Unamortized War Losses. "Going value" in the sense of the court of appeals decision means the intangible asset representing necessary but unrecompensed outlays in the experimental or developmental period of the enterprise, the cost of attaching or building up business and making the enterprise a going concern. In a competitive industry, such development cost would usually be included in an intangible asset such as good will, which would be written off against the profits of later years. Investors in public utility companies should also have the opportunity of recouping pioneer losses and if by reason of insufficient rates, such losses have not been made good, they become a claim that must receive consideration in the determination of the "fair value" of the property.

This doctrine of going value does not mean, however, that all losses sustained by a public utility company must be made good by the public. Under such interpretation the most ill conceived or foolishly undertaken business, the most poorly managed and financially unsuccessful enterprise would become the most valuable. The larger the losses, the higher would be the rates to be charged the public. Rates would mount till they reached the point where customers would be driven to the use of substitutes and cease using the service supplied at an exorbitant price.

While, therefore, the investor must expect to assume the usual and ordinary risks of business, he should not be held responsible for failure to earn a fair return on his investment due to contingencies that could not in their very nature be foreseen. Such a contingency was the upheaval in economic conditions and relations resulting from the European War into which this country was drawn. Prices of materials and labor advanced suddenly to unprecedented heights and necessitated immediate adjustment in the selling price of finished products. When the finished product was supplied by enterprises subject merely to the regulation of competitive forces, its price could be increased sufficiently to absorb increased costs of production. Public utilities whose rates were fixed by contract were less fortunate, and in many cases where they were unable to secure modifications of contractual obligations passed through a period of financial hardship that seriously threatened their credit and rendered it impossible for them to procure moneys needed for extensions or

even necessary replacements. If such companies are to furnish adequate service, their credit must be restored through rates that will enable them to recoup at least a portion of their war losses.

It does not follow that the public must now be taxed to provide back dividends at a rate that had never been earned before the war. Before a company may claim reimbursement for "war losses" it must first show that it was unable to obtain the necessary public consents to an advance in rates and then must be prepared to accept a rate of return somewhat below that which is deemed reasonable in the present period of high interest rates. It should not expect the public, which already has its burden of war debt and taxes, to bear all the losses sustained by the utility company. But where a company was unable through no fault of its own to obtain for its services sufficient revenue to cover reasonable fixed charges and operating expenses, including allowance for depreciation or capital consumed in operation, that company is now entitled to a rate that will compensate it for such losses, due to general conditions that were beyond its power to control or modify and common to all companies similarly situated. Such reimbursement by the public should be made either through a higher rate of return on the investment or through a process of amortization, which requires the inclusion of the unamortized losses in the rate base commonly called the "fair value" of the property.

Criticism to the effect that such losses do not add to the value of the property would be justified if the sole standard of value were its replacement or duplication cost. Such, however, is not the case. Replacement cost is merely one factor to be considered and definite rulings of both state and Federal courts require consideration of other factors. Replacement cost of mains and services, for example, must not include paving that was not actually laid and paid for by the company. (People ex rel. Kings County Lighting Co. v. Willcox, 210 N. Y. 479, 104 N. E. 911.) Pioneer or development losses are not includible if they have been subsequently made good. The tendency in recent practice has been so to modify the reproduction cost formula as to bring it into agreement with the necessary and prudent investment and thereby obtain such stability in a rate base as will at once

protect the investment, represented in outstanding securities, and do away with the exceedingly burdensome expense of making appraisals of property to meet frequent changes in price levels. The relation between the utility company and its consumers is a permanent relation, and when a trustworthy record has once been secured of the amount of money honestly and prudently invested in property used in the service of the public. (and this is one of the primary purposes of the uniform system. of accounts which the Commission is authorized to prescribe), this record should receive the most serious consideration in the determination of rates.

The method herein followed is in close agreement with the practice of both the former New York Commissions, which practice was followed and upheld in a carefully drawn opinion by former Supreme Court Justice Charles E. Hughes, in the case of Brooklyn Borough Gas Co. v. Public Service Commission, 17 N. Y. Off. Dept. R. 81. The only new departure consists in the allowance herein made for unamortized war losses, which in principle, however, does not differ from the unamortized rate expense allowed as a capital or investment item by Justice Hughes and the pioneer losses allowed by the court of appeals under the designation of "going value."

Including such deficiencies in the rate base for fixing a fair return in this case is not capitalization of deficiencies. As the court said in People ex rel. Kings County Lighting Co. v. Willcox, 210 N. Y. 479, 489, 104 N. E. 911:

"Treating a reasonably necessary and proper outlay in building up a business as an investment for the purpose of determining the fair rate of return to be charged is far from holding that it should be treated as capital against which securities might be issued."

[7] Deficiencies in Amortization Reserve. In each of the last three years during the war period the Company has failed to set aside an adequate amount for depreciation. The amounts set aside are as follows:

1918 1919

1920

$1,179.28

$1,400.02

$3,484.84

The Company has not earned anything like a proper amount

from which allowance for depreciation could be set aside. At the time of taking over the gas properties the depreciation, as stated by the Commission, was $49,585. It is now $120,000. The reserve by the balance sheet December 31, 1920, is $30,162. The deficit in the provision for depreciation is, therefore, at least the difference between $120,000 and $49,585, that is to say $70,415, and that amount will be assumed to be the deficit for the war period in the provision for depreciation.

Deficiencies in Return. The average of fixed capital between $736,222 as allowed by the Commission as of 1916, and $875,808 of 1920 less depreciation adjusted to each year, plus working capital at the same percentage as allowed in this decision has been taken as the basis for each year's return. Allowing upon these amounts 7 per cent interest, the results, as compared with the actual return, are as follows:

or in all for deficits for the four years $99,735. This amount will be taken as the deficit in return for the four years under the war conditions.

[8] Work in Progress. An exhibit has been submitted showing securities permitted to be issued by the Public Service Commission, Second District, for additions during the years 1920 and 1921 and not yet included in fixed capital. Provision for this is necessary. Much of it is now in place. The sum of $71,419 should be allowed and included in the rate base.

Taking, therefore, all relevant matters into consideration, we find the fair value of the properties as a rate base to be as follows:

Revenues and Expenses. The determination of reasonable rates requires the forecasting of future costs and future revenues. Such forecasts could be made with a reasonable degree of certainty before the great war. Prices on the whole were then relatively stable; an increase in the price of one commodity was usually offset by a decrease in the price of some other commodity; and the principal factor in introducing changes in operating expenses was the volume of production. Increasing output added to the amount of expenses but seldom a proportionate increase, so in growing communities there was a natural tendency toward a decreasing unit cost of the service supplied.

The tendency toward lower unit costs has been reversed in recent years as exemplified in the following comparative figures of the output, revenues and expenses of the Long Island Lighting Company:

By reason of credits derived from insurance the net operating income given above for 1920 was revised by Exhibit 27 to become $37,549.54.

[9] Between 1918 and 1920 while the quantity of gas sold increased 50 per cent and operating revenues more than 80 per cent, operating expenses increased more than 90 per cent. The cost of operation rose from $1.10 in 1918, to $1.40 in 1920, and, according to statements placed in evidence, to $1.70 in the first four months of 1921. This last figure, however, is based on incomplete records of gas sold. Even were the records of sales reasonably complete, the unit costs in the winter months are abnormally high. Only one-half as much gas is then sold per day