16 F. (2d) 615 from the viewpoint of the company, but from that of a contractor, for which reason he assumed the current labor prices paid by contractors, which he made a conscientious effort to ascertain from contractors employing similar labor in the vicinity of plaintiff's territory. Plaintiff's employees were in a steady employment. This aided plaintiff to receive and hold labor at somewhat under the rates usually paid by contractors, who could offer but irregular work. I do not think that the fact that Dillon contemplated a wider trench for the laying of mains than Duncan estimated upon is particularly important. Probably no two men would agree as to which was the best and most economical method. The defendants argue that, if Dillon had adopted the trench width of Duncan, the value, as estimated by Dillon, would be much lower. Although Duncan contemplated the narrower trench, he figures a higher cost than did Dillon for the wider trench. I do not believe that the court should be asked to accept one man's trench width, because it is the narrowest, and the other man's estimated cost to dig it, because his figures are lower. There must be some consistency. On the whole, Duncan's figure is much higher than Dillon's. Defendants show no inclination to accept Duncan's valuation of the whole distribution system, and I am not particularly impressed with the urging of this particular item, because it happens to be lower. Such a method logically carried out for the defendants, extracting all the items from all four valuations at the lowest appraisal, and, for the plaintiff, reversing the process and selecting all the items at their highest-would terminate in results altogether unjust, unsatisfactory, and not the slightest in accord with the testimony of any witness. Included in the Dillon estimates are estimates of paving over the mains and the services. As to the mains: City inspection, $22,182.66; paving $29,982.79-a total of $52,165.45. As to the services: City inspection, $7,944.40, paving $26,727.58-a total of $34,671.98. The testimony of Dillon that he included only the pavement which had theretofore been disturbed by the plaintiff and that he applied the costs thereof as of June 1, 1923, as procured from the bureau of highways of the borough of Brooklyn, is uncontroverted. Against the allowance of these items defendants cite People ex rel. Kings County Lighting Co. v. Willcox, 210 N. Y. 479, 104 N. E. 911, 51 L. R. A. (N. S.) 1, and Des Moines v. Des Moines, 238 U. S. 153, 171, 35 S. Ct. 811, 59 L. Ed. 1244. In the former case, the court allowed the cost of the pavement actually in place when the mains were laid, and it appeared in the latter case that the streets were unpaved when the mains were laid. In the instant case the plaintiff does not claim for streets unpaved when the mains were laid, or streets paved subsequently thereto. Its proof was limited to streets where pavement had been actually removed when the mains were laid, the costs as of the proper date, June 1, 1923, were applied, and the cost of removing and replacing pavement, while it may add no efficiency to the functioning of the mains themselves, or add to their intrinsic value, is certainly an inescapable item of expense in their laying. The Attorney General presents an elaborate tabulation, based, as he says, upon the company's authorizations for new main installations for the year 1923, which show values to be somewhat lower than those estimated by Dillon. The tabulations are open to the objection that they are the testimony of no witness who was called to the stand to testify to them and submit to cross-examination concerning them. A service is a pipe which extends from the main in the street to the premises of the consumer. That the plaintiff had, on June 1, 1923, 19,861 services in operation is not controverted. The actual length of each of the nearly 20,000 services has not been proved in this case. Such proof, which would necessarily be very voluminous, is unnecessary, for the defendants did not establish that the average used was not an accurate one. Further, plaintiff says in its reply brief, and the evidence shows, and I do not find it controverted, that the average used was that fixed by the Public Service Commission. I am satisfied that on the 1st day of June, 1923, the plaintiff had in operation 792,239 feet of mains and 19,861 services, and that the mains were of a value of $2,100,761, and the services of the value of $625,920, exclusive of undistributed structural costs or overheads, to which I shall presently refer. Overheads. It is elemental industrial economics that the cost of land, material, and labor does not represent the full amount that it is necessary to use in production or construction. That overheads are necessary, unavoidable, and must be allowed in this type of cases is recognized. Ohio Utilities Company v. Public Utilities Commission of Ohio, 267 U. S. 359, 45 S. Ct. 259, 69 L. Ed. 656; New