city in case of purchase. That value would be comparatively slight, as the stations would have to be abandoned or put in reserve along with the Brooklyn stations, upon the arrival of Catskill water, and unless money should be spent upon them continuously to keep them "fit," they would gradually become valueless even for emergency purposes. In short, their value to the city, if any, would certainly be far less than their value as going properties.

(5) Unauthorized pipe lines in the Third Ward. Under this category are included the so-called Alley, East Alley and Little Neck lines. The first two of these lines are essential to the company so long as it continues to operate Station No. 8 as at present. The Little Neck line will be necessary if Station No. 9 is ever operated again. The East Alley line would not be necessary if Great Neck were to be supplied from Station No. 7, as it was originally. These lines represent a large investment. Our estimate of their present value as going property is about $275,000, and the company's estimate is about $50,000 more. If acquired by the city, these pipe lines would be of little use for many years to come. Of course, if the city acquired the pumping stations and wished to hold them in reserve, these pipe lines would be necessary. But for active use in the distribution of water in the Second and Third Wards they would be of little present value and probably would never fit into the city's system so as to be of value corresponding to their cost. However, they represent long-lived property which will deteriorate very slowly and which could be put to partial use if incorporated in the city system. It may be that the city would be justified in taking over these lines as a concession in return for the company's abandoning its demand that the city purchase as going property the "perishable" elements of its plant which would be of no use as a part of the city's water works.

(6) No common standard of value applicable to the property as used by the company and as it would be used if acquired by the city. At one time our attention was directed to the possibility of taking up the various elements of the property in detail and agreeing on the value of parts of it, leaving the value of the rest, where the department's estimates and those of the company were widest apart, to be settled by the board of estimate, by arbitration or in condemnation proceedings. The difficulties in the way of this program seemed insuperable, because of the inherent disadvantage to the city of breaking up the negotiations into several parts, when the only way to reach a correct net result was by holding the whole transaction together and determining what the city could afford to pay in the aggregate for the property it was to acquire. The company maintained that if the city wanted to buy its property it should take all of it and pay for it at its estimated full value as going and going-to-go property, and in its appraisal the company seems to have included the full "expected" value of the lands for their highest use and the full cost of reproducing the structural property under present conditions, less a slender allowance for depreciation. This basis of arriving at value might be upheld if the company's plant were the sole available source of supply for an isolated city, and if the purchaser were an ordinary one seeking a profitable investment or the city acting under contract or compulsion. But the Second Ward is only a fragment of an immense metropolitan district; the company has no exclusive franchise to supply it the city itself has spent enormous sums to secure from afar an adequate supply of water for the entire metropolitan area; the company is subject to actual competition by one other company having a franchise and by unfranchised concerns which have the undoubted right to bore into the

earth on private property and withdraw as much water as they can use from the same general underground reservoirs from which the Citizens company takes its supplies; the city has trunk mains passing through the Second Ward and the undoubted right to use them to extend the city service into that district; the company's rates to small consumers are higher than the city's rates, and its fire protection service is less adequate. Under these conditions, the city cannot properly concede the company's claims as to the standard of value to be applied in determining a fair purchase price. The city can afford to pay what the property would be worth to it. It is under no legal obligation to pay more, or for that matter to buy at all. The company can afford to sell at a price representing what its property is actually worth to it, due consideration being given to all the circumstances of the case. It knows well that it cannot afford to have the city enter into active competition with it. It should know well that it cannot expect to continue indefinitely to serve the people of the Second Ward at rates in excess of the city rates and without a full practical acknowledgment of its obligation to furnish fire protection according to the city's standards. The city's point of view and that of the company as to the value of the property are absolutely irreconcilable in detail; for what particular items of property are worth depends upon the use to which they are to be put, and that use would in the case of this property, other than the distribution system in the Second Ward, be very different if the city had it from what its use now is or would be if the company kept it. The only reasonable method of negotiation that appears possible under such circumstances is for the city to determine what property it wants and what price it can afford to pay for it under all the circumstances; the company can then determine whether it can accept the price offered for the property sought to be acquired, and if not, whether it is worth while to negotiate for a modification of the city's offer either as to price or as to property to be included. Unless the company appreciates the fact that the development of the Catskill supply by the city has affected the value of its own water plant, there would seem to be little chance of the two parties reaching an agreement for purchase.

(e) Principal points to be considered in fixing a reasonable price for the purchase of the property that would be useful to the city.

Certain major questions should be answered before the city determines what price to offer the company for the portion of the property which the city would be glad to acquire. These will now be considered.

