Ben Avon Borough v. Ohio Valley Water Co.

Opinion by

Kepi-tart, J.,

The Ohio Valley Water Company was incorporated in 1903 and in 1904 it purchased the property and franchises of a number of water companies which had charter powers to operate in various parts of the district now supplied by the appellant. The companies then doing business were the Valley Consolidated, Perrysville, and Fleming Park. In May, 1913, the appellant purchased the controlling capital stock of the Monongahela Water Company and later, through sale, the property of the Monongahela Company was transferred to it. On December 30,1913, it adopted a schedule of rates which has given rise to the present controversy. Since the adoption of these rates, many of the boroughs instituted proceedings to restrain the collection of the new rates. These proceedings were not successful, and in December, 1914, complaints were filed before the Public Service Commission. The commission filed a report February 12, 1917. From that finding, the Ohio Valley Water Company has appealed. At the time the valuation was fixed the appellant had outstanding $1,000,000 bonds, $110,000 floating debt, and $1,000,000 capital stock. The commission found the value of the appellant’s property for a rate basis to be $924,744. Our consideration is limited to whether the rates fixed upon the valuation as found are reasonable and in conformity Avith law. In determining the questions of rate making value and rates, the commission is given extensive powers to be exercised after a thorough consideration of the business from the most accurate knoAvledge obtainable. The questions present matters of such grave importance as to call for the most careful consideration by the commission designated by the legislature to act. A rate that is too low may deprive the members of the corporation of property that cannot be returned and if too high, the public is unjustly deprived of property. Rates should not be speculative or put in operation for the purpose of determining whether too low or too high. Before that question can be answered, a loss of property may result. The business of rate making should not be an effort to impose on either the public or the corporation ; and, Avhile it may be true that some corporations in the past have acted unfairly to the public, that Avould not justify a confiscatory valuation by the commission or a lowering of rates causing a confiscation. Rate making contemplates fair dealing between the company and the public. When the question of rates to be fixed is before the commission, the value of the whole property and the net return thereon must be considered. If the net return is fair for the present value of the whole property, there is no confiscation: Minneapolis & St. Louis R’D. Co. v. Minnesota, 186 U. S. 257. Yet the rate may be reasonable, though it fails to produce ah investment return of the legal rate of interest, as where the business has not been developed sufficiently to be remunerative, or the plant has been over-developed to meet the probable future demands of the business: San Diego Land & Town Co. v. Jasper, 189 U. S. 439. The public is entitled to be served at reasonable rates on the value of the property used in the public service. The company is entitled to a rate that will allow it a fair return. To induce investment and the continuance of capital, there must be some gain commensurate with that of any other business. The mere assurance that the investment will not be confiscated will not suffice. Section 20 of Article Y of the Public Service Act prescribes the elements of value which may enter into the commission’s determination in fixing the fair or present value of the appellant’s property.

“The value of the property is to be determined as of the time when the inquiry is made regarding the rates. If the property, which legally enters into the question of the consideration of rates, has increased in value since it was acquired,- the company is entitled to the benefit of such increase”: Willcox v. Consolidated Gas Co., 212 U. S. 19-52. Of course, there are exceptions to this general rule as where the property has increased enormously in value so that normal rates based thereon would be prohibitive. The basis of calculation is the fair \ value of the property used for the convenience of the! public. “What the company is entitled to demand, in order that it may have just compensation, is a fair return upon the reasonable value of the property at the time it is being used for the public”: The Minnesota Hate Cases, 230 U. S. 352-434, and cases therein cited. The weight of authority is in favor of the standard of ' present value as distinguished from the cost of reproduction, or the actual cost of construction: San Diego Land ; & Town Co. v. Jasper, supra.

