until all such advances have been repaid and the reserve fund restored to the amount of at least $700,000 with all claims against it liquidated. As a matter of fact, however, in the actual working out of the service-at-cost plan, during 1918 and the first part of 1919, expenses grew so rapidly that revenues could not be made to overtake them, with the result that on June 30, 1919, when the first fiscal year under public operation came to an end, the reserve fund had been completely wiped out and an additional deficiency of $3,980,151 had been accumulated, to be made up temporarily by the state. It is still too early to forecast with certainty the ultimate financial outcome under the present 10-cent fare, but for the present, and possibly for the future, the original $1,000,000 put into the reserve fund is being used for the purpose of helping to make up deficits and not for what might be termed the legitimate purposes of current working capital. Obviously, it would be inadmissable in the case of a fully developed street railway system that has been in operation for a great many years permanently to capitalize current deficits. In the discussion of working capital, it is evident that a clear distinction should be made between moneys required for prepayments or for the payment of current expenses in advance of the collection of current revenues, and moneys that are used to make up deficiencies when the revenues derived from the sale of the service are insufficient to meet the cost of the service. If capital is being used to enable a street railway company to keep up appearances while it is running in the hole, it is important from every point of view that this fact should be known and the condition be corrected.

The second Massachusetts serviceat-cost act of 1918 related to the Bay

State Street Railway system, since reorganized as the Eastern Massachusetts Street Railway Company. This act also provides for the establishment of a reserve fund out of the proceeds of the sale of securities, the par value of which is recognized as a part of the capital value upon which a fixed rate of return is to be paid under the service-at-cost arrangement. The plan is based upon the assumption that the full cost of the service can be obtained from the fares, not merely in the long run but immediately, and no provision is made for making up general deficiencies by taxation, although the act authorizes any individual city or town to contribute a certain amount through taxes "for the purpose of preventing increases in fares or of reducing fares or of avoiding discontinuance or reduction of service.' Thus far the Bay State system has not been able to earn the full cost of service, even under the 10-cent fare, and the $500,000 reserve fund has evidently been wiped out as completely and with much less hope of its restoration than in the case of the reserve fund of the Boston Elevated Railway. It is doubtful whether moneys advanced for the purposes of these socalled "reserve" funds, if used to make up deficits and not subsequently restored from earnings, can properly be designated as working capital. The valuation wags might perhaps be able to bring them under some such term as "anticipated development costs."

WORKING CApital in the Bay State CASE

In the case of the Bay State company, we have the advantage of a previous valuation for rate purposes made by the Massachusetts Public Service Commission in 1916, in which the sum of $1,141,375 was allowed for

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working capital in a total of $39,104,340 fixed as the rate base. Here the engineers for the company had claimed an allowance of $1,424,097 for working capital, which they defined as including cash on hand and money invested in stores and supplies." The figure used by them was based upon the average of these items during the preceding five years. The municipalities and other remonstrants in this case strongly urged that no such amount as claimed was needed or ought to be allowed for working capital. Their expert, Mr. Alton D. Adams, said (Mass. P. S. C. Rep. 1917, Vol. I, p. 26):

"As I understand it, working capital is money that the stockholders or creditors of a concern

must put into it and keep in the business in order

to do the business, and I don't see that a concern like the street railway business that collects its income with much greater frequency than it pays its bills, collecting it daily and hourly, requires to have a substantial sum of working capital, and to my mind to allow a substantial amount of working capital in such a concern is merely to allow the company a return on a part of its operating expenses. The company gets from the public an income. A part of that income is for the express purpose of meeting the operating expenses and those operating expenses and the meeting of them is what working capital would be used for if it were used at all. And yet we find that part of the income which the public supplies is on hand ready to meet these operating expenses because it is paid to the company in the main before the expenses are incurred."

The company, on the other hand, claimed that it was necessary to have on hand continually "materials and supplies and other working assets.' While admitting that less cash working capital was required than in the case of a gas or electric light company, the company denied that it was possible to depend entirely upon annual receipts. In its brief the company made the following arguments:

"It should be borne in mind that during certain times the balances must necessarily run up anticipating interest payment and the company must be prepared to pay its interest on the inter

est day without embarrassment. Further, during certain seasons of the year, large expenditures are being incurred for construction and reconstruction work. The amount carried for con

struction purposes should be taken care of by an allowance for interest during construction, but the company should have on hand sufficient capital to finance temporarily the non-betterment part of its work. There are also many times when exceptional expenditures must be made. Take for instance, the expenditures incident to this present case."

In commenting upon the arguments of the respective parties the Massachusetts Commission said that the

question was "not entirely open" for the reason that its predecessor, the Board of Railroad Commissioners, in a proceeding under an act of 1909, had allowed two of the predecessor companies of the Bay State system "to issue, all told, 9,945 shares of preferred stock at 115 to supply $1,141,375 for working capital." For this reason the Commission evidently felt itself debarred from passing on the merits of the controversy over working capital, and allowed the old amount to stand in the new valuation.

