ever, was immediately recognized as a part of the capital value and the proceeds were used by the company in part for the purchase of Liberty bonds at a lower rate of interest than the rate which the stockholders were receiving from the public.

INTEREST FUND SHOULD BE ZERO

Our analysis of the Cleveland balance sheet shows that so far as working capital requirements are concerned, there was absolutely no need for any part of this cash derived from the sale of securities, inasmuch as the funds actually used for working capital were accumulated out of earnings in advance of disbursements attributable to

the cost of service. It even shows that the $500,000 originally set aside out of capital for the interest fund was wholly unnecessary and that, under a serviceat-cost arrangement, where the current revenues are sufficient to cover the cost of service, the normal condition of this fund should be zero instead of

$500,000, or any other positive amount. The "condition" of this fund is a matter of bookkeeping, and for the purpose of automatic rate regulation a range from minus $200,000, indicating a need for higher fares, to plus $200,000, indicating the feasibility of lower fares, would be just as effective as the present range from plus $300,000, the low limit, to plus $700,000, the high limit. On June 30, 1919, when the theoretical "condition" of the Cleveland interest fund was $838,559, the actual amount of the fund was $1,920,058 of cash and its equivalent, the difference between these two sums being represented by taxes and interest accrued but not due, charged against the fund. Thus it appears that on June 30 the sum of $1,081,500 accumulated out of revenues, was available as a balance in cash or its equivalent on account of the deferred claims attribu

table to the service already rendered. On December 31, 1919, after the usual liquidation of accounts at the close of the fiscal year, the corresponding amount was still over $500,000.

WORKING CAPITAL AS SEEN BY REGULATORY COMMISSIONS

We may now turn to the treatment by the regulatory commissions of working capital for street railway purposes. In most cases street car fares originally were fixed by legislation or franchise ordinances, and for that reason the public service commissions of the various states were slow in assuming or having thrust upon them jurisdiction over them. Hence, the valuation of street railway properties in connection with rate proceedings is a comparatively recent development. THE ORIGINAL MILWAUKEE FARE

CASE

The outstanding pioneer case of street railway valuation and fare fixing by a state commission is City of Mil

waukee v. the Milwaukee Electric Railway and Light Company, decided by the Railroad Commission of Wisconsin,

August 23, 1912. As introductory to

the discussion of the allowance to be made for working capital in this case, the Commission said (10 W. R. C. Rep. 157):

"It is conceded that the respondent compary is entitled to an allowance for working capital in order to economically carry on its business. The only question in dispute is the amount of such an allowance. It is apparent that such an amount is dependent largely upon the nature of the business. The electric railway is unlike the water, gas and telephone utility, in that it has no monthly bills but receives a large portion of its transportation revenues daily. The electric railway also has the advantage of selling a part of its transportation service in advance in the form of blocks of tickets or mileage books. The money so received is at the company's disposal as working capital prior to the time when it is necessary for current expenses."

In this case counsel for the city of Milwaukee took the position that the monthly average of current operating expenses would be adequate allowance for working capital, and upon this basis suggested $150,000 as approximately the right amount. Prof. Mortimer E. Cooley of the University of Michigan, testifying on behalf of the company, estimated that, in addition to stores and supplies, the working capital should include the average amount of the monthly pay rolls plus the average amount of the monthly vouchers, and upon this basis the working capital for 1906 would aggregate $263,270 and for 1910 $296,290. Mr. John I. Beggs, who had for many years been in charge of the property, testified that he had not found it necessary to maintain a working capital fund in view of the fact that reserve funds were being used for such purposes. His estimate of what the working capital should be was $250,000 in addition to the average amount of stores on hand. The Commission calls attention to the fact that in 1910, "the amount of unredeemed tickets not yet lifted by conductors aggregated $81,575," and that "the excess of current assets over current liabilities for the same year aggregated $591,069." However, this latter figure related to the company's combined railway and lighting business, and the Commission expressly notes "that the lighting business required more working capital per dollar of income than the electric railway." The Commission states that "by far the largest portion of working capital is required for the pay roll." At that time employes were paid by the company every fifteen days and the semi-monthly pay roll aggregated $52,566. The Commission then calls attention to the fact that considerable working capital is necessary to cover property extensions." It states that the capital investment for

the 10-year period ending with 1910 had increased $3.74 for each dollar of increase in annual gross earnings, and then remarks:

"Not all of this extension can be covered by utilizing credit reserves and only a portion is properly financed through the issue of additional bonds. This fact is undoubtedly entitled to considerable weight. Much of this new construction will probably relate to service betterments ordered by the commission, which in their nature are not revenue producing."

The Commission states that the amount of stores and supplies on hand for railway purposes on January 1, 1910, was $376,360, which included material necessary for a reasonable amount of new additions." In the summary of its findings the Commission says:

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"The working capital should not exceed the cost of the materials and supplies and the cash ordinarily carried for this purpose, which amounts to about $350,000 and $150,000, respectively. In fact, an amount that is somewhat less than this would probably be sufficient."

The total rate base found by the Commission was $10,300,000, from which it appears that the allowance for working capital, including both materials and supplies and cash, was about 5 per cent of the total rate base.

THE WISCONSIN COMMISSION GETS MORE LIGHT

The development that has taken place in the theories of working capital with respect to street railways will be clearly brought out by a comparison of the Wisconsin Commission's decision in the original Milwaukee fare case just cited, with certain subsequent decisions. In the case of Superior Commercial Club v. Duluth Street Railway Company, decided November 13, 1912, the Commission gave evidence of having seen considerable new light, as will be seen from the following discussion of working capital taken from its opinion (11 W. R. C. Rep. 21):.

"In regard to the matter of working capital, petitioner's brief states that the method of doing business by respondent is on a cash basis and that current expenses can always be paid leaving a balance on hand. Witness for the company admitted that not much working capital was required excepting for construction, and that for this purpose about $25,000 was considered adequate. A study of operating conditions obtaining on street railways discloses that they require considerably less working capital than those utilities selling their product on a monthly basis. Especially is this true when traction companies sell tickets in advance. The cash on hand from such tickets unredeemed is almost sufficient in some cases to supply the necessary funds for working capital. However, it is often to the benefit of the railway, as well as to the public, that funds are always at hand with which advantage can be taken of low current prices for materials, especially in view of the short duration of the season when renewals and betterments can be undertaken. An examination of respondent's reports to the Commission pertaining to materials and supplies, and facts found in other sources, indicate that for conducting the Superior division of company's property an allowance of some $10,000, in addition to about an equal sum for stores and supplies, seems adequate."

In this case the Commission fixed upon $700,000 as the rate base, and it will be seen, therefore, that the $20,000 allowed for materials and supplies and cash working capital was a little less than 3 per cent of the total. It is also to be noted that the Commission in both the Milwaukee case and the Superior case gave favorable consideration to the demand for working capital for extension purposes, although it is a well-established rule of valuation that interest during construction should be allowed as an overhead expense in connection with the construction of the physical property. It follows that if interest during construction is properly chargeable, either in a reproduction cost appraisal, or in the capital account where actual cost is accepted as the basis for determining value, a separate allowance for working capital for construction purposes involves a

duplication of interest charges to the disadvantage of the fare payers.

THE LA CROSSE AND RECENT MILWAUKEE DECISIONS

Six years later, in the matter of the application of the Wisconsin Railway, Light and Power Company for authority to increase its rates in the city of La Crosse, decided September 12, 1918 (21 W. R. C. Rep. 734), the Wisconsin Commission took the position that "practically all allowance for working capital should be excluded, since the revenues derived from the operation of a street railway property are paid in advance." In this case the language used by the Commission is not sufficiently explicit to indicate whether or not the term working capital as here used is intended to include materials and supplies," but apparently these were included in the appraisal of physical property used as a basis for the decision. The Wisconsin Commission's present policy with respect to working capital is even more clearly shown by its treatment of the subject in its most recent decisions in

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the matter of the valuation and rates of the Milwaukee Electric Railway & Light Company, handed down October 30, 1919, and January 30, and June 24, 1920. In each of these three decisions the Commission made an allowance for

materials and supplies, but none for "cash working capital."

THE ILLINOIS COMMISSION'S CASES

Turning to other Commissions, we find that different rules and no rules have been followed in various street railway rate cases decided in recent years. For example the Illinois Public Utilities Commission, in the case of the Chicago, North Shore and Milwaukee Railroad Company, decided September 5, 1917 (P. U. R. 1918A, 431), fixed $100,000 as a proper amount for

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working capital, including amounts invested in materials and supplies," with a total rate base of $5,100,000. The working capital allowance figures out at approximately 2 per cent of the total. It should be stated, however, that in this case the valuation submitted on behalf of the company contained the item of $61,395 of materials and supplies, and that the company made no request for an allowance for cash working capital. On the other hand, the assistant engineer of the Commission also submitted a valuation, based upon an inventory taken at a different time, showing materials and supplies on hand amounting to $136,374, of which a a considerable amount was in stock to be used for additions and betterments. He also allowed the sum of $100,000 for cash working capital, but gave no details as to how he arrived at the amount. It will be seen, therefore, that in this particular case, although the Commission was comparatively conservative in its working capital allowance, it went somewhat beyond the company's own claims. In discussing the matter, the Commission said:

"It is well recognized that a railroad company requires comparatively small working capital. Unlike most other public utility companies, it sells its services for cash in advance, and the receipts are usually available within a few hours after they have been collected. There is thus a constant stream into the vaults of the company of a volume that can be closely predetermined, enabling the corporation to gauge its disbursements to suit the normal expenditures as they arise. However, it is a well-recognized business principle that a concern must constantly have a bank balance sufficiently large to retain its credit unimpaired. The exact amount of such a balance is not capable of accurate determination, and it must be fixed more by the exercise of business judgment than by the use of a mathematical formula."

