in this entire discussion I am assuming only actual costs in the capital investment, and only such an interest rate as will induce the investment of the capital in the utility. At the end of the franchise period it is necessary to make good both principle and interest.

The importance of this sinking fund and its magnitude depend on the attitude of the public towards the utility company. The public service corporation works under a franchise, which is simply a grant by the public of the right to do business. With certain kinds of utilities the franchise is perpetual; with others, the life is limited to a definite period, say, 30 years. In some states, Wisconsin for instance, indeterminate franchises are granted; that is, franchises which can be called in, or surrendered at any time, subject to control by the Railroad Commission of that state. In the case of a limited franchise under which the utility company must cease operations and close up its business at the end of a definite period, the company must make not only enough to pay the interest on the cost of the plant and maintain it always in condition to render the service demanded by the public, as well as the operating expenses, including taxes, insurance and repairs, but also an additional amount to cover whatever part of the plant must be sacrificed at the end. This means a sinking fund to retire portions of the cost, if not the entire cost. In other words, the company must earn enough during its life to pay back whatever part of the principal has to be sacrificed, as well as the interest on the principal, in addition to maintaining and operating the plant satisfactorily during the franchise life.

This sinking fund is not always, indeed I may say, is not generally kept as a separate account in this country, but is taken out in the form of distributed earnings from year to year in excess of the amount normally required as interest on the cost. Not infrequently what appears as an abnormally large dividend will on analysis be found to be only sufficient in the end to make good to the investor both the interest on his money and the principal sacrificed when the business. is closed out.

It should be clear from this that in general a long term franchise is more favorable to the public, so far as charges for service are concerned, than a short term. To illustrate: assume that the plant must be sold for what it will bring as scrap or second-hand material; the difference between its cost and sale value must be made up out of earnings during the life of the franchise. Thus, if the franchise life be short, say 25 years, the sinking fund annuity must be much larger than if the life be 50 years. No annuity is required, when the life is perpetual. No doubt longer term franchises will be granted in the future, particularly now that the control of them is being lodged by the states in public service commissions.

I am not discussing in this paper conditions which have existed in

the past, or may exist now, in connection with old properties, but am confining myself to fundamental things, those which should guide us in our future relations; those relations which will come to exist when the public service corporation is permitted to earn only enough on its investment to bring capital into the field; that is, the critical condition, as it were.

There remains for me only one more topic, and this I have put off until the last, always shying at it and going around when possible. I refer to discounts on securities. This I have found: no bond house will even consider financing a public service corporation without a bond discount. I refer particularly to utilities built and operated under a limited franchise. It will have to be a good property to secure better than 15 per cent discount. It is an excellent property which commands as low as 10 per cent discount. The best discount I have ever come across in my own investigations is 8 per cent. This does not apply to municipalities, however, at least not to the same

extent.

The simple conclusion is that if the public utility is a necessity and the money for it is obtained in the usual way, one element of cost is the discount on the bonds, which in effect starts the property off with some water in its securities. It is, or is not, water, as you view it. Anyhow it is necessary in the ordinary way of financing properties. Thus we are obliged, in determining a reasonable charge for public utility service, to consider not merely the actual cost as I have previously given it, but something more, namely, the face of the securities which command an interest return. Opinions differ on whether it is better for this discount to be absorbed as a capital charge or carried as an interest charge. So far as the purpose of this paper is concerned it is not material, as in either case there must be a charge against earnings to take care of the discount.

It will be convenient to bring together the several elements which take part in determining a reasonable charge for public utility service. Not all of them take part at the same time necessarily, for some may appear in one case and not in another; or several may be combined in a single item. In a general way, and in a somewhat natural order, they may be summarized as follows:

I. CAPITAL INVESTMENT

1. Preliminary costs covering investigations as to feasibility of project.1

2. The physical property; the several items making up the whole arranged in order, each affected with its proper allowances to cover

Organization, promotion, administration, and legal expenses, engineering and superintendence during construction, which are distributed over the whole period of construction, are more conveniently placed later in the schedule.

contingencies, special engineering, and other costs peculiar to the item; land first, followed by clearing and grubbing, then the various structures and equipment; sub-contractor's profits included with the separate items.

3. General contingencies applicable to the property as a whole as distinguished from special contingencies applicable to particular items. 4. General contractor's profits; or, the profits to an engineering firm building the property on the "cost plus a percentage" plan. 5. General engineering, and superintendence during construction. 6. Insurance and taxes.

7. Organization, administration and legal expenses.

8. Cost of promotion and promoter's profits.

9. Interest during the construction period.

10. Office furniture and fixtures.

II. Stores and supplies.

12. Working capital.

II. OPERATING EXPENSES

13. Operating expenses per se; that is, salaries, wages, fuel and other supplies, repairs and upkeep; all expenditures required in rendering the service of the utility, including insurance and taxes.

14. Interest on the capital investment (the actual cost of the property), i.e., interest on securities which must be paid regularly. 15. Interest on floating debts; this may include the discount on bonds, and the cost of financing, if these have not been incorporated with the capital.

