usually a desirable feature of a railroad, but it must be clear that if
there were no river between Cincinnati and her sister cities in
Kentucky, communication between the two States might be entirely free,
and the business opening for toll bridges would not exist; consequently,
in these particular cases, the bridges cannot be considered undesirable.
One other consideration bearing on values has been at least suggested by
the study of the Cincinnati Suspension Bridge. It is, as indicated, the
oldest river bridge at Cincinnati, the second or third oldest over the
Ohio River, and, though repaired and strengthened, it has never been
supplanted by an entirely new superstructure. The next oldest bridge is
the pin-connected Pennsylvania Railway Bridge, built five years later
than the Suspension Bridge, but, at the time of this valuation, it had
been entirely replaced by quite a different structure—even the masonry
was largely rebuilt. In a degree this comparative facility with which
provisions for the greater loads can be provided without condemnation of
the leading features of the structures has been shown in the Brooklyn
and Niagara Bridges, though not by any means perfectly, but the point
the writer would make is that this element of ease of reinforcement, or
with which provision can be made for greater loads, is to be considered
in the author's "Physical Property Elements of Value," as doubtless he
has concluded.
HENRY EARLE RIGGS, M. AM. SOC. C. E. (by letter).—The discussion of this
paper has been so full, and so much of it is devoted to bringing out
methods of valuation not fully covered in the paper, that it does not
appear to the writer desirable to do more than to clear up one or two
matters which may have been left somewhat ambiguous in the paper, and to
review the main points on which there is apparent disagreement among
engineers who have engaged in valuation work.
The writer wishes to express, to those who have added so materially to
the value of the paper by their discussion, his sincere appreciation and
his thanks, and he regrets that, owing to the length of the paper and
the extent of the discussion, it will be impossible to review all the
points raised.
It would appear that there are a few matters in regard to which the
writer did not succeed in making his views entirely clear; consequently,
a few words on these items may not be amiss.
_Overhead Charges Versus Unit Values._—The point raised by Mr. Higgins,
that the determination of any percentage figures to be applied to cover
overhead charges must be carefully considered in connection with the
unit prices that have been adopted and applied to the items of the
physical inventory, is well taken. On all valuation work with which the
writer has been connected the various local conditions were taken into
account, and, for each item a figure was used which, it was believed,
would fairly represent such price as would be named by a contractor for
the work under the existing conditions. Therefore, all elements of
hazard to contractors, and contractors' profits, have been included in
the unit price, leaving to be treated under overhead charges only those
elements of cost which the corporation under investigation would be
compelled to bear.
The determination of a proper set of unit prices for a valuation
involves a very careful study of prices and local conditions, so that it
would appear to be impossible to establish any fixed rule which would be
generally applicable to all appraisals. If the unit prices adopted be
the cost to a contractor, then the overhead charges must be made large
enough to cover the contractor's hazard and profit. Every appraisal
should be accompanied with a report or statement, showing clearly what
has been done in this matter.
_Items to be Inventoried._—In reference to the items to be inventoried,
the construction placed on one sentence by Mr. Newton is entirely
foreign to the meaning which the writer intended to convey. Mr. Newton's
statement of his own views is entirely in harmony with those of the
writer.
_Discount._—Messrs. Henry C. Adams and W. H. Williams have both
discussed discount, and both take exception to the conclusions of the
writer. This would appear to be a subject on which there is disagreement
in all professions. Very able and experienced railway managers and
accountants will be found on both sides. Since the paper was written,
the writer has been engaged on the appraisal of a comparatively new
property which was defendant in a condemnation suit. In this case,
20-year bonds were issued in 1905, and sold at an average discount of 15
per cent. The discount has been treated as an interest charge on the
books of the company, and was being written off from year to year. The
question arose: Should the discount balance (approximately
three-quarters of the discount) be added to the physical value and paid
by the parties acquiring the property; or should the loss be sustained
by the owner? The treatment of the account on the books of the company
was in exact accord with the writer's first contention, but a careful
study of the case in hand led to the conclusion that equity demanded
inclusion of the unamortized discount in this case. Had the condemnation
taken place in 1925, after all the discount item had been charged
against operation, no part of this amount would appear to be proper in
an appraisal. This case is cited as being the only one which has come up
in the writer's practice in which he has been inclined to recognize the
propriety of including the item. The writer is not yet convinced that
his first conclusion was in error.
