AMERICAN SOCIETY OF CIVIL ENGINEERS
INSTITUTED 1852
TRANSACTIONS
Paper No. 1190
THE VALUATION OF PUBLIC SERVICE CORPORATION PROPERTY.[1]
BY HENRY EARLE RIGGS, M. AM. SOC. C. E.
WITH DISCUSSION BY MESSRS. F. LAVIS, CHARLES H. HIGGINS, S. D.
NEWTON, WILLIAM V. POLLEYS, C. P. HOWARD, J. E. WILLOUGHBY,
HENRY C. ADAMS, CARL C. WITT, R. A. THOMPSON, CHARLES H.
LEDLIE, WILLIAM G. RAYMOND, W. H. WILLIAMS, P. E. GREEN, E.
KUICHLING, RICHARD T. DANA, GEORGE T. HAMMOND, LEONARD
METCALF, CHARLES HANSEL, J. MARTIN SCHREIBER, CLINTON S.
BURNS, HALBERT P. GILLETTE, ARTHUR L. ADAMS, C. D. PURDON,
A. MORDECAI, W. B. RUGGLES, AND HENRY EARLE RIGGS.
INTRODUCTORY.
The industrial and economic development of the past two decades has
opened many new lines of special work in the Profession of Engineering,
none of which is more difficult and complicated or of greater ultimate
value to the public at large than that of the appraisal or valuation of
the property owned and operated by public service corporations; and none
of the fields of engineering specialization requires greater care or
calls for more skill, experience, integrity, or sound judgment.
The individual engineer, or commission of engineers, entering upon an
appraisal of large magnitude, particularly one including properties of
more than one company, will find conditions varying in every one, and
each property presenting new, complex, and confusing elements of value
to pass upon and determine.
Prior to 1900 there had been few calls on engineers for large
appraisals, and the literature descriptive of engineering effort along
this line was practically nothing. Since 1900 many extensive appraisals
have been undertaken by States, by railroad and banking corporations,
and by cities; certain well-defined lines of practice have been
developed; many differing opinions as to certain methods and principles
have been brought out; and enough has been added to the printed
literature to enable one to compare methods of work and to fix with
reasonable certainty upon some as correct, and to discard others as
improper.
There are so many complex factors entering into the problem of
valuation, so many widely different plans have been presented, and there
are so many thinking men who have opposed and do honestly and sincerely
oppose any form of valuation, that a most thorough study of the subject
should be made. It should be examined from all angles, and every
possibility of danger from legislation regarding it should be weighed
with utmost care.
The question of railroad valuation, involving as it does the largest
industry of the nation, naturally takes first place in such a
discussion, but so many of the general principles of railroad valuation
are applicable to the appraisement of corporate property, so many
arguments have been advanced by engineers and others, and so many
judgments of the Courts have been rendered in connection with
water-works and gas-works valuations, that it is not desirable to limit
this discussion wholly to the problem of railroad valuations.
The reasons for requiring that valuations be made may be broadly divided
into two general classes:
_First.—As a Matter of Public Interest._—The public, and particularly
the investing public, requires valuations in order to guard against
unworthy and dishonest corporation securities, to be assured that
corporations are bearing their legitimate and proper share of the burden
of taxation, and to furnish a proper basis for fixing equitable and just
rates for the services rendered by the corporation.
Under this class would come all appraisals made for information to be
used as a basis for legislation relative to:
(_a_) _Taxation of Corporations._—Such were the valuations in
Michigan and Wisconsin.
(_b_) _Rate Regulation._—This was the reason which prompted the
work in Minnesota and Nebraska.
(_c_) _Limitation of Capitalization._—The regulation of issue of
stocks and bonds was the purpose of the Texas valuation.
(_d_) _Fixing a Price for Sale._—Many of the water-works and
electric light valuations were made in order to determine a
fair price to be paid for the property at the expiration of
the franchise.
(_e_) _The General Information of the Public._—To be used in
connection with the fixing of terms for franchise renewals,
etc., etc.
_Second.—As a Matter of Corporation Necessity or Expediency._—Valuations
are made in order to guide large investors, to secure a safe and
up-to-date basis on which to negotiate a sale, a purchase, or a
reorganization of the property, or a consolidation with other like
properties, and to secure justice to honestly administered corporations.
The great majority of appraisals under this head have been in accordance
with some other methods than those adopted in the State valuations. It
is not intended in this paper to engage in any argument as to the
various purposes of appraisals, or even to urge the necessity or
desirability of a general appraisal of properties. An absolutely
accurate and correct statement of the cost of reproduction of all the
physical properties of the railroads of the country, a correct statement
of the actual capital needed to reproduce these properties as they
exist, and, along with this, a statement of the actual physical
depreciation, would be a document of vital interest.
