But theory as to a reasonable rate is to be adopted. whichever principle is applied should be applied consistently. If land is to be valued differently than other physical property, the commission doing so must assume the burden of showing cause for such discrimination. This both the St. Louis and the New York First District Commission have failed to do. PAVEMENTS 1 The fact that pavements have been laid after the pipe-lines or conduits of utility companies are in the ground gives rise to some questions. In such cases, if the policy of present valuation is adhered to, ought not the value of the plant to be estimated upon a basis of what it would cost to reproduce it under the present conditions, with pavement in the street? It is evident that if this method of appraisal is adopted, valuations will be greatly enhanced. This claim was first advanced by the Consolidated Gas Company of New York, in the well-known "Eighty cent gas case." It has been advocated by utility corporations before several commissions within the past few years, upon the basis of the decision of the United States Supreme Court in the above case. In discussing land valuation, the Court said: "If the property which legally enters into the consideration of the question of rates has increased in value since it was acquired, the company is entitled to the benefit of such increase." But, the Court did not find it necessary in this case to pass upon the claims of the company on pavement valuation, and the commissions have apparently believed that pavements are not " property which legally enters into the question of rates.' 1 Wilcox v. Consolidated Gas Company, 212 U. S. 19. The Wisconsin Commission refuses to allow any additional valuation for pavement where the company has not paid for it, or incurred any expense for it,1 altho admitting that expenditures for pavements incurred because of assessments levied by the city, and the cost of cutting pavement in order to lay mains and that of replacing such pavement, are legitimate capital charges. The New York First District Commission takes the same position, saying; 2 "If this theory (inclusion of pavement values) is correct, citizens must consider in connection with every civic improvement its effect upon rates for gas, electricity, telephone service, water, transportation, and every other service which involves the use of the subsurface of the streets. If such improvement increases the cost of reproducing the undertaking supplying the service, higher rates will thereby be justified than would be reasonable before such improvement be made. . . . The cost of reproduction method may be the only method which can be used in some instances, but to follow it to the last extremity in all cases, ignoring all other considerations, not only leads to absurd conclusions, but runs counter to judicial decisions.' The New Jersey Commission also refuses to make allowance in valuation for paving " laid subsequent to the installation of the mains, and not paid for by the company." 3 The California Commission 4 refuses to allow any amount "for tearing up and relaying pavement in excess of the amount actually expended therefor." This mode of treatment is also followed by the St. Louis Commission. The author 1 Ripon Light and Water Company, 1910, Wisconsin Railroad Commission Reports, vol. v, p. 1. Mayhew v. Kings County Lighting Co., no. 2, P. S. C., 1st Dist. N. Y., decided October 20, 1911. In the matter of rates of Public Service Gas Co., New Jersey Public Utilities Commission, Reports for 1912, p. 31. City of Palo Alta v. Palo Alta Gas Co., decided March 12, 1913. knows of no commission which has allowed an increased valuation to property because of the presence of pavement not in existence when the property was put in place and not paid for by the company. The fact that the commissions have developed a course of action on the subject of allowances for pavements, the reverse of what might naturally be expected as the logical interpretation of the decision in the Consolidated Gas case, is an encouraging indication of the tendency of the commissions to develop independent courses of action, and to decide economic questions not by a blind application of precedent but by independent reasoning. And certainly the attitude of the commissions concerning pavements is sound. To penalize citizens by permitting a higher utility rate because they have decided to tax themselves to lay pavements in their own streets would be a reductio ad absurdum of the present value theory. OVERHEAD CHARGES Certain items, usually called overhead charges, should be added to the cost of material and labor in order to get the true valuation of the property. The Maryland Public Service Commission is the one commission which thus far has refused to make any allowance for intangible elements. Altho it has made several valuations of large properties, the most important being the Chesapeake and Potomac Telephone Company of Baltimore and the Consolidated Gas, Electric Light and Power Company of Baltimore, it has included, up to the present, in its valuations nothing but the physical or structural values. But the necessity of allowing for overhead and intangible elements is generally recognized by the other commissions. Two methods of computing the overhead charges are in use: (1) to compute accurately the expense involved for all overhead purposes; (2) a percentage "allowance "to be added to the structural value. The first method is that employed by the New York First District Commission. Its basis for estimating the proposed amounts of allowable overhead charges is to add to the physical valuation the following items:1 (1) Expenses of supervising, engineering, contractor's profit, etc. (2) Expenses of promotion, organization and development of the company. (3) Expenses of interest and taxes during construction. (4) Working capital. All the above are regarded by the Commission as legitimate items to be included in the valuation. The amounts to be allowed are obtained from records as far as possible. When the records are missing, the estimates are based on general knowledge and experience, and an effort is made to arrive at a sum which will represent what was actually spent or might have been expended for these purposes. This practice is also largely followed by the St. Louis Commission, which arrives at its allowance for interest, taxes and insurance during construction, by ascertaining the actual expenditure of the companies as indicated by the companies' books, the tax records, and other available data. The second method is represented by the practice of the Wisconsin Commission, which generally allows 12% on the reproduction cost to cover overhead charges. In the City of Ripon case the Commission explained that its figure of 12% is made up as follows: 5% for engineering and superintendence; 4% for interest during construction; 3% for organization and legal 1 Queens Borough Gas & Electric Co., no. 2, P. S. C., 1st Dist. New York, June 23, 1911. 2 Wisconsin Railroad Commission Reports, vol. v, p. 13. 2 expenses. The Wisconsin practice of allowing 12% was followed by the New Jersey Commission in its early cases.1 Recently, however, the New Jersey Commission seems to have adopted a new figure for this purpose, 17.6% which includes engineering, supervision, omissions, contingencies, and interest during construction. This figure appears to be the result of estimates submitted by five different engineering firms, and is accepted as being "the fairest estimate of all these allowances." The percentage method is also followed by the Los Angeles Board of Public Utilities, which includes the usual 20% above cost, to cover engineering, supervision, interest, and contingencies during construction." 3 The California Commission in railroad valuation cases is accustomed to allow 5% for engineering and organization expenses, 1% for legal expenses, and 6% interest for one-half the period of construction. Where the Commission finds that it may have overlooked items, it allows an additional percentage for contingencies, ranging up to 5%. In the case of companies which have been recently organized, or which have reliable records and accounts showing past expenditures, doubtless the method of exact computation followed by the New York First District Commission and the St. Louis Commission is the more desirable. Commissions which intend to follow this practice should notify companies in their jurisdiction that all expenditures for such purposes in the future must be properly charged and recorded, if they are to be recognized in valuations. In the case of companies whose expenditures for these purposes extend far back in the past, and which have not records 1 Report of New Jersey Public Utilities Commission for 1911, p. 109. Matter of Rates of Public Service Gas Co., Dec. 26, 1912. Third Annual Report of the Board of Public Utilities Commissioners of New Jersey, p. 246. • Los Angeles Board of Public Utilities, First Annual Report, p. 69. |