In the matter of the Rockford City Traction Company, decided July 22, 1918 (P. U. R. 1918F, 840), the Illinois

Commission expressed the opinion that "the sum of $20,000 will sufficiently care for petitioner's needs for cash working capital and necessary materials and supplies." The company's appraisal included an amount of $40,000 for these purposes, but the Commission, commenting upon this claim, said:

"A street railway company receives payment in advance for its services, and the daily collections will ordinarily care for expenditures as they become necessary. So well standardized are the articles entering into a street railway property, that requirements can usually be foretold with considerable accuracy, and can be ordered as needed, thus removing the necessity of keeping them in stock. For these reasons neither a large cash working capital nor a considerable quantity of materials and supplies is required for a street railway property."

In this particular case the Commission showed that the items of "cash," "miscellaneous accounts receivable,' and "materials and supplies," on December 31, 1917, as shown by the company's balance sheet, amounted to $6,828, and it was in consideration of this fact in conjunction with the company's claim for an allowance of $40,000, that the Commission hit upon the figure of $20,000. Evidently there was very little "science" in the decision of this case.

In another street railway case, in the matter of the East St. Louis Railway Company, decided April 10, 1919 (P. U. R. 1919D, 40), the Illinois Commission allowed $25,000 for materials and supplies and apparently allowed an additional $5,000 for cash working capital. Here the company had claimed an allowance of $100,000 for these two items. The Commission did not clearly set forth the basis upon which it reached its conclusion in this

case.

In still another case, in the matter of the Tri-City Railway Company, decided July 9, 1919 (P. U. R. 1919E,

845), the Illinois Commission makes an allowance for working capital. It finds that to care for the company's "needs in the way of materials and supplies used currently in its business,' the sum of $45,000 will be required, and that to provide proper cash working capital the additional sum of $17,000 will be required, making $62,000 in all, in a total rate base of $2,900,000, or a little more than 2 per cent. The company claimed a total of $79,600. In this case the Commission says:

"As heretofore frequently pointed out by this Commission, the cash-working capital needs of a street railway company are usually not so great as are those of other utilities, such as gas, electric or water, for the reason that it receives pay in advance for the services rendered. Further, many needs of the company can usually be anticipated to a considerable extent and the credit of the company be invoked in obtaining the necessary articles."

It will appear from the cases cited that the Illinois Commission, while recognizing theoretically the difference between the working capital demands of a street railway company doing a cash or cash-in-advance business, and the corresponding demands of other utilities where monthly collections after the service is rendered are the rule, still clings to the fallacy that the average amount of materials and supplies and cash on hand carried by a company is in some sort a measure of the working capital which should be included in the rate base. The Commission's arguments tend to show that the materials and supplies, as well as the cash on hand, are supplied by the fare payers; yet the Commission evidently hesitates to draw the logical conclusion that a street railway company, under normal conditions, does not need and is not entitled to an allowance for working capital furnished by the investors, for the very good reason that no such working capital

is in fact furnished by them. It will be remembered that in the first Milwaukee fare case Mr. Beggs, president of the company, admitted that he had not found it necessary to maintain a cash working capital fund.

THE MISSOURI COMMISSION'S CASES

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The Missouri Public Service Commission, in the matter of the Joplin & Pittsburgh Railway Company, decided December 31, 1918 (P. U. R. 1919B, 366), fixed upon $50,000 as 'a fair allowance for system working capital." In arriving at this figure, it considered two methods of determining working capital. The first was by an examination of the balance sheet to find the amount of the "net current assets," which in this case were approximately $50,000. In referring to the second method the Commission said:

"As the primary purpose of working capital is to meet expense, the necessary working capital may be computed as one-twelfth of the annual operating expenses plus stores and supplies."

On this basis the figure arrived at as of December 31, 1917, would have been $54,910. However, the Commission decided to take $50,000 as the proper sum in view of the fact that "the company's business is done principally on a cash basis.' Onetwelfth of the annual operating expenses amounted to $40,710. It would seem evident that in knocking off $4,910 in consideration of the fact that the money required for the monthly expenditure of $40,710 was paid to the company in advance by the car riders, the Commission was not unduly inconsiderate of the interests of the company.

In the matter of the Kansas City, Clay County and St. Joseph Railway Company, decided January 15, 1920 (P. U. R. 1920B, 60), the Missouri Commission made an allowance of $125,731 for working capital, including