VALUATION OF PHYSICAL AND OTHER PROPERTY (WISCONSIN) The commission must value all the pro perty of every public utility. It holds a pub lic hearing, after notice to the corporation, before the final determination of the value. The commission may at any time, upon its own initiative, make a revaluation. It must publish separately in its annual reports the value of all property used, and the value of the physical property used, by all public utilities.
In compliance with the law, every bit of physical property of every utility in the state is to be valued, and constant revaluations are to be made to keep these values up to date. In the case of Hill et al. vs. The Antiago Water Company, the commission makes a comprehensive explanation of the methods of obtaining a valuation as the basis of rate making.
There are three such valuations : (1) Original cost.
(2) Cost of reconstruction.
(3) The present value.
Which of these valuations the commission may use depends on the special circumstances of each case.
When it includes only proper charges, and when there have been no unnecessary wastes or mis takes, of such nature that no one but the owners should be held responsible for them, then the original cost of construction would seem to repre sent the investment that has been made in the physical property of the plant.
Thus the commission states the circumstances under which the original cost properly repre sents the investment value of the plant. It ascertains this cost from the construction ac counts. They should show: the cost of the various parts of the plant; the cost of engi neering, superintendence, and management; the amount allowed as interest during the period of construction; the amount, if any, at which bonds were discounted; the basis on which contracts for construction were let; the basis upon which stock was issued; promotion expense, cost of franchises, and other items. In short, each of the various items entering into the cost of the plant should be shown in detail.
The commission has this further to say con cerning the original cost valuation: The original cost, even when shown in detail, may not be the same as the value upon which the investors are entitled to reasonable returns. The question here is one of equity between the in vestors and the customers. The former are en titled to reasonable returns on a reasonable valu ation; the latter are under obligations to pay rates which will yield such returns. The problem is to find the valuation equal to both sides. This value may not always be represented by the amount of money actually invested. The plant may have been built when prices were unreasonably high or low; there may have been excessive promotion fees, private understandings with the promoters, and so on. All of these things must be taken into consideration. Subject to such considerations, if satisfactory records have been kept, the original cost as estimated from the construction accounts is accepted as correctly showing the value of the investment.
If the records of original construction cost are wholly or partly lost, so that the orig inal cost cannot be correctly ascertained, the value has to be determined by what it would cost to reconstruct the plant. The commis
sion describes the method of obtaining this cost: To begin with, it is necessary to obtain a com plete inventory of the physical property. This inventory must be secured by actual inspection, aided by the records and such other information as may be had from the company. This inventory should include not only the different parts of the property of the plant, but the amount or quantity of labor and material required to place it in posi tion as a part of the complete plant. The next step consists of finding a suitable price per unit for the labor and material required. The prices are usually those which constitute the average market price for the last few years, modified by local con ditions. From these facts the total cost of labor and material that enters into a plant can be com puted. In addition it is necessary to ascertain the time required for construction, in order that the interest on the cost during the construction period may be estimated. The probable cost of engi neering, superintendence, insurance, and various other factors are also to be computed. The sum of the costs of all these elements is considered to constitute the cost of construction new.
As a third possibility the commission may use the present value. The total amount of depreciation is deducted from the cost of re construction new, giving the present value of the plant. In many cases companies have charged rates ample to cover operating ex penses, including depreciation, together with a fair amount for interest and profits, but have distributed to the stockholders the amount which should have been reserved for deprecia tion. This practice, the commission argues, is one way of paying dividends out of capital. Since part of the stockholders' capital has been returned to them, and their investment decreased proportionately, it is only fair that the sum upon which returns are to be esti mated should be reduced accordingly. An alternative to reducing the investment valua tion is to keep the plant value up to the cost of reproduction new, and make the managers pay back from earnings the amount diverted from depreciation. In all cases the franchise is to be valued at its actual cost alone, and no other intangible assets are to be considered.
A further element contributing to the value of the investment is the cost of business. This consists of the deficit from operation during the development period. The commission con siders it as necessary a cost as the cost of plant construction, and believes it should be treated as part of the capital invested. An alternative to charging this cost to capital would be to amortize the amount by charging it directly to the consumers as an addition to the price or rate. In that case it becomes a temporary charge, borne only by those con sumers who exist during the amortization period. The commission considers this in equitable to the unlucky consumers who are burdened by it.