1

d

T

evidence of a reasonable rate or fare for the service under investigation.27

§ 4528. Probable increase of business from decrease in rates. In the business of most public service corporations an increase in business results in a decrease in the average cost, and it has been held that where the state or a municipality reduces the rates of a public service company, the fact that such reduction usually results in an increase in business should be taken into consideration,28 but in some lines of business the increase in business means an increase in the average cost, as for example in the telephone business.29 Ordinarily, where it is very doubtful as to whether the rates are unreasonable, the court will refuse to interfere until after practical experience has demonstrated that the new rates are unreasonable or confiscatory.30 Moreover, it has been held that it is not unreason

27 Turner Creamery Co. v. Chicago,
M. & St. P. R. Co., 36 S. D. 310, 321,
154 N. W. 819.

28"Of course, there is always a
point below which a rate could not be.
reduced, and, at the same time, per-
mit the proper return on the value of
the property, but it is equally true
that a reduction in rates will not al-
ways reduce the net earnings, but on
the contrary, may increase them. The
question of how much an increased
consumption under a less rate will in-
crease the earnings of complainant, if
at all, at a cost not proportioned to
the former cost, can be answered only
by a practical test. In such a case
as this, where the other data upon
which the computation of the rate of
return must be based, are, from the
evidence, so uncertain, and where the
margin between possible confiscation
and valid regulation is so narrow, we
cannot say there is no fair or just
doubt about the truth of the allega-
tion that the rates are insufficient."
Willcox v. Consolidated Gas Co., 212
U. S. 19, 53 L. Ed. 382, 48 L. R. A.
(N. S.) 1134, 15 Ann. Cas. 1034.

"The inquiry in cases of this char-
acter is not alone what has complain-
ant heretofore earned, but it is what

I will be the effect of the ordinance reducing the rate upon the future net earnings of the company, and it devolves upon complainant to show not that the past rates have not produced a reasonable return, but that the rate prescribed by the ordinance will not in the future produce a reasonable return." Lincoln Gas & Electric Light Co. v. Lincoln, 182 Fed. 926, 929.

"The point is urged from time to time that the reduction ordered in existing rates should not be questioned at the outset, but the company 'should be compelled to give the new rates a fair trial. It may turn out that there will be no reduction in earnings after all, since the increased business consequent upon the lower rate might more than make good that loss.

Although this has much force from a theoretical point of view, it must obviously be acted upon in an actual case with the greatest caution." Wyman, Public Service Corporations, $1129.

29 Railroad Commission of Louisiana v. Cumberland Telephone & Telegraph Co., 212 U. S. 414, 53 L. Ed. 577. 30 See § 4560, infra.

able to reduce a rate as a test where the company has capacity for increased production, and the rate is exorbitant, notwithstanding the company is making but very little profit at the former price.31 On the other hand, it has been held that commutation rates fixed by a commission should be set aside, where not giving a fair and reasonable return to the company, without regard to the views of the commission as to the probable beneficial effects of such rates in increasing such commutation business.32

§ 4529. Methods of valuation in general. The three theories of valuation are (1) the original cost plus subsequent expenditures which is called the investment theory; (2) the present value theory; and (3) the cost to reproduce theory.33 The fact, however, is that the various methods and theories of estimating the value of a public utility, such as reproduction new, original cost, cost to reproduce the service, etc., are to be regarded only as one or more of numerous facts to be considered by public service commissions in reaching the fair value of the property used and useful for the public.34

§ 4530. Original cost as test. Present value rather than original cost is the generally accepted rule of valuation for rate-making purroses,35 although there is more or less authority, most of which is found in the rulings of the various public service commissions, in favor of the original cost test as the basis for rate-making.36 To be sure, in determining present value, the original cost is always an important item, and if the plant is a newly-constructed one, and the amount expended was not reckless or extravagant,37 or if the property had been recently purchased at a fair price (the purchase price then being in effect the cost of construction),38 it would seem

31 State v. Public Service Commission, 269 Mo. 525, Ann. Cas. 1917 E 786, 191 S. W. 412.

32 Kansas City, C., C. & St. J. Ry. Co. v. Barker, 242 Fed. 310, construing Missouri statutes.

33 For valuable note on "Fundamental principles of valuation of public service property," see L. R. A. 1916 F 599.

34The investment cost is evidence on the question of present value. The cost of reproduction new less depreciation is also * evidence. The two methods of appraisal are independent and entirely distinct. The

1

that such original cost or sale price might well be adopted as the present value. On the other hand, in ordinary cases, where a considerable time has elapsed since the original construction or purchase, the original investment, while often a valuable aid in determining the present value of the property,39 is also oftentimes, because of changed conditions, a matter of very small importance,40 and is not conclusive, but is only one of several items to be considered in determining the present value of the property. The plant may have been built imprudently, or when prevailing prices were high so that actual cost in such respects may exceed present value,42 or the original cost may have been otherwise reckless or improvident, in which case, in the words of the Federal Supreme

43

strong evidence of value'; and a number of decisions of public service commissions are cited in support thereof.

39 Smyth v. Ames, 169 U. S. 466, 42 L. Ed. 819; Southern Pac. Co. v. Bartine, 170 Fed. 725; State v. Seaboard Air Line Ry., 48 Fla. 129, 37 So. 314; Brunswick & T. Water Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537.