Professor Adams suggests several different claims made as to the
discount item. If any one of them be adopted, has suitable agreement
been advanced for treating the item as a capital charge? Clearly, the
amount of money involved in the discount item is not paid by the company
until the maturity of the bond. It is not invested in the physical
property of the company until it is paid. If written off from year to
year and charged against operation, or treated as a deduction from
earnings or from surplus, it would hardly seem proper to include it in
capital at the end of the period. The writer is open to conviction, but
he has not yet been convinced of his error on this point. Happily, this
is an item, the amount of which may be exactly determined from the books
of any company under investigation; so that, whatever the final
determination may be as to the propriety of its inclusion in an
appraisal, the amount to be treated is not a matter of estimate.
_One Value Versus Several Values._—The writer has called forth
discussion on this point from several members, and, in view of some of
the discussion, he believes that a few sentences may tend to clarify his
views:
(1) An appraisal should be in complete detail, and should show fully,
not only all schedules of physical property and of unit costs and
depreciation percentages on which physical values are based, but should
completely detail all schedules based on an examination of the books.
(2) The final summary should include every element of value which enters
into the property, and which should enter into the "fair value" or "true
value" of the property, if valued for any purpose whatsoever.
(3) An assessed value for taxation purposes should not necessarily
include all the items in the engineering valuation; but an assessment
can be made with absolute fairness if all the facts are at hand and in
such form that non-taxable items are separable.
(4) If rate-making or the sale of the property be the ultimate object,
the work of making rates or of negotiating the sale can be carried on to
better advantage with a complete appraisal than with an incomplete one.
(5) The work in the States of Minnesota and Washington was done with one
object in view. It was ultimately used for another purpose. If a low
valuation is deliberately made for taxation purposes, serious
embarrassment is likely to arise when rate legislation is contemplated.
It will be very difficult for an engineer to sustain his position when
he submits one "true value" or "fair value," with the expectation that
it will be used as a figure for assessed valuation, and another and
radically different one as a basis for rate-making. It would appear to
be much easier to submit a complete set of schedules, showing the cost
of reproducing the physical property, depreciation, present physical
value, together with all other elements affecting the final value, and
then to point out that certain modifications would appear to be proper
in an assessment for taxes.
(6) The actual making of rates or of assessments for taxation is not a
duty usually assigned to a body of engineers.
Mr. Dana's discussion is directed to this phase of the subject, and
brings out a number of points which are suggested above very fully.
This is a matter on which engineers have radically differed in practice,
and it involves a principle of valuation which should be finally
determined as soon as practicable. Further discussion in connection with
this paper would hardly accomplish any definite end, therefore it is
left, with emphasis on the fact that there are radical differences of
opinion regarding it.
_Going Concern._—The discussion of this paper, taken in connection with
the paper by Mr. Alvord before the American Water-Works Association, and
the recent paper by Messrs. Metcalf and Alvord,[49] brings out clearly
three points of view:
(1) That of Professor Henry C. Adams, stated by him in various
publications, and advocated by the writer in the paper: That there is no
going concern value, as such, but that all intangible elements of value
merge into one non-physical value, which may be determined by a study of
the income accounts of the particular property under investigation.
(2) The "Wisconsin Method," sometimes called the Cooley Method. The
general principles of this are described so fully and so clearly in Mr.
Gillette's discussion, under the head of Development Expense, that
further explanation is unnecessary.
(3) The method advocated by Mr. Metcalf in his able discussion of this
paper, and by Messrs. Metcalf and Alvord in their paper.
The writer cannot concede the accuracy of the position of Mr. Burns,
that interest during construction should be eliminated from the physical
valuation of the property and included as part of the "going value."
Interest during construction is no less a part of the actual cost of
constructing the property than the rails in a railroad or the water pipe
in a water-works plant. Nor can the writer accept Mr. Metcalf's
optimistic view of the probable action of the Supreme Court when it will
be called on to pass squarely on the "going concern" value in a rate
case. Mr. Metcalf says:
"Certainly, as applied to water-works valuation, Mr. Riggs'
statement is not justified. The Maine cases clearly include going
value as an element of value on which rates should be predicated; by
inference, so does the Kansas City case. In the Knoxville case it
was in fact allowed by the Master."
This is all true. The Knoxville case, however, reached the Supreme
Court, and the Supreme Court squarely side-stepped "going value" in the
following words:
"We express no opinion as to the propriety of these two items
['organization promotion, etc.,' and 'going concern'], in the
valuation of the plant for the purpose for which it was valued in
this case, but leave that question to be considered when it
necessarily arises."
