42

circumstances this position would be correct. But let some agency secure the entire supply of bread and then refuse under this rule to sell any of it, the people who desire the bread will get it even though the last resort of government be appealed to and force take the place of barter. My fourth fundamental proposition is that,

Owners of public utility property hold such property by a different tenure than other owners.

This conclusion is fully as well justified and fully as well established in the decisions of the courts as any of those preceding it, yet it is the one concerning which there seems to be the greatest amount of confusion. Government has the inherent power to fix the rates of public utilities. This is one of the incidents of regulation and follows directly from the necessity which makes regulation justifiable. It is the power of the public utility to impose unfair burdens its patrons that justifies its control and justifies the state in depriving such utility of the power to determine at what price its commodity shall be sold. This is of the very essence of regulation. I imagine this is admitted by all, yet, notwithstanding this fact, we continually meet those who apparently cannot see that this condition makes it absolutely impossible to apply the same measure of value to a public utility property

upon

regulation.

as to property not subject to

There are primarily but two conceptions of value. The one most commonly accepted is power in exis simply put as the price at which the thing will sell. The other conception is that value is represented by what it costs to produce a commodity. For the purpose of this discussion we will call the former of these "market value" and the second "investment".

For the purpose of public regulation market value can have absolutely no application. This position has been taken by the federal courts rather reluctantly at first but finally in the so-called Minnesota Rate Case the Supreme Court has at last gone definitely on record and has pointed out the impossibility of applying the ordinary conception of value to the public utility in a rate fixing inquiry. What the thing will sell for, of course, is largely determined in the The earning power of a utilmarket by its earning power. There you have the entire ity is determined by its rates.

proposition, and we find ourselves immediately arguing in à circle, and I say that it is irrefutable that we must reject

we

the market value theory as applied to public utility prop-
erty when we are considering this property for the pur-
of regulation. Regardless of the apparent simplicity
pose
of this proposition and the apparent absurdity of saying
that market value shall apply to a public utility property,
still find it hard to dislodge the idea. Independent,
however, of the logical inapplicability of the market value
theory to public utility property for the purposes of regu-
lation, there is a purely legal bar to such a position.
very power to regulate which is inherent in the government

any

The

whenever
governmental
cloud, we
prevents the
as corresponding property devoted to private uses.
question of

agency assuines a position which requires
compulsion to protect its patrons, places
we might say, upon the title to the property and
property from being held by the same tenure

worthy of

have to pass it with this short mention.

This

valuation is one of great importance and is an entire session of this Association, yet we will It is my belief small amount of reflection on the part of any thoughtwould lead to the conclusion which is the basis

that a
ful person

of my

fifth fundamental proposition, which is that

The amount of money wisely invested in a public utility

and

property is the best evidence of value for rate fixing pur

poses

amount

no

is the controlling element in determining the
on which a utility should be permitted to earn.

I have already pointed out how market value can have
application

volved.

to a utility property when regulation is in-
The Supreme Court of the United States in the

so-called Minnesota rate case, recently decided, in addition
rejecting the market value theory, very lucidly pointed
out many of the fallacies inherent in the so-called reproduc-
tion theory when carried to the extreme that public utility
engineers and lawyers have advocated, and while that court
does not there reject the reproduction theory of value in its
entirety, it has considerably circumscribed it and has given
place of much less importance than it has heretofore
played in regulation matters.
reproduction theory of value of a public utility is important,
its present condition is an important element in determin-
and that what it would cost to reproduce the property in
ing what the investment of the utility owners is; but I
believe the main function of appraisals is to reproduce con-