This paper is confined to a discussion of the methods which should be
used in arriving at a correct figure of cost of reproduction and
depreciation—it does not take up questions involving the propriety of
those figures when reached. The propriety or legality of using such
figures as a basis for an assessed valuation, as a basis for rate-making
(rate-making being an art in itself involving complications as great as
those encountered in valuation), or any arguments as to the justice or
injustice of legislation restricting issues of stocks or bonds, will be
conceded no place in this paper. It is assumed that all these questions
would have been taken up and a satisfactory answer reached before a
valuation could have been ordered.
The different elements of value in property, the relations of this
property to the public, the method of determining the worth of these
elements of value which have been adopted in the past by men engaged on
valuation work, a comparison of these methods, a discussion of the
objections that have been made to them, and a presentation, not only of
the writer's views as to proper methods, but those in which he disagrees
with usages adopted by others—these define the scope of this paper.
No matter what particular end is to be served by a valuation, the
commission engaged upon it will be asked to furnish a fair value,
perhaps with reasonable limitations in the instructions, perhaps with a
general and indefinite instruction to find the value. They will
encounter, among other difficulties:
_First._—The fact that human machines are not exact duplicates, and that
allowance must be made for a large measure of error, on account of the
personal equation of the men engaged on the work, as individual errors
of judgment are frequent on any work of magnitude. This personal element
must be corrected by uniformity of method, by constant checking, and, as
far as possible, by subordination of personality to system.
_Second._—The fact that human selfishness is a dominant quality—the
railroad manager who opposes methods which he believes will increase
values in an appraisal for taxation, or who, on the other hand, uses
every possible argument to increase values if the work be as a basis for
rate-making or for restriction of bond issues, or the State official who
is desirous of using original cost on a valuation to be used for
rate-making in order to keep the valuation down to a minimum, and the
politician who depends on an unenlightened public opinion to create
sufficient outcry to influence the work to his advantage—are all
actuated by a perfectly human wish to attain ends which seem to them
desirable, and are but typical of men who will endeavor to influence
every appraisal.
In view of these considerations, it is a question whether results are
not frequently affected by the knowledge of their intended use, and
whether a system which will entirely remove such causes of error can be
applied to the work.
If an engineer, or a commission of engineers, is directed to examine a
certain property and report the true cost of reproduction, depreciation,
or present value, taking into account all facts connected therewith, the
final figures should not differ, whether the report is to be used as a
basis for reorganization, sale to another corporation, or is to be used
by a State legislature as a basis for formulating a rate bill, or as a
basis for a value for taxation. The result secured is a necessary
preliminary on which depends the accuracy, fairness, and justice of the
other work which is to follow. This is an engineering work, a statement
of certain physical property, the estimated cost of reproducing it new,
less the estimated depreciation, and, beyond the differences due to
personal judgment, these figures may not vary.
The word "value" is in common use, and yet, in the minds of many people,
its exact meaning is vague. It is true that the "value" of a property is
an unstable figure, subject to fluctuations due to natural or artificial
causes, and that a material change in value may occur suddenly, but the
"value" of any given property on any given date is, or should be, from
an engineering standpoint, a definite sum which may not be varied or
changed to suit the whim or will of the people for whom the work is
done.
In all the subsequent discussion of values and methods of obtaining
values, it is assumed that, unless specifically limited to a
determination of cost of reproduction and depreciation, a valuation
commission should be governed by the following rules:
_1._—No account may be taken of the purpose for which the resultant
figure of value is to be used; and the result should not vary, no matter
what that purpose may be.
_2._—The resultant figure should be the honest judgment of the men
composing the commission, as to the actual cost of reproduction, present
physical value, or "fair value," and should be ascertained by a
systematic and scientific method which takes into account all the facts
concerning the property, its physical value, its strategic location, its
operating revenues and expenses, and its franchises, rights,
competition, opposition, and all other tangible or intangible elements
which would affect values. The method of valuation should be such as to
minimize or entirely eliminate all differences due to errors of personal
judgment.
_3._—All properties being appraised are considered as operating
properties. One which is dead, inert, and not in use, cannot be
considered as coming under such a discussion as this, and such
properties are not treated in this paper. The term "going concern" is
not used in connection with the physical property, any element of value
implied by the term, over and above the "overhead charges," being
treated as an intangible or non-physical element of value.
In stating this position, the writer is aware that it is a difficult
matter indeed to get away from the fact that some specific
purpose—taxation, for example—is the definite end in view in every
valuation, and that, instinctively, men engaged on the appraisal will
find themselves modifying their figures to meet some real or fancied
condition which they conceive might arise, or to prevent some injustice
which they believe might be done. Every subordinate employee needs to be
watched, every man in charge must watch himself, or he will find himself
unwittingly, almost instinctively, coloring his results by some old
prejudice of his early years of employment, or some loyalty to his own
ideas of governmental or economic policy. The writer has noted this in
every appraisal on which he has been engaged, and calls particular
attention to it as the first difficulty which must be overcome in the
organization of the force for a large appraisal.
In the following pages all complications which might arise from the
purpose of the appraisement are considered as eliminated, and the
possibility of erroneous conclusions being reached by reason of the
personal factor (while recognized as being ever present) will not be
specially emphasized.