Organization and development prior to construction, 5 per cent. of all reproduction costs and expenses, including working capital, but excluding going value and cost of financing, amounting to the sum of $6,542,871.13, equaling $327,143.55, which the plaintiff approximates at $325,000. Cost of financing, same base used as in preceding paragraph, adding the cost of organization and interest thereon, bringing the base up to the sum of $6,540,556.09, and dividing that sum by 19 per cent., results in the sum of $344,239.79, which the witness and the plaintiff approximate at $344,000 as the cost of financing. Engineering and superintendence and general contractor's expense and profit, 13 per cent. of the reproduction cost of equipment at gas plant, omissions and contingencies, buildings and appurtenances, and mains, totaling $3,382,547.18, equals $439,731.13. Interest during construction "at the rate of 8 per cent. for the obtaining of the requisite new capital by a gas company in this territory"; 8 per cent. for six months on total value of equipment, apparatus, buildings, and appurtenances, including engineering and contractor's profits and expense and administrative expense, all in the sum of $3,917,835.27, equals $156,713.41, plus interest for one year at the rate of 8 per cent. per annum on the value of the land, $430,000, equals $34,440, plus interest for one year at ....... $ 92,500 00 35,000 00 290,375 00 73,000 00 55,000 00 4,918 00 120,000 00 $670,793 00 Brought forward Resident engineers: District engineer.. Superintendent 16 F. (2d) 615 $125,000 00 $10,000 00 8,000 00 Two assistants...... 10,000 00 Miller sets the amount allotted to the task; Little, the number of men. Neither can, of course, be absolutely accurate, but I think Miller's finanical budgetary scheme would more closely approximate the ultimate financial cost of necessary overhead than Little's human schedule. I therefore allow the overheads in the amounts presented by and testified to by Col. Miller, as tabulated above in the second paragraph under this subjectmatter headed "overheads" and totaling the sum of $1,472,721. Cf. New York & Richmond Gas Co. v. Prendergast (D. C.) 10 F. $ 7,000 00 (2d) 167. 165,375 00 $290,375 00 20,300 00 23,700 00 11,000 00 $73,000 00 $ 55,000 00 Working Capital. Of the necessity of adequate working 11,000 00 capital in the management of any enterprise there can be no argument. It is the daily life blood stream of the business; it keeps the pay of those laboring for the company and the bills of its creditors and supply houses paid promptly. Not only must a mobile capital fund for those purposes be there, but it must be present from day to day in amounts adequate for the reasonable needs of the company. The adequate amount necessary even defendants' witness Mr. Little concedes is largely a matter of management. $ 4,918 00 $120,000 00 Although he testified that there would be an actual outlay and expense for the cost of financing, Little did not include any allowance therefor in his estimate. Miller's testimony may therefore be taken to be undisputed upon this point. He estimated, as stated above, $340,000. If this item is added to Little's estimate at Miller's figure, Little having supplied none, it would bring Little's overhead estimate up to $1,010,793. Upon his recross-examination, Little testified that in estimating overheads he used 18 per cent. of the value of all the physical property as of June 1, 1923, except land, using Miller's figures for the plant and equipment, Burt's figures for the buildings, and his own for the mains and services. I incline to the method adopted by Col. Miller, rather than that of Mr. Little, as the more accurate and consistent way of approximating what the overhead would amount to. Little's method freezes itself into a definite number of men, and it might work out very well if the organizer of the work was able to get at first, and keep throughout the entire progress of the work, men fully qualified for their tasks, sticking to them, and performing them exactly as planned. But human nature is too variable an element to react to such mathematical precision. It does not seem to me that Little has made full allowance for the turnover of men, just as inescapable in executive as in minor positions. Col. Miller arrives at his estimate of the amount necessary by allowing therefor 50 cents on each thousand cubic feet of gas sold during the year-in 1923, 1,080,363,400, which equals $540,181.70. Miss Dillon, the vice president of the plaintiff, presented two exhibits for the year 1923, the first showing the average monthly working capital for all corporate purposes for that year to be $698,897.33, and the amount of such capital necessary in its gas business to be $476,537.72. Mr. Little, for the defendants, estimated the amount necessary to be $396,316. This is approximately $400,000. In view of Mr. Little's frank admission that the amount of working capital reasonably required