It means

that of original cost as a basis for rate making. that utilities will be freed from the risk of a lessening in the value of their properties, due to changes in the price of labor, materials, and the like. On the other hand it means that utilities will not be enabled to profit by increases in the value of their property, as, for example, by appreciation in the value of their land. It means that investors purchasing their stocks or bonds will own securities having back of them an obligation or promise from the state; therefore that the element of risk in utility investments will be lessened and that presumably the necessary interest payments may be reduced. In view of the dissatisfaction expressed in many quarters with the reproductive value theory as a basis for rates it is fortunate that at least one commission expects to proceed upon another principle, making it easier in the future to judge which basis is the more expedient both for the corporations and for the public.


The second decision, that of the New Jersey Court of Errors and Appeals, is of importance because it marks the conclusion of a long series of litigation which aroused widespread interest throughout the entire state, and because of its reasoning upon the valuation of franchises for rate-making purposes. New Jersey Public Utility Commission had held in 1912 that the franchises of the Public Service Gas Company should not be considered in the appraisal of the property which was to serve as a basis for rates, beyond an amount representing the cost of securing such franchises.1 The case was appealed to the New Jersey Supreme Court, which upheld the Commission. Appeal was then taken to the Court of Errors and Appeals, which in December, 1914, reversed the opinion of the Commission and of the Supreme Court, holding that a substantial value must be given the franchises. A rehearing was granted, however, and in June, 1915, the Court of Appeals and Errors reversed its former decision, affirming the decision of the Supreme Court, that franchises are not to be valued.2

1 Reports of Board of Public Utility Commissioners of New Jersey, vol. i, p. 433. * Public Service Gas Co. v. Board of Public Utility Commissioners. Published as pamphlet by the Board of Public Utility Commissioners.

The Court of Errors held that it is improper to include franchises when they are not exclusive and when the public retains the right to regulate rates. The argument frequently advanced, that franchises ought not to be included because they have been a gift to the utilities from the public, the Court held to be of little force, except in so far as the value of such gifts may be lessened or destroyed by the exercise of the public's power to regulate rates or to make similar grants to other parties. Said the decision of the Supreme Court, now affirmed by the Court of Errors and Appeals: “We do not attribute much force to the argument that the special franchises were a gift from the State. . . . The value of property does not depend upon the mode in which title is acquired. . . . There is, however, a sense in which the fact that franchises are the subject of gift may be important. The value of a gift to an existing company may be destroyed by a similar gift to a new corporation or other individuals; and it is obvious that in order to determine the wisdom of investing in the enterprise, the newcomers would be under no necessity of seeking a return upon a franchise for which they were to pay nothing. Since it is in the power of the State to bring about a supply without compelling the public to pay on the franchise valuation, beyond the actual cost of procuring it, it would be likely to do so, and the effect would be to destroy the value of the special franchise of the existing company. These considerations lead us to the conclusion that logically no allowance should be made for the value of the special franchise in a case where it is not legally exclusive and where the State still retains the right to fix rates." This reasoning would seem to be conclusive.

Recently the claim that franchises should be included in rate-making valuations, in so far as they are taxed as property, has been advanced with persistence. Under this theory, franchise values allowed would not depend directly upon earnings, but upon the appraisal of the franchises by the taxing authorities. The Court of Errors and Appeals, in its earlier decision, defended this position. The Maryland Commission has recently acted upon the same theory and in

its appraisal of the property of the Consolidated Gas, Electric Light and Power Company of Baltimore, allowed $5,000,000 for this purpose.1 But the New Jersey Court, in its final decision, wisely refrained from giving acceptance to this theory. The Court refuses to believe that franchises must be valued for rate making merely because they are valued for taxation purposes, and points out the peculiar nature of franchises as property. It says, "That they (franchises) are property is well settled. . . . Our own laws recognize them as property and tax them accordingly. . . . Such franchises, however, are property of a peculiar kind; the right of property in them is not absolute, but is qualified by the right of the State to fix reasonable rates. .. That a special franchise in the absence of an exclusive right is property only in a qualified sense is the result of the right of the State not only to regulate rates, but also to authorize a municipality to supply itself, and thereby to destroy the value of the special franchises." Accordingly the Court refused to include the franchises in the valuation for rate making, in spite of the fact that they are treated as property by the taxing authorities.

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This position is fundamentally sound. that it is unjust to deny to a corporation a valuation upon its franchise for rate making, because the franchise is taxed, is sophistical. The levying of a franchise tax ordinarily does not lessen the returns of a company, nor prove a burden to it, since the taxes are included in computing the operating and general expenses of the company, above which it is entitled to a fair return. Assuming that a utility is held by the courts or commissions to be entitled to a certain rate of return, and to this return only, the laying of a tax upon its franchise increases the amount which the public must pay to the company in order that it may make this return. If the utility can sell its service at a price which will produce its former rate of return plus the franchise tax it must be permitted to do so. The general result of franchise taxes, under such conditions, will be either to increase rates or to prevent them from going

1 Report of the Public Service Commission of Maryland, 1913, p. 52.

down as rapidly as they otherwise might. In either case, the tax falls upon the public. Hence the cry of injustice against not permitting a return upon the value which is taxed is not well founded, for the franchise taxes would ordinarily be charged against the consumers.1 It is to be hoped that other judicial bodies and commissions will concur in the position of the New Jersey Court upon this issue.



THE report recently issued by the Commissioner of Corporations (Part III of the Report upon the Tobacco Industry), treating Prices, Costs, and Profits, is the first to deal with a post-dissolution period and to compare conditions before and after the execution of the court decree. Disappointment will be met, however, if one reads the report with an expectation of learning anything conclusive about the effectiveness of the dissolution of 1911. In the letter of transmittal, the Commissioner indicates clearly the limitations of the inquiry.2 "The actual extent of the competition between the successor companies is discussed in so far as the facts regarding prices, costs, and profits, and changes in the volume and division of business tend to show it, but not with regard to the other important factors. These other factors are not covered by the report because the court retained jurisdiction in the case, and the Department of Justice has undertaken an investigation as to the manner in which the decree has been observed." It is to be regretted that the task of investigating these matters was not turned over to the Bureau of Corporations. In consequence of the lack of coöperation between the

1 This reasoning, of course, does not apply to franchises which establish a definite charge to consumers, but only to those under which charges are subject to regulation by the public.

2 Page xxvii.

two Departments, the present report is in certain particulars very unsatisfactory.

As the title indicates, the present report takes up the investigation of costs, prices, and profits: (1) those of the combination up to and including 1910; (2) those of the several large companies, called the successor companies, which took over the business of the combination; and (3) those of a group of independent concerns. Upon the basis of the material gathered and disregarding other factors, the report asserts that competition has been restored.

Two chief reasons are assigned for this conclusion. First, it is maintained that the changes in the relative volume of business of the several successor companies indicate competition. In the two years following dissolution, there was clearly a tendency for these concerns to fill gaps in types of business in which they were weak. But to hold that the more even distribution of business in the post-dissolution period is indicative of competition is to assume that each company has striven successfully to build up those parts of its business in which it was weak. But might not competition between several concerns, each strong in some branches and weak in others, lead to further specialization of each company in the branches in which it excelled, and withdrawal, perhaps forced, from the branches in which it was inefficient? Is it not conceivable that some of the changes in the division of business might be parts of a plan to allow each company to increase its business in the lines in which it was weak to such a volume as would make efficient production possible under the new conditions imposed by the courts?

The second argument presented in the report for the opinion that competition has been restored, concerns the increase in costs of distribution since the dissolution of the combination. It is to be expected that retail prices would show no change. In a commodity which is marketed commonly in small packages, at "popular" prices, the inertia of the public renders a change in retail prices difficult. It is much more convenient to change the size of the package. One might suppose, on the other hand, that wholesale prices

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