Any value of an old and well-established property in excess of a fair return on its physical property (in other words, any intangible value) must be limited and restricted, when used for rate-making purposes, by the value to the consumer of the services rendered. The Courts hold so squarely that the rates charged for services must not be more than the particular service is worth, and that the Company may exact a fair return on property actually being used, that it is not conceivable that any valuation which attempts to attach fictitious elements of value to physical property can be sustained.
This argument is not intended as an attempt to show that intangible values are improper and that where they exist rates should be lowered. It is contended that the determination of rates that will be just and fair to all competing companies involves other consideration than the valuation of either physical or intangible properties, and that when all these rate-making problems are properly solved, there will remain large intangible values on the well-designed plants. It is further contended that the work of valuation should separate the tangible and intangible elements, so that the further work of rate-making or assessment may not be complicated by improper elements which are included among the items of the physical properties.
In consideration of franchise value, the history of the corporation should be investigated with a view to determine what part the public played in the creation of the property.
The granting of aid bonds, of public lands, and of aid money to railroads, the giving of encouragement to water-works companies by the payment of excessive hydrant rentals, are illustrations of the fostering and development of public service utilities by the public to such an extent as to justify in a large measure the claim that in many cases the allowance of an intangible value is improper as against the public.
A further consideration in the matter of intangible values is the fact that they all partake more or less of the nature of "good will," and the question very properly arises, in the case of a purchase by the public, or of a rate-making valuation: "Should the public be compelled to pay for its own good will?" In the case of such a corporation as a street-railway company in a large city, any value arising from a surplus of earnings is due to the franchise, established business, or going value, or good will of the citizens of that city. This element of value frequently sustains an excessive bond indebtedness. At the expiration of the franchise period the citizens of that city consider a purchase, and are asked to pay, among other things, for their own good will. In view of the attitude of the Federal Courts in the Consolidated Gas Case, and the language of the lower Court in disallowing the item of "good will," which judgment was sustained by the Supreme Court, it is very evident that any attempt to fix arbitrarily a value on such an item in an appraisal is not likely to be supported successfully. The grounds named by the Court are:
Tangible property has a value apart from any franchise or good will value.
The franchise, conferring the privilege to be a corporation, to use public property, to be free from competition, and to enjoy many other privileges, has some value apart from tangible property.
Good will can have no existence as apart from or detached from the franchise conferring the necessary privilege. Such good will (by itself) is not capable of being capitalized and distributed among stockholders.
Citizens are entitled to have gas (or water) because they pay for it, exactly as they are entitled to have clean streets (and, in the same way, police protection or fire protection), because they pay taxes among other things for that.
The Court, therefore, finds that there is no good will value in connection with the gas business in the City of New York, although it is said, elsewhere in the finding, that it is the best, most favorably located, and most prosperous business of its kind in the country.