is a matter of managerial judgment, and his testimony that the plaintiff company is well managed, and as the defendant's whole case is lacking of any proof whatever of mismanagement, I see no reason for discrediting the plaintiff's actual average experience for the year 1923. I do feel, however, that the basis of Miss Dillon's figure of $476,537.72 does not wholly support Col. Miller's estimate of $540,000. On the other hand, I do not think that any company should be held down to the ultimate penny of its proved necessary working capital, but that there should be a reasonable margin of safety thereover. In view of all the proofs in this case, the sum of $500,000 for good years and bad years within the period here under review would be a reasonable allowance for working capital. Going Value. The plaintiff asserts a claimed going value of $1,015,256. That is the estimate of that value submitted by its witness, Mr. George E. Woods, who has had an extensive experience as to the going elements of gas companies and other public utilities. Col. Miller, also called by the plaintiff, testified that it had a going value which he placed at $950,000. While the defendants assert that there should be no allowance for going value, Mr. Little, one of the witnesses called by them, stated that in his opinion the plaintiff had going value in a sum closely approximating $575,000. He estimated that value as of May 1, 1925. Manifestly, the value of plaintiff's property is not to be confined to its physical property alone. It is a going business; it functions; it is not just so much idle realty, buildings, plant, apparatus, equipment, tools, and a distribution system. These are but the "bare bones," as Judge Lurton has called them in Omaha v. Omaha Water Co., 218 U. S. 180, 30 S. Ct. 615, 54 L. Ed. 991, 48 L. R. A. (N. S.) 1084. The "expenditure of time, labor and money," says Miller, J., in People ex rel. Kings County Lighting Co. v. Willcox, 210 N. Y. 479, 104 N. E. 911, 51 L. R. A. (N. S.) 1, "co-ordinates those bones into an efficient working organism and acquires a paying business." "The proper and reasonable cost of doing that," continues Judge Miller in the same case, "whether included in operating expenses or not, is as much a part of the investment of the company as the cost of its physical property." That intangible property acquired by the "expenditure of time, labor and money," which puts the whole works into motion, makes it function efficiently, makes the service available and useful to the public and a profitable enterprise to the company, is a real value, capable of measurement in rate cases, is now well recognized. In Monroe Gaslight & Fuel Company v. Michigan Public Utilities Commission (D. C.) 11 F. (2d) 319, the special statutory court (Denison, Circuit Judge, and Tuttle and Simons, District Judges) in its per curiam opinion says as to "going value": "There remains the subject of the cost of converting the basic structure into a going business. There is much confusion as to the name by which this should be called. For the purpose of this opinion we will call it 'going value.' For this going value, the utility claims an additional sum of $65,000; while the commission, according to its computation, allowed a little less than $6,000. "The plaintiff's expert evidence that there is a 'going concern' value of $65,000 is based in inseparable part upon the 'intangibles,' like favorable contracts, strategic situation, and community good will. These lead into debatable ground, where we have as yet no clear teaching from the Supreme Court, and we leave these things out of present consideration; but, so far as the conclusion of value depends on development costs, by which we mean the cost of getting customers, the case is different. The early part is closely akin to interest during construction, and it would be prudent to have initial capital sufficient to use some of it for this development purpose. "Whenever and to the extent that historical cost or prudent investment is to be determined, it is material to know whether this development cost has been repaid out of later profits; not so when we use the reproduction value as the starting point. It is too plain for doubt that the fair present value of a plant with an established output of 80,000,000 feet is greater than that of an equivalent plant with no business. The additional value is there. "Nor is it important that, if perhaps the business has been developed to the point of 'saturation' by an existing company, the hypothetical new plant would probably get the old customers with little expense. We are ultimately fixing the value of the old plant, not of the new one; we take the latter only as evidence, as far as it goes, of the former. If we suppose (arbitrarily) that an annual consumption of 30,000,000 was necessary to put this plant into the successfully established class and (again arbitrarily) that it cost $500 per million to get this business, we have