Fair rate of interest upon the money invested in the plant during construction, and before completion, is as large a part of the cost of construction, as is the money itself which is expended for materials and labor. Brunswick & T. Water Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537.

40 Louisville & N. R. Co. v. Railroad Commission of Alabama, 196 Fed. 800,

820.

41 Minnesota Rate Cases, 230 U. S. 852, 57 L. Ed. 1511, 48 L. R. A. (N.

VII Priv. Corp.-33

S.) 1151, Ann. Cas. 1916 A 18; Brunswick & T. Water Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537; Griffin v. Goldsboro Water Co., 122 N. C. 206, 41 L. R. A. 240, 30 S. E. 319.

"What a plant costs originally is not the measure of value that courts must look to to determine the validity or invalidity of rates." Des Moines Water Co. v. Des Moines, 192 Fed. 193, 197.

The question is not what the plant costs, "although such evidence is admissible as having a bearing. The question is: What is the value of the plant today? There must be a reasonable rate of interest or dividend allowed on the value of the plant." Des Moines Water Co. v. Des Moines, 192 Fed. 193, 196.

42 Kennebec Water Dist. v. Waterville, 97 Me. 185, 60 L. R. A. 856, 54 Atl. 6.

43 If there was extravagance and unnecessary waste in the construction, or, as is often the case, fictitious stocks and bonds issued, the proceeds of which did not go into the original construction, such method would prove unfair to the public. On the other hand, where the market price of the physical units or of the labor entering into the construction of the plant has advanced since its construction, the original cost may be much lower

Court, "losses may be sustained which the community does not underwrite." 44 On the other hand, the works may have increased in value since their construction or acquisition, in which case, if the present value is greater than the cost, the public service company is entitled to the benefit of it, provided, however, the increased valuation does not require a return so large as to be unreasonable and unjust to the public.46

Amounts expended to make good depreciation cannot be added to the original cost in valuing a plant.47

§ 4531. Present value as test-General rule. In 1913 the Supreme Court of New Jersey stated that "the great weight of authority is in favor of the standard of present value," as distinguished from the standard of actual investment or of cost of reproduction.48 This statement is borne out not only by the decisions of the Supreme Court of the United States,49 as well as those of the lower 50 federal

courts, but also by the decisions of the state courts,51 except that it may be said that the standard of present value does not necessarily conflict with the standard of cost of reproduction, since many courts merely use the cost of reproduction as a means of ascertaining the present value in connection with other circumstances,52 and except possibly that this test is not applicable where the property has increased so enormously in value as to render a rate permitting a reasonable return upon such increased value unjust to the public.53 Of course, cost of reproduction, less depreciation, is not always the same as fair present value, as for instance where a mining camp has not more than a third the population it had when a water plant was acquired and constructed, and the value of substantially all other fixed property in that locality has fallen at least fifty per cent.54

§ 4532. What constitutes "value" in general. While it has been repeated, time and time again, especially in the decisions of the Supreme Court of the United States, that rates must be such as to furnish a fair return on the present (sometimes the word "present" is omitted) value of the property of the corporation, there is much confusion as to what the word "value" as used therein means. Generally, the reasonable value is to be estimated at the time of the

99; Des Moines Water Co. v. Des Moines, 192 Fed. 193; Spring Valley Waterworks v. San Francisco, 192 Fed. 137, 145; Contra Costa Water Co. v. Oakland, 165 Fed. 518, 532; San Diego Land & Town Co. v. National City, 74 Fed. 79.

"There can be no true test, other than the physical valuation, and to such physical valuations there may be added certain other items.'' Des Moines Water Co. v. Des Moines, 192 Fed. 193, 197, per Judge McPherson. Telephone rates may, in a large measure, be local questions to be determined upon factors, among which the most important may be (1) the cost of the plant; (2) the cost of operation and maintenance; (3) the amount of taxes and other dues exacted by the local government; and (4) the rapidity of deterioration due to climatic or other causes. Cumberland Telephone & Telegraph Co. v. Memphis, 183 Fed. 875.

51 California. Redlands, L. & C.

Domestic Water Co. v. Redlands, 121
Cal. 365, 53 Pac. 843.

Maine. See Kennebec Water Dist. v. Waterville, 97 Me. 185, 60 L. R. A. 856, 54 Atl. 6.

Missouri. Home Tel. Co. v. Carthage, 235 Mo. 644, 48 L. R. A. (N. S.) 1055, Ann. Cas. 1912 D 301, 139 S. W. 547.

New Jersey. Long Branch Commission v. Tintern Manor Water Co., 70 N. J. Eq. 71, 62 Atl. 474, aff'd without opinion 71 N. J. Eq. 790, 71 Atl. 1134.

Oklahoma. Pioneer Telephone & Telegraph Co. V. Westenhaver, 29 Okla. 429, 38 L. R. A. (N. S.) 1209, 118 Pac. 354.

52 See § 4543, infra.

53 Willcox v. Consolidated Gas Co., 212 U. S. 19, 53 L. Ed. 382, 48 L. R. A. (N. S.) 1134, 15 Ann. Cas. 1034.

54 Goldfield Consol. Water Co. v. Public Service Commission of Nevada, 236 Fed. 979, 982.