of Railway Operating Property in the United
States: 1904." Bulletin 21, United States
Bureau of the Census. Contains an exhaustive
discussion of sundry methods of valuation.
The most complete series of papers on
valuation yet published.
_The Chicago Appraisal._—
Report to the Common
Council on Railroad Valuation. B. J. Arnold,
M. Am. Soc. C. E., M. E. Cooley, and A. B.
Du Pont.
_The Michigan Appraisal._—
"Expert Valuation of
Railway and Other Corporate Property in
Michigan." E. E. R. Tratman, Assoc. M. Am.
Soc. C. E. _Engineering News_, December
20th, 1900. A descriptive paper.
"What is the Value of
a Railroad for the Purpose of Taxation?"
Charles Hansel, M. Am. Soc. C. E. _Railroad
Gazette_, April 19th, 1901. Discussion of
the work done by Professor M. E. Cooley, and
on valuation in general.
"Michigan Railroad
Appraisal—Valuation of Physical Properties."
Professor Mortimer E. Cooley. Bulletin 21,
U. S. Bureau of the Census, p. 76.
"Michigan Railroad
Appraisal—Valuation of Non-Physical Elements
of Railway Property." Professor Henry C.
Adams. Bulletin 21, U. S. Bureau of the
Census, p. 78.
_The Minnesota Appraisal._—
"Valuation of Railway
Property." A. S. Cutler. _Year Book_,
University of Minnesota, 1908. An account of
the methods used for obtaining and checking
the information.
Report on the
Valuation of Railways in Minnesota, January,
1909. Minnesota State Railroad Commission.
"Valuation of
Railways in Minnesota." _Railway Age
Gazette_, February 5th, 1909. A descriptive
article.
_The Texas Appraisal._—
"Railroad Franchise
Values in Texas." W. H. Coverdale, Assoc. M.
Am. Soc. C. E. _Railroad Gazette_, February
12th, 1904. Discussion of methods used in
Texas.
"Methods Used by the
Railroad Commission of Texas Under the Stock
and Bond Law, in Valuing Railroad
Properties." R. A. Thompson, Assoc. M. Am.
Soc. C. E., with discussion by Messrs. E. L.
Corthell, F. Lavis, W. H. Coverdale, and W.
D. Taylor. _Transactions_, Am. Soc. C. E.,
Vol. LII, p. 328, _et seq._
_The Washington Appraisal._—
"Report to the
Washington Railroad Commission on the
Valuation of Railways in Washington."
Halbert P. Gillette, M. Am. Soc. C. E.
_Engineering-Contracting_, April 7th, 1909.
_The Wisconsin Appraisal._—
"Wisconsin Railroad
Valuation." W. D. Taylor, M. Am. Soc. C. E.
Bulletin 21, U. S. Bureau of the Census, p.
82.
"The Appraisement of
the Physical Value of Wisconsin Railways for
the Purpose of Taxation." W. D. Taylor, M.
Am. Soc. C. E. _Engineering News_, March
31st, 1904.
Discussion on
"Valuation of Railroad Properties." W. D.
Taylor, M. Am. Soc. C. E. _Transactions_,
Am. Soc. C. E., Vol. LII, p. 353.
"Report to the Tax
Commission." W. D. Taylor, M. Am. Soc. C. E.
Report of the Wisconsin Tax Commission,
1907, p. 269.
"The Work of the
Joint Engineering Staff of the Wisconsin Tax
and Railroad Commissions." W. D. Pence, M.
Am. Soc. C. E. _Journal_, Western Society of
Engineers, Vol. XIV, p. 73. (Abstract.)
_Engineering News_, March 4th, 1909.
_Water-Works Valuation._—
"Water-Works
Valuation and Fair Rates, in the Light of
the Maine Supreme Court Decisions, in the
Waterville and Brunswick Cases." Leonard
Metcalf, M. Am. Soc. C. E. _Transactions_,
Am. Soc. C. E., Vol. LXIV, p. 1. (A complete
bibliography of the subject of water-works
valuation may be found on p. 69 of Mr.
Metcalf's paper.)
TABLE OF CONTENTS.
PAGE
INTRODUCTORY 1
_Reasons for Valuation_ 2
_As a Matter of Public Interest_ 2
_As a Matter of Corporation Necessity or Expediency_ 3
_Difficulties of Accurate Valuation Encountered_ 4
THE RELATION OF PUBLIC SERVICE, OR QUASI-PUBLIC CORPORATIONS, TO 6
THE PEOPLE
_Supreme Courts_ 8
_Regulation and Legislation_ 10
EXPLANATION OF TERMS 16
_Appraisal or Valuation_ 16
_Cost of Reproduction_ 16
_Cost, or Original Cost_ 16
_Present Value, or Present Physical Value_ 16
_Non-Physical, or Intangible, Value_ 17
_Elements of Final Value_ 18
_The "Physical Property" Element of Value_ 18
_The "Non-Physical" or "Intangible" Elements of Value_ 18
_True Method of Valuation_ 19
THE MICHIGAN STATE APPRAISALS 20
Organization 20
_Administration_ 20
_Civil Engineering_ 20
_Mechanical Engineering_ 20
_Telegraphs_ 20
_Telephones_ 21
_Vessel Properties_ 21
_Methods of Procedure_ 21
_Difficulties_ 22
_Lack of Complete Understanding on the Part of the State 22
Officials_
_The Attitude of the Railroad Corporation Managers_ 22
_The Confused Condition of the Records_ 22
_Forms Used_ 23
_Board of Review_ 36
Office and Field Methods 37
_Making the Inventories_ 38
_Office Inspection as a Check on Field Work_ 39
_Field Inspection_ 40
_Special Work on the Chicago and Northwestern Railway_ 40
_Special Valuations_ 41
_Computation_ 42
_Filing in Office_ 42
_Computation Tables_ 43
_Unit Prices_ 43
_Classification_ 45
_Compilation_ 46
Special Problems of the Mechanical Department 46
_Assignment of Value to States_ 46
_Freight Car Inspection_ 47
_Locomotives_ 48
_Vessels_ 48
Overhead Charges 49
_Engineering_ 49
_Legal Expense_ 49
_Organization Expense_ 49
_Interest_ 49
_Discount on Bonds_ 49
_The Charge of Ten Per Cent. for Contingencies_ 50
Right-of-Way Values 52
_Comparison of Country Land Values_ 59
_Average Price per Acre for Village Land_ 63
_Comparison of Valuation Figures with Actual Considerations_ 64
Non-Physical Values 64
History and Results of the Michigan Appraisal 67
_Market Value of Stocks and Bonds_ 67
_Error in Published Reports as to Michigan Work_ 67
_The Cost of the Work_ 69
_Grand Summary of Railroad Appraisal of 1900 as to 70
Seventy-eight Incorporated Railroads_
_The Result of the Michigan Appraisal_ 70
RAILROAD APPRAISAL OF THE STATE OF TEXAS 71
_Authority for the Work_ 71
_Method of Physical Appraisal_ 72
_The Result of the Texas Work_ 73
RAILROAD APPRAISAL OF THE STATE OF WISCONSIN 75
THE MINNESOTA STATE RAILWAY APPRAISAL 77
_Land Valuation_ 78
_Forms Used in the Compilation of Information_ 79
THE WASHINGTON STATE APPRAISAL 79
THE VALUATION OF TRACTION PROPERTIES IN CHICAGO 94
THE COMMERCIAL VALUATION OF RAILWAY OPERATING PROPERTY OF THE 97
DEPARTMENT OF COMMERCE AND LABOR
THE EXTENT OF APPRAISAL PRACTICE 99
REVIEW OF SOME METHODS OF VALUATION, AND SOME OF THE CRITICISMS ON 101
THE MICHIGAN APPRAISAL
THE DETERMINATION OF ELEMENTS OF VALUE AND METHODS OF VALUATION BY 112
THE COURTS
PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION 128
_The Preliminary Study_ 132
_The Field Inspection_ 135
_The Computation_ 136
_Classification of Properties_ 137
_Unit Values_ 138
_Right of Way and Real Estate_ 139
_Depreciation_ 141
_Immaterial Elements of Physical Property_ 142
_Organization_ 143
_Legal Expense_ 143
_Engineering_ 143
_Administration_ 143
_General Expense_ 143
_Discount_ 145
_Working Capital_ 145
_Contingencies_ 145
_Design_ 146
_Adaptation_ 146
_Apportionment of Values_ 147
_Terminals_ 147
_Development of the Art_ 148
The Preparation of the Final Figure 150
NON-PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION 150
_"Going Concern" Value_ 154
_Developed Business_ 155
_Cost of Handling Business_ 155
_Good Will and Established Organization_ 155
_Franchise Values_ 156
_Conclusions Regarding Non-Physical Rules for Determination_ 165
CONCLUSION 165
BIBLIOGRAPHY 168
_Railroad Valuation_ 168
_The Chicago Appraisal_ 169
_The Michigan Appraisal_ 169
_The Minnesota Appraisal_ 169
_The Texas Appraisal_ 169
_The Washington Appraisal_ 170
_The Wisconsin Appraisal_ 170
_Water-Works Valuation_ 170
DISCUSSION
FRED LAVIS, M. AM. SOC. C. E.—The author states that his 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,"
and that "it does not take up questions involving the propriety of those
figures when reached." In so far as this is concerned, it is probably
the most complete compilation of the available information on this phase
of the subject which has yet appeared in print. The author refuses to
recognize that the consideration of the so-called intangible values has
any place in a physical valuation. As, however, there exists such a
widespread feeling, especially among those interested in railroads, that
physical valuations, for any purpose whatever, are absolutely useless,
because these intangible values are not or cannot be included, it does
not seem out of place to refer to this phase of the subject at this
time, and more especially in view of the fact that many persons, the
prominence of whose position entitles them to consideration, have taken
this point of view very recently, and their remarks have received
considerable publicity. Not more than two weeks ago, Judge Lovett, the
head of the Harriman System, expressed the opinion that the theory of
valuing railroad property by trying to determine the cost of
reproduction was utterly impractical. It seems important, therefore,
that we, as engineers, interested in having the question properly
understood, should be careful, in referring to valuation, to make it
plain that other features besides the value of the physical property are
to receive due consideration. The speaker, therefore, proposes to
examine some of the arguments advanced by the opponents of valuation to
see if the objections most generally brought forward are insuperable.
Some critics of valuation go so far as to say that engineers cannot make
a close valuation of even the purely physical property. For instance,
Mr. W. H. Williams, Vice-President of the Delaware and Hudson Company,
in a paper on this subject,[19] states that:
"No engineer in estimating on the several important items of
construction work for the year will come within 10 per cent. of the
total aggregate cost. Many of the more important items are
frequently underestimated 25 to 50 per cent."
He cites, as an especially good illustration, the Panama Canal, the
original estimate of the cost of which was $140,000,000, though the
present estimate is $300,000,000. Almost every one who has kept in touch
with that subject knows why the Panama Canal has cost more than the
original estimates, and that the greater cost is no reflection on the
judgment of the engineers who made such estimates. One cannot always
foresee what changes in plans may be made before construction is
completed, and would hardly expect the estimates of the cost of a
railroad to be adequate if they were made for a single-track road and a
double-track was built. In any event, there is a vast difference in
estimating the cost of an engineering work already completed and one
which has yet to be started, the difference being largely in favor of a
closer estimate of the completed work.
Limitations are often placed on engineers, in connection with work they
do, which are afterward forgotten. The speaker was asked not long ago to
prepare a report in connection with the valuation of a large railroad
property. The time within which the results were required was very
limited, and the methods used in the valuation necessarily had to be a
combination of the inventory method and reliance, in a great many
matters, on the judgment of those making the appraisal. Undoubtedly the
result obtained was entirely adequate for the purpose for which it was
required, but would hardly stand if an attempt were made to use it as a
basis for an argument before a Court of law or a public service
commission, though it would not be beyond the range of the experience of
many engineers to have a matter of this kind brought forward some time
in the future as an absolute statement of fact, with no reference to the
way in which the work was done.
It is inevitable, of course, that engineers will differ in their
opinions as to some details of methods of making an inventory of the
property of a railroad or other public service corporation, and also as
to exactly what unit prices should be applied, but in general it is safe
to say that any engineer of proper experience and training can make a
satisfactory appraisal of the value of the physical property of a
railroad, and that if two or more such competent fair-minded engineers,
unhampered by any consideration of the purpose for which it is to be
made, should make such an appraisal, the variation in the result would
be so small as to be negligible. The speaker, however, does not entirely
agree with the author, that the purpose for which the appraisal is to be
used should be entirely ignored by those who are making it. There can be
little doubt as to the propriety of using a properly made physical
valuation as a basis for taxation, or as information for the owners,
although there may be some as to the methods whereby the so-called
intangible values are to be determined in these cases, or even whether
they should be considered at all. The greatest difference of opinion
arises when an attempt is made to regulate the issue of stocks and
bonds, or to fix the rates which should be charged for transportation,
on the basis of a physical valuation.
Arguments for and against rate regulation revolve in a circle, and,
apparently, there is no starting point which will satisfy every one. The
Courts have ruled that the railroads are entitled to such rates as will
enable them to earn a fair return on the value of their property; the
railroads claim that the only way to determine this value is on the
basis of the earning capacity; that is, one side claims that the rates
must be based on the value and the other that the value should be based
on the rates. It is evident, however, by this time, that the railroads
must submit to regulation, therefore a way must be found to break into
the circle, and it would seem to be incumbent on them to direct their
energies along lines which will tend to make such regulation fair and
just rather than to oppose it entirely. There is little claim that
unduly large dividends are paid, but there is a feeling in the mind of
the public that the railroads are over-capitalized. Is it not possible,
therefore, to break into the circle at this point, and decide, by means
of a proper valuation, as to the fairness or otherwise of the
capitalization? The objection to this, on the part of the railroads, is
that the value of the purely physical elements is by no means the whole
value of their property, but that something should be added for the
so-called intangible values.
To emphasize the difficulties of appraising the intangible values in any
way which will permit the application of such value to the determination
of rates for transportation, the opponents of physical valuation cite
what is now the familiar instance of two mythical roads between the same
termini, the first with good alignment and easy grades following a
valley, and the second forced into the mountains, having not only
heavier grades and more curvature, with consequently a higher cost of
operation, but also more expensive construction. The value of the purely
physical features of the former, of course, would be much less than
those of the latter, but its actual value as a property would be
greater. How then should the rates on the two roads be fixed? The
fallacy of using this example as an argument against physical valuation
as a basis for rate-making is in assuming that there would be two
railroads built under such circumstances, with no other features than
the two termini and the line between.
One has only to call to mind such examples of competing lines as those
of the Denver and Rio Grande between Denver and Salt Lake, the Union
Pacific between Cheyenne and Ogden, the Lackawanna and New York Central
between New York and Buffalo, or many others, to realize that there are,
on all roads of this nature, many other factors than the actual cost of
operating through trains between the termini, which determine the
through rates.
One would hardly suppose that at this late date any one believes that it
is proposed to use only the value of the purely physical property of
railroads as a basis for rate regulation, yet the _New York Sun_, a
paper of national prominence and usually most ably edited, devoted a
column of its editorial page[20] to a discussion intended to show that
rate regulation, based on physical valuation alone, was an
impossibility.
In addition to citing the example given above, the following is put
forward as the _reductio ad absurdum_ of the argument for rate
regulation based on physical valuation. It is said:
"Suppose there are two bridges over the Ohio, the _cost of the
construction of each being the same_, one between Cincinnati and
Newport and the other twenty miles below where there is nothing but
a village on either shore.... On what basis would the proponents of
physical valuation, as the determining value in rate making, adjust
a toll charge on these respective bridges?"
The example is far-fetched, and in no way applicable to the question of
the adjustment of rates on railroads, but inasmuch as it is seriously
put forward from a responsible source, it seems worth while to consider
it.
Assuming, as apparently the propounder does, that the proposition is
uncomplicated by any questions of franchises, public rights in the land
on which the bridge and its approaches are built, etc., then there is no
question but that the owners of either bridge have a perfect right to
charge what toll they please. On the other hand, suppose the permission
of the War Department, or some other governing body, had to be obtained
in order to build piers in the river, or even to build the bridge at
all; the argument used in asking for this permission is that the bridge
is needed as a public convenience; or it is desired to occupy certain
streets for the approaches, again is used the argument of public
convenience, and so on. These privileges are granted on the tacit
understanding, at least, that the public convenience is to be served,
and the Courts rule that, in such cases, in consideration of the equity
which the public has in the property by reason of the rights granted, a
fair return on the value of the property, but no more, should be the
basis for establishing the rates of toll. Would the _Sun_ claim that the
value of the rights and franchises given by the public in such a case,
be included in the value of these bridges, and that a higher total
income should be derived from one bridge than the other because the
value of the streets on which the approaches had been built is greater
in one case than the other; or that a greater income should be derived
in one case than another because the cities furnish more people than the
villages? Is there any particular reason, except for the slightly larger
depreciation and cost of maintenance, and, bearing in mind the fact that
both bridges cost the same, why, if there is ten times as much traffic
on one bridge as on the other, the toll should not be proportioned
accordingly, to provide the same income on each?
If the _Sun_ had imagined a bridge built by private individuals, with
their own money, between two villages, the inhabitants of which, at the
time the bridge was built, having been willing to grant almost any
franchises or privileges in order to get the bridge, the villages in
course of time growing to large cities, and the old bridge having been
replaced by a heavier modern structure, the example might have been more
nearly comparable to the railroad situation. In this case, the original
toll, of say 10 cents a head, may have, in the early days, only barely
returned a meager rate of interest on the investment, or even for some
years resulted in a deficit. Would the _Sun_ uphold the owners of the
bridge if, since the villages have grown to cities, they still insisted
on collecting the original toll, if it could be shown that a new bridge
could be built and would be a paying investment with a toll of, say, 2
cents, except for the fact that the original bridge was built in the
only location where it was practical to build a bridge at all? Or is it
reasonable to say that the foresight and energy of the owners of the
bridge, even though it may have been one of the principal factors in
enabling the villages to grow into cities, entitle them to capitalize
their enterprise on the basis of a 10-cent toll? It cannot be denied
that the energy and foresight of the original builders should be
recognized in fixing the rate of toll, but there is a limit to the value
of this, and it is because of the feeling on the part of the general
public that the capitalization of similar intangible values on the part
of the railroads and other public service corporations is too large,
which, whether true or not, has caused the present agitation against
them. If the capitalization is reasonable, there must be some way to
demonstrate the fact, and it seems as if a properly made physical
valuation, with due allowance for the intangible values, is at least a
step in the right direction.
The _Sun_ states in its editorial that:
"The scheme of physical valuation, as a basis for rate making, is
flatly rejected as unworkable by practically all the ablest railway
authorities of the country, and that the only true measure of value
is the earning capacity."
To quote only one, namely: Dr. Emory R. Johnson, who is generally
regarded as an authority and not by any means predisposed in favor of
the public as against the railroads, it is found that he states in his
"American Railway Transportation" that:
"The earning capacity of the railroad cannot be equitably or
logically made the sole criterion of value, because the rates, and
hence the earnings, should depend to some extent, at least, upon the
amount of capital justly entitled to profit."
It would seem to be self-evident that the earnings alone, either gross
or net, are not necessarily an indication of the value of the road.
Gross earnings are not, because, if a minimum proportion of them is used
for maintenance and betterment, the value of the property will steadily
decrease; whereas, if the opposite policy be followed, it will increase.
On the same principle, the net earnings offer no criterion as to the
manner in which the property has been kept up, and alone are, therefore,
no measure of its true value.
As an example of the arguments used by some of the opponents of physical
valuation, the following quotations are made from an article by Mr.
Henry Fink, Chairman of the Board of the Norfolk and Western
Railway.[21] Referring to the fluctuation in the costs of construction,
he says:
"As the cost of materials and labor fluctuates ... it follows that
what may be a fair valuation of a railroad one year may not be so
one or two years later. Hence, it would be necessary to make new
valuations from time to time."
Further, in the same article, referring to a valuation based on the
market value of bonds and stocks, he says:
"Unlike the physical valuation, this method has a rational basis....
It is true that prices of stock fluctuate—at times violently—but
this difficulty can be overcome in a measure by using the average
prices for long periods."
It is strange that it did not occur to so able a man as Mr. Fink that
the value of the physical property might also be based on average prices
for long periods; the cost of railroad construction and equipment as a
whole does not fluctuate nearly so violently as the stock market.
The report on "The Basis of Unit Prices,"[22] by W. D. Pence, M. Am.
Soc. C. E., the Engineer of the Wisconsin Railroad Commission, in
connection with the Appleton Water-works case, is an excellent example
of a fair and impartial study of this phase of the subject, and the
conclusion of the Commission in this matter can only be regarded as
reasonable by any one who is disposed to be at all fair-minded. It says:
"If the standard by which the reasonableness of charges is to be
determined should fluctuate with the market prices of material,
labor and land, no schedule of rates could be established for any
length of time, for, under the circumstances, a rate that would be
reasonable to-day might be very unreasonable to-morrow. The
principles of the law applicable to the subject certainly involve no
such absurd consequences."
Another instance of an argument based on technicalities is found in the
_Railway Age Gazette_.[23] In an editorial on Valuation and Rate
Regulation, it is said: