or extension, the case is not altered," (Signed) R.D. Parker, Chief Engineer Gas Utilities. 0 w •. it 't :l' 'J ::o‘ .. . r '. ■; .r. ■ . . : . i, ' , i : . ..'j. . ^ ;■ -.■'•It \. jt •-• JL i , '[ ■ * _ ^ . » . . - ' ■ ■■ •.;;.-a y .; '■ V' ’■■ ^ ■ *|.'V ^ i' i' J, ,.j ''* 'i-^ ' i t".' ' . ^ \r-r: o ‘ ' /'urf : .. .. •. >r ! • -y * -■ -/ ^ ^ V 2 ' J ^ ^ '. L .1'. ; iU V . ‘ (.1 . «; »■ r P *t ■.A' . j' .'f I' 1 f , ^ »« »; j> ^ 1 • -• L ^' t * 1 ^ •/ - . I V .■"f’f , ■■'.'■ ' f. I' • • i* fv»'*.. : • r,c*^f O, , .... . ... . , -.;J .-V.. ., _ 1'' - ' ••, '- “'■ « . * % r -I- .■- .-■ *»-A- . L . '’.nc>i'! 7 u..i#!- J.V' ■ ■• . /j t-'- - ' A , I y ..* .!(( t.-f,; Y . 'a, It - '^ . . .;«•;; ■ ' ' .■? ■ ••:<• ; r' , J V '■ i' ■• V »■•'- .'TJ ^ • ' '. ■'». ■ .3-'. " .UA‘.v A . . \H\ > ., »• ■! •’ T •. w ■ '• i. ■■.;? ’ -A.'x'*’' yj __ rlJ’ t.;v AAV - xi'r.x' . 1 * ), . OC-' '’fJO .■ -'iV; ,. b'A f"), .'. J',! 5 r 'JXfli'ti'’’ •y '1' *-■'-*'■• ‘ .'-WT.A . ■ ..'• v;.»t>.-. aifc- ;•*:-■* _ • ■ 5'it.iAL o« 'a: , ■ . ^' ■'*. ? ‘:wJ: ; .. , -•' -■ ' ■\--- .- ■ " ■■ ?:CJ , 7 e»V A;v,^,u '* ■ '■ •‘- •' ■■'-V'. . M .. •. ■.< J1 Ox* . ; . 1^: A./ . a..^;A; ...a r ^ ^ A r> jC Xc - , < , ^ A,n>. ■ ^ ^ »-- . \ OO’A/ .'i . ./•; t'-o-'i ,^c ' '■'■’“‘■A ■' '•" • • '■ n,:. ^Aa. Ati ,* i'tr:5'’’i; A'-a j li ■' » '-•r:^- iO*::p a;/^ io '■’ ’*'•' ' tii/lAA/ tfovl .>c* •- '• -. 'tv X 'u‘ AA,>i>nih AA/ . ’': ^ Aji rr-A +_- *■ ^ ,.rx>.ir.i»ri'*ix :• vo- wOi ;>:? a /t*- ^ :• VO- wOi!A. . ;,;> ‘ ‘r/tA 1 ' ',.J . ... |, < , a i mu>i » ^ ,xtisssisi‘ii.'T.- r » ^^ . ■ -ja-a 109 Virginia.: "Mainly pre-war reproduotion plus additions at war and post-war prices." Washin gton: "It is the practice of the Engineering and Aud- iting Section to submit the following items in a valuation proceed- ing: a. Cost of property a.s shown by the utility’s records, b. Fstima,ted cost of construction. This is arrived at by the split inventory method, using unit prices applicable to the several periods into which the inventory is divided. c. Estimated cost of reproduction. This is arrived at by us- ing unit prices as of the date of the report or average unit prices over a reasoneible construction period term- inating on the da,te of the report. d. Cost of reproduction less theoretical accrued depreciation. This department has never deducted accrued depreciation in de- termining the rate base." Wisconsin : "The Commission has not officially adopted any particular basis of appraisa.1 in so far as any definite commitment to such basis is concerned. In general, however, it uses a basis designed to reflect as nearly as possible the actual investment. During recent years it has used a ten year average of prices prior to the war for property which was in existence at the beginning of the war and actual prices so far as determinable for property put in during the war period. * * * Accrued depreciation is not deduc- ted in determining the rate bases where properties have been prop- , erly maintained * * * " . Wyom ing : The Commission has not adopted any piarticular basis, nor does it give preference to any. From the foregoing it appears that the statement made by me in the last paragraph on page 85 " * * * it appears that the state regulatory commissions overwhelmingly favor the undepreciated ac- tual cost of a utility property as the proper amount for the rate base" is not too strong. In this connection, attention is partic- iarly drawn to the excerpt from the letter of the chief engineer of gas utilities of the Texas commission. In that letter Mr. Park- er has q.ui'oe lucidly set forth some striking facts connected with - . 'J . -^ • .V -." :-. ''Oj' ! < ■■. •:.•• *■). : -’.r ■• • -■ ‘ "JA I -•■■ ..’ ^ oil. ri . 1 [\ ’j ’• •■' ■• ■ - 't*? '•■ " - ^ n.,t . 1 J * 1 *'; ; " ,- /,i -j ■■■ ' V ' «w; > .; ' . r. .' -kw»i .. •" /» '^i.vA fjt»L J 10 1 ^ . ' O -».i - t) ; ^ a : ^ "I VS 'V ..r <,. ' r,. -■ ‘"■'V '* ' r »\ P v ■■* c-v.. ' VI <.'.4 . .: ' 'r .1 f . C J *?> 0 m « . ‘'•yrCl. . ' r ‘V A 1 ) . { ■' . • . - .• . ■ . J. '■. ,'w- •r AT;-:!' iiujo 0 .'v> Ki i A.-; :i t'r ■1 'v ' '-.vf-fj -n*. ..o' •>. '. s. ■ 0 ^ '! . -A/r; . ; ,j J ■ " , ‘'-. ■ . •: i* :i'' ; -i t !/tirJ' :tl ;■ j 'H • •' . • -Mi b'^:t j. 3 • " " xi-: . ’ 'i^rrr • .-iri"* ;. \ r< ■ ’ f, '*()’■ ii 'r^ ' *' ’'f f ' V-V-; 1 »il; ;t:(. • -• < • 'r{ ,jq ’ i ■ .‘i ■'•' > •>* •< f ’.•'•T -..\ 'r J. "iir or" •A ‘ t; : . ' - £ j-ri JT’ n if .-7. ■ -£,,.;;. '• . T'O.. .: I.;...t>, 1. C.' r ! w 1 -'"I! yrfj .nli; r:; :; •; ’ '. :J j ii •. • r^< *. ' t'. a i \ . U ' iij }. j. ■'• .' ' I r " -^-sv i\'^. '\ '■ i) y‘ ,i *4. .."t* • •;• A I 'I ‘r.'iolc, ■(?:• Hvo-^nfir Z; ■: \ f . • ’ Vj V . f , J , - *'// ' ' >■ ■C’oS yif,, , ': 2. V •. t. . ., . -rir ' - i- C ' .1 •. £.it 112 to judicial starvation by reason of the action of a narrow-minded regulatory commission which mistakenly thinks it thereby is "sav- ing the people". For in the end such tactics not only grieviously injure the utility, but they force upon the consumers an unsatis- fpvCtory service, or may even deprive them of it altogether. And modern life without these services is almost unthinkable, as may be easily brought to mind by even such a slight mishap as the blow- ing of the fuse in the circuit which furnishes your home with elec- tric light. In my opinion, the proper way to dispose of the q.uestions in- volved in the determination of rates and values is the fixing the rate base at the undepreciated, honest investment , innthee essential property used in furnishing the service, p.nd then permitting the company to ea.rn such return thereon as shall insure its financial stability and attract the capital that from time to time may be re- q.uired to care for extensions and the upkeep of the plant. A pros- perous utility is a direct asset to the community which it serves, and every encouragement should be given it in the endetwor to sup- ply its patrons with reliable service at a reasonable price. Chicago, Illinois Ma.rch 15, 1928. ^ -1. ttnvf, uMVO *;Y /ifrifll r * -re?^ «■■' -'i’i' ' *t,‘^ - ■“'*■-**• *'‘*^^^ ’'■'■l^.'< ’ u, ‘t'SjH !'T ‘ > 0 ' j‘ '; — ' ' '^ ; i . ^'f-J ■\\i , !•* : »' :/ : •’ tR. . u<»i 4 r Ut-rt;! t*f* * * * V. - '* 7 . ' .■^^' ' "\{t ' ' ^si* i . .. 4 ? ,!d u^i/jf.gi’i 'iJuu-a o f 'i.'WiS s-.*.r^r v!i ;;A.n « 4 ^ •»){i,‘I +«“•''. , tt B yit.f 'Tirfli4i‘^ E«, »: ' ' 10 ^: Cjy fr^Ut^a