Judge Lurton, in upholding an intangible value in the Omaha case, and
quoting among others the Kansas City case and the Gloucester and Norwich
cases, which approved and followed the Kansas City case, significantly
adds:
"No such question was considered on Knoxville Water Co. [212 U. S.,
1] or Wilcox _vs._ Consolidated Gas Co. [212 U. S., 19]; both cases
were rate cases, and did not concern the ascertainment of value
under contracts of sale."
The writer quite inclines to the views expressed by Mr. Gillette, and
fails to read any approval of "going concern" or "going value," as
advanced by our water-works brethren, when the determination of a value
on which to base rates is the issue.
That there is sound logic in Mr. Gillette's argument for development
expense—which differs in the last analysis but little from Mr. Metcalf's
presentation of "going value"—the writer will admit. There are many
corporations in existence to-day which have made substantial investments
in creating a successful business after the physical plant was completed
and in operation. It hardly seems equitable that such an investment
should not be taken into account in fixing a value. The real difficulty
lies in drawing the line between the really valuable property, and one
which is truly a profitable investment, and that property which, by
reason of poor business judgment in its creation, faulty or uneconomical
construction or bad management, is not earning a reasonable profit.
The writer has given some study to the theory advanced by Professor
Cooley in the Milwaukee Street Railway case, and later adopted by the
Wisconsin Commission in the Antigo Water case, but is not yet ready to
accept it. The hypothetical curve appears to be acceptable and
reasonable, but the actual application of the formula to cases which
have come under the writer's attention, fails to show a profit at the
end of a period of years. If the rule be stated: "the greater the
deficit in earnings the greater the value," then this method may be of
general application, but it does not appeal to the writer as sound
business to advocate the assigning of any non-physical or "going" value
to a property unless the property has, for some years, actually been
earning a return on the investment which is large enough to justify
fully the claim that it is worth more than it cost, or more than its
present physical value. If, during the first few years, there was a
deficit, due to the expense of creating the demand for the commodity
produced and building up the business to a profitable condition, it may
be sound to include this element in an appraisal. The actual cost may be
determined, but the cost of reproduction is pure speculation. The actual
cost of a ton of rail, a locomotive, a boiler, or the copper for a
transmission line bought fifteen years ago may be radically different
from the cost of reproduction of the same physical things to-day; but
that cost of reproduction is radically determined as the things are
being bought and sold in the open market. Not so, however, with the
development charge, or cost of creating a business. Conditions are not
the same, they may not be at all similar.
Without arguing the subject further, the writer submits that this is a
matter that requires the greatest of care in its treatment. The adoption
of any rule which will assign a "going value" to a property which has
been managed so that it not only has never earned a large return on the
investment, but has not taken care of depreciation—a property which
would not appeal to financial men as a sound investment at its physical
valuation—will not only be difficult to sustain in the Courts, but will
tend to discredit the entire subject of valuation.
The writer's present feeling is that the term "going concern" ought to
be eliminated from the nomenclature of valuation practice, and that
scant consideration ought to be given to any attempt to include
anticipated profits in any manner in a valuation.
Mr. Kuichling has suggested that some further data as to the Michigan
Appraisal might be of value. Unfortunately, the writer has not in
available form information as to different classes of railroads. Table
15, based on the average of all the roads in Michigan, was prepared by
James Walker, Chief Engineer of the Michigan Board of State Tax
Commissioners, after the completion of the Michigan Appraisal. Column 2
gives the percentage of each item to the entire cost of reproduction.
Column 3 gives the average percentage of conditions. The remaining four
columns give the average cost of reproduction per mile on various
mileage bases.
It must be borne in mind that Michigan is geographically unlike any
other State in the Union, that the mileage of high-class main-line
railroad is relatively small, and that there is a large mileage of cheap
branch lines and logging roads. As a result, these general averages are
of little value for comparison with similar figures in other States,
where trunk-line mileage forms a greater percentage of the entire
mileage.
In closing, the writer believes that it is but justice to himself to
correct a few misleading statements in Mr. Williams' discussion which
might cause serious misunderstanding of the writer's views.
Mr. Williams refers to his discussion of Professor Adams' paper before
the American Economic Association in December, 1909, he also again
refers to the same paper, and conveys the impression that the writer
discussed this particular article in the paper before this Society.
Reference to page 105 will show that the writer did not refer to this
paper (which, in fact, he did not see until his own paper was in print),
but to one written by Mr. Williams in January, 1909, and given the
widest publicity, not only by its distribution in pamphlet form, but by
publication in the columns of _Railway Age Gazette_.
