The Detroit times., 1910-01-15
VALUE
PART OF CAPITAL
Should Be Included in Street Rail.
ways Investment, Says City So
licitor Baker, of Cleveland.

When the committee of fifty brought
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 a part of the cap
itaiization on which interest must be
allowed.
1t was argued that. since the fran
chises had been free gifts of the peo-
pie, they could not fairly be counted
now as an asset. Secretary Paul G..
Renaud, of the committee of fifty,
called in expert advice on the matter
by writing to Newton ID. Baker, city
solicitor OF Cleveland. and the man
who has been Tom l.. Johnson's 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. 1t Is 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. r.
should be allowed six per cent return
is comparatively simple. The making
Of such q grant as we have had under
advisement In Cleveland. and as you
are doubtless about to make in De-
troit. implies fresh start in the rel
tions between the city and the CON-
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 ascertainment of the value of 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 a
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 exteD-
sive capital expenditure which must
be amortized at the end Of the grant.
"Now the amortization fund must
come from the net earnings above OPP
Grating expenses, taxes and interest,
and therefore from franchise value.
Development expenses. the costs or
experimentation, contingencies In con-
struction, casualties, financing and
such other general charges as must
be met by a company constructing a
property do not become part OF the
permanent value OF the property, but
rather are In the nature of initial ex-
pense. They, too. for the mosr part,
IL not entirely, should be amortized
at the end OF the grant. SO that, the
franchise value granted by a city
must I'm theory be deemed The fund
provided by the city for the amortiza-
tion of these charges. II this view Is
sound 1t follows, quite naturally that
whatever unexpired franchise value
the company now has should he al
lowed to 1t I'm undertaking to estimate
the present value of its property.
"As | have. said, this is. confessed
ly a moderate view and does not state
the public side as strongly as 1t is pos
sible to state; for II the public pre-
ferred to wait until the expiration or
a grant IL would no doubt be able 10
force a settlement upon basis that
would not recognize the assembled
value OF the property. but would be
lust enough above its scrap value to
dissuade the company from scrappine
its plant. In my views. this would be
a harsh course for the city to assume.
Public service companies. it IL true.
extort the last dollar from cities, and
when they undertake TO naye their
property valued thev multiply over
head charges by the application OF vari-