consumers must pay a reasonable return upon the company's property. Therefore, the company is no worse off because of its decreased land values. This plan is a virtual acceptance of the original value theory, if applied to a new utility, or, if applied to a company which is being evaluated for the first time, but which has been operating previously, what might be called "the existing and unchanging valuation."

The inconsistency lies in that the New York First District Commission does not apply such a principle of valuation to other property. Throughout its decisions it appraises the other property on a basis of its present value, i. e., its reproductive value at the time of evalution, which permits fluctuation. In other words, it applies a theory by which, in effect, the value of land may not change, whereas the value of physical plant may.

The St. Louis Commission is also guilty of inconsistency in its treatment of land. This Commission, as already pointed out, employs the original cost principle in appraising the physical plant. Curiously enough, it rejects this principle in its valuation of land, and uses present value. In its valuation of the property of the Union Electric Light and Power Company (1911) the Commission offers no explanation whatever for its differentiation between land and physical equipment aside from the statement that "Inasmuch as the land is used in serving the public, and if not so used could be realized upon by the company at its present value, it seems only fair that this present value should be the basis for estimating the amount of return which the company is entitled to earn." But such a statement, it is obvious, would be equally true of all the other physical property of the company, which the Commission valued at its original cost. In its valuation of the

property of the United Railways Company, in 1912, the Commission again made the same differentiation in the treatment of physical property and land, and offered, as a justification, the fact that "real estate, in American cities at least, is almost certain to rise in value," whereas in the case of buildings and plants "the fluctuations in price are uncertain and generally small and compensating." Therefore, argued the Commission, this rise in the value of real estate was presumably part of the inducement to make the investment, and should be recognized as a legitimate gain of the company. It would seem, however, that the certainty of a great appreciation of real estate in the cities would be sufficient reason why such discrimination should not be made, if the public is to be safeguarded. The inconsistent method of the St. Louis Commission is one which is likely to prove extremely advantageous to utility companies, since the original cost of physical equipment and plant, several years after its purchase, would very often greatly exceed its present value, while the present value of land would generally be much higher than its original cost. The inconsistency of the New York First District Commission is one likely to prove disadvantageous to the companies, since the original cost of urban land, several years after its purchase, would be likely to be much less than its present value, while the present value of physical equipment would often be much less than its original cost. In other words, under the St. Louis plan the utility company has both ends of the stick; under the New York method, both ends of the stick are with the public.

This paper makes no argument for the principle of original cost or for that of present value. As already pointed out, the justice of either depends upon what

Report on the United Railways Company of St. Louis by the St. Louis Public Service Commission, 1912, p. 23.

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

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." 1 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,' 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.' 11 3 The California Commission 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.

2 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.