The facts in the case are, of course, quite as Mr. Davis suggests. And very likely his use of the term

productive efficiency" is better than mine. Taking all the factors in the situation into account the productive efficiency of a new plant is more than that of an older one. My statement, it will be observed, was carefully qualified. The productive efficiency of an old plant, properly maintained, is usually equal to that of a new one similarly constituted. That is, from the factors which may be said really to determine productive efficiency I put aside maintenance and made of it an independently given magnitude. But my argument

took full account of the fact that replacement costs are lower during the early years of a plant's life, before it has reached a state of normal average depreciation. Mr. Davis means one thing by " productive efficiency," while I mean another. But we see the same facts.

If the difference between us at this point were purely verbal, if Mr. Davis merely preferred to give a name to A, B, and C which I had used for A and B, — it would hardly be profitable to pursue the matter further. But to Mr. Davis the higher operating costs of the

depreciated" plant or its smaller store of productive life (both formulations come to the same thing) is a sufficient reason for reducing its valuation for rate regulation. His conclusion depends, however, upon a point of view which I believe to be untenable. It involves, more particularly, a questionable theory of the general nature and meaning of public valuation.

"The relative values of different capital goods," says Mr. Davis," are determined by the relative amounts of productive power they contain." And he believes that "this productive power is the normal and proper criterion of the value of the physical plant, as for any unit or group of capital goods." With certain minor qualifi

cations I should concede this, if the "value" wanted were selling value in a supposedly open market. Under certain conditions of expressed or implicit contract with the government, relative productive efficiency (in Mr. Davis's inclusive use of the term) might properly be the dominating criterion of the price to be paid by the government in taking over a public service plant. But valuation for rate control is a very different matter.

There is no better word than value to denote the goal sought in the "valuation" of public service properties. It has the necessary amount of elasticity and it gives the proper suggestion of an ethical element in the problem, — of justice to be attained and apportioned. But it is value for a particular purpose; not the market value of the economists, nor value even as defined in President Hadley's well-considered phrase, “ what price ought to be," but value in the special sense of a capital sum on which a fair rate of return is to be conceded. The word value is here used as setting a problem, not as solving one. And one cannot safely attempt to solve the problem by applying principles derived from one specific use of the word. "Value" is nothing to conjure with. It has to be carefully sought.

No commission or court has ever given a set of hard and fast rules by which we might definitely determine the value it would impute to a particular plant. But we do know that no such body has ever made productive power or future earning capacity the fundamental criterion in such matters. Nor have commissions or courts attempted to make value a Janus-faced thing, looking both to the future and the past. Not that forward-looking considerations always have been thrown aside, but rather that emphasis has been placed on the retrospective view. Cost, investment, sacrifice, these

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are the controlling factors. Otherwise such items as

"the cost of establishing the business," "interest during construction," and the like, become unintelligible. I cannot ask for space to develop this contention at this time-it would necessitate a review of the whole general theory of valuation-but its soundness will be admitted by all conversant with the matter. What I called the "investment entitled to a return" may not be the only factor in valuation, but it is easily the dominant one.

A possible rejoinder to all this is that the appeal to authority is inconclusive when it comes from one who is questioning the soundness of the findings of that same authority in one very important detail. But altho I believe that my thesis might derive convincing supports from general considerations of equity, the matter cannot now be pursued that far. It is sufficient to show that the treatment of the depreciation problem by courts and commissions has been inconsistent with the general principles of valuation which they themselves have adopted.

If investment is the ruling factor, Mr. Davis's emphasis upon the“ store of productive efficiency" is misplaced. The question is not whether a plant in a state of normal depreciation is as " valuable " for productive purposes as a new one. It is merely whether there is a reasonable presumption that the lower operating costs in the first years of a plant which does not accumulate a depreciation reserve involve a virtual return of part of the investment to its proprietors. I see no way of getting at the matter except by weighing the probability that these lower operating expenses were taken into account in determining the amount of the investment and the level of rates.

Mr. Davis holds that "it is not safe to presume that if an allowance for depreciation had been required from the outset investments would not have been made or

would have been smaller." But is it safe to presume that such a requirement would have made no difference to investors? There is, of course, no evidence which directly bears on this point. But there is food for thought in some statistics gathered in 1897 and 1898 by the Commissioner of Labor. For each of eighteen groups in which 375 privately-owned waterworks were classified (on the basis of size) it appeared that the average cost of production per unit of product (including an allowance for interest) was more than the average price charged for the water sold. A similar condition was found in seven of the eleven groups into which 344 privately-owned gas plants were classified.' "The explanation of these results," says the editor of the tables, "may be found in the fact that depreciation, which is here included in the cost of production, is, as a rule, not considered by the plants themselves as an actual charge against cost, and that prices are consequently based on cost exclusive of this element."

That these figures are accurate in detail is not to be expected. But the general conclusion to which they point seems to me unmistakable. For many years most public service companies failed to charge to operating costs all of the items which, under present rulings, they are entitled to charge. But their policy was in line with what was current business practice and found support in court decisions. Part, at least, of the immediate saving went to the public in the form of larger facilities or lower rates. And yet we are asked lightly to assume that all of it went back into the pockets of the proprietors.

Because a property administered with a view to continuous operation has reached that normal state where

1 Water, Gas, and Electric-Light Plants under Private and Municipal Ownership Fourteenth Annual Report of the Commissioner of Labor (1899). See especially pp. 42, 43, 396, 397.

* Comparable figures were not given for electric-light plants.

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it is about " half worn out," it does not follow that half of the investment, or any part of it, even, has been returned to the stockholders and that whether their profits have been high or low. Mr. Davis's adherence to the necessarily arbitrary categories of accounting seems to blind him to this simple fact.

When he says

that to write down the values of present properties for past depreciation involves "no regulation of past actions or profits" he fails to weigh the real effect of this procedure upon a company which made its investment and adjusted its whole business policy in accordance with the admittedly reasonable supposition that operating expenses need not be charged with any burden for the upkeep of capital beyond the cost of proper repairs and renewals. To write down the properties of such a company for depreciation is to adjudge that past profits have contained or should have contained an element representing the return of part of the investment. And when he goes so far as to say, "the investors are not required to disgorge the sums they received in the false guise of profits; they are not required to return the profits actually secured for years when rates were allowed to remain at a level to yield normal income on a capital sum higher than the actual investment," he openly begs the whole question at issue.

Mr. Davis raises the problem of the proper valuation of two similar plants, one of which has regularly charged depreciation to operating expenses, while the other has not. The answer is, of course, that there is a reasonable presumption that one plant has adjusted its investment, its service, and its rates to a higher scale of operating expenses than the other. That is, there is a presumption that one company has collected or planned to collect in rates enough to repay part of its investment. Depreciation might fairly be deducted from the valua

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