In January, 1923, in City of Minneapolis v. Rand et al., the Circuit Court of Appeals of the Eighth Circuit (285 Fed. 818, at page 830) held 72 per cent. to be a fair and reasonable return on the value of the property. Applicant claims that the book cost of its property is $67,381, exclusive of going value, and that said book cost represents the minimum value of its property, but applicant failed to submit any evidence to show that its property had a value greater than $67,381. Included in this estimated book cost of $67,381, there is included $35,000 gross amount of additions to property necessary to render satisfactory service and $27,963 book cost of old property which will remain after necessary changes have been completed. On a reproduction basis, this remaining old plant would be subject to some appreciation, but would also be subject to some depreciation. There is no evidence to show what the net result of this appreciation and depreciation would be. Consequently, on the evidence before us and on the basis of the decision of the United States Supreme Court in Georgia Railway and Power Company et al. v. Georgia Railroad Commission et al. (67 L. Ed. 1144), we find the fair present value of applicant's telephone property in the city of Charleston, Missouri, for the purposes of this case, to be $67,381, including net additions necessary to make changes outlined in the application filed herein. It, therefore, appears that a monthly rate of $3.75 for business telephones, $2.00 per month for one-party line residence telephones, and $1.75 per month for two-party line residence telephones, will yield applicant a reasonable return on the tentative fair present value of its property, after making necessary changes to improve the service rendered by applicant. An order will issue in accordance with the foregoing. ORDER. This case being at issue, and having been duly heard and submitted by the parties, and full investigation of matters and things involved having been had, and the Commission [Mo. C. L. 148] having on the date hereof made and filed its report containing its findings of facts and conclusions thereon, which said report is made a part hereof, Now upon the evidence in this case, and after due deliberation, It is ordered, 1. That the Southwestern Bell Telephone Company be, and is hereby, authorized, beginning on the first day of the month following the date on which improvements to its plant are completed, to charge and collect the following rates for telephone service at Charleston, Missouri: Business, one-party line.... Per Month $3 75 2.00 1 75 Ordered, 2. That said Southwestern Bell Telephone Company be, and is hereby, required to file with this Commission a complete detailed statement of its revenues and expenses, at Charleston, Missouri, during the first twelvemonths' period covered by the above rates; said statement to be filed as soon as practicable after the close of said twelve-months' period. Ordered, 3. That the Commission retains jurisdiction to issue other order or orders in the matter or otherwise change or modify same in accordance with the files and record evidence now before the Commission, or that may hereafter be adduced by the Commission. Ordered, 4. That this order shall take effect on the tenth day of April, 1924, and that the secretary of the Commission shall forthwith serve a certified copy of the report and order herein on the parties in this case, and that the Southwestern Bell Telephone Company shall notify the Commission on or before the effective date of this order in the manner prescribed by Section 25 of the Public Service Commission Law, whether or not the terms of this order will be accepted and obeyed. March 31, 1924. ΜΟΝΤΑΝΑ. Public Service Commission. THE PUBLIC SERVICE COMMISSION OF MONTANA, ON ITS OWN MOTION V. THE MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY. Docket No. 835-Order No. 1377. Decided February 26, 1924. State-wide Basis of Fixing Values and Rates Approved - Principles Controlling Valuation Stated - Reproduction Cost New as Exclusive Method of Fixing Rate Base Rejected Allowance Made for Construction Work in Progress Allowance Made of 3 Per Cent. of Physical Value for Omissions and Contingencies — Allowance Made of 3.3 Per Cent. of Physical Value Depreciated for Interest During Construction - Amount of Working Capital Fixed Allowance Made for Going Concern Value – Rate Base Determined - Depreciation Charges Fixed at 5.72 Per Cent. of Depreciable Property - License Agreement and Western Electric Contract Approved Return of 8 Per Cent. Approved Exchanges Grouped and Classified - Rates Established Exchange to be Automatically Raised or Lowered to the Group in Which It Should Belong as Number of Stations Increase or Decrease Without Further Order of the Commission. The Commission on its own motion entered upon an investigation of the rates, rules and regulations, service and business affairs of The Mountain States Telephone and Telegraph Company. State-wide Basis. Held: That the value of applicant's property used in the public service, its rates charged and its rules and regulations, should be considered on a State-wide basis. The distribution of the burden of payment of the necessary revenue should then be made on the basis of the class of service furnished and the number of subscribers and population of each community affected. Controlling Principles. Held: That under the present state of the law the following principles should control the action of the Commission in the present inquiry: (1) That the value to be determined is the present fair value of the property, that is, the fair value of the property C. L. 148] at the time it is being used for the public which is to be determined