To determine the "fair value" of a public utility under the law of the land virtually requires a physical appraisal of all units of property used and useful in public service. While intrinsically the amount to be determined might be developed through a different process, the long established practice of commissions and other fact finding bodies has been the appraisal method. This chapter will be concerned with the principal considerations relating to the procedure, especially in deriving reproduction cost. It will set out the steps involved, an analysis of intended results, and particularly the media through which facts are developed.
The first step in an appraisal of utility property for rate making purposes consists in a separation of the corporate property into the part which is suited for utility purposes and that which is not so used. Only those units of property which are used or useful in the utility service may be included in the valuation upon which rates are to be based.
The expression "used or useful" takes cognizance of the fact that it is not necessary that all units be used at all times in order that they may be included in the utility valuation. A street railway or a railroad has in the aggregate more units of rolling stock, cars and locomotives, than it constantly employs. In the first place, there are certain peak service demands for which the road must be prepared and during which time a maximum of equipment is put into service. This peak demand may occur only a few days in the year or a few hours each day. Nevertheless the equipment so used is necessary to the running of the railroad. It is therefore fair and proper that it be included in the valuation.