7. Net divisible revenue or net return, dollars..

1.85

2.30

2.45

3.68

4.90

(for the year 1915) of $3.55, equivalent to 10 per cent on value, yielded a divisible net annual return of $1.85, or about 5.3 per cent upon fair value. This rate is comparable with allowances by the courts and commissions of 7 per cent or more.

Similarly for the postwar year 1923 the recorded gross annual revenue of $5.54 yielded a divisible return of $2.30, or 6.6 per cent on prewar, not on postwar, value.

To have earned a 7 per cent rate of return on prewar basis these privately owned works should have had in 1915 an average gross annual revenue of $4.25, instead of $3.55.

On postwar value basis 50 per cent in excess of prewar, giving an assumed average per capita value of these works of $52.50, the necessary gross annual revenue to earn a 7 per cent divisible net return would have to be $7.12, instead of the recorded average for 1923 of $5.54-involving an increase of about 30 per cent.

Similarly, if the postwar basis of value of water works be assumed to be 100 per cent in excess of prewar basis, as are the general costs of water works materials and labor, the necessary gross annual revenue to yield a 7 per cent divisible net annual return would be $8.54 per capita, instead of $5.54 recorded for the year 1923. This would involve an increase of about 50 per cent.

It may fairly be anticipated, then, that under average conditions. there will be an advance in water rates of at least one-third in the next few years, if water works values are readjusted in conformity with those of other property.

The postwar financial problem of the water works of the United States has clearly not yet been solved. There is good ground however, for hope of further relief in the recent decisions of the higher courts of this country, which have made clear that postwar, rather than prewar conditions, and present value rather than original cost, must control in public utility rating problems as in other economic fields. This increase in value, due largely to the loss in purchasing power of money, coupled with the general advance in the fair rate of return now and hereafter to be enjoyed by these works, as compared with the actual average prewar rate, will justify increases in rates which improving business conditions will make possible.

Marked progress has been made in making good the postponed betterments of the war period, replenishing the margins of safety, and bringing these properties to a higher degree of perfection.

Good service from its water works is so essential to the health and industrial success of the public that a period of prosperity to these works may reasonably be expected, if their managers are persistent in their efforts to obtain fair recognition of the difficulties under which they still labor.

CHAPTER XXII

VALUATION OF WATER WORKS

It is necessary to value water works properties for a number of purposes, transfer of ownership; determination of an equitable rate base; the issuance of securities, and for other purposes.

Up to 1875 only a few of the larger cities had public water supplies, and practically all the work that had been done was planned, financed and executed by municipalities. Between 1875 to 1880 there was a great advance in sanitary science. In this period municipal water works construction had its beginning upon a large scale. Between 1880 and 1890 there was great activity of construction. Nearly all the cities over 5000 in population were supplied, many of them by private corporations. By 1900 most municipalities, including many small villages, had public supplies.

During the past twenty years many of the franchises granted to water works companies expired. In this period the sentiment for municipal ownership grew. Many valuations were required on which to base transfer of ownership from the private company to the municipality. In most cases where a franchise expires, a valuation is necessary as a basis for the establishment of rates for water. Recently, valuations for change of ownership have been less frequent, but the necessity for changes in rates has occurred with increasing frequency, resulting from the now generally accepted rule at law, that rates must be equitable, regardless of prior contract stipulations. The wide fluctuations in prices, accompanying and following the world war, has also compelled frequent rate changes.

Value in general

Value as it relates to material things may be briefly defined as "worth expressed in money." In the case of objects frequently transferred, value is usually determined by the price that the object brings in the market. Market price is generally based upon supply and demand. If these factors are evenly adjusted, value is governed by the cost of production. When demand slackens, values fall. The

same effect may be produced by an increase in the supply relative to demand. The converse is true in both cases. Decreased supply or increased demand enhances value. Thus the valuation of things frequently exchanged involves simply a study of recent statistics. Values are automatically recorded from moment to moment upon the Board of Trade and the Stock Exchange. They are determined from month to month in the record of real estate transfers.

Many things are valued on the basis of what they will produce. Thus manufacturing enterprises are commonly transferred on the basis of what they produce or can be made to produce in net revenues. This is true generally only in enterprises not subject to the regulation of earnings by governmental bodies.

Valuation of utilities

The laws of this country, as interpreted by the Courts, make no distinctions in the valuation of property. All property is subject to the same general laws, although value may necessarily be determined by different methods in different cases.

The public utility cannot be valued by the same method as a bushel of wheat. Although subject to the same laws of ownership in other respects, it differs from ordinary property by reason of the infrequency of sales and the restriction of the law of supply and demand by regulation. Otherwise it is subject to the laws governing property. It may not be taken without just compensation. Rates may not be enforced that do not produce a fair return on fair value.

Water works valuation is a matter of considerable intricacy, and should be attempted only by persons having some accomplishment in three fields of knowledge.

1. A knowledge of the law; especially its fundamental principles as affecting "property."

2. A knowledge of finance, that is to say, the economics of business, including investment, the varying value of money, the special hazards of various enterprises and the economic operation of utility properties.

3. A knowledge of engineering with especial emphasis on that branch of engineering that deals with the conceiving, planning and building of utility structures, involving a knowledge of costs and methods, both in construction and operation.