the circumstances under which that property was created and placed in the public service should be taken into account. This view leads us to the use of the original cost theory where practical. . . The method by which the original cost is computed by the Commission is to make a complete detailed inventory of the entire physical property, and then assign to each item its original cost, based upon costs as taken from the contracts in the files of the company, where possible, and when no such contracts are in existence, on estimates collected by the Commission's engineers.

While the New Hampshire Public Service Commission has not yet developed a theory of valuation, it is evident that it regards original cost as an extremely important factor. For in a recent rate case, it held that it was unnecessary to make a valuation of the property, since it was clear that the original cost of the property, less depreciation, was in excess of the amount upon which the company was earning a return.

In rejecting the original cost theory, the Connecticut Public Utility Commission says: We do not think that the original cost of construction, whatever that may have been, the price paid for the line by the company, are proper standards to determine the value of the plant and equipment for which the company is entitled to receive a fair income, but that the cost of reproduction at the present time in this particular case is a more accurate standard." This reasoning seems to be accepted by the commissions of the following states, all of which base their valuations upon present or reproductive value: California, New Jersey, New

1 Report on the United Railways Company of St. Louis, by the St. Louis Public Service Commission, 1912, p. 12.

In Brown et al. v. Exeter, Hampshire and Ames Street Railway, Report of New Hampshire Public Service Commission, 1912, p. 139.

First Report, Connecticut Public Utilities Commission, 1912, p. xxxvi.

York, Maryland, and Wisconsin, and also by the Board of Public Utilities of Los Angeles.

Which of these principles is the more nearly just? In the opinion of the author, either is fair, if accompanied by an appropriate return. The rate of return, however, should depend upon which of these methods is adopted. If present value is to be taken, the result is that the company will be called upon to bear the burden of any decrease in the value of its property, and to accept a lessened return because of such depreciation. It is true that the company will also be entitled to the benefit of any appreciation. Yet the amount upon which it may earn a return in the future is indefinite and uncertain. The rate of return should therefore be sufficient to compensate the corporation for assuming this risk. In some cases it may be that the possibility of increased value, due to the ownership of land, will more than offset the possibility of a lessened value of the other property. But land does not ordinarily represent a large portion of the value of municipal utilities, operating in the public highways. Whenever a company is called upon to assume a risk as to the future value which will be placed upon its property, that risk should be given proper consideration in establishing the rate of return to be permitted. If, however, original value is to be applied, then the company will be freed from any risk as to future fluctuations in the value of its property, since the amount upon which it may expect a return is established once and for all. In such case, the rate of return permitted should properly be somewhat less. Theoretically, either method of valuation is fair, if the rate of return is regulated accordingly. Practically, however, the theory of present value is much easier to apply, since but few corporations have records by which to prove the original cost. The repro

ductive theory also seems much more in harmony with the decisions of the courts.

The rapid increase in the value of land in large cities has given rise to the feeling that the public should not be taxed to give a return to the companies upon increased land values, which, it is argued, have been created by the public. This question presents itself with much more force in the valuation of railways, which own their rights of way, than with the municipal utilities, which simply operate in the public highways. Nevertheless, the question of the proper treatment of land is becoming an important one in the valuation of utilities of the latter kind, since they must own more or less land in order to operate their business.

As a rule, the commissions have followed the same principle in the treatment of land which they employ in the valuation of plant, i. e., valuation at its reproductive value. The Wisconsin Railroad Commission justifies itself in thus permitting the companies to derive the benefit from increases in land values by declaring that such appreciation is of a kind which is regarded as right and proper in other undertakings, and which, therefore, ought not to be denied to public service corporations.1 With but two known exceptions, all the commissions have followed the Wisconsin practice.

The two commissions which have differentiated in their treatment of land and of physical plant are the St. Louis Commission and the New York First District Commission. Each of them employs a different method and each method is inconsistent with itself. The New York First District Commission adopts the method of including the estimated future increase in land value in the income of the companies, when establishing rates to the consumer. This is justified on the ground that

1 Wisconsin Railroad Commission Report, vol. iv, p. 579.

"if depreciation is a debit, appreciation is a credit." The Commission points out that it allows on physical property a depreciation rate for the future which is based upon past depreciation. This it makes a charge against income, in establishing a rate which will give a fair return to capital value. It maintains that therefore an estimate of the future appreciation in value of the property should be placed as a credit to the future estimated income. The estimate of future appreciation is to be based upon the past increase in the land values, the average rate of appreciation being secured by subtracting the original cost of the land from its present value and dividing this amount by the number of years. The rate of appreciation, however, is to be estimated in the light of the existing trend of prices. The Commission realizes that this method can give but an estimate of future appreciation, but expresses itself as being willing to grant rehearings in case its estimates do not work out. The Commission says:1 "If property is to be taken at its depreciated value where it has depreciated, an entry must regularly be made in estimated operating expenses equal to the average annual depreciation. Conversely, if land, or any other property which generally appreciates in value, is to be taken at its appreciated value, then an entry must be made in the estimated receipts equal to the average appreciation. Unless this is done, it is obvious that the consumer will be burdened with all the estimated decreases in assets but not credited with the increases in assets." This theory was also explained at length in a later case, in which the Commission said: 2 "In determining operating expenses, an allowance was made to meet depreciation as a charge against income, for rates should

1 In re Gas & Electric Rates of the Queens Borough Gas and Electric Company, no. 2, P. S. C., 1st Dist. N. Y., June 23, 1911.

Kings County Lighting Co., no. 2, P. S. C., 1st Dist. N. Y., October 20, 1911.

be such that the consumption of capital may be offset by deductions from income. If these processes are correct, it follows that appreciation should be placed as a credit to the estimated income. It is indisputable that if depreciation is a debit, appreciation is a credit."

The essence of the scheme is to deny to the companies the advantage of increases in land values. If such increases occur, the increase is to be computed as part of income, and thereby to lessen the charges to the consumer. In all fairness and justice, the Commission would, therefore, find itself compelled to follow the reverse principle: if there are decreases in land values, charge them to operating expense, and thereby increase the charges to the consumer. This means, so far as land is concerned, that its value is in reality to be established at its value at the time of the first valuation by the Commission. From that time on, there can be no increase or decrease in its value which will materially affect the company's finances. It is the consumer who is to be affected, advantageously by increases in land value and disadvantageously by decreases in land value. Apply this principle to a new utility plant. result is, in effect, that the land value is permanently established at its original value (to the company). True, the land value may increase, and the company will be permitted to earn a return upon the increased valuation. But this will be offset by including in the company's earnings the amount of the increased land value, thereby lessening the amount which the consumers must pay, so that the company is no better off than if its land had not increased in value. Likewise, the land value may diminish, and the company will be permitted a return only upon the diminished valuation. But this seeming loss to the company will be offset by adding it to the operating expenses, above which the

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