16. Cost of establishing the business; the sums of money required to be borrowed, with interest on the same, to make good the differences between the earnings and expenditures up to the time the earnings become sufficient to meet all expenditures. This may be made a capital charge, or carried as a floating debt to be paid out of future earnings.

III. DEPRECIATION FUND

17. The regular contribution to the depreciation fund, out of which the integrity of the property is to be maintained.

IV. SINKING FUND

18. The annuity required to retire such portions of the securities as may be necessary at the expiration of the franchise life of the property, in order that the investor may receive back his entire principal when the business is closed out.

It will surprise everyone not familiar with the cost of building

public utility plants to learn that the so-called overhead charges are in the aggregate a large percentage of the costs of labor and the material things entering into their construction. An examination of the various percentages mentioned in discussing the elements of cost, omitting items 1, 4, 8, 15 and 16, will disclose that if the individual contingencies of construction, special engineering charges, and contractor's profits be assumed to be embraced in item 2, the total percentage may vary from 12 to 25 per cent; and if these inside percentages be added to the outside, or general, percentages, the total percentage may vary from 30 to 60 per cent.

It is to be regretted that engineers, and others who have had experience in building properties, and valuing them afterwards, have not done more towards disseminating knowledge of the actual conditions found in such work. We should then be much further along towards the mutual understanding which must exist before the public and the public service corporation can get together on common ground. But engineers have many times hesitated to use the larger percentages, fearing to be accused of favoring the corporation. They have preferred instead to secure the equivalent of them by using larger units of costs; or have used the smaller percentages, influenced by the feeling, unconsciously perhaps, that all things considered, the results were fair enough. In combining the judicial with their engineering function, they have unwittingly only obscured the issue. All too frequently engineers have felt obliged to exert themselves to the utmost in favor of their client, leaving the interests of the other side to be fought for with equal solicitude by an opposing engineer. Thus they have become advocates. This, in my opinion, is not the best way to handle these momentous problems. It would be far better in these troublesome times to throw open the blinds and let in all the light, our motto being veritas vincit.

A WORD ABOUT COMMISSIONS

BY HERBERT J. FRIEDMAN OF THE CHICAGO BAR

(From the Harvard Law Review, June, 1912)

At the outset, the question arises as to the nature of the duties of a commission. If a commission is an administrative body or a legislative body, then the course of procedure before it is likely to take an entirely different form from that it would take were it a judicial body..

Are the acts and the doings of the ordinary commission legislative,

executive, or judicial? In an interesting case before the Supreme Court of the United States,' the court went quite extensively into the question whether the duties of the State Corporation Commission of Virginia were judicial or legislative. The constitution creating the commission provided that it should have the power and be charged with the duty of supervising, regulating, and controlling all transportation and transmission companies doing business in the state, in all matters relating to their performance of their public duties and their charges therefor, and of correcting abuse thereof to enforce such rates, charges, rules, and regulations, and require the companies to maintain such service facilities and conveniences as might be reasonable, and to prevent unjust discrimination. The act further provided that the commission should have the power to administer oaths, compel attendance of witnesses, and to punish for contempt. There were further provisions in the act giving it certain powers to enforce its findings. There the court, in its opinion by Mr. Justice Holmes, said:

But we think it equally plain that the proceedings drawn in question here are legislative in their nature, and none the less so that they have taken place with a body which, at another moment, or in its principal or dominant aspect, is a court such as is meant by Section 720. A judicial inquiry investigates, declares, and enforces liabilities as they stand on present or past facts and under laws supposed already to exist. That is its purpose and end. Legislation, on the other hand, looks to the future and changes existing conditions by making a new rule, to be applied thereafter to all or some part of those subject to its power. The establishment of a rate is the making of a rule for the future, and therefore is an act legislative, not judicial in kind, as seems to be fully recognized by the supreme court of appeals (Com. vs. Atlantic Coast Line R. Co., 106 Va. 61, 64, 7 L. R. A. N. S. 1086, 117 Am. St. Rep. 983, 55 S. E. 572), and especially by its learned president in his pointed remarks in Winchester & S. R. Co. vs. Com., 106 Va. 264, 281, 55 S. E. 692.

The court cited other authorities in support of this proposition.

Chief Justice Fuller, while agreeing with the conclusion of the court, dissented from the opinion. He was of the belief that the act was a judicial one, not legislative. In the course of his opinion he said:

The Virginia State Corporation Commission was created and its functions, powers, duties, and the essentials of its procedure were prescribed in detail by the Constitution of the State as well as by statute. It was made primarily a judicial court of record of limited jurisdiction, possessing also certain special legislative and executive powers. When it proposed to make a change in a rate of a public service corporation, or otherwise to prescribe a new regulation therefor, the commission was required, sitting as a court, to issue its process, in the nature of a rule, against the corporation concerned, requiring it to appear before the commission at a certain time

1 Prentis vs. Atlantic Coast Line, 211 U. S. 210, 29 Sup. Ct. 67 (1908).