TABLE 15.
╒═════════════════╤════════╤════════╤═════════════════════════════════╕
│ Item. │ Per- │Present │ COST PER MILE, ON BASIS OF: │
│ │centage │ value. │ │
│ │of each │ Cost │ │
│ │item to │ per- │ │
│ │ entire │centage.│ │
│ │cost of │ │ │
│ │ repro- │ │ │
│ │duction.│ │ │
├─────────────────┼────────┼────────┼──────┬────────┬────────┬────────┤
│ │ │ │ Main │ Main │ Main │ Main │
│ │ │ │track.│ track │ track, │ track, │
│ │ │ │7,082 │ and │ bran- │ bran- │
│ │ │ │miles.│ bran- │ ches, │ ches, │
│ │ │ │ │ ches. │ spurs, │spurs, 2│
│ │ │ │ │ 7,813 │ and │sidings,│
│ │ │ │ │ miles. │sidings.│ and │
│ │ │ │ │ │ 10,718 │ second │
│ │ │ │ │ │ miles. │ track. │
│ │ │ │ │ │ │ 10,883 │
│ │ │ │ │ │ │ miles. │
├─────────────────┼────────┼────────┼──────┼────────┼────────┼────────┤
│ 1. Engineering │ 2.7│ 100│ 761│ 689│ 503│ 495│
│ 2. Right of way │ 13.7│ 100│ 3,918│ 3,551│ 2,589│ 2,542│
│ 3. Real estate │ 0.4│ 100│ 122│ 110│ 81│ 79│
│ 4. Grading │ 10.7│ 99.9│ 3,064│ 2,777│ 2,025│ 1,994│
│ 5. Tunnels │ 0.6│ 95.2│ 162│ 147│ 107│ 100│
│ 6. Bridges │ 4.0│ 78.9│ 1,133│ 1,027│ 749│ 738│
│ 7. Ties │ 5.5│ 55.2│ 1,578│ 1,426│ 1,040│ 1,024│
│ 8. Rails │ 14.1│ 76.2│ 4,052│ 3,673│ 2,678│ 2,637│
│ 9. Track │ 1.9│ 77.7│ 543│ 492│ 359│ 353│
│ fastenings │ │ │ │ │ │ │
│10. Frogs, │ 0.7│ 70.7│ 207│ 188│ 137│ 135│
│ switches │ │ │ │ │ │ │
│11. Ballast │ 1.8│ 100│ 525│ 477│ 347│ 342│
│12. Track laying │ 3.2│ 97.6│ 926│ 839│ 612│ 602│
│13. Fencing │ 1.4│ 58.9│ 390│ 354│ 258│ 254│
│14. Crossings │ 0.3│ 70.5│ 86│ 78│ 57│ 56│
│15. Interlockers │ 0.2│ 89.4│ 71│ 64│ 47│ 46│
│16. Telegraph │ 0.1│ 52│ 36│ 33│ 24│ 24│
│17. Stations │ 0.2│ 75.7│ 580│ 526│ 384│ 378│
│18. Shops │ 0.1│ 68│ 305│ 276│ 202│ 198│
│19. Shop │ 0.5│ 79.6│ 156│ 142│ 104│ 102│
│ machinery │ │ │ │ │ │ │
│20. Water │ 0.4│ 71.9│ 103│ 93│ 68│ 67│
│ stations │ │ │ │ │ │ │
│21. Fuel stations│ 0.1│ 66.4│ 43│ 38│ 29│ 28│
│22. Elevators │ 0.6│ 75.5│ 189│ 171│ 125│ 123│
│23. Warehouses │ 0.1│ 71.1│ 37│ 35│ 24│ 24│
│24. Docks and │ 2.7│ 69.3│ 781│ 708│ 516│ 507│
│ wharves │ │ │ │ │ │ │
│25. Miscellaneous│ 0.6│ 69.4│ 174│ 158│ 115│ 113│
│ structures │ │ │ │ │ │ │
│26. Locomotives │ 4.4│ 56.4│ 1,274│ 1,154│ 342│ 829│
│27. Passenger │ 1.6│ 71.2│ 452│ 409│ 299│ 294│
│ equipment │ │ │ │ │ │ │
│28. Freight │ 9.7│ 69.4│ 2,787│ 2,525│ 1,841│ 1,813│
│ equipment │ │ │ │ │ │ │
│29. Miscellaneous│ 0.3│ 60.3│ 99│ 90│ 66│ 65│
│ equipment │ │ │ │ │ │ │
│30. Ferries and │ 0.8│ 63.5│ 244│ 221│ 161│ 159│
│ steamers │ │ │ │ │ │ │
│31. Electric │ 0.004│ 96.6│ 13│ 12│ 9│ 9│
│ plants │ │ │ │ │ │ │
│32. Terminals │ │ │ │ │ │ │
│33. Legal │ 0.3│ 100│ 95│ 86│ 63│ 62│
│ expenses │ │ │ │ │ │ │
│34. Interest │ 2.6│ 100│ 747│ 677│ 494│ 486│
│35. Organization │ 1.3│ 100│ 373│ 339│ 247│ 243│
│36. Contingencies│ 9.1│ 82│ 2,602│ 2,358│ 1,712│ 1,695│
│37. Total cost │ 100 │ 82.1│28,623│ 25,945│ 18,914│ 18,627│
╘═════════════════╧════════╧════════╧══════╧════════╧════════╧════════╛
The writer does not care to permit to go unnoticed the imputation that
he has attacked railroad officials as a class. If such inference is to
be drawn from this paper, he desires to correct it.
