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§ 295. Unit prices.

If it is desired to base fair value on the reproduction method in its strictest form, present prices are doubtless the more logical. If the problem is, what will it cost today to replace the existing plant, the prices of to-day will naturally be used. The theory that an average for a period of years preceding equal to the assumed construction period shall be used has its difficulties.31 Moreover, price movements are quite frequently in long cycles and therefore present prices may be nearer the average based on the past few years. On the other hand, it is clear that a process of averaging by five or ten year periods greatly reduces the fluctuation in price level. A curve showing monthly prices averaged annually is uneven, while with each lengthening of the period to two years, five years, the curve is smoothed out and the variations from year to year correspondingly reduced. If the reproduction method is used, not as an end in itself but as a means of finding a fair and equitable basis for determining the relations between the investor and the consumer, a modification reducing the effect of price fluctuations is not inconsistent.32

§ 296. Cost of building up the business.

The cost of building up the business must be taken into consideration, in determining the value of the plants for rate fixing purposes. Both justice and authority require that a proper allowance should be made for this element in placing a value on the property of public service corporations. The investor in public service properties should receive a return on his investment for the entire period during which it is devoted to the public service, and a return not only on the first investment, but on the amount necessarily spent in putting the business on a paying basis, including profits foregone during the early years. 31 See N. H. P. S. Com., 1912, 32 See Conn. P. U. Com., 1912,

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But there is no reason for including in a valuation under the name of going value, the cost of securing all the business connected with the property appraised. That the allowance for going value should be sufficient to cover the cost of bringing the property to the point where a fair return upon the prior investment can be secured. What should be taken is the average time for the completion of each operating unit, due allowance being made for the cost of such unit. A pure average is not correct, for the amount of interest to be paid has relation, not merely to the period, but to the cost of the work.

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Topic A. Establishment of the Doctrine

§302. Establishment of the power to restrict charges. 303. Rates fixed must not produce a deficit.

304. Adequate return must be left.

305. Reasonable return must be left.

306. Reasonableness of return a judicial question.

307. Reasonable profit upon each transaction. 308. Jurisdiction of the Commission.

309. Status of the companies affected.

Topic B. Fair Rate of Return

§ 310. Interest upon bonds protected.

311. Rates at which governments can borrow no criterion. 312. Prevailing rate of interest allowed.

313. What are reasonable dividends?

314. Current rate of return.

315. Fair rate of return.

316. Current rate the standard.

317. Reasonable profits sufficiently safe.

318. Rate of return upon investments in general.

319. Public service has its peculiar risks.

Topic C. Policies Respecting Return Allowed

§ 320. General policy for allowing a fair return.
321. No right to raise rates in prosperous times.
322. Commercial conditions affecting dividends.
323. More than current rates of interest not secured.

324. How interest payable is considered.

325. Profits divided not operating expense.

326. Consolidation of interest and dividends.

327. Reductions ruinous only to certain companies.

328. Creating a fund for payment of uniform dividends. 329. Greater profit for better service.

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Topic D. Character of the Enterprise

§ 330. Larger returns in risky enterprises.
331. Hazards of the business considered.
332. Whether uniform return upon all property.
333. Rate of interest dependent upon safety.
334. Risk by reason of depreciated security.
335. Rate of return dependent upon locality.
335. Investment in public service.
337. Present tendencies in regulation.

§ 300. Provisions of the Act.

The question of rate of return has been subjected to the jurisdiction of the Commission only to the extent of giving it oversight over payments of this sort. Such payments to owners of securities must be duly reported; and the requirements of the Commission in regard to accounting are such that the result will be that dividends will only be showed as having been earned, after allowances for depreciation and betterments, such as the Commission requires, shall be met. In section 20 it is provided that the annual reports, which carriers subject to the Act shall file with the Commission, shall show in detail the amount of capital stock issued, the amounts paid therefor, and the manner of payment for the same; the dividends paid, the surplus fund, if any, and the number of stockholders; the funded and floating debts and the interest paid thereon; and the cost and value of the carrier's property, franchises, and equipments. Later in the section it is provided that the Commission may, in its discretion, prescribe the forms of any and all accounts to be kept by carriers subject to the provisions of the Act. The exercise of the powers of the Commission under these provisions of the Act are also discussed in Chapter XX, particularly in Topic A.

§ 301. Elements in determining a fair return.

What constitutes a fair rate of return may not be fixed by general rule, but is largely a question of the particular case. It depends to a certain extent upon the character of the enterprise; in established businesses, a lower rate

should be expected than in new ventures. Again, it depends upon the nature of the security; upon bonds, a lower rate of interest is secured than the percentage payable in dividends upon stocks. These are the principal considerations; but as the discussion advances it will be seen that there are other minor matters to be taken into account. It will make some difference, also, in what manner the matter comes before the court for decision. If the question is whether a rate fixed by one in a public service is producing an unreasonably high rate of return, that is one thing. If the question is whether a rate fixed by public authority, either by the legislature directly or by a commission acting in pursuance of legislative authority, is unreasonably low, that is another matter. It is obvious that there is all the difference of reasonable alternatives between these two aspects of the problem, that eight per cent might not be too much return by a schedule fixed by the company in one case, while a reduction of a schedule by legislation so as not to produce more than six per cent might not be thought outrageous in the other.

Topic A.

Establishment of the Doctrine

§ 302. Establishment of the power to restrict charges.

The earlier cases under the Fourteenth Amendment simply established that the State might regulate the rates of those engaged in public employment. The attention of the court was directed to showing that the power to regulate existed, and practically nothing was said about the limitations upon that power. And, indeed, the complainants did not adduce evidence that the rates fixed by the State were inadequate; they denied altogether that the rates could be regulated at all. The idea of these earlier cases, so far as one can judge from the language used, was that regulation of rates might go to any extent, so long as a deficit was not brought about.33 In the much

33 The federal cases of this period, which held that if there was any

net profit left, apparently no matter how small, the legislation was not

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