stores and supplies. In an earlier proceeding affecting the same property, the Commission, by an order dated December 5, 1914, had allowed only $30,000 for working capital. In its opinion the Commission states that it "was fully warranted in fixing the allowance for working capital at $30,000 upon the application and evidence before it at the time of the former report," but that "actual experience has since demonstrated that an additional allowance should be made in the sum of $95,731." The total allowance was determined upon the basis of the testimony of the Commission's chief engineer and the railway company's auditor, who based their estimate of working capital "on the average monthly differences between current assets and current liabilities, plus stores and supplies, plus cash on hand and cash in the bank." A monthly average for a period of eighteen months was taken. "This method of ascertaining the adequate amount of working capital," says the Commission, "is commonly used by valuation engineers and authorities." The Commission does not explain just what is included in "current assets" and in "current liabilities,' but the inference is that these assets were greater than these liabilities and that the assets referred to did not include cash and stores and supplies which ordinarily are considered as a part of current assets. In any case, the Missouri Commission, like the Illinois Commission, is apparently laboring under the delusion that the amount of cash on hand measures a part of the allowance for working capital to be included in the rate base. Perhaps it should be added that in the case last cited the Commission was dealing with an electric interurban railway, but I find nothing in the opinion to indicate the relative im

THE UTAH COMMISSION SPEAKS

In the matter of the Utah Light and Traction Company decided January 15, 1920 (P. U. R. 1920B, 262), the Utah Public Utilities Commission made an allowance of $199,458 for working capital, in a total rate base of $8,468,279, or about 2 per cent. This was the exact amount claimed by the company. In discussing the matter, the Commission said:

"The working capital of a utility should represent a sum ample, under ordinary circumstances, to carry on the business. There should be sufficient funds available to provide for prompt payment of operating expenses and maintain the credit of the company. Some Commissions have said this should in general be a sum sufficient to bridge the gap between outlay and reimbursement, it should include such stock, materials and supplies as is necessary to enable the company to make repairs and minor replacements chargeable to operation without unreasonable delay or expense, and to meet ordinary operating contingencies and emergencies.

"The stock of repair and renewal parts and supplies that it is necessary to have on hand varies from time to time, depending upon current demands and upon facilities of the company for replenishing the stock.

"In considering a utility of this nature, it must be borne in mind that the income of the company consists of daily cash receipts. For the sale of tickets, cash is received by the company in advance of service. For the reason that cash is received daily, a comparatively small working capital only is necessary."

Thus the Utah Commission, like others that have been quoted, recognizes that the amount of working capital required by a street railway company doing a cash business is less than the amount required by other utilities doing a credit business. But like most of the others, this Commission apparently fails to see that the reve

nues collected in cash from day to day, and sometimes partly in advance, on the average represent the entire amount which the company will ever get from any source in liquidation of the cost of service rendered from day to day, and that, therefore, the use of capital by a going concern to pay operating expenses is inadmissible from the point of view of sound financial policy. Particular attention should be called to that portion of the definition of working capital cited by the Utah Commission where it is said that in general this item should be “a sum sufficient to bridge the gap between outlay and reimbursement." In most of the specific cases to which I have referred, including this Utah case, the commissions treat the matter as if the definition were reversed and the item were to include the sum sufficient to bridge the gap between revenues received and moneys paid out, for it is only upon this basis that the Commissions could justify themselves in accepting cash on hand as in any respect a measure of working capital contributed by the investors.

THE DISTRICT OF COLUMBIA COM

MISSION'S THEORIES

In the matter of the valuation of the Washington Railway and Electric Company and its subsidiaries, decided September 4, 1919 (D. C. P. U. C. Order No. 339; see P. U. R. 1919F, 938), the Public Utilities Commission of the District of Columbia made an allowance of $235,000 for materials and supplies as of June 30, 1919, and $295,000 for cash working capital as of the same date, making a total working capital allowance of $530,000 in a rate base of $16,106,368. As will be seen, this figures out a little more than 3 per cent. In this case the Commission's findings were based in part upon a physical valuation made by C. L.

Pillsbury as of July 1, 1914. Mr. Pillsbury's valuation had been compared with the valuation submitted by the company's engineers, the J. G. White Engineering Corporation, and as a result an agreement had been entered into between the Commission and the company as to the cost of reproduction on the major portion of the property involved. By this agreement materials and supplies were put in at $187,863, but on account of the subsequent increase in the company's business and the advance in prices, the Commission allowed as the fair value for materials and supplies as of June 30, 1919, $235,000. To this was added $295,000 for cash working capital, representing the amount used in the engineering reports based upon onetwelfth of the operating expenses, with taxes omitted. In finding the cash working capital in the original appraisal as of July 1, 1914, the Com-. mission adopted Mr. Pillsbury's figures, which were derived by taking one-twelfth of the annual operating expenses and real property taxes and then adding small amounts for property extensions. In this connection, the Commission said that it had reached its conclusions, "having taken into account the fact that in the instant cases, the street railway fares were either all paid at the time of the ride, or in advance through the purchase of tickets, and the fact that the properties were not then growing to any great degree."

