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. Onecannot 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 theNew 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 thereductio ad absurdumof the argument for rate regulation based on physical valuation. It is said:
"Suppose there are two bridges over the Ohio, thecost 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 theSunclaim 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 theSunhad 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 beenreplaced 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 theSunuphold 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.
TheSunstates 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 theRailway Age Gazette.[23]In an editorial on Valuation and Rate Regulation, it is said:
"It has been supposed in the past that rate-making is an exercise of judgment. It seems to be assumed by many that after a valuation has been made it will be merely an exercise in mathematics. Suppose the value of a railway for state purposes is $50,000,000. Then, on this theory, all that will have to be done will be to multiply this amount by 6 per cent.—or whatever may be regarded as a fair return—and so adjust the rates as to enable the road to earn, say, $3,000,000 a year,"but, the writer goes on to ask, "how are the specific rates to be fixed? A great majority of those who advocate valuation say that they should be based on the cost of the service. The proper method, then, would be to ascertain the exact cost of hauling each commodity and then base rates on these ascertained costs, making them just high enough to allow the road a fair return."
Then the article goes on to point out the difficulties of doing this, which of course we all know, and finally concludes that: "The theory of basing rates absolutely on the cost of service is unjust and impracticable." In the present state of the art this is probably true, but why is it necessary to change the present theory of rate-making because the rates are to be lowered or raised? If, for instance, it is shown that it is necessary to reduce the rates sufficiently so that the net earnings will be reduced, say, approximately 10%, is it beyond the capacity of the traffic officials of a railroad to adjust their rates accordingly?
In an editorial in another part of this same issue theGazetteadvocates the raising of rates to meet higher prices of supplies and higher wages; it is surely as feasible to lower rates as it is to raise them, and, even though it were necessary to base rates on the cost of service, it does not seem as if that would be entirely impractical, inasmuch as it is the whole argument advanced for raising the commutation rates on the railroads entering New York City. Will theGazettesay that the arguments put forward by these railroads are all wrong? Mr. Fink, in the article[24]already referred to, states:
"It cannot be said that ... railroads make tariffs; they can only adjust them to varying conditions."
"Adjusting freight rates is practical work of men who have special training for it and large experience. They may not all be able to explain underlying principles, such as the value of service, but they have used this principle for years, and apply it, intuitively in every case which comes before them."
Surely this body of men is equal to whatever adjustment may be necessary. Rates will probably never be arranged to suit every individual shipper; but if the people, as a whole, believe that the railroads are fairly capitalized on a reasonable basis of value, and the rates, in the aggregate, are adjusted so that unduly high profits are not made, individual complaints of injustice may easily be taken care of.
The most important considerations affecting the regulation of railroad rates arise in attempting to fix the amount which shall be considered a fair return on the investment. If a certain rate of interest is fixed as the maximum which may be earned, all incentive toward improvement or progress is removed. The effect of this would be, of course, to retard all development. Once a railroad was earning itslegal rate of interest, there would be no necessity of cutting down grades, building larger locomotives to handle larger trains, investigating the economics of operation and location, in order to introduce the thousand and one economies which are being developed day by day, or for our railroad presidents to lie awake nights thinking how they are to save that million dollars a day for the benefit of the always ungrateful shipper. This objection against rate regulation, and incidentally against physical valuation, can undoubtedly be overcome. One proposal which has been made is somewhat along the lines on which it is proposed to finance the New York Subways, the profits to be divided between the railroads and the State, after a certain rate of interest had been earned. There is nothing novel about this, as several railroad charters have been granted with a provision that all earnings, over an amount necessary to provide a certain rate of interest, should be paid to the State. Another suggestion[25]is that the reasonable rate of return be fixed as a percentage of the gross income, irrespective of the amount of capital required to produce it. There are probably other ways in which this might be worked out and adjusted, and this phase of the subject surely does not present any insuperable objections.