The writer was in railway service for some years, for six years in an
official position. For the past fifteen years he has been, at frequent
intervals, on special service for railroads. He is at present under
employment by two of the principal railways of the country. He has many
warm friends in the service, many in official capacities, and he is
fully cognizant of the high ability, integrity, and loyalty of railway
employees, and by employees he means to be understood as including all
classes, from the highest officials down.
Inasmuch as our railroads form our greatest industry, and inasmuch as
the active heads of the large roads have under their control such
properties as but few in other fields are called to administer, it
follows that there are hundreds—yes, thousands—of men in railway
service, competent to fill any office in the land. The writer repeats:
it is a pity that the demands of their work are such that they cannot
give more of the benefit of their highly specialized training to the
public service, and that they have so often apparently misunderstood or
misconstrued the perfectly honest attempts of public officials to find a
remedy for real evils.
In closing, the writer desires to say that he regrets the impossibility
of treating the subjects of depreciation and fair return in a
satisfactory manner without unduly lengthening this discussion.
It may not be out of place to say that, in the writer's opinion, a fair
return on the average public service corporation property should be
considerably in excess of the figures usually named. There is but little
incentive to invest in railways, street railways, or other public
service corporations, if the limit of return is to be 7%, or 8%, or even
10%, on the actual investment. This is especially true where the hazard
of investment is increased by term franchises under which the companies
are operating. The writer has the most absolute confidence in the
ability and integrity of our Supreme Court, and is led to believe that,
on a proper showing, confiscation will not be permitted.
He also believes that, in general, the great mass of intelligent people
wish only absolutely fair dealing with the corporations.
On making a full and frank showing of facts and conditions, the public
service corporation which is honestly financed and honestly operated,
need have little fear of ultimate justice.
The public service corporation which is administered, not to render
service to the public, but to permit stock speculators to reap a
harvest, can hardly hope for the same brand of justice, and it is hardly
to be expected that such a corporation will welcome publicity.
-----
Footnote 19:
_Electric Railway Journal_, January 8th, 1910. p. 76.
Footnote 20:
December 4th, 1910.
Footnote 21:
_Railroad Age Gazette_, July 24th, 1908. p. 587.
Footnote 22:
_Engineering News_, June 16th, 1910, p. 697.
Footnote 23:
March 4th, 1910.
Footnote 24:
_Railroad Age Gazette._ July 31st. 1908, p, 627.
Footnote 25:
_Engineering-Contracting_, May 25th, 1910, p. 468.
Footnote 26:
_Railway Age Gazette_, March 4th, 1910, p. 437.
Footnote 27:
_Electric Railway Journal_, January 15th, 1910, p. 110.
Footnote 28:
Professor of Political Economy and Finance, University of Michigan.
Footnote 29:
For convenient reference, a set of these forms is filed in the Library
of the Society.
Footnote 30:
Now M. Am. Soc. C. E.
Footnote 31:
_Transactions_, Am. Soc. C. E., Vol. LII, p. 328.
Footnote 32:
"Elements of Railroad Engineering."
Footnote 33:
Michigan Central _vs._ Powers Record, p. 500.
Footnote 34:
Second Annual (1888) Report of the Interstate Commerce Commission, p.
64.
Footnote 35: