Needless to say a public utility corporation cannot be deprived of the right to charge a reasonable rate for its services. To deprive it of this right would be to discriminate arbitrarily against it and thereby deny to it the equal pro tection of the laws. It would also amount to a deprivation of property without due process of law. But to decide in a given case what is a °reasonable* rate is not so simple. The solution of the problem is not much furthered by quoting the rule which our courts have frequently an nounced that a reasonable rate is one which ensures a °fair return upon a fair valuation of the property devoted to the public use.* This statement, of course, means nothing until some definiteness attaches to the meaning of the terms °fair return' and °fair valuation.* The inability of economists, legislators and judges to agree upon what these terms mean has brought the whole problem of the regulation of public utility rates into a confusion from which it has but very recently begun to emerge.
It is not perhaps so difficult to say what is meant by °fair return,* although it is naturally impossible to lay down as a general rule that it is this or that percentage of profit on a given investment. The courts have reached with practical unanimity the conclusion that a fair return from apublic service enterprise is that measure of profit which would be realized from any other business where the risks and capital investment are the same. What this is in any given case depends of course upon the peculiar circumstances of that case.
There has been much diversity of opinion as to what is a °fair valuation of the property devoted to the public service.' Several different standards for measuring that valuation have received recognition. (I) First, it has been urged that the total original cost of the plant and improvements should be deemed the true valuation. There are many objections to this test. Except in the case of newer enterprises the original cost cannot usually be determined with any accuracy. Furthermore, in such a may be included various items represent ing unwise or unnecessary expenditure which ought not to be made the basis of earnings at the present time. (2) The present capitaliza tion of the business is also suggested as a meas ure of public utility. valuation. This, however, overlooks entirely the not infrequent fact of over-capitalization, an abuse which public con trol has only begun to mitigate. There is too little relation between the capitalization and the actual investment in public service companies. (3) Another proposal is to take as the proper valuation the cost of reproducing the plant less the existing depreciation of the equipment. Opinions differ as to whether this should be the cost of reproducing the original plant, per haps with a somewhat antiquated equipment, or the cost of reproducing a new and modern plant. (4) Perhaps the weight of authority inclines to the view that °fair valuation" means the present value of the plant as a going con cern. This includes two elements, the physical
valuation of the equipment and an additional increment representing the fact that the system is actually operating and producing earnings. It seems clear that any attempt to arrive at a fair valuation of a public utility investment must begin with an accurate appraisal of the value of the physical property. This fact has received a somewhat belated recognition and there is now a widespread tendency throughout the several States in the United States to pro vide for the making of such a valuation on a scientific basis. In estimating the value of the business as a going concern it must be borne in mind that the value of the public utilitity fran chise should be excluded. This franchise value is directly based upon the capacity of the cor poration to earn profits and it would accord ingly be absurd to include it in the valuation upon the basis of which those profits are to be computed. The Supreme Court of the United States has declined to adopt any one of the above methods of determining the fair valuation of the property devoted to public service but has declared that all of them are to be given consideration. In Smyth v. Ames (169 U. S. 466, 1898), the court said: °In order to ascer tain that value, the original cost of construc tion, the amount expended in permanent im provements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particu lar rates prescribed by statute, the sum re quired to meet operating expenses, are all to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property.' Regulations to Secure Equality of Secs ice.— Inequality of service rendered by public ry seice • corporations may take three forms : First, the arbitrary refusal to some of service rendered to others; second, the rendering of service of unequal quality for the same charge, and third, the charging of higher rates for the same service rendered under substantially sim ilar conditions. The illegality of the first two forms of discrimination has long been estab lished, but discrimination in rates has been made illegal per se only in relatively recent years. Under the early common law one who was not charged a rate unreasonable in itself had no cause of complaint because some one else was charged less. This rule was later modified so as to make discrimination in rates prima facie evidence of the unreasonableness of the higher rate charged.. Finally, such dis crimination came to be recognized as contrary to public policy and has been made illegal by statute practically everywhere.