as of the time when the inquiry is made regarding rates. (2) It is not the cost, original or otherwise, or the value of the property at the time it was constructed that determines present fair value. (3) In arriving at present fair value, the reproduction cost of the property at the time of the investigation is an important element and is to be given due weight. (4) The greatly enhanced cost of material, labor, supplies, etc., now prevailing over those costs operating in 1913, 1914 and 1916, must be accorded weight, and in order to ascertain what will amount to a fair return upon properties devoted to public service, consideration must be given to the cost of labor, materials, etc., at the time the investigation is made. Reproduction Cost New. Held: The suggestion that the rate base should be determined exclusively upon the theory of reproduction cost new should be rejected. To do otherwise would involve a wide departure from the actual history of the company's property in Montana and a direct disregard of the real condition of the plant in service. In short, it would require the selection of a hypothetical plant and system and reject the actual plant and system, as it could not truthfully be said of a property as long established and in service as the defendant's property that it was as good as new and, therefore, to be valued on the basis of new property. Construction Work in Progress. That to the physical value there must be added expenditures for construction work in progress since the valuation date in order to develop the value of the property, as of December 31, 1923; that the company claimed for construction work in progress the sum of $102,949, and since there was no evidence of record to impeach the claim, this sum would be adopted. Omissions and Contingencies. When an existing plant is inventoried for rate-making purposes, common sense requires that an allowance should be made against error that may, and almost invariably does, arise from the fact that portions of the existing plant are overlooked; that 3 per cent. of the depreciated physical value of the property less the land value, or $305,497, should be allowed for omissions and contingencies. Interest during Construction. Interest begins to run from the time the investment in material or labor is made and runs until the work is completed. The annual rate should be the normal rate prevailing in the jurisdiction where the construction is in progress. Care must be taken that interest is applied only to that portion of the investment for work actually in progress and which has not been checked to fix capital accounts and is not in service and earning; that in this case an allowance of 3.3 per cent. of the value of the physical property depreciated, or $342,323, should be made for this item. Working Capital. In allowing for working capital of a company that has been engaged in business for some time, it is not necessary to employ any of the theoretical methods that might be suggested, or to depend upon estimates or opinions. Accrued experience has furnished persuasive evidence of the proper allowance, for the amount actually employed can be definitely determined through an analysis of the accounts involved. The company's claim of $292,378.19 rests on the realities of routine business for the last available annual period, and this figure should therefore be passed into the rate base. 66 Cost of Establishing the Business. The Commission said: The cost of establishing the business is also known as going value or going concern value. In endeavoring to escape sharp criticism of processes formerly employed to determine going value, and particularly endeavoring to escape the force of the Galveston Case, the company here proceeds on the theory that this additional value must be what it would cost over the value of the physical property to form a company, finance, organize and attach the business, with everything else necessary to start the giving of service. The study is therefore made as to what this would cost, just the same as the appraisal has been made as to what it would cost to reproduce the physical property.' The method contemplates the formation of a new company and the calculations of the expenditures and revenues up to the time the construction is completed with the entire number of customers connected to the plant. The following items are considered: (1) Promoting, organizing and financing the company. (2) Preliminary and development engineering. (3) Training employees for telephone work. (4) Attaching the business. (5) Developing routines, records and instructions. (6) Fair rate necessary to finance the undertaking. The figures applied are derived from costs incident to the expenditures for the purposes named in the year 1922. The costs of organization and development and operating expenses for the assumed development are $1,567,946.97. To this is added $806,738.25, an amount said to represent the excess of expenses over revenues after service is started and prior to the completion of the plant and the development of a fair return on all expenditures. This gives a total of $2,374,685.22, from which is deducted gross revenue received during the assumed development period, totaled by quarters $1,152,842.97, leaving the net cost of establishing the business at $1,221,842.25. There is no duplication in the last figure for and on account of interest during construction heretofore passed into the rate base. "We think the method employed successfully overcomes the fatal objections lodged against the capitalization of deficits theory. If a new company were actually started today to construct the existing telephone plant in Montana, doubtless these various cost items would be recorded [Mon |