Original cost, assuming that the books of old concerns correctly recorded all of the items that went into cost, which would be quite rare, would not take into consideration many of the incidental features of expense which* companies must meet, nor would it make any allowance for any “increase in value” in the physical property. And it is admitted in this case that, as to certain items of physical property “a record of the original cost could not be obtained or......the book cost was not a true statement of the historical cost” in the sense of original cost. It is not remarkable that in reaching original cost from the books the results of the different experts should closely coincide. “In ascertaining the present value we are not limited to the consideration of the amount of the actual investment. If that has been reckless or improvident, losses may be sustained which the community does not underwrite.” Nor should the public be required to underwrite these investments where bad management, or the falling off in business, causes the value to fall below original cost. “As the company may not be protected in its actual investment, if the value of its property be plainly less (than original cost), so the making of a just return for the use of the property involves the recognition of its fair value if it be more than its cost. The property is held in private ownership and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law”1: The Minnesota Rate Cases, supra, 454. The present value represents more than the cost of reproduction, which is the present day cost of the real estate, machinery, equipment or plant, labor of installing or construction, and putting in place to perform its various functions. These constitute, as Mr. Justice Ltjkton says, in Omaha v. Omaha Water Co., 218 U. S. 180-202, “the bare bones of the plant, its physical properties.” The expenditures beyond physical cost are sometimes called overhead charges, and some of the items are termed preliminary, developmental, or going concern costs, or value. To these bare bone charges must be added “time and money expended in .the promotion of the enterprise; in the organization of the company and interesting capital therein, including, also, legal expenses, obtaining the necessary franchise, as well as the costs of incorporating the company”; engineering and superintendency; losses arising from accidents to men and material during the construction period; expenditures bound to be made by reason of the incompleteness of plans, always attached to the most perfectly planned work; the cost of administration; interest paid during construction; securing and retaining customers; the loss of earnings during the time usually required in a well managed, progressive plant to build.up its business; the loss from unsuccessful experiments, intended to protect life and property, or reduce operating cost, or increase the efficiency of the service; the installation of machinery made necessary through the progress of scientific development, thereby causing good but inferior machinery to become obsolete, increased public demands causing the present equipment to become inadequate through lack of capacity and its replacement necessary; the cost usually attendant upon the consolidation of many plants into one efficient organization, the benefit of which should be reduced cost of operation and better service; and the increased value of such consolidated plants over the separate units that formerly composed them: Des Moines Gas Co. v. Des Moines, 238 U. S. 153-166; Public Service Co. v. Board of Public Utilities, 84 N. J. Law 463 (87 Atl. 651) ; People v. Willcox, 210 N. Y. 479; Omaha v. Omaha Water Co., supra. Rare, indeed, is it that a utility, or any other concern, can launch into business without encountering most of the items of expense here enumerated. A company does not receive a, fair valuation when the cost of its physical property alone is considered. Nor do we wish to be understood as saying that the exchange value used in condemnation and sale should be the basis upon which the rate should be determined. In this latter value, the income is assured and its continuance enters into and affects it. In exchange or selling value, the ability of the utility to produce earnings is a large factor, if not the controlling factor; but such value of necessity takes into consideration the monopolistic feature of a utility. It produces earnings by virtue of the commodity it sells; its position in public life to command sale from the compulsory aspect which causes the inhabitant to buy, whether he will or not. These companies secure ,an added value from these causes.