That the railroads have little to fear, in regard to capitalization, from a properly made valuation, is shown by the results in the State of Washington, where the valuation was undertaken solely for the purpose of fixing rates, the result being a determination of the market value of the three principal railroads of the State—the Northern Pacific, Great Northern, and Oregon Railroad and Navigation Company—at an amount considerably in excess of their capitalization.[26]It is true that rates were lowered in this case on some commodities, but it does not necessarily follow that every change of rates on the basis of valuation must be toward a lower scale. Railroad rates are low and have stayed low while the cost of everything else has been raised, and yet, while this fact is well known to the general public, they still believe that, in some way or another, the railroads are getting or have been getting more than their proper share of profits. Evidently there is something wrong somewhere, and it is not going to be set right by calling the public fools and ridiculing their presumption for meddling in any way with railroad affairs. Mr. F. W. Whitridge, the Receiver of the Third Avenue Railroad, of New York, while stating[27]that he had only just discovered that there was such a thing as valuation, at the same time held up the whole scheme to ridicule, though he admitted that:
"The people of this country have, I think wisely, made up their minds, in consequence of great corporate abuses, that public service corporations should be subject to regulation, etc."
He nevertheless ridicules the efforts of the authorities, particularly their endeavors in the matter of valuation, with its "irreverence for facts." They seem, he says, "to be singing the song of the Banderlog who dreamed of
"'Something noble, grand, and goodWon by simply wishing we could.'"
"'Something noble, grand, and goodWon by simply wishing we could.'"
"'Something noble, grand, and goodWon by simply wishing we could.'"
"'Something noble, grand, and good
Won by simply wishing we could.'"
Valuation, however, has gone far beyond the point where it can be considered a visionary scheme, or can be held up to ridicule; and it has been worked out far enough to show, at least, that there is a rational basis, on which a determination of values can be made, which will do justice to both sides; furthermore, the Supreme Court of the United States has not only ruled that valuation must necessarily be precedent to rate regulation, but has gone so far as to specify at least some of the elements which must be taken into account, and it may be worth while noting that, in spite of the author's criticisms of the Washington State Valuation, it is the only one, thus far, in which an attempt has been made to comply with the rules laid down by this Court. The results in Washington, however, indicate clearly the need of regulation of the railroads, as a whole, and not varied regulation by individual States of the parts of systems within the borders of each.
Arguments on either side can be prolonged indefinitely, and many good reasons for and against physical valuation are advanced from time to time, just as they may be on any proposition. Some of the principal objections have been referred to here in an endeavor to show that they are not insuperable; the point which concerns us now is that to-day we are confronted with a fact and not a theory, and that fact is that the railroads are going to be regulated, and that their proper development is held back and general business is hampered by the feeling of uncertainty as to the outcome. Physical valuation is not a panacea for all evils, but a properly made valuation of the physical elements, with a due allowance for the intangible values, based possibly on some such method as that developed by the Washington State Commission or by Professor Adams in Michigan, is surely as good a way of breaking into the circle of argument as any that has been proposed thus far.
The equipment of freight trains with air brakes and safety couplers was practically forced on the railroads by the pressure of public opinion led by laymen, yet one will hardly find a railroad man now who will not admit that this is good practice, not only from the standpoint of safe operation, but from that of economy as well. The early attitude of the railroads in this matter is already being quoted by the advocates of valuation, and inasmuch as we have to admit, as we surely do, that a start is going to be made somewhere along the line of obtaining some more definite information in regard to the truerelation of the value, capital, and profits, of railroad properties, than the mere statement by the railroads themselves that they are all that is good and fair, would it not be wise on their part to do all they can to have the start made properly rather than oppose it? Some of the most prominent and progressive railroad men of the country have already arrived at the point of believing and saying that regulation properly carried out may not be an unmixed evil, in fact, would probably be beneficial, but they still balk at valuation, without, however, suggesting any other means whereby the general public is to obtain the information on which to base an intelligent opinion as to how such regulation is to be carried out.
The speaker does not for a moment underestimate the difficulties incident to the determination of the intangible values, or forget the difference between the problem presented by the comparatively new lines in the State of Washington and a valuation of, say, the Pennsylvania Railroad or the New York Central. No one who gives any real thought to the problem pretends that the value of a railroad is the value of its purely physical property; but, because the matter of determining the intangible values is difficult and complicated, is it necessary that we should sit back and fold our hands and say "it can't be done"; that in the whole country there is no man or body of men, or engineers, if you please, with brains and ability enough to solve the problem? As for cost, is it not worth $10,000,000, which is more than $40 per mile for all the railroads in the country, or about three times as much as the cost of the most careful appraisals yet made, to have the question put once and for all on a stable basis, satisfactory to all, if the problem be approached in a fair, broad-minded, common-sense way, by engineers big enough to command the respect of both sides? Aside from the question of rate regulation, is it not worth this much to the railroads of the country to be able actually to prove that the amounts at which they are capitalized are reasonable, as in the great majority of cases they probably are?
