Such a basis of rating, while still dependent on sound judgment and judicial treatment, is nevertheless not beset with the speculative element involved in the capitalization theory, which, Mr. Riggs himself admits, fails as a basis of rate-making except when predicated on fair rates.
If the writer's contention, that going value is a real element of cost in the property of any public service corporation, is sound, Mr. Riggs' statement that, "It appears to be doubtful whether the Court can be construed as approving such an element of value in rate cases," and his interpretation of Judge Tayler's ruling in the Cleveland Street Railway matter,[[43]] must be challenged.
Certainly, as applied to water-works valuation, Mr. Riggs' statement is not justified. The Maine cases clearly include going value as an element of value on which rates should be predicated; by inference, so does the Kansas City case. In the Knoxville case it was in fact allowed by the Master.
In equity it cannot be doubted that going value should be included in the base on which the returns are predicated, if, as contended, it involves real cost to the company; for the company must be permitted to earn a fair return on this cost, or to liquidate it in some way, as otherwise the corporation would suffer substantial property loss—from 10 to 20%, more or less, of the reproduction cost of its property. This would be contrary to public policy, for, with such an outlook, capital would not enter this field of enterprise, except at increased rates of return, commensurate with this added hazard. To assume such increased rates of return is to provide another means of liquidating such a loss.
As to "good will," it has seemed to the writer more proper to use this term in private competitive corporation enterprises, as applied to the element of value corresponding to the going value of the quasi-municipal or public service corporation enterprises, which latter are in effect controlled monopolies. If the term is used in its more colloquial sense, such as the effect on earnings of having, in the office of the corporation, men who meet the public pleasantly, who are good "mixers," and who are active in getting business, the value is substantially included in the consideration of the income, in the manner involved by going value determination and franchise valuation.
The depreciation question has been discussed so fully elsewhere that the writer only calls attention to the fact that, while physical and functional depreciation only are to be considered in a review of the present physical condition of any plant, in considering a fair-rate schedule, provision should also be made for contingent depreciation, covering such items as cost incident to change in street grades or construction of subways; placing structures under ground, which were previously above ground; serious loss due to injury by electrolysis, the distribution of which over a period of years rather than inclusion in the operating cost for one year, is to be preferred, alike from the public and from the corporate point of view, from the fact that it spreads the burden to be borne by the rates, and prevents violent fluctuation in prices or valuation of the public service corporation's property. The public pays dearly for all hazards. It is wise, therefore, to pursue the conservative course in providing adequate funds to meet extraordinary conditions, and to give stability to the investment of the corporation. Moreover, such funds can be carried in a separate account which can readily be watched; any excess can be credited to future reduction in depreciation account requirements, while a prolonged deficit cannot perhaps be recovered by the corporation, in the light of the Knoxville decision.
The comment that no hard-and-fast rule can cover determination of proper depreciation allowances, is amply justified. In its final analysis, it is a matter of good judgment, experience, and judicial temper.
The author's statement that the organization, legal, engineering, administration, and general expense accounts, "should not be considered as affected by depreciation, as long as the property is a going concern," is not quite clear. Obviously, this is true with regard to all the early organization expenses, as these expenses are incurred once for all, and constitute a continuing asset similar to other elements of plant cost. If, however, the author refers therein also to the engineering and contingent item added to many of the reproduction cost items making up the physical property, exception must be made; for when an old structure, the life of which is gone, is replaced with a new structure, new engineering costs are incurred, and the engineering element of cost incident to the installation of the original structure no longer inheres in the plant. It, too, has passed away with the life of the structure, and, therefore, its cost should be liquidated, or provided for in the depreciation account, as well as the cost of the structure to which it was incident.
In the same way the "interest-during-construction" item is not a continuing asset, but should be liquidated with the complete depreciation of the portion of the structure to which it relates. The replacement of the structure will involve new "interest-during-construction" charges, commensurate with the time required for construction. The value of the initial "interest-during-construction" costs will have disappeared with the original structure and, therefore, should be taken care of by the depreciation account.
The method of making allowances for interest during construction, suggested by the author,[[44]] accords closely with that used by Mr. Alvord and the writer in a recent valuation of a large water-works property, in which the "interest-during-construction" charges were limited, and the contributions to depreciation account were begun, at the date on which any workable unit of the property was assumed to be available for service and to begin to earn a return on its investment cost, even though the structure, as a whole, was not assumed to be completed for a considerable period of years thereafter. Thus, for instance, it might be assumed that as soon as the supplying works in a water-works project were in operation, the investment in them and in the distribution pipe system laid up to that time, would cease to be credited further with "interest-during-construction" allowances, and would be compelled to earn interest through the water rates or income from water supplied to consumers—the fact that the interest charge could not be wholly met, immediately at this time, being taken care of in the resulting increment in going value.