A valuation estimated on the cost of repro duction alone might well be unfair, in that a decrease in the cost of materials, or a fall in wages, might make the reproduction cost lower than the original. As against this, how ever, it may be argued that a monopolistic public utility would be little or no worse off on such a valuation, for the purpose of basing an allowable return on capital, than a manu facturing enterprise without state regulation of charges, which, nevertheless, would be liable to competition from a plant built at a lower capital cost under similar conditions of construction. Danger of unfairness lies, too, in mistaken estimates of the cost of reproduc tion. Those having to do with the financing of new enterprises know how difficult engineers find it to estimate construction costs, and how commonly they underestimate. If this is the case with the most expert engineers whose reputation is at stake, and whose fig ures will be tested by the actual performance of the work, it is easy to see what injustice might be done by engineers estimating on behalf of the state, whose figures will not be checked up by the actual carrying-out of the work.
Cost of replacement affords another possi ble basis of valuation. Cost of reproduction, which we have just been considering, con templates the present cost of building an ex actly similar property in the same location. Cost of replacement contemplates the pre sent cost of building a property that will per form the same service as the property now in existence. We see at once that cost of repro duction and cost of replacement may come to very different sums. Engineering mis takes, now easy to see and to avoid, may have made the present property cost more than would one built new at the present time that would do as much work. Even more likely, new inventions or devices for doing the work may make it possible to construct a property at a much cheaper cost that will perform that same service. Again, this basis of valuation applied to public service corpora tions would not, perhaps, in its general tenor, be unfair, because capital invested in a manu facturing corporation is subject to the same possibility of loss through similar improve ment in methods, giving a new competitor an advantage. If valuations are to be based,
however, on analogies to manufacturing cor porations, these additional elements of risk need be kept in mind in determining that com pensation which is to be counted fair.
With these very general considerations in mind, indicating the difficulty of the problem, we may now go on to see what some of the states have done through commissions in dealing with it. What has been stated will afford any one a basis for a critical examina tion of their work. On the other hand, the statement of their work will show many other things needful to consider. We shall make little attempt to comment, but will simply examine what they are doing.
For our purpose we will take the Gas and Electric Light Commission of Massachusetts, the Public Service Commission of New York, and the Public Utilities Commission of Wis consin. These are the only commissions with a jurisdiction over public service corporations other than steam railways that have a long enough history to show much accomplished. The statements for New York represent a study of only the first district. The general jurisdiction of these commissions include: A. Establishment of uniform accounts.
B. Publication of statistics.
C. Quasi-trade journal functions.
D. Service.
1. Improvement of service.
a. Upon commission's own initia tive.
b. Upon complaint.
2. Extension or abandonment of serv ice.
a. Upon commission's own initia tive.
b. Upon complaint.
E. Safety.
F. Valuation of property.
1. Physical property.
2. Other property.
G. Capitalization.
H. Regulation of rates.
I. Policy of the commission as to the admission of new companies into the field, the consolidation of companies, and as to the transfer and sale of rights of companies.
From the standpoint of a discussion of cor poration finance we are interested only in that part of the jurisdiction including (1) Valuation.
(2) Capitalization.
(3) Regulation of rates.
(4) The limitation of competition as an off set to the limitation of earnings through rate regulation. The discussion will take up the work of all three commis sions under each head.