There are one or two points which, it seems to the speaker, cannot be too strongly emphasized:
First, that valuations properly made may be the means whereby confidence may be restored, not only in the mind of the general public, but in that of the investor; but, in order to obtain this result, the railroads should urge, with all the power they possess, the necessity of having such valuations made by a body of men, some of whom, at least, should be engineers, big enough to entitle their opinions to the respect of both sides, and thoroughly qualified by training and experience for the work.
Second, that, as far as possible, regulation should be general or national, so as to avoid the complication of dividing all roads at the State lines, and of having different regulations in different States.
Third, that there need not necessarily be any relation between rate regulation and rate-making. Rate regulation can well be confined to rates in the aggregate, rate-making applies to the adjustment of individual rates, and must necessarily be the work of men well versed in all the varied elements which control it and the particular conditions affecting the business of each particular road. The speaker believes that valuations made in this way and with these objects in view will do no harm to the railroads, and will do much to restore confidence and give us the much needed peace and quietness to carry out necessary development.
Charles H. Higgins, Assoc. M. AM. Soc. C. E.—Mr. Riggs' able and timely paper is of great interest and worth to all concerned with the matter of values, whether of public service corporation property, or other property; and what engineer is not concerned with values?
One cannot but wish that an index accompanied the paper, as its usefulness would be thereby greatly increased, particularly as, by its arrangement, such subjects as depreciation, non-physical values, etc., are treated of in many different portions of the paper.
The Wisdom of Having a Physical Valuation.—It is hard to understand how any thoughtful person can now doubt this, for we are in a period of regulation and taxation of public service corporations, and the only question is whether they shall be regulated and taxed with a full understanding of the investment involved, or by arbitrary methods, such as the 2 cents per mile passenger rate, which has been so popular in many States, under widely different conditions and irrespective of the cost of the service.
The time would seem to have arrived when the thoughtful public service corporation manager would welcome a fair valuation of the company's property, as protection against legislation conceived in ignorance of the capital invested.
Relation Between Railroads and Other Properties.—The relation between appraisals of railroad and of water, gas, and traction companies is very close, and the same general principles apply. In the former, however, it is complicated more often by the fact that the lines of a railroad extend through many States, with terminals in one or two, and, further, that the railroads have many subsidiary, controlled, or dependent companies, such as coal, lighterage, terminal, car, warehouse, contracting, elevator, stock yard, and supply companies, often owned, wholly or in part, by men in the railroad management. Agreements with these companies may greatly affect the non-physical values, as determined by the methods advocated in this paper, which may otherwise be sound.
Valuation of All Properties.—The author says that the valuation of all railroad properties in the country "would be of interest." Itwould be more; it would be of value infinitely greater than the cost. The mere presence of light prevents many vices, and this is as true in corporation practices as in the streets. It is in accord with Dr. Woodrow Wilson's "pitiless publicity"; and, which is, perhaps, more important, it is the basis, or should be, of all legislation concerning the regulation of these great highways.
One and Only One Fair Value.—Nothing in Mr. Riggs' paper is of more value than his insistence that there is one and only one fair value of the physical property of a railroad, no matter for what purpose it is to be used. How futile are the misdirected efforts of those who would have it otherwise, for, no matter what the purpose of the appraisal may be, who can foresee the use that may be made of it when it becomes public property?
Cost of Reproduction.—Cost of reproduction less depreciation seems to be the established method—that recognized by the Courts—for arriving at the value of the physical property. Cost, as the author contends, can only be an element in determining the present value, for the owner of a stone bridge has as much right to any appreciation in the value of masonry as the owner of land has in the increased value of his property; and, though the cost early in the life of the structure is usually near its value, it may lose that position. What relation exists between the value of the Pyramid of Cheops and its cost? Now, as then, our unit measure of value is changing. Cost is certainly of historic interest, but present value is the subject for present uses.
The points in favor of inspection to determine the physical condition of the object to be valued are convincing, where the structure may be readily inspected. Mortality tables mean little without a history of maintenance. With perfect maintenance there would be no physical depreciation.