-----
Footnote 1:
Presented at the meeting of January 4th, 1911.
THE RELATION OF PUBLIC SERVICE, OR QUASI-PUBLIC CORPORATIONS,
TO THE PEOPLE.
In reference to questions of value, the engineering commission must
hear, consider, and reconcile arguments advanced by adverse and often
hostile interests. On the one side stand the corporations, with large
financial interests involved, often with an excessive amount of stock
and bonds issued on the property, the existence of which issues the
corporation wishes to justify, and, whether properly capitalized or not,
the management being imbued with the perfectly human desire to defend
corporate interests from attack of any kind; on the other side is public
opinion, often unreasonable, often misinformed, and frequently
prejudiced.
It appears necessary, therefore, to consider briefly the relation which
these interests bear to one another, to study the causes which have led
to mutual misunderstandings, and to note the proper relations which
should, if possible, be established and maintained between the people
and those corporations organized to perform certain of the functions of
the State.
A public service or quasi-public corporation is a corporation which is
operating under the terms of rights, grants, or franchises given by the
public, either to this particular corporation direct or granted by
statute to a class of corporations.
The property of the corporation is used to render certain services to
the public, with the expectation of financial gain.
It is not material whether the grant be a franchise permitting a
water-works company to use the streets and alleys of a city for its
mains, and the service be the pumping of water for domestic service and
fire protection, or whether the grant be the statutory rights of
corporate existence and eminent domain, and the service rendered be the
transportation of freight and passengers; the general principle is the
same; the company has secured from the people certain rights which
enable it to do business, and the people are directly benefited by the
services rendered by the company. The increased comfort of living makes
for the growth of the city; the increased transportation facilities
build and develop the country traversed by the railroad; and this growth
and development, not only operate to the advantage of the people, but
also to that of the company in the way of increased business and
increased revenues.
The capital required to build and develop these properties was furnished
in the hope of, and with the expectation of, a proper financial reward.
It has frequently happened that such properties have been built years in
advance of sufficient development to support the enterprise, built, in
fact, without expectation of immediate returns, and long periods of time
have often elapsed before any profit has been secured.
It has also frequently happened that corporations have been aided to a
very large extent by public funds, by the voting of aid bonds, by the
donation of large tracts of land, by payment for certain service at such
rates as would largely relieve the company from loss in operation, by
the remission of taxes, or by the direct donation of funds.
The company is clearly entitled to earn a reasonable profit on the
actual capital invested, in addition to the legitimate cost of
operation, payment of taxes, and sinking funds to cover depreciation and
obsolescence.
The public is clearly entitled to good service at the lowest rates that
will permit the company to earn its reasonable profit and expenses.
Increases in tonnage, population, and consequent net earnings of the
corporation should entitle the public to a benefit in reduced charges
for service, when the increased earning is of a permanent character.
The general tendency of the Courts has been to treat a franchise as a
contract, and to be governed closely by the language and evident intent
of the makers, but to safeguard the rights of the public to the fullest
extent consistent with justice.
A franchise requires specific performance of specific acts. Nothing will
be assumed or implied. The Courts recognize that the investors are
entitled to reasonable returns, and that the public is entitled to fair
rates.
In the case of Los Angeles Water Company _vs._ City of Los Angeles (103
U. S., 711), the United States Courts held that at the expiration of a
30-year franchise, which provided that the city was to pay for the value
of all improvements, when the city failed to agree upon, tender, or pay
such value, so long as the company complied with the terms of the
contract, and until the city terminated it by making or tendering
payment, the passage of an ordinance by the city fixing rates was void.
In the case of Weatherly _vs._ Capital City Water Company (Ala. 22 So.,
140), the Alabama Courts held that the acceptance of a franchise
involved a grave responsibility, and that the company could not stop
furnishing water and fire protection, even if the work was done at a
loss.
In the case of Myer _vs._ Brown (65 Cal., 589), the Court said:
"It is well occasionally to recall the fact that there is no more reason
to permit a municipal government to repudiate its obligations entered
into for value, than to permit an individual to do so. Good faith and
fair dealing should be exacted of one equally with the other."
Judge Brewer, in the Kansas City Water-Works case (62 Fed. Rep., 853),
said:
"All contracts involving property rights and obligations, between
municipalities and individuals, must be presumed to be based upon and to
recognize the ordinary laws of business transactions."
In 1903 the Maine Supreme Court issued a set of instructions to
appraisers appointed to fix values of certain properties. The Court set
forth its views as follows:
"Summarized, these elemental principles are, the right of the company to
derive a fair income based upon the fair value of the property at the
time it is being used for the public, taking into account the cost of
maintenance and depreciation and the current operating expenses, and the
right of the public to demand that the rates shall be no higher than the
services are worth to them, not in the aggregate, but as individuals."