In the 1918 general act providing for service-at-cost by street railway companies, the Massachusetts legislature made it a condition of the acceptance of the act by any company that it should have provided a reserve fund of not less than 6 per cent nor more than 12 per cent of the gross earnings of the preceding year, but authorized the companies to make provision for the fund by the issuance of securities. This fund, like those in the Boston Elevated and Bay State cases, is to be used primarily for the purpose of making up deficiencies and to serve as a semi-automatic regulator of the fares. CINCINNATI'S WORKING CAPITAL TAKEN FROM EARNINGS

Another notable service-at-cost franchise is the one negotiated between the city of Cincinnati and the Cin

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cinnati Traction Company in August, 1918. This contract stipulates that the company 'shall accrue from gross receipts a working capital fund in amount adequate for the usual purposes of such funds." This fund is to be accumulated at such times and in such amounts as shall be approved by the director of street railroads, a city official. The payments into this fund come after the payment of operating expenses, return upon capital and amortization of the company's "reducible debt." Thus it appears that under the Cincinnati plan, working capital is to be provided by the car riders, not as a part of the current cost of service, but as a surplus contributed in excess of the cost of service. In other words, the car riders are to supply the capital by the payment of higher fares than would otherwise be necessary, but are not to be required to pay the

company a return upon this working capital which they themselves supply.

The Cincinnati plan also provides for a "reserve fund" which is to be used for the same purposes for which the interest fund in Cleveland and the reserve funds in Massachusetts are used. However, this fund is to be accumulated only in part by the sale of securities. The normal sum for the reserve fund is fixed at $400,000, of which $250,000 is to be furnished and capitalized by the company, the balance being built up out of the public's share of the surplus gross receipts. In case the property of the company acquired by the city under the option provided in the contract, the purchase price is to be reduced by the amounts in the working capital fund and the reserve fund which shall have been accumulated out of earnings.

is

It is not necessary to follow further the special treatment of working capital in connection with the development

of the service-at-cost idea. It is apparent that as a rule stores or materials and supplies on hand are treated either as a part of the physical property going to make up the principal item in capital value, or else are provided for by a special allowance for working capital. It is also apparent that as a rule, the need for a cash fund of some kind or other, to be used as a reserve for deficiencies and as a semi-automatic rate regulator, is assumed. It would be interesting to examine in detail the balance sheets, and the record of cash receipts and cash expenditures, of each of these companies where the serviceat-cost plan has been adopted, as in this way we might be able to prove or disprove the practical need, and throw light upon the theoretical necessity, for the special funds which have been set up and recognized as a part of the value upon which the car riders are bound to pay a fair return.

ANALYSIS OF CLEVELAND RAILWAY BALANCE SHEET

In the case of the Cleveland Railway, the balance sheet for June 30, 1919, set up by the accountants for the city street railroad commissioner, shows the cash on hand to be $372,516, the interest fund before the deduction of accrued liabilities to be $1,920,058, and the company's investments in liberty bonds and other securities outside of the interest fund to be $1,227,967, making a total of $3,520,541 of cash and outside investments for which cash has been paid. The balance sheet also shows that the amount of capital stock and bonds outstanding, plus the premium on capital stock, is $34,296,905, while the road and equipment account, plus net suspense accounts of $688,487, is only $32,120,099, indicating that $2,176,846 is available from the proceeds of the sale of stock and bonds to account for

the cash and investment items shown, leaving $1,343,695 of cash investments presumably derived from revenues. This figure is increased to $2,221,947 by the balance sheet items for materials and supplies on hand which show an aggregate net amount of $878,252. It would appear from this balance sheet that the amount of cash derived from the sale of capital stock and bonds and actually available for the purposes of working capital in the case of the Cleveland Railway on June 30, 1919, was $2,176,846. It is obvious that this enormous sum of money was wholly unnecessary for operating purposes. Furthermore, this is proven by the fact that we find investments in United States Liberty bonds, certificates of indebtedness and war savings stamps and in Cleveland Railway bonds and certain other minor securities, amounting in the aggregate to $2,727,475. In fact these investments are $550,629 in excess of the amount furnished by the investors and available for working capital.

An examination of other items on the Cleveland Railway balance sheet throws further light upon the subject. The company's expenditures attributable to service not yet rendered or, in other words, its prepayments or advance payments, are as follows:

"Materials and supplies," net... "Prepaid accounts'

"Advance deposits"

"Work

orders".

Total..

$878,251.79 180,542.18 3,781.40

45,676.76

$1,108,252.13

These figures indicate that on June 30, 1919, the Cleveland Railway Company should have had a cash balance of $939,033 derived from the car riders, and that all disbursements actually made prior to that date on account of the cost of service rendered or to be rendered had been made out of revenues derived from the car riders.

In this connection it should be stated that the detailed balance sheet which we have been analyzing strikes a balance between permanent liabilities consisting of capital stock and bonds, and permanent assets consisting of "road and equipment" and "investments other than the interest fund." This shows a remainder of $1,637,326 which is described as "current working capital." The investments referred to amount to $1,227,967. They are entirely extraneous to the railway plant and facilities devoted to public use. Upon the entire amount of the outstanding capital stock and bonds, the company was paying from the interest fund the return specified in the serviceat-cost franchise. It appears, therefore, that the car riders of Cleveland were paying interest upon some $2,865,293 of "capital value" not invested in permanent railway assets. In effect, stock had been sold in advance of the need of capital for railway extensions and improvements. This stock, how