it a

It is my belief that the

a

ditions the evidence of which is now lacking, and that when the court says this is one of the elements to be considered it has in mind the fact that there should be some relationship between what it would cost to reproduce the property in its present condition and the money that has gone into the property. But still having in mind the cloud which is upon the public utility property we see that the unearned increment in adjacent land may not ordinarily be directly reflected in the right-of-way of the railroad. I know that this may at first hand appear to you to be a strong position to assume and probably difficult to maintain, but I say that neither from the standpoint of law nor equity is it necessary to accord to a utility owner the unearned increment in his land corresponding to the advance which has been made in lands adjacent to his property. In the case of a railroad, for example, if the railroad were removed the value of both of the railroad's right-of-way and of the adjoining lands would be depressed. I know that this fact is urged by our railroad friends as justification for their increases in value. But let us analyze it a bit. It may well be that the section through which the railroad runs may become very valuable for residence purposes, for example, because of its natural situation and proximity to transportation, but can it be said that the land upon which the railroad is constructed is likewise enhanced in value for residence purposes? The very necessity of its being a railroad precludes the possibility of the land being used for residence purposes, and therefore the particular land upon which the railroad is constructed cannot possibly be enhanced in value for residence purposes. The same may be said for agricultural, manufacturing, or any other purpose than that to which the property is devoted, and the very fact that the property must remain devoted to this purpose and may not, as may the adjoining property, be used for any other purpose which the owner may desire, puts a burden upon this property, and this burden can quite justly be placed in return for the large power of eminent domain which is conferred upon such an agency, and the conferring of such a power, if it were between private parties and within the power of one private party to grant to another, would be of sufficient consideration for the cloud which attaches to the property in the hand of the public utility owner. The burden is that this agency, in this instance, stay a railroad and thereby hold

up the value of the other property; and the further burden is that this property cannot be used for purposes for which other property is utilized. It is valuable and has its entir value as a railroad.

Mr. Commissioner Thelen, of the California Commission, very ably pointed out in a paper recently presented to the National Association of Railway Commissioners, the real relationship which exists between a public utility and the public, and that relationship is the relationship of principal and agent. I do not mean to be understood as saying that the bare legal relationship of principal and agent exists, but there is abundant authority to the effect that the condition. is analogous to the strict legal relationship of principal and agent. A utility is engaged in a business in which the State could engage. This the Supreme Court of the United States has again and again pointed out. Any agency which occupies such a relationship to its consumers that it may legally be treated as a public utility is conducting a business which is of sufficient importance that the State, or a political subdivision thereof, might carry it on. But up to the present time the people of the various states of the Union, except in some cases in municipalities, have chosen to permit the doing of this work by private agencies with private capital, and have delegated these private agencies as their agents in the carrying on of what may be legally assumed as a governmental function. Such being the fact the public has a right to expect the business to be carried on at reasonable terms, and the public should not give any more reward to these private agencies carrying on this public business than is necessary to get the business done. National Securities Commission appointed by President Taft in 1910, of which President Arthur T. Hadley of Yale was chairman, had this to say bearing upon this subject, with particular reference to railroads however:

"A reasonable return is one which under honest accounting and responsible management will attract the amount of investors' money needed for the development of our railroad facilities. More than this is an unnecessary burden; less than this, a check to railroad construction and to the development of traffic."

The

With this sentiment I am entirely in accord. If public utility business is to be done by private capital the public should hold out only those inducements which are required

to get the necessary amount of capital into the business. If it is required to hold out excessive inducements, then the doing of this business by private capital is too expensive and unless there are corresponding disadvantages which more than offset this expense then it certainly would be better for the State to do this business for itself, and the issue between private and public ownership of utilities will be fought out right here and the wise public utility manager who does not believe in public ownership of public utilities should see to it that private enterprise. performs the service as adequately and at as reasonable rates as public authority could hope to do.

The comparison then being between the result under public ownership and private ownership it may be well to see upon what the basis of earnings would be if public funds were put into the construction and operation of utilities. Certainly it requires no great amount of study to determine that if the public owns a utility the basis upon which the earning must be computed would be the amount of money which the public authority puts into it. In other words, if the public constructs a light plant and issues and sells bonds to get the money, the capital will be the money put in and interest will have to be earned on that else the undertaking is a failure. And from the standpoint of pure equity, what possible objection could a man with money to invest have to an arrangement whereby the amount of money which he invests shall be the basis upon which he shall earn? I do not think that ordinarily a public utility investor would object to putting his money into a public utility business under these circumstances if he was sure of a reasonable return upon the capital invested, and that on the faith of this assurance he would be willing to waive any expectation of increase in the value of the property due to unearned increment in lands. But the difficulty which confronts us is that we are required to attack the problem, as it were, in the middle and we find utilities in active operation and in full maturity at the time regulation becomes effective, and in every instance these utility owners advocate that basis of value which best fits the condition of the property they own. But I suggest to them, one and all, that the final determination of the issue between public and private ownership of these agencies will depend largely