The Supreme Court of the United States has again and again given its
views, which may be summarized as follows:
"It cannot be said that a corporation is entitled, as of right, without
reference to the interests of the public, to realize a given per cent.
upon its capital stock. When a question arises whether the legislature
has exceeded its constitutional powers in prescribing rates to be
charged by a corporation controlling a public highway, stockholders are
not the only persons whose rights and interests are to be considered.
The rights of the public are not to be ignored.
* * * * *
"The public cannot properly be subjected to unreasonable rates in order
simply that stockholders may earn dividends. The legislature has the
authority in every case, where its power has not been restrained by
contract, to proceed upon the ground that the public may not rightfully
be required to submit to unreasonable exactions for the use of a public
highway established and maintained under legislative authority." (164 U.
S., 578.)
"It is not to be inferred that the power of limitation or regulation is
itself without limit. This power to regulate is not a power to destroy,
and limitation is not the equivalent of confiscation. Under pretense of
regulating fares and freights the State cannot require a railroad
corporation to carry persons or property without reward, neither can it
do that which in law amounts to the taking of private property for
public use without just compensation. * * *" (116 U. S., 307.)
In the case of Smyth _vs._ Ames (169 U. S., 466), the Court said:
"If a railroad corporation has bonded its property for an amount that
exceeds its fair value, or if its capitalization is largely fictitious,
it may not impose upon the public the burden of such increased rates as
may be required for the purpose of realizing profits upon such excessive
valuation or fictitious capitalizations; and the apparent value of the
property and franchises used by the corporations, as represented by its
stocks, bonds and obligations, is not alone to be considered when
determining the rates that may reasonably be charged. * * *
"We hold, however, that the basis of all calculations as to the
reasonableness of rates to be charged by a corporation maintaining a
highway under legislative sanction must be the fair value of the
property being used by it for the convenience of the public.
* * * * *
"What the company is entitled to ask is a fair return upon the value of
that which it employs for the public convenience. On the other hand,
what the public is entitled to demand is that no more be exacted from it
for the use of a public highway than the services rendered by it are
reasonably worth."
The relations between the corporations and the public that they serve
have been clearly defined by the Courts, as the foregoing quotations
show.
That the mutual relations existing between the management of the
corporations and the public are far from what they should be, there can
be no doubt. On the one hand, the great mass of the voting public is
uninformed as to actual revenues, disbursements, and operations of the
corporations, as to whether their income is unreasonably large, or
whether they are struggling to exist. The sums of money involved in the
dealings of the corporations are so stupendous in comparison with the
amounts used in an ordinary private business—even in one of considerable
magnitude—that the majority of the public cannot comprehend them. The
published statistics are in such form that only the careful student of
affairs can understand or analyze them, and but few of the public
officials who receive them are able to read the reports of the
properties and comprehend them. As a consequence, the corporation, as a
political issue, has been the subject of jest, gibe, and cartoon; there
has not been an intelligent public discussion of available reports and
statistics, and it may be said that, generally, the mass of the public
has come to class all corporations as grasping, overbearing, and unjust,
and to consider them all as exceedingly prosperous. This has been taken
advantage of by politicians for their own selfish ends, and has led to
sundry legislation, some of which has been unreasonable and unjust to
the corporations, and much of which is aimed at real abuses that never
ought to have existed.
The reasonableness of a rate depends, not alone on the amount of capital
invested, but on the volume of traffic, the density of population, the
actual cost of service, and many other elements. Rate legislation has
been attempted without full investigation. Acts have been passed
compelling the establishment of stations and terminals, the improvement
of roadway and structures, the purchase of new equipment, the
installation of safety appliances and block signals, and many other
requirements have been made, some (but by no means all) of which are
unreasonable and burdensome. Nearly one-half the States of the Union
have by law required a 2-cent, or 2½-cent, passenger fare, regardless of
density of population, amount of traffic, or other considerations which
might render such rates unreasonable. The regulation of the carriers, by
legislature, by railroad commissions, by State officials, and by Courts,
the addition of burdens of expense, and the cutting off of revenue, all
give considerable ground for the opposition of the carriers to anything
that looks like hostile legislation, and compels the student of affairs
to admit that there is justice in the claim of the managements, that
there is grave danger, not only of seriously crippling many roads, but
of so impairing the credit of the railroads as a class that it will be
increasingly difficult to secure capital to provide for the necessary
extensions and development of the transportation facilities of the
country.
On the other hand, perfect frankness compels the admission that the
state of public opinion which compelled the passage of these laws has
been caused largely by the corporation officials themselves. There is
probably no more loyal body of men in America to-day than the officials
and employees of railroads. Their loyalty, however, is all to "our
company." They enter its service as boys or young men; they grow up to
the full strength of manhood working for its good; they take little or
no part in public affairs; they have no time for the study of public
questions. Their friends are almost exclusively among their own
associates in the service of the road, and their development is along
the lines of their own special work in the service. As a body of honest,
honorable, and worthy men, absolutely loyal to their employers, they
have few equals; but it is doubtful if any equal number of men, of equal
intelligence, have as limited a knowledge of the fundamental truths of
government, or knowledge so colored by bias. It is also doubtful whether
any equal number of men have in their ranks so few who bear an active
part in the duties and activities of citizenship, or who exercise large
influence on their neighbors.
