The Detroit times., 1910-01-17
FRANCHISE VALUE.
PART OF CAPITAL
Should Be Included in Street Rail.
ways Investment, Says City So
licitor Baker, Of Cleveland.

When the committee OF fifty brough.
In its report on cost OF service for
street railways In Detroit. there was
much criticism because the estimated
value OF the unexpired franchises had
been computed as part of the can.
italisation on which interest must BIO
allowed.
It was argued that. since the fran.
chises had been free gifts or the peo-
pie, they could not fairly be counted
now as an asset Secretary Paul c.
Renaud, OF the committee OF Atty.
called in expert advice on the matter
by writing to Newton ID. Baker city
solicitor OF Cleveland. and iae man
who has been Tom l.. Johnsons prin.
cipal lieutenant In the decade OF bat
tie between the city government and
the street railways OF that city.
Bakers reply is interesting as show
ing the result OF years OF study OF the
franchise question. IL IL as follows:
1t seems To me that the question
whether or not franchise values arc
TO be included In the amount OF In.
vestment upon which the ID. u. II.
should be allowed six per cent return
is comparatively simple. The making
OF such grant as We have had under
advisement in Cleveland. and as you
are doubtless about To make In De.
troit. implies a fresh start In the rel.
lions between the city and the com.
pany. In making this start extreme
views as to the rights Of the company
and the rights OF the city are possible
but a moderate and just view involves
the entertainment OF the value or the
property OF the company. fixing that
value so that II cannot be increased
without the consent OF the city. and
only for extensions and betterments
In the property. and then assuring a
stipulated rate of return on the secur-
ity to the capital at the end OF the
grant.
ITO the extent that the company
now has unexpired franchises at q
rate OF fare higher than would be
necessary to pay operating expenses
and interest, the privilege thus
granted TO the company. Is not only
valuable privilege. but one which
must be assumed to have been granted
In compensation for some burden as
sumed by the company. The paving
obligations. for instance. which the
company assumed called for an extep-
siye capital expenditure which must
be amortized at the end OF the grant.
Now the amortization fund must
come from the net earnings above op.
Grating expenses. taxes and Interest.
and therefore from franchise value.
Development expenses, the costs of
experimentation. contingencies In con-
struction, casualties, financing and
such other general charges as must
be met by a company constructing
property do not become part OF tie
permanent value OF the property. but
rather are In the nature OF initial ex.
pense. They. too. for the mos. part.
IL not entirely, should be amortized
at the end OF the grant. SO that. the
franchise value granted by city
must in theory be deemed the fund
provided by the city for the amortiza-
ton of these charges. II this view ID
sound II follows. quite naturally ina,
whatever unexpired franchise vaiue
the company now has should be al
lowed TO II In undertaking to estimate
the present value Of It's property.
"As have said. this Is, confessed
" a moderate view and does not state
the public side as strongly as II Is pos
sible TO state: for II the pubic pre-
ferred TO wait until the expiration OF
grant II would no doubt be a9ie 10
force q settlement upon basis tnat
would not recognize the assembled
value of the property, but wouid oe
Just enough above its scrap value 10
dissuade the company from scrappihs
its plant. In my views. this would De
a harsh course for the city TO assume
Public service companies. II IS 'rue
extort the last dollar from cities. ano
when they undertake to a1ye their
property valued thew multiply over
head charges by the application OF varr
Gus assumed percentages until tney
have swollen the real value or tneiF
property beyond all recognition. ou,
such attempted injustice by the com
panies ought not to lead cities TO re-
, taliate, and |. therefore. incline 10
liberal policy. recognizing the pubic
need OF continued service. and In
sense forgetting and forgivins past
misconduct on the part OF SUCH com
panies. so that the new start can pe
made with a general good feeling ana
an assurance on the part OF the pubnc
that they have been more than JUST