In the matter of the valuation of the Capital Traction Company decided by the District of Columbia Commission on the same date, September 4, 1919 (P. U. R. 1919F, 779), an allowance of $175,000 for materials and supplies and of $200,000 for cash working capital, in a total rate base of $14,270,495, was made. These results were reached by the same processes as

in the Washington Railway and Electric case.

It is noteworthy, however, that in the Capital Traction case, the Commission referred to a claim made by the company to the effect that the cash working capital as of June 1, 1914, was $275,000, basing the claim upon the fact that the Commission's accountant, in his study of historical costs, found this amount as representing the excess of current assets over current liabilities averaged over a period of years. This claim was rejected by the Commission in favor of Mr. Pillsbury's method by which cash working capital was figured as we have already seen, comprising an average month's operating expenses and real property taxes plus a small amount for extensions.

DEAN COOLEY'S VALUATION IN THE JERSEY CASE

I shall now take up the analysis of the subject of working capital in connection with the valuation of the property of the Public Service Railway Company of New Jersey, in proceedings before the Board of Public Utility Commissioners of that state, first instituted in 1918. The Public Service Railway system is one of the biggest and most important street railway systems of the country, comprising as it does about 800 miles of track and rendering local transportation service in no less than one hundred and forty-one municipalities. From the point of view of street railway revenues, the group of communities served by the Public Service Railway Company constitute the fifth most important transportation area in the United States, being surpassed only by the New York City, Chicago, Philadelphia and Boston areas. A physical valuation of the railway property, made by Prof. Mortimer E. Cooley, Dean of the

Colleges of Engineering and Architecture of the University of Michigan, President of the American Society of Mechanical Engineers, and one of the great names in the valuation field, was introduced in evidence on behalf of the company. A summary of Dean Cooley's appraisal shows that after having made his inventory, fixed his unit prices, established the base cost, and added overheads, he included as the final element in his "appraisal of physical properties" two items for working capital, one of $693,403 for "materials and supplies" and the other of $929,404 for what has been frequently referred to in this study as "cash working capital." The two items together, amounting to $1,622,807, represent about 2 per cent of the total reproduction cost new of the physical properties, as appraised by him. In explanation of the basis for these allowances, Dean Cooley said:

"Experience has shown that in general these items are likely to be more nearly correct if taken directly from the company's books. That is particularly true if, as in this case, the books are well kept, and frequent inventories are made of materials and supplies on hand. The amount used in this appraisal was taken from the following analysis furnished by the company."

The item of materials and supplies was made up of the average monthly balance in the materials and supplies account over a period of five years, with the addition of materials in shops and car houses shown by inventory at the time of the appraisal and certain minor items such as badges, buttons, rule books, etc., in the hands of the company's employes. The item of cash working capital was made up by taking an average for twelve months of the four items "receipts," "other current assets," 'accounts receivable" and "prepayments" and deducting therefrom the "accounts payable."

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CASH LYING IDLE IN THE BANK The Cooley appraisal was introduced as evidence of the value of the property for rate purposes in a proceeding before the Utilities Board in 1919. In explanation of how he got the item of cash working capital, Dean Cooley, upon cross-examination, said:

"We went to the books of the company and took an average over a certain period of time of the actual money that they held idle in order to conduct the business of the company, held idle in the sense it brought no interest, they got no return on it. Every business requires a certain amount of money to take care of its daily business and that money is in a checking account, upon which no interest is received. It is necessary to the conduct of the business, and it should have its interest and, therefore, it is put into the capital. If you did not put it into capital it would be a contribution."

In answer to the question as to where this money came from, and as to whether it came out of the rates, he replied:

"Not when it starts. This money goes into capital; it is before you get started; it is the money that is held permanently. It is not built up out of earnings."

Asked whether he meant that the item of $929,403 had actually been held from the beginning, permanently, for working capital purposes, he replied:

"No, not at all. I mean, that such part of this $929,000 which was the amount in 1915,

in proportion to the magnitude of the companies, has been held idle since the companies were organized. It has grown to that point, and we reproduce this property in 1915 and this is the amount of capital that was necessary to conduct the business of this company when we made the appraisal in 1915, whatever may have been its amount in the past.

This is a reproduction of the bare bones of the property in 1915, and it takes up to the point of starting but it has not started. Now, you cannot start it without having money, working capital, with which to pay the bills that come in from day to day."

Asked whether the cash referred to was "kept specifically as working capital, or just a sum of money that happens to be on hand," he replied:

"It was the sum of money that was on hand at the various banks with which this company does business, lying idle."

Asked just how this money was used for working capital, he said:

"Wages and the bills, the payment of accounts that the company are required to pay, all those different things that you have to have working capital for. There are thousands of different things that they have to pay out their money for, and if you did not have that money available, they would have to go to the bank and borrow it, and if they went to the bank to borrow it, they would have to pay interest on it. We put it in here because of that fact. I think the important point is that this is money, idle money that should bear a return to someone, and if you went to the bank to borrow it, you would have to pay a return. Let me say again: if you are starting this company after you have got it built, you have got to have money to pay your bills. You have not earned a dollar. You have got this property built, you have not turned a wheel, you dare not turn a wheel until you have the necessary stores and supplies to make replacements, do the things necessary to keep the property going. You have got to spend money before you turn a wheel. You have got to have money to pay wages before you turn a wheel, but at the moment you begin to turn the wheels you have not earned a cent. All that money you have got there whether it is the amount I have stated or not, just for the completed property, all that money, or what corresponds to the $929,000 plus, and the $691,000 of stores and supplies, the proper part of that money has got to be on hand when you begin to turn the wheels of this property, and you have got to borrow it, and if you borrow it, you are going to pay interest on it. Now you have not earned a dollar."

In connection with this testimony, attention should be called to the fact that the principal item in working capital, as indicated by Dean Cooley's appraisal report in this case, was not

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66 cash on hand" but 'one month's receipts," with nothing to indicate whether they were on hand or had been disbursed.

DR. JACKSON'S THEORIES Subsequent to Dean Cooley's testimony Dr. Dugald C. Jackson, Professor of Electrical Engineering in the

Massachusetts Institute of Technology and for many years head of the engineering partnership, D. C. and Wm. B. Jackson, was called as a witness for the Utilities Board. On crossexamination he was asked by counsel for the municipalities to explain generally his view of working capital and his method of treating it. In the course of his reply, Dr. Jackson said:

"Some utilities get paid in advance for their service, some get paid afterward, some get paid very promptly after they render the service, very promptly after the end of the month, and some don't get paid for sixty days after the end of the month, and consequently, one has to consider the situation.

"In the case of a street railway, generally speaking, it gets paid more or less in advance. A man pays his fare when he gets on the car, which is distinctly in advance, or he may pay it when he gets off the car, which is pretty near the same thing. In other words it is a cash transaction. You don't have to wait for thirty days or sixty days to get your money; you make a transaction with the public and he pays the cash. You give him Service and he pays for it right then and there. The cash I should say for a street railway, that cash which is the minimum, might be the monthly revenue, or a minimum, say, of the monthly expenses; they ought to have an average of that much cash at the minimum. Two months' expenses would be

reasonable I should think. You could put it in between those two for questions of difference of opinion. In my opinion it pays; the people riding ought to be willing to see a company have ample cash on hand.”

Here again, running through Dr. Jackson's testimony, we find the same fallacies that run through so many commission decisions. He assumes that the cash required by a street railway company with which to purchase materials and to meet the weekly or monthly pay rolls is working capital furnished by the investors, and a part of the rate base. He admits that a street railway company is paid for the service it renders at the time of rendering it, if not in advance, but he does not draw the conclusion from this fact that is inevitable when it is

coupled with the further fact that the major portion of a street railway company's expenditures are deferred until a considerable time after the service is rendered and the revenues collected. Clearly, everything depends, first, upon a correct definition of working capital and, second, upon a correct analysis of the facts in each particular case where a public utility's property is being valued for rate purposes. THE MONEY SUPPLIED BY INVESTORS FOR DISBURSEMENTS IN ADVANCE OF COLLECTIONS

In the New Jersey case, as a witness for the municipalities, I defined working capital as follows:

"It is the money which the investors in a public utility must put in, in addition to the money represented by fixed capital, in order to enable the utility to pay its expenses in connection with the service rendered, to the extent that it is compelled to pay such expenses in advance of the collection of its revenues from the users of the service."

I pointed out that when a company is starting off new it unquestionably has to have some materials and supplies on hand and that in part they must be paid for in advance; also that there are likely to be certain other items paid in advance, but that as time goes on and the enterprise becomes a fully established going concern, the revenues derived from the service will accumulate on account of the large amount of deferred payments so that the working capital originally furnished by the investors, or borrowed temporarily from the banks, can be paid back out of current revenue, and a handsome balance be maintained sufficient to meet all the needs of the company as they arise.

As I defined it, working capital would be limited to money furnished by the investors. Undoubtedly, this should include any earnings of the