While the foregoing statement is believed to be absolutely true, it will
not do to pass over the notable exceptions. Such men as James J. Hill,
F. Am. Soc. C. E., M. E. Ingalls, and others of the higher officials,
who have taken an active part in public affairs, have had commanding
influence. Theirs has been the sound policy, as the property in their
hands has not suffered. The short-sighted policy which, in December,
1909, induced the management of one road to compel all its employees
holding municipal offices to resign, is bound to react and create
hostile feeling on the part of the public.
The entire trend of a training in railway service is to fill a man with
prejudice against all things that undertake to regulate or control the
corporations, and often goes so far as to enable him to do, willingly
and as a matter of right, things which with a broader view of the
interest of the whole community he would not agree with at all. The
result of this intensive training is that the railway service has in it
thousands of men who become impatient with any effort to regulate or
control; who permit their irritation to show; and who, by their own
attitude, create unnecessary hostility. F. A. Delano, M. Am. Soc. C. E.,
President of the Wabash, in an address[2] at Hannibal, Mo., on March
25th, 1909, said:
"In ordinary manufacturing or commercial undertakings, every man has his
own notions about the conduct of his business, and does not want to be
interfered with, or dictated to by people who know less about his
business than he does himself. Now, while it may be argued in the case
of public service corporations that the people who have put their money
into these enterprises, have done it with their eyes open and with full
knowledge that they were subject to governmental regulation and control,
there is nothing in that argument which makes public interference any
more palatable to the man or group of men who are interfered with."
This address well expresses the spirit of the railway managers and
employees toward all forms of investigation, and the complete lack of
understanding, on the part of these managers, of the legal and moral
relations which they bear to the communities which they serve. It is
extremely unfortunate that railway and corporation people have not taken
the public fully into their confidence, and fully and freely given out
correct information as to the operation and depreciation of their
properties; also, it is unfortunate that, when a corporation official
does feel a grievance, he permits himself to make a partisan speech, or
write an unwise article for publication. Much hostility is traceable to
foolish, undiplomatic sayings or writings of corporation managers (which
are often but half quoted), or to equally foolish speeches or newspaper
editorials in opposition to the corporations, which are taken seriously
by the managers. Whatever may be the cause, there is a regrettable
hostility, and, on the part of the corporation officials, there is an
apparent unwillingness to admit right motives to anyone advancing
theories regarding corporate regulation and control, due largely to the
training and atmosphere surrounding the corporate service.
The public has a large bill of particulars, one of which is the
promotion of wildcat companies, such, for instance, as the "New York and
Chicago Air Line" project which, only a year or so ago, drew from
$2,000,000 to $3,000,000 from the people in a limited territory. These
people were "investing" in railway stocks. A Federal control of the
issue of stocks and bonds would have prevented this and hundreds of like
swindles. Any move to secure such a law has always been opposed by the
management of large and legitimately operated corporations, under the
impression that they are about to be persecuted, and, naturally, the
victim classes these corporations with the alleged one that secured his
money.
The issue of stocks and bonds far in excess of any possible cost or
value of railroad, street railroad, and other properties, and the making
of large personal fortunes by the promoters, are matters of such
frequent occurrence that it is difficult, indeed, to dismiss them with a
mere denial. There is hardly a community of any size which has not had
its example of "consolidation," "combine," or "merger," which has
resulted in the issue of excessive securities; and there is hardly a
citizen of any intelligence who has not either seen or had experience
with some form of corporation promotion carried on strictly within the
law, but which, nevertheless, in plain language, was a swindle. These,
to say nothing of some gigantic deals involving millions, will sooner or
later compel some form of regulation of the issues of stocks and bonds.
In the last analysis, it is the money of the people, the hundreds of
thousands of small investors, depositors in banks, and owners of life
insurance, whose money goes into corporation securities, and, until the
officers of the great railroads co-operate in securing such forms of
control of stock and bond issues as will make impossible the purely
speculative "wildcat" corporations, and thus safeguard minor
corporations, as to furnish at least reasonable security to those whose
money is invested, all forms of corporation security must be under
suspicion with the public, and the agitation for control must continue.
It is not, as Mr. Delano says, a case of put your money in with your
eyes wide open; it is an effort on the part of the people to safeguard
this form of corporate security in such a way that it can be treated as
any other form of sound investment. It should not be necessary to
require that all investors in corporate securities be financial experts.
It is the writer's opinion, based on his observation and professional
practice, that the railroads are not generally open to charges of
over-capitalization. While there are flagrant instances, the chief
culprits are among other classes of corporations. If such be the fact,
it would seem that the interests of the great railway corporations would
be in no wise jeopardized by sane and reasonable control.
The theory of taxation is that every one shall bear his proportionate
burden of the cost of maintaining the government.
Regardless of any opinions that may be held as to the propriety of the
methods adopted in the Interstate Commerce Commission's commercial
valuation of railroad properties, it will be conceded that the results
gave a set of figures for all the States of the Union, secured by a
uniform method of computation and distribution. Table 1, which is a
compilation from Tables 1 to 11 of Bulletin 21, shows clearly why, in
certain States, corporate taxation is a live issue, and if (as suggested
by Mr. Williams in his article, elsewhere referred to) amendment of the
Constitutions of some of the States is necessary, it is safe to assume
that the condition of inequality shown by this table is such as to
compel these changes.
It is needless to cite further instances; enough has been said to
indicate:
_First._—That the corporations and the public have such intimate
business relations that a blow at either must necessarily
injure the other seriously;
_Second._—That the Courts have defined quite clearly the legal
relation existing between the two interests;
_Third._—That there is lacking a proper spirit of mutual
confidence, and the two interests at the present time are
generally hostile;
_Fourth._—That there have been errors and abuses on the part of
both corporations and public; and
_Fifth._—That capital invested in corporations is, and should
be, the money of the people, and should be safeguarded so as
to prevent its loss by manipulation, and insure a fair
return.
TABLE 1.—COMPARISON OF ASSESSED VALUATION AND COMMERCIAL
VALUE OF RAILWAY PROPERTIES.
═══════════════╤══════════╤══════════════╤═════════════════╤═══════════
State or │ Miles of │ Commercial │ VALUATION FOR │ Ratio of
territory. │ single │ value: June │ ASSESSMENT. │assessed to
│ track. │ 30th, 1904. │ │commercial
│ │ │ │valuation:
│ │ │ │Percentage.
───────────────┼──────────┼──────────────┼─────┬───────────┼───────────
│ │ │Year.│ Amount.│
───────────────┼──────────┼──────────────┼─────┼───────────┼───────────
Alabama │ 4,669.35│ $150,211,000│ 1905│$53,926,026│ 35.9
Arkansas │ 4,126.44│ 124,626,000│ 1904│ 34,709,623│ 27.8
California │ 6,262.54│ 350,694,000│ 1904│ 92,378,550│ 26.3
Colorado │ 4,976.24│ 198,261,000│ 1903│ 49,492,135│ 25.0
Connecticut │ 1,017.72│ 105,369,000│ 1904│120,493,648│ 114.4
Florida │ 3,555.84│ 80,467,000│ 1904│ 21,817,478│ 27.1
Georgia │ 6,304.72│ 156,603,000│ 1903│ 63,105,810│ 40.3
Idaho │ 1,461.53│ 91,877,000│ 1904│ 10,115,378│ 11.0
Illinois │ 11,622.74│ 805,057,000│ 1904│425,709,055│ 63.8
Indiana │ 6,917.85│ 375,541,000│ 1904│165,863,367│ 44.2
Iowa │ 9,859.23│ 344,847,000│ 1904│ 57,535,160│ 16.7
Kansas │ 8,811.43│ 356,356,000│ 1904│ 60,093,534│ 16.9
Kentucky │ 3,253.00│ 155,772,000│ 1904│ 77,658,040│ 49.9
Louisiana │ 3,898.74│ 123,401,000│ 1904│ 29,044,195│ 28.9
Michigan │ 8,660.29│ 277,597,000│ 1904│196,795,000│ 70.9
Minnesota │ 7,811.04│ 466,734,000│ │ │
Mississippi │ 3,480.25│ 107,884,000│ 1902│ 29,847,640│ 27.7
Missouri │ 7,711.05│ 309,768,000│ 1903│ 97,916,869│ 31.6
Montana │ 3,267.10│ 196,209,000│ 1904│ 36,759,827│ 18.7
Nebraska │ 5,820.88│ 263,170,000│ 1904│ 46,082,853│ 18.5
Nevada │ 986.56│ 43,745,000│ 1904│ 13,778,049│ 31.5
New Hampshire │ 1,275.97│ 79,786,000│ 1904│ 22,625,000│ 28.3
New Jersey │ 2,277.85│ 333,568,000│ 1904│231,655,525│ 69.5
New York │ 8,297.29│ 898,222,000│ 1903│229,582,064│ 25.6
North Carolina │ 4,075.00│ 113,146,000│ 1904│ 69,480,974│ 61.4
North Dakota │ 3,190.77│ 689,797,000│ 1904│133,858,945│ 19.4
Oklahoma │ 2,611.03│ 78,668,000│ 1905│ 11,936,317│ 15.2
Pennsylvania │ 11,023.24│ 1,420,680,000│ │ │
Rhode Island │ 211.89│ 25,719,000│ 1904│ 15,832,003│ 61.6
South Carolina │ 3,175.28│ 75,500,000│ 1903│ 29,467,716│ 39.0
South Dakota │ 3,047.14│ 49,646,000│ 1904│ 14,354,930│ 28.9
Tennessee │ 3,480.83│ 131,166,000│ 1903│ 58,536,566│ 46.6
Texas │ 11,848.03│ 237,718,000│ 1904│ 95,209,785│ 40.0
Utah │ 1,779.69│ 90,325,000│ 1904│ 20,682,461│ 22.9
Vermont │ 1,063.25│ 37,311,000│ 1902│ 27,344,020│ 73.3
Virginia │ 3,932.33│ 211,315,000│ 1904│ 63,269,623│ 37.7
West Virginia │ 2,836.83│ 201,799,000│ 1904│ 28,771,358│ 14.2
Washington │ 3,355.83│ 182,837,000│ 1904│ 26,066,949│ 14.3
Wisconsin │ 7,048.76│ 284,510,000│ 1904│218,024,900│ 76.6
Wyoming │ 1,247.70│ 100,307,000│ 1904│ 7,498,232│ 7.5
Arizona │ 1,751.35│ 68,356,000│ 1904│ 6,667,349│ 9.7
District of │ 32.00│ 5,578,000│ 1904│ 2,486,024│ 44.6
Columbia │ │ │ │ │
New Mexico │ 2,504.66│ 8,640,000│ 1904│ 8,511,538│ 9.9
───────────────┼──────────┼──────────────┼─────┼───────────┼───────────
Total, U.S.A. │213,932.13│11,244,852,000│ │ │
═══════════════╧══════════╧══════════════╧═════╧═══════════╧═══════════
In concluding this subject, it may not be amiss to quote the language of