1. What it would cost the city to install an independent distribution system in the Second Ward. The city already has several trunk mains which could be used as the nucleus for a system in this territory. Our engineers estimate that the additional investment necessary to complete such a system according to approved city standards under normal price conditions would be about $1,800,000. This estimate includes an allowance of ten per cent for overhead expenses and some $200,000 for replacing pavements in excess of the estimated actual cost to the company of replacing the pavements which were originally laid in advance of the water pipes now in the ground. The new system would be adequate to render complete fire protection and domestic and business service to the extent of present needs, and would be of sufficient capacity to meet the prospective needs of the next ten years without reinforcement. The only additional capital expenditures required within such period would be for extensions in streets not now built up.

2. What property useful for water purposes the city would get by pur

chasing the company's plant and what its value would be in comparison with a new city-built system. If the city took the company's entire physical property, the only portions that would be useful to the city for water purposes are the following:

Distribution system in the Second Ward, full use.

Trunk mains in the Third Ward, partial or emergency use.

Water lands, wells, buildings, mechanical equipment, etc., at Station No. 3 (Flushing Creek) and Station No. 8 (Alley Creek), reserve or emergency use.

Maps, office records, and pipe supplies, full use.

We have already estimated the present value of the distribution system in the Second Ward to be $984,000, without counting the improvements and extensions required by the order of February 4, 1916, to be completed during the present season, which when done will add about $106,000 to the present value of the system. Using round figures we may assume that the value of the distribution system as found for rate purposes would hold good for purchase purposes. This would be approximately $1,090,000. If the cost of replacing the pavements not actually disturbed when the company's mains were laid, but which would have to be disturbed in the construction of a duplicate system, is included in the value for purchase, we get a total value of $1,290,000, exclusive of small extensions made subsequent to May 1, 1916.

Thus the system acquired from the company within the limits of the Second Ward would be worth at least $500,000 less than the duplicate system which the city could build for $1,800,000.

The value to the city of the trunk mains in the Third Ward and of the water lands, wells, buildings and mechanical equipment at Stations No. 3 and No. 8 is problematical.

The value of the maps and office records might be $5,000 or $10,000. The value of the pipe supplies would depend upon the amounts on hand at the time of purchase, and might be as much as $10,000.

The city would acquire in addition to the physical property the company's business. Obviously, a system with over 16,500 connections in active service is worth considerably more than the same system with only half as many connections or with none at all. What a connection is worth depends on many things, including the amount of water consumed through the connection, the rates and conditions that apply, the cost of rendering the service and the abundance of the available supply. A connection is worth more at the company's rates than it would be at the city's present rates. If the city has a surplus of Catskill water, all paid for and going to waste unless sold, a connection is worth more to it than it would be if the water supply was scarce and every additional gallon sold meant an increased cost for pumping or a curtailment of service elsewhere. This value is identical with "going value" in purchase cases, which is quite a different thing from "going value" as measured by development expenses not recouped through excessive profits. In my judgment, under the conditions existing in the Second Ward, a fair estimate of this going value as applied to the distribution system alone would be $10 per tap or a total of about $165,000. This is on the assumption that the cost of paving is allowed in the value of the mains. If it were not, the going value would be greater, as it would include the value of established location under the pavements. The better way in determining the value to the city of the property acquired would be to allow for pavements and going value as separate items. This would bring the value of the distribution system and connections in the Second Ward up to about $1,455,000.

It should be clearly understood, however, that any allowance for paving or going value in the purchase price will be offset by any payments for partially useful property in excess of the actual value of such property to the city. With the connections and pavements allowed, a new city-built system, at a cost of $1,800,000, would be worth about $345,000 more than the system acquired from the company within the Second Ward. Whatever amount may be paid in excess of $1,475,000 (including $20,000 for maps, records and pipe supplies) for the entire property must be justified by the value of the partially useful property above referred to. If we allow for the Third Ward pipe lines and the structural property at Station No. 8 fifty per cent of their present value as parts of a going concern, and for the structural property at Station No. 3 twenty-five per cent of such value, these partially useful structures might add $275,000 to the value, and the water lands tributary to Stations No. 3 and No. 8 about $150,000 more. This would bring the value to the city for water purposes of the property acquired up to $1,900,000.

3. What price would be just to the company in consideration of its actual investment, its previous profits and the losses it would incur as a result of the city's taking its water business and only such portion of its property as would continue to be useful for water purposes. To satisfy the demands of justice in this case, it is not necessary for the city to pay the company a price that will enable it to take out of the water business all the profits it may have hoped to realize. Under the circumstances, the offer of the city to buy the property at all is primarily the result of a desire to be just. The company has had a profitable past, but has now reached a period where on account of a necessary reduction of rates and increased investment as a probable alternative to active city competition, and on account of the early arrival of Catskill water on Long Island, its future as a water works corporation is by no means as bright as its past. The company's property would be practically destroyed as a water works investment if the city took advantage of its legal rights and satisfied the demands of the citizens of the Second Ward for city water at city rates and adequate fire protection, by installing an independent system of its own there. Moreover, the company's history and profits are in many respects such as to invite the city to pursue its own interest regardless of the effect upon the value of the company's property. Still, the advantages accruing to a city from being just, and even liberal, to a public service corporation are so great that the department might even be willing to negotiate for the purchase of the company's entire property, if it could do so on the basis of the actual original investment, less a fair allowance for accrued depreciation. There is no disposition on my part to cause the company to suffer loss as a result of its having rendered a necessary public service during a period of more than twenty years. But thus far the company has refused to negotiate on the basis of its actual investment in water works property and has even refused to disclose the amount of this investment. It insists on "taking its profits," regardless of whether there. are any except by grace of a compliant municipal policy. In a previous. portion of this report I reached the conclusion that $2,850,000 probably represents an outside estimate of the company's aggregate bona fide investment in lands and structures, of which about $700,000 came out of surplus earnings over and above liberal dividends. The entire expense of the propertyoperation, maintenance, taxes, interest on investment-has been borne by the consumers. Therefore, if the company's future as a water works corporation has begun to be uncertain and if the city could build its own plant and extend its own service into the Second Ward for less, the desire to be

just to the company does not require that the city should pay for the entire. property more than its legitimate cost to the company. But the lands alone, which the city does not need for water purposes, are valued by the company at upwards of $2,600,000.1 If they are really worth this enormous sum as real estate, the company could abandon its entire distribution system, its buildings and mechanical equipment, its wells, suction lines, flumes, etc., without losing anything at all on its original investment. The people of New York City, hard pressed to bear the burdens of necessary debt and taxation, certainly cannot be called upon in the name of justice to acquire the company's property at a price that would enable its stockholders to realize millions of dollars of profit from the water business while the property acquired by the city would in large part be a dead weight on the taxpayers. The city ought not to complain of legitimate profits made by a public service corporation in the course of its business if it serves the public well at reasonable rates, but there is no reason why the city by its own act and at an enormous loss to itself should translate into cash theoretical values which circumstances have rendered largely fictitious. In this connection we should not forget that for more than ten years the company has been collecting rates from 20 to 25 per cent in excess of the rates which, in return for the extension of its hydrant rental contract, it publicly promised not to raise. The financial history of this company shows clearly that a desire to be just to the company cannot properly raise the price to be paid for its property very much above what that property would be worth to the city.

4. How much the city already has invested in water plant in or for the Second Ward, and how much more it could afford to invest and still have its investment self-sustaining at the rates which it would be compelled to charge. As already stated, the city's actual investment in trunk mains. within the Second Ward which would be useful for local service in that district is about $725,000. An additional investment of $280,000 in Catskill mains in Brooklyn is attributable to the Queens service. Upon the basis of the relative amounts of water consumed, this $1,005,000 investment would be apportioned among the First, Second and Third Wards, if they were all dependent upon the city service, by the assignment of about $307,000 to the First Ward, $438,000 to the Second, and $260,000 to the Third. This takes no account of the Catskill investment other than the portion included in the distributing trunk mains from the terminus of the city tunnel at Fort Greene Park, nor of the Brooklyn investment other than the trunk mains within the boundaries of the Second Ward. It may, perhaps, be regarded as proper not to charge any portion of these larger investments, which have already been made for more general service, to the Second Ward of Queens at the present time. Perhaps the future growth of that ward should be depended upon to carry the ward's share of these great fundamental investments in the city's water supply. But at the very least, the $438,000 above referred to should be taken into consideration in determining how much the city could afford to pay for the Citizens company's plant and still have the total investment self-sustaining at the present stage of the ward's development. It is estimated that the city's revenues from the Second Ward service at the regular city frontage rates for residential premises and the regular city meter

1

1In Table 23, ante, p. 228, the aggregate value of the company's lands as shown by the Hill appraisal is $2.727.311. This figure is reached by adding to the "base cost," which Mr. Hill gave as $2,279,027, an allowance for overhead expenses equal to 19.67 per cent., which was the average allowed by him for the entire physical property. I subsequently learned that his allowance for overhead on the land taken by itself was about 15 per cent., and that his actual appraisal of the land (including overhead) was $2,621,343.