§ 283. Treatment of unearned increment. 284. Valuation of utilized realty. Topic D. Cost of Reproduction § 285. Rule of the Minnesota courts. 286. Methods of Texas commission. 287. The federal courts opposed. 288. Explanation of the California decisions. 289. Condition of the plant itself. 290. What physical reproduction means. 291. Identical reproduction. 292. Intervening conditions. 293. Piece-meal construction. 294. Overhead charges. 295. Unit prices. 296. Cost of building up the business. $250. Provisions of the Act. The Commission had nothing directly to do with the determination of the value of the capital devoted to the service of the public, by the carriers subject to its jurisdiction, until the Valuation Act of 1913 was passed; and since all the items of value which seem to be of interest are set forth in one way or another in this Amendment, extracts from Section 19a are printed at the beginning of this chapter. Additions to capital currently have long been under the jurisdiction of the Commission over accounts, as will appear from the quotations from the provisions requiring returns to be made thereof, extracts from which will be reprinted subsequently. By the Valuation Act the Commission is required to investigate, ascertain, and report the value of all the property owned or used by every common carrier subject to the provisions of this Act. The Commission shall make an inventory which shall list the property of every common carrier subject to the provisions of this Act in detail, and show the value thereof as hereinafter provided, and shall classify the physical property, as nearly as practicable, in conformity with the classification of expenditures for road and equipment, as prescribed by the Interstate Commerce Commission: First, the original cost to date, the cost of reproduc tion new, the cost of reproduction less depreciation, and an analysis of the methods by which these several costs are obtained, and the reason for their differences, if any. Second, separately from improvements the original cost of rights of way and terminals owned or used for the purposes of a common carrier, and ascertained as of the time of dedication to public use, and the present value of the same, and separately the original and present cost of condemnation and damages or of purchase in excess of such original cost or present value. Third, separately the property held for purposes other than those of a common carrier, and the original cost and present value of the same, together with an analysis of the methods of valuation employed. Fourth, in ascertaining the original cost to date of the property of such common carrier the Commission, in addition to such other elements as it may deem necessary, shall investigate and report upon the history and organization of the present and of any previous corporation operating such property and upon any increases or decreases of stocks, bonds, or other securities, in any reorganization. Fifth, the amount and value of any aid, gift, grant of right of way, or donation, made to any such common carrier, or to any previous corporation operating such property, by the Government of the United States or by any State, county, or municipal government, or by individuals, associations, or corporations. The scope of these provisions of the Act is discussed at large in Chapter XX. § 251. Various theories as to proper capitalization. In order to decide upon what principles the amount of capital devoted to a public service, and therefore entitled to a return, is to be estimated it is important to examine the various theories which have been brought forward for determining what amount is proper. There is as yet no real agreement among the authorities which have dealt with this problem; but it is desirable that some theory should be found with a sufficient preponderance to be taken as a working basis in a given situation. For without a basic theory as to proper capitalization, rate regulation is virtually impossible; since unless the charges for return on capital are determined, it cannot be told whether the receipts from any given business are excessive or not. Many theories as to proper capitalization have been advanced at different times; and, indeed, each of them still has some advocates at the present time. But, various as these are, they may be reduced to four. Thus (1) the outstanding capitalization is by a few still regarded as sacred; while at the other extreme are those who refer everything to what might be shown to be (2) the bare cost of substantial reproduction at the present moment. But to most persons both of these standards seem essentially unfair, either to the company concerned or to the public served. And the real controversy it is submitted is between the two remaining theories, (3) the original cost of the property in question to its owners, or (4) the fair value of the property at the present time. It will be seen that, although these amounts may sometimes nearly approximate each other, there is such an inherent difference between these cases that one or the other must ultimately be adopted in a particular case. Topic A. Original Cost § 252. Actual investment entitled to return. Actual cost properly considered is the most natural, and in many respects the fairest, single basis for the determination of fair value for rate purposes. 44 A fundamental principle of public service regulation is that since the public service corporation devotes its property to a public use, it may consequently be required to render the service at reasonable rates of charge. Rates of charge to be reasonable may not be in excess of the fair value of the service, 44 A schedule of rates that enables the company to realize no more than this is reasonable and just. Brymer v. Butler Water Co., 179 Pa. St. 231, 36 Atl. 249, 36 L. R. A. 260. and may not be higher than necessary to produce a fair return on the property devoted to a public use. This is undoubtedly in the first instance, at least, the money that the company has actually and necessarily invested, i. e., the actual cost. As a general working principle the Commissions generally hold that the original investment, or in the absence of evidence as to that, the cost of reproduction, which probably reflects the original investment more accurately than anything else, may be taken as of primary importance; but neither can be controlling as to the final conclusion, and all available information should be considered, and given such weight as is proper in the case under consideration.45 It is submitted, at all events, that this rule that a return may be based upon the total investment made in the construction of the plant from first to last, with certain limitations, may be adopted not unreasonably by a public-service company in making up its own schedule of rates; and it would seem to follow that this should be the basis upon which a Commission would be inclined to act, if given a free hand by the courts. § 253. Cost of proper facilities. The ultimate test of reasonableness with the carrier itself is based upon the return for the use of its equipment and facilities. 46 If the carriers are to equip themselves with cars, motive power, tracks, and terminals so as to meet the demand for transportation, the shipping public should pay interest upon that investment, and for the maintenance of these facilities. 47 Thus rates were held not unreasonable in a recent case, when the net earnings on heater cars were apparently no more than a just return upon the value of those cars. 48 But state 45 The original cost of carrier's property devoted to public use is an element in determining reasonableness of rate. Portland Chamber of Commerce v. O. R. R. & N. Co., 19 I. C. C 265. 46 National Hay Asso. v. M. C. R. R., 19 I. C. C. 34. 47 In re Mine Ratings, 25 I. C. C. 286. 48 In re Advances on Potatoes, 25 I. C. C. 159. ments of increased cost of transportation by reason of higher price of equipment can have little weight, when presented in the abstract, with no attempt to consider corresponding reductions resulting from greater efficiency.49 A new line ought to be worth what it cost; and it ought, therefore, to be allowed to earn a fair return upon that amount if properly shown, without interference from the regulating authorities. 50 And the Commission is very ready to recognize the protection due, under normal circumstances, to the owners of the property devoted to public use. 51 § 254. What is the actual cost. The question of what constitutes the actual cost of the plant was raised and much discussed in an important case decided in Massachusetts not long ago.52 A statute gave the plaintiff town a right to take the corporate property of the defendant company on payment of the actual cost with interest. The town exercised the right, and this suit was brought to determine the actual cost. The court held in the litigation which followed that the actual cost mentioned in the statute was the actual cost of the plant to the company; and this cost they held to be the amount actually paid to the contractor by the company, although the contractor had done the work under a rather peculiar contract which yielded him a somewhat unusual profit. Mr. Justice Loring said in part: "It is argued by the town that this result amounts to substituting market value for actual cost, and actual cost excludes everything in the nature of a profit. It is true that actual cost excludes everything in the nature of a profit; but what is actual cost to the company includes a profit to the contractor, just as what is actual cost to the contractor in 49 Hormel & Co. v. C., M. & St. P. Ry. Co., 26 I. C. C. 112. 50 Spokane v. N. P. R. R., 19 I. C. C. 162. 51 Detroit Switching Charges, 28 I. C. C. 494. 52 180 Mass. 325, 62 N. E. 255. |