the Supreme Court in the Knoxville Water Case (212 U. S., 1), as
follows:
"Regulation of public service corporations, which perform their duties
under conditions of necessary monopoly, will occur with greater and
greater frequency as time goes on. It is a delicate and dangerous
function, and ought to be exercised with a keen sense of justice on the
part of the regulating body, met by a frank disclosure on the part of
the company to be regulated. The Courts ought not to bear the whole
burden of saving property from confiscation, though they will not be
found wanting when the proof is clear.
"The legislatures and subordinate bodies to whom the legislative power
has been delegated ought to do their part. Our social system rests
largely upon the sanctity of private property, and that State or
community which seeks to invade it will soon discover the error, in the
disaster that follows. The slight gain to the consumer, which he would
obtain from a reduction in the rates charged by Public Service
Corporations, is as nothing compared with his share in the ruin which
would be brought about by denying to private property its just reward,
thus unsettling values and destroying confidence. On the other hand, the
companies to be regulated will find it to their lasting interest to
furnish freely the information upon which a just regulation can be
based."
-----
Footnote 2:
_Railroad Age Gazette_, April 16th, 1909, p. 857.
EXPLANATION OF TERMS.
In order that there may be no doubt as to the exact meaning of the terms
used throughout this paper, a few definitions or explanations are
submitted:
_Appraisal, or Valuation._—These words are used interchangeably, and
refer to the engineering work of determining the present worth of both
physical and intangible properties of corporations.
_Cost of Reproduction._—This expression refers to the estimate of cost
of reproducing the physical properties as they exist on the date of the
appraisal, all elements entering into the cost being considered as new
and not affected by the elements of depreciation or obsolescence.
_Cost, or Original Cost._—These terms refer to the actual amount of
money paid for the property, either when it was originally constructed,
or in its condition at the time of appraisal, the latter case being the
original cost plus the cost of additions and betterments, less
abandoned, replaced, or worn-out property. This figure ought to be
represented by the "book cost," but it is not often that "book cost" and
"actual cost" are the same.
_Present Value, or Present Physical Value.[3]_—These terms are used in
describing the physical property as reproduced after it is affected by
all elements of depreciation or appreciation. The use of the word
"value" in this expression is unfortunate, as it may lead to some
confusion. It must be kept clearly in mind that, where this term is
used, it refers only to physical property as depreciated, and is in no
case intended to refer to the final or "fair value" of the property.
_Non-physical, or Intangible, Value._—These terms are used to represent
those elements, entering into the final worth of the property as a
business concern, which arise out of the operation of the property and
are not attachable to the physical property.
All the foregoing terms have to do with the determination of the
elements which enter into the final value.
What is "value"? In defining the exact meaning of this term, as applied
to the property of a public service corporation, many elements must be
taken into account. Standard authorities give many definitions of
"value," none of which appears to meet fully the requirements of the
term as used herein. Before considering the elements which enter into
the value of corporation property, or attempting to determine the
methods to be used in fixing proper figures of worth for each of these
elements, it is proper and necessary to obtain a clear definition of
"value," the thing sought to be ascertained by the inquiry.
The term, "commercial value," has been considered in place of "value,"
but is not used because it is held to be more properly applicable to the
selling or exchanging value of fractional interests in the property, and
the methods of computing the commercial value of securities which are in
common use cannot be adopted in an engineering valuation. The Standard
Dictionary definition of "commercial value" is:
"The source of commercial value, according to different schools of
economists, is (1) the degree of want felt for a commodity as shown in
the relation of supply and demand, (2) the amount of labor embodied in
it, or (3) the cost of reproduction. Practically, commercial value is
that for which a thing can be sold or exchanged at a given time and
place."