an added $15,000 value plainly present in the plant, for which initial capital might wisely have been used, in order that dividends might not be delayed or diminished. "Whether the utility actually made this back in current profits, or lost money every year, would be of no importance. In that franchise contract period annual losses were of course no criterion of development costs. The loss may have come because there was too little development expense, or too much, or there may be no relation between them. 16 F. (2d) 615 Annual profits belong to the utility, to be investment, until the appliances were all set withdrawn or to remain invested. The same and in operation. principles apply with little, if any, less force to the cost of attaching the next 50,000,000, which might be (again arbitrarily estimated) $250 per million. We consider such costs as a clear incident of value pertinent to the replacement cost theory of fixing the rate base. Without that, the replacement is not complete." As with the ascertainment of all other values in such cases, the courts have refused to prescribe or to follow any definite formula "Col. Miller assumed the construction of the plants, mains, etc., in a period of one year. For the purpose of ascertaining the going value, I have assumed an expenditure of 60 per cent. of Col. Miller's figure (including working capital) as having been expended when operations started and the remaining 40 per cent. during the first year of operation. ing Business as of June 1, 1923. for measuring the property element known "2. Time Required to Reproduce the Existas going value. Each case is to be decided upon its own facts. A sound foundation for the testimony of plaintiff's opinion witnesses is found in the testimony of Miss Dillon, vice president of the company, which showed the existence of the elements of going value. The tabulation presented by Mr. George E. Woods presents the best basis in this case for the consideration of going value. It is spread in full upon the record. Inasmuch as it does not lend itself to an abridgment consistent with clarity, it is here set out in full. It follows: “1. Statement of Going Value of the Brook- "July 1, 1925. "It will require two years after the commencement of operations to secure the business of the Brooklyn Borough Gas Company to the extent that such business was secured as of June 1, 1923. It is assumed that the new company will commence to set meters and install gas-consuming appliances one year from the time the construction of the plant was started, and during the second year of operation the company will complete all installations, so as to produce the physical property in existence June 1, 1923. "Some preliminary work, such as canvassing, advertising, demonstrating, etc., will have to be done prior to that time; therefore it is estimated that, during the first year of actual operation, 60 per cent. of all the meters and gas-consuming appliances in use as of June 1, 1923, will have been installed, and the remaining 40 per cent. will be completed during the second year of active operation. I am assuming the quantity of gas to be consumed on the basis of sales for the year 1923, and the number of active meters as of June 1, 1923, and that the prospective consumers are educated in its use. 1923 Sales per active meter............. "To place the Brooklyn Borough Gas Company on the basis of a going concern (as of June 1, 1923), engaged in furnishing gas to its consumers, and having developed the operation and business of the company beyond the construction of the gas plant and the installation of the distribution system, and the setting of meters devoted to the use of consumers existing as of June 1, 1923, Number of active meters-June 1, which are covered by the inventories and appraisals of Col. Alten S. Miller et al., in evidence in the pending case of the Brooklyn Borough Gas Company v. Prendergast et al., it would be necessary for the company to do certain work and incur certain additional costs which are included in what is known as the going value of a gas company. The additional costs considered by me may be classified as follows: First, the expense of obtaining the appliance business and the cost of their installation; second, the additional expense incurred in the operation of a new plant and system with a new personnel; third, the additional expense as a result of selling a lesser quantity of gas per dollar of 1,080,363,400 cu. ft. 25,456 "3. Operations of the Company. "As previously stated, it would take the new company at least two years after commencement of operation to develop its sales to the point where the gas sales had actually been developed as of the year 1923. In order to attain, at the end of that period, the sales of the Brooklyn Borough Gas Company as of the year 1923, I have therefore made a study and estimate of the prospective sale of gas by a new company during the first three years of its existence as follows: |