Bonds and stocks issued largely in excess of value by and to parties interested in and controlling the company, or issued on inflated or fictitious values, afford no measure or guide for fixing present value: Knoxville v. Knoxville Water Co., 212 U. S. 1. The investor in a public enterprise must know that at some time the State may step in and exercise its regulatory control and fix returns on the fair value of the utility. If, in corporate management, large amounts of securities are issued on values that do not exist, the investors in common must bear the loss. The commission did not err in declining to consider issues of stocks and bonds on over inflated values as affecting the rate making base of the property under consideration. It presented little, if any, light on the subject. The commission, in the present case, received evidence tending to show the original cost and the reproduction cost. It then endeavored to fix a fair present value for rate making purposes. Voluminous testimony, oral and' written, was taken. More than two thousand printed pages make up the record. The commission filed its report fixing the rates as of January 1, 1916. During the course of the hearing, the engineers for the appellant and the various boroughs agreed upon the reproduction cost of a number of the items making up appellant’s property, which were accepted by the commission as their reproduction cost. Depreciation, though largely theoretical in its nature, which is allowed on the reproduction cost seems to have a fixed place in valuation. If, however, replacements and renewals are amply provided for and made, depreciation only to a very small extent takes place. If, through depreciation, the value of the property is largely reduced, the securities which were placed thereon may be unnecessarily reduced. As these charges withdraw from the rate making base, such depreciation naturally effects a purchase of a part of the property for the consumer, a thing never contemplated. A rate for renewals and replacements should be provided and expended for that purpose; when that is done, as is the custom in every utility concern, depreciation is a very small fractional per cent. This should be placed in a reserve and it, with renewals and replacements, is properly allowable in fixing a schedule of rates. All of the assignments of error have relation to the items which the engineers could not agree upon and which the commission declined to find as contended for by the appellant. They relate to, (1) real estate and right-of-way; (2) the parallel lines of the Monongahela Water Company system; (3) going value, or going concern value; (4) engineering and contingencies; (5) interest during construction; (6) brokerage. _

Considering these items in their order, in the light of the foregoing discussion, we do not feel that the commission committed any error in the value fixed for the Bellevue and Stowe Township reservoirs. The Neville Island property presents a much more difficult proposition. The appellant purchased several acres of land upon which it drilled a number of wells and secured a supply of pure water which it. pumped into its mains and with it furnished between nine and ten thousand families. The daily production from these wells amounted to 4,-500,000 gallons, and could readily be increased. The appellant contends that the particular valúe comes from the location of a sand bar within the property line through which the water percolates into the wells, thereby enabling the appellant to furnish filtered water to its consumers. The appellees urge that inasmuch as some of this property is within the harbor lines, it is necessary for the appellant to secure a permit from the United States government to sink its wells, which permit may be revoked at any time and the wells rendered useless for use. This theory of the appellees to reduce the value of the appellant’s property cannot be sustained. Considering the testimony as to what relative claims might arise between the Federal government and the appellant as to the ownership or use of the land in question, the presumption of ownership is with the grantee, who is in the possession and use of the property. As against the entire world, its rights are, so far as the commission is concerned, free from dispute. It presents a title in fee simple, which, with possession and actual use, ought certainly to outweigh any remote possibility of danger from • the government, even if they could assert a right. But the commission cannot enter into such disputed questions of title. When sufficient evidence is presented of a prima facie title, such as that before the court, the commission cannot act as a court and jury and determine the question of title adversely to the utility company and deprive it of a rate of return on its property in use on the complaint of one having no interest of any kind in the property in question. If the appellant’s title should be taken away at some future time, and its value should be of such weight as to enter materially into the basis on which the schedule of rates was fixed, the commission can readily adjust the rates; but until that time, the appellant is entitled to what it bought, paid for, improved and is now using. A special value is claimed for this property. The appellees would limit it to the price fixed for lots immediately adjoining, or in the vicinity; it is contended that water of the same quality as secured by appellant could be procured from the adjoining lots. The appellant is dealing with what has been done, and not with a problematical use of adjoining properties; and, while it was shown that one particular property produced a certain supply of water for one well, we have here a property on which is located a number of wells, with a sand bar, which, according to the government engineer, was approached in size by none within a space of five miles down the stream and two miles up the stream. It is advantageously located for supplying the appellant’s territory, and if located at other points, additional pipe and large operating- expense would be encountered; because the appellant dug some wells in the back channel to be used as a reserve supply, should not reduce the value of this water supply. ' That was expedient and necessary to every well conducted concern that wishes to render efficient service continuously to its customers. ■ It may be, as stated by Mr. Justice Hughes in the Minnesota Rate Cases, supra, that real estate should not receive an enhanced value beyond that of communal growth and that the real estate of a railroad company should not be valued beyond that of contiguous properties or for it's worth to the railroad; but that court, while disallowing condemnation value for real estate; was particular to say that real estate is entitled to a fair market value for all its available uses and purposes or if it has a peculiar value or special adaptation for a particular use, these items should be considered in the rate making values. There is a difference between increased value which accrues by reason of the concentration of population along the utility’s lines and the value which results from the centralizing of real property, mechanical appliances, machinery, equipment and business sagacity into a successful industry which produces large returns of the particular commodity which these energies were bent on bringing forth. For many years this property remained idle, when the men with the idea and capital developed it. Such property, so- worked upon, has an added value undoubtedly beyond that of the mere cost of the machinery, the labor and pay of the man who conceived the idea, or the value of the adjoining- property, or in the immediate vicinity. In this case the public has been benefited in that it is able to procure a commodity of-purer quality in large quantities. If a fair rate making value cannot be given this increased value, then much of the efforts of managers to procure satisfactory and suitable agencies to reduce the cost or better the service of utilities would be seriously handicapped. It has been held in a number of cases that the full extent of this value can be included in the exchange values. The property should not be considered in the light in which the appellees’ witnesses place it for building or manufacturing purposes. It is not entitled to the measure of value fixed by the appellant, that is, what it would cost to reproduce the supply of water if it were taken away. Between the extremes of the evidence introduced there is a fair value. While it might be difficult to determine, nevertheless, confiscation cannot be permitted because of difficulties. The commissioner, who heard the testimony, fixed it at $100,000. He possibly was in a better position to judge than any one. The commission’s value of $48,800 did not consider all the elements that tended to make up the value of this property. It is directed that the value be increased as indicated by this opinion.

In considering the value of the parallel lines of the Monongahela Water Company, the commission allowed one-third of the reproduction cost, $21,331. The Monongahela Water Company supplied water to McKees Bocks and parts of Chartiers and Stowe Townships. A part of its supply was in competition with the appellant. Prior to 1913, this company offered a part of its property to the appellant, but we do not find any evidence where the entire property was offered to it. In 1913, the Ohio Valley Company purchased ninety-seven per cent, of the outstanding stock of the Monongahela Water Company from persons, one of whom was not connected with the appellant and the other in a very small way. It paid for this stock notes amounting to $100,000 and stock amounting to $192,450. Subsequently a number of shares were purchased for $662.46. The appellant was practically the owner of the Monongahela plant. It appears from the evidence that the persons who sold the stock to the appellant paid for it close to $70,000. After the sale to the appellant, the Monongahela Water Company sold to the Ohio Connecting Railroad Company a pumping station for $60,000. A pipe line was sold to the City of Pittsburgh for $4,-325.94, and the remainder of the physical property, with cash on hand and accounts receivable, was sold to the appellant for $30,000. Stripped of all questions of corporate stock, the total amount of cash participated in by the Ohio Valley Company, through sale, etc., was $77,-068.80, and the physical property that remained of the Monongahela Company was the property of the appellant. The engineers representing both parties estimated the reproduction cost of this property, after this cash distribution, at $82,357. This company’s property seems to have been segregated from the rest of appellant’s property and dealt with separately by the commission in valuation. It is evident that at the time the property changed hands, and that for all practical purposes was when the appellant bought ninety-seven per cent, of the stock, without considering any exchange or present value, the physical value of the property was actually worth $159,425.80; the commission fixed the original cost of this property at $17,257, or the purchase-price of the physical property now in possession of the appellant less accounts receivable and cash on hand. When the commission, in original cost, considered the first purchase made by the appellant, it did not consider the exchange or selling price of the property. For original cost it took the cost as nearly as it could be ascertained that was necessary to produce the property under consideration and that, of course, was very much lower than selling price as represented by the stocks and bonds paid for the properties. We do not attempt to justify the conduct of the officers in forcing such sale with respect to the minority stockholders of the Monongahela Company, or in issuing to the majority owners of the stock of the Monongahela Company stock and bonds in excess of what appears to be that value of the plant; nor is it necessary for us to enter into a discussion of the other items of value that it is urged would justify the price paid. The appellant asks here that it be allowed full value for its parallel lines in McKees Rocks, and this, we think, is a proper request. If utility companies in organizing into one operating plant a number of smaller ones must be deprived of a fair return on the values of the properties purchased and are also limited to the reduced cost of operation by reason of such consolidation, it is evident that the more practical way would be to permit the companies to remain separate operating concerns. The public is entitled to a fair benefit, from every such move made by a utility concern, and where they assemble a number of plants with separate overhead and operating charges into one plant with one overhead charge'and one or more operating plants, while the operating plant of some of the separate units may be rendered useless, still the new concern- has paid for it, and capital was originally and is now invested on its account. Investors could not be induced to traffic in such an unsatisfactory and unstable security, where the risk is not failure by reason of operation, but failure through confiscation. The benefit that should come to the public is through the reduced cost of operation; but the value of the dismantled plant should not be taken from the books as a capital chai’ge until such time through sale, or other equitable arrangement, such value has been amortized. So, too, with respect to the paral] el lines in question. The commission valued these parallel lines at one-third of the value fixed by the engineers, $63,992, or $21,331. From a total valuation of $39,696, parallel and nonparallel lines, the appellant has a return in revenue of $11,000. These lines are useful for the present operation and for future development and they became very necessary in case of trouble with the other line. The reproduction cost should have been allowed as fixed by the engineers, $63,992, and the total reproduction cost of the Monongahela system would then be f82,357.

The commission declined to allow any sum for going concern cost or value. While it said due consideration would be given this item, its report expressly shows, in the separate items found, nothing was allowed for going value; in fact, the rate making value allowed was less than the reproduction cost of the physical property. The right of the company to have going value, or going concern cost, assessed as a part of the present value for rate purposes has been recognized by our own Supreme Court. “As to the items of ‘going value/ interest during the period of construction, and the cost of repairing the streets, which appellant contends were not allowed,” the findings as to these items were correct, that they were elements in that case: Monongahela Water Co.’s Case, 223 Pa. 323; Turtle Creek Boro. v. Penna. W. Co., 243 Pa. 401. “ ‘Going value/ or ‘going concern value/ i. e., the value which inheres in a plant where its business is established, as distinguished from one which has yet to establish its business has been the subject of much discussion in rate-making cases before the courts and commissions. That there is an element of value in an assembled and established plant, doing business and earning money, over one not thus advanced, is self-evident. This element of value is a property right, and should be considered in determining the value of the property upon which the owner has a right to make a fair return when the same is privately owned although dedicated to public use”: Des Moines Gas Co. v. Des Moines, supra; Public Service Co. v. Board of Public Utilities, supra; People v. Willcox, supra. It takes time, labor and money to bring a new operation into an efficient working organization and to acquire a paying business. The time and money expended in the promotion of the enterprise, the cost of securing and retaining customers, the loss of earnings on a reasonably well developed plant during its initial years, when its business is being built up, the increased value which conies from the consolidation of separate plants into one concern, these items, with the value that inheres in a plant with its business established, may be termed going concern cost or value. As stated above some authorities divide these costs into preliminary, developmental, or going concern. Good will, in the sense in which that term is generally used, or that element of value which adheres in the fixed and favorable consideration of custom, arising from an old established business, has no place in the fixing of values for the purpose of rate making of public service corporations of this character: Des Moines Gas Co. v. Des Moines, supra; Willcox v. Consolidated Gas Co., supra. Going value is to be distinguished from good will. “The difference between a dead plant and a live one is a real value, and is independent .of any franchise to go on, or any mere good will as between such a plant and its customers. That kind of good will, as suggested in Will-cox v. Consolidated Gas Co., 212 U. S. 19, is of little or no commercial value when the business is, as here, a natural monopoly, with which the customer must deal, whether he will or no. That there is a difference between even the cost of duplication, less depreciation, of the elements making up the Water Company plant, and the commercial value of the business as a going concern, is evident. Such an allowance was upheld in National Water Works v. Kansas City, 62 Fed. Rep. 853, where the opinion was by Mr. Justice Brewer”: Omaha v. Omaha Water Co., supra. The appellant would have been entitled to a return on the value as adopted by the commission if it had just completed its construction and was ready to start business. It will not do, as argued by the appellees, to say that the item of going value was considered in the reproduction cost as returned by the engineers for the appellees. Aside from the fact that the engineers by their evidence excluded any such thought, it would be almost impossible to determine the going cost or value assessable to each factory comprising the property. It is only by considering the property as an entire operating concern that we are able to reach any conclusion on this item. To take the familiar illustration of two plants identically planned, one completed, ready for business, the other completed and doing business, there can be no question but that the one doing business is more valuable than the one not doing business; and it is not correct to say that the first plant, without business, should have a junk, scrap or second-hand value. The same is true of companies just starting in business. The reason given by the appellees’ engineers for not allowing any sum for going cost was that at the time the valuation was made the company had a paying business. This omits the theory upon which present value as aided by reproduction cost is found. It must include all the charges necessary to duplicate the plant,-allowing present day prices for the cost of construction. The present value, in the case before us, includes nothing for developmental, preliminary or going concern costs, or value as herein mentioned, As it is a property right, the commission cannot vaguely consider it, but where it exists as here shown, it must be allowed. While it may be said that the assessment of this value is difficult, still, as said before, difficulties will not justify confiscation. The evidence does not show that excessive earnings were made, no dividends of any consequence have been paid by the company, and there were no excessive interest charges paid on borrowed money on the value fixed. There is no evidence of bad management in operation, nor is there any evidence that there was a surplus accumulated. There was sufficient evidence before the commission from which this value might have been included in the present value or rate making base. Considering the territory served, the number of miles of construction employed, the number of consumers already attached, the reasonable time within which the company should have accumulated a remunerative business, and the well recognized difference between a plant that is doing business and one that is just ready to do business, and the added value which must come from consolidation, the lowest amount fixed by the appellant’s evidence would not be an excessive value for this item. It bears a very fair comparison with the amounts allowed by commissions and appellate courts of other states. From the evidence, the commission should have fixed a value for this item. We are not impressed with the table of theoretical surplus. As a matter of fact, there was no' surplus. The table might be useful in showing what the earnings should have been had a proper return been made. It might thereby assist in determining going value. The commission did not consider it and we need not.

The amount ascertained for engineering and contingencies is substantially correct. While it might be increased a trifle, the difference is not so large as to warrant any revision.

Interest during construction was allowed, but exception is taken to the reduced amount for the reason that the estimated time within which the plant should have been completed was reduced by the commission. The experts for both sides, whose agreement on many items had been accepted by the commission, found that the time necessary to construct the plant would be two and one-half years. The money used to construct the plant, as the labor employed thereon, demands its fair return from the moment it leaves the investors’,hands. During the period of construction, the company secures no return for its use. The interest charges must be met and this can only be done from capital account. Those who have practical knowledge as to the time necessary to construct a plant of the magnitude of the one under consideration, are properly qualified, and perhaps in a better position to determine the time, than lawyers or judges without practical experience. The engineers agreed that two and one-half years was a reasonable time, and this agreement should have been accepted, unless the commission had other information or other evidence from which to curtail that time. The appellant was entitled to the additional year’s interest at the rate found by the commission.

Concerning the item of brokerage, the courts and commissions of other states have held that discounts on securities should be allowed; as utilities, like other companies, are not able to make their financial arrangements without allowing such discount. The difference between the amounts derived from the sales of its bonds and the amount which the company must eventually pay oji the b03ids has been regarded as a part of capital charge for construction. While corporations should not be permitted to capitalize their lack of credit, still, where bonds are sold at a reasonable discount and bear a fair rate of interest, such discount should be allowed. What is a fair discount depends upon the condition of the money market and the ability of the organizers to attract capital to the project. It is a well known fact that the great majority of companies are started without all the available cash necessary to complete the undertaking. This country would not have reached its great stage of industrial'development if it had been the rule that all capital must be procured in advance by fully-paid stock subscriptions. If a legal rate of return whs all that was offered, the investor could very well answer that without risk and, with a safe margin of value, money could be loaned on lands and buildings at this rate of return. When solicited to invest in a new project, with the uncertainty of success before him, the investor demands a return commensurate with the risk involved, and that must be something more than a legal rate investment. If the venture is a failure, the investor is compelled to take his loss without any hope of recoupment; but it is equally unfair to require him to suffer all the loss if the enterprise fails, and to deprive him of the chance of additional gain if the venture is a successful one. Moreover, the company should be allowed the expense necessary to afford the inducement to capital, and if to secure capital it is necessary to give a reasonable discount on bonds (and this has been the rule in the past), such discount should be allowed as a capital charge. To hold that only the cash received may be considered in a rate making value, would not only deprive the company of property, but would deprive the investor of property; it would drive from the field of legitimate banking the securities of hundreds of utility companies within the State. Many of these securities are held in good faith by banks throughout the Commonwealth. We cannot view the present success of utility companies as the medium through which this question must be judged. It is necessary to go back to their formative period, when these securities were sold, and from that viewpoint examine the various critical stages through which the utility company has passed. It has only been through inventive genius that many utility concerns have become successful ventures. The appellant should be allowed a certain per cent, for brokerage, or discount. There was sufficient evidence before the commission to determine the fair amount and while the company, in undertaking to allow exorbitant amounts, fell into error, and such issues were clearly unreasonable and grossly in excess of any fair demand, still we cannot deny to the innocent stock and bondholder the justice of securing a reasonable allowance for brokerage as a capital charge. In so doing we do not give any consideration whatever to inflated or fictitious values; the evidence before the commission was that seven and one-half per cent, of the reproduction cost would be a fair amount. When based on reproduction cost, the discount is limited to actual value and no fictitious charge is allowed as it would be if calculated on an issue of stocks and bonds where the utility was created solely from the money received from the sale of bonds. This, for a new concern does not seem unreasonable.

In fixing a schedule of rates that would produce a return on plant value mentioned in going cost, three ways have been suggested by the authorities: First, to make the rates so high that these items would be returned to the investors from the first years of the business. This, it is readily seen, would cause a prohibitive rate to be fixed. Second, to distribute the cost over a given number of years and gradually amortize it. This, while fairer to the public than the first proposition, is not as satisfactory as the third one, which seems to be adopted by most authorities. Third, tó treat these costs or values, as well as the other items of plant value, as a capital charge for the purpose of fixing a fair rate to the public. These questions must be determined from the principles of sound business, with an equal appreciation of public interest. It may be that future business, from the schedule of rates now fixed, may demand a further regulation, the increase of business having such tendency. This is one of the consequences that follow adjustment of rates. So, too, if it is made apparent to the commission that items of value have been omitted from the testimony, the commission under its broad powers may cause such action to be taken that will permit a return thereon.

The order of the commission is reversed and it is directed to reform its valuation in accordance with this opinion and upon such valuation it shall fix a schedule of rates which shall cover the expenses, depreciation, etc., and the return per cent, as found by the commission to be fair.