The definition given by Professor Adams is:
"The estimate placed upon the worth of a property, regarded as a
business proposition."
Both these definitions are in a measure involved, and the writer
considers that the term, "Commercial Value," is too narrow and
restricted to be properly used.
As a definition of that estimate of worth which an engineering
commission should report as the result of a complete appraisal, the
writer submits the following:
The value of a property is its estimated worth at a given time, measured
in money, taking into account all the elements which add to its
usefulness or desirability as a business or profit-earning proposition.
There are two classes of elements entering into the final value:
_(1) The "Physical Property" Element of Value._—This consists of those
things which are visible and tangible, capable of being inventoried,
their cost of reproduction determined, their depreciation measured, and
without which the property would be unable to produce the commodity on
the sale of which income depends. This physical property is considered
as an operating entity, and not as collateral of inert and partly
worn-out equipment, and, being so considered, carries, as part of the
physical value, those costs and charges which are an inseparable part of
the cost of construction but do not appear in the inventory of the
completed property.
_(2) The "Non-Physical" or "Intangible" Elements of Value._—These are
those things which, added to or taken from the worth of the physical
property, make up the value, and include whatever accrues to the
property by reason of its operation, or by reason of grants, contract
rights, competition, or location, which at the time of appraisal affect
favorably or unfavorably the worth of the property.
The worth of the physical property is primarily that on which the value
of the whole property rests.
While it is clear that the worth of the physical property, being the
cost of reproduction less depreciation, is not necessarily the value of
the property, it is equally clear that the physical worth must bear some
very definite relation to value, and the writer is strongly of the
conviction that this relation is such that "value" cannot be ascertained
without a determination of physical worth. The physical property element
represents the investment on which a fair return is to be earned, and in
most cases an appraisal is necessary for the determination of the amount
of money actually invested. As illustration of the fact that "physical
value" and "value" are not the same, the case of two railroads actually
existing and in operation between two cities in Michigan may be cited.
Road "A" occupies a narrow valley through high and abrupt hills. Its
alignment is fair for hilly country; its maximum grade is 1 per cent. It
has a number of bridges, all short and low. Its cost of reproduction
might reasonably be placed at $28,000 per mile. A mining town at one end
ships a heavy tonnage down grade to a lake port at the other.
Road "B" was constructed several years later, and, being barred from the
only valley, built a line across the hills, involving heavy grading,
very long and high steel trestles, a longer line, maximum grades of 2%,
and a heavy climb from the mining town to the summit before starting to
drop to the lake. The cost of construction was more than double that of
Line "A," and the tonnage which can be hauled in either direction is but
a small fraction of that which can be hauled with the same power by Road
"A." A reasonable figure for cost of reproduction may be given as
$60,000 per mile.[4]
Here is clearly a case where the older, less expensively built road has
a value as an earning proposition far in excess of that of the new road.
The rate on commodities does not affect the relative difference. A
higher rate, while permitting Road "B" to live, greatly adds to the
value of Road "A," while the latter can operate at a profit on rates
which would not permit Road "B" to pay expenses.
This example indicates the existence of non-physical values, not only
positive in the case of Road "A," but also negative as to Road "B."
Many properties have been built in the United States, representing large
investments of capital, which are not, and some of which can never be,
profitable business investments. In all such the physical valuation will
exceed the final value where the property is considered as an operating
concern, and a negative factor to cover improper location, uneconomical
design, ill-advised investment, or whatever the trouble may be, should
be applied.
The physical property is that which enables the corporation to do
business. Without physical property it could not produce the commodity
which it sells. The amount of money actually invested in acquiring that
physical property represents the measure of capital on which it is
morally entitled to earn interest and profit; and, in the stage of
promoting and financing the enterprise, all hope of earnings is based on
the amount of money required to construct the property. These
considerations lead the writer to contend that the true method of
valuing a corporate property is first to determine the cost of
reproduction of the property and its depreciation, and modify this
figure by any applicable positive or negative non-physical elements of
value.
-----
Footnote 3:
The term "present value," as used in this paper, should not be
confounded with its use by bankers or accountants, or with the present
worth of a sum of money due at some future time.
Footnote 4:
In this case, traffic as to Line "B" is limited, and as it is feasible
to double-track Line "A" at less cost than Line "B," no advantage can
be assigned to Line "B" on account of development of future business.
THE MICHIGAN STATE APPRAISALS.
Organization.
The State Legislature of Michigan, at the session of 1899, passed an act
creating a Board of State Tax Commissioners and outlining and
prescribing their duties. This act authorized the board to "inquire into
and ascertain the value of the property of corporations paying specific
taxes under any of the laws of this State."
The object of this valuation was to determine the rate at which the
corporations were paying taxes, to the end that necessary laws should be
passed so that all taxable properties in the State might be taxed
uniformly.