14 VALUATION, DEPRECIATION AND THE RATE-BASE
necessary allowance for operating expenses including a proper
allowance for anticipated future replacements but should not
always immediately be allowed interest on the full cost of this
extension which, as already stated, together with other im-
provements such as street grading, paving, sidewalk and sewer
construction will be included in the price charged by the owner
for the lots and will therefore represent a contribution by this
new section of the municipality to the cost of the privately
owned water-works.
In some measure a donated extension to a water-works system,
as here used for the purpose of illustration, bears a similar re-
lation to the plant, as does property held for future use in
excess of the capacity of the plant, with the difference that in the
one case the public donates the property to the owner, in the
other, the owner secured the same by investing his own capital.
In the fixing of rates the increase of capital due to the receipt of
gifts and donations should generally be considered separately
from the actually invested capital. Individual cases will arise
requiring special treatment. The owner in most cases will not
be entitled to as large a return on this donated capital as on his
actual investment.
2. The above case is not materially different from that of
the municipality which needs water-works but cannot afford to
make the necessary expenditures. To induce the investment
of private capital in a water-works enterprise, the offer of a
bonus is made. To avoid legal restrictions this has sometimes
been done through the medium of extra large annual payments
extending through a number of years for the water required for
street sprinkling, for sewer flushing, for extinguishing fires and
other municipal uses. Whenever a direct or an indirect con-
tribution is thus made, the owner’s invested capital — the rate-
base — is not necessarily represented by the cost of the repro-
duction of the entire water-works.
Fair Value as a Rate-Base. — In concluding this introductory
chapter attention may be called to the accepted view of the
courts in the matter of valuations for rate-fixing purposes. It