Maintenance versus Depreciation.—Depreciation and maintenance are interdependent, so much so that some engineers have advocated dropping the term, "depreciation," and substituting "deferred maintenance." A little thought will make this clear. While this term would not apply in the case of a single rail or car, it is not illogical when applied to a system, built and renewed piecemeal and maintained at a certain standard of usefulness, that is, on all well-managed undertakings of magnitude, units are constantly being replaced, thus maintaining a standard of efficiency. This standard, on the entire system, is usually found to be between 70 and 90% of the cost of reproduction. Some items are even improved, and the cost is charged to the maintenance account, such as that referred to in the paper as "consolidation and adaptation" of roadbed; and only a few, such as steel rails, steadily and progressively become less useful, and even these have a bottom value, that of scrap steel. Nor are examples numerous where all the rails are laid at one time, and they are extremely rare where all arereplaced at approximately the same time. When the rails on a street or section are renewed, the cost cannot properly be charged to capital account, except in so far as the new rails are of a more valuable type than the old ones; for, if this were done, there would be no limit to the capitalization as time goes on. Furthermore, the moment it is admitted that, by reason of a change in the art, we may have depreciation through obsolescence, we admit that through a change in the art we may have appreciation through the opposite of obsolescence. This being the case, the use of "mortality tables" to determine present value is misleading, unless it is done with the full itemized accounts of maintenance, which are seldom, if ever, available. The author's position in regard to the need of inspection of each item is well taken.
Dead versus Live Properties.—These, perhaps, are not happy expressions, but they serve to emphasize a vital distinction which must be made in the valuation of properties. The difference may be as great as between a corpse and a man; here, also, the distinction is hard to define. We say the soul has departed, or the spark of life is extinguished, but these expressions do not contain a satisfactory scientific definition. So, as Mr. Riggs points out, the physical property of a going business may not be valued as so much junk, even if the non-physical values are to be determined separately.
The Franchise a Contract.—The Courts hold a franchise to be a contract, something often forgotten, both by the public and by corporations. The speaker, however, understands this only to mean, even where the franchise is in perpetuity, that the property of the corporation cannot be taken for public use without just compensation. In a sense, then, there can be no such thing as a perpetual franchise. Using the word franchise with its restricted meaning, the unreasonableness of the rates may be measured by the value of the franchise.
Physical versus Non-Physical Values.—The following division has been made by the author between physical and non-physical property, for the purpose of valuation:
"That the Physical Value, or present value of the physical property, should fairly represent the actual capital invested in the property at the date of appraisal; that it should be made up of the sum of the various elements which constitute the cost of reproducing the property together with any appreciation which may have been added to any of them, less all depreciation.
"That the Non-Physical Value is the difference between the 'fair value' as defined by the Courts, or the reasonable value of the property as a business or producing property, and the physical value, or actual present worth; and that the only proper method for determining such values involves a study of income accounts.
"This Non-Physical Value may be: positive, or a value in excess of the physical property, or negative, or less than the physical value. In the case of a property having a negative intangible value, a deduction should be made from the physical value."
This division is convenient but arbitrary. It is the division of an engineer rather than of an economist; for these so-called non-physical values are like the breath of a man's life; without them, the physical value is like the discarded body. Again, the use of negative non-physical values, while convenient, may not be wholly logical. These remarks are not directed at Mr. Riggs, for he is careful to say that he is dealing only with active enterprises, and not with those which are inert, and the speaker realizes that he is not attempting primarily to build up a logical argument, but to formulate certain rules to overcome practical difficulties met by all who have attempted valuation work. As many who have not given this matter much thought are apt to be misled by the distinction made between physical and non-physical values, they should bear in mind that the line between them is like the equator, an imaginary one.
Water.—"The water is as much a part of the cost of putting that line there as the rails," remarked a corporation official, of admirable character and wide experience, pointing to a trolley line from the window of a Pullman car; and, bearing in mind what he meant by "water," this is undoubtedly so. The cost of promoting the enterprise, the discount on the hazard, the loss of interest during its infancy, the labor of building up the undertaking—these are all real elements of cost, and may remain in the property as value, but, like all other items of cost, they have their reasonable limits, which, in each individual case, can be determined within narrow bounds.
Purpose of a Valuation.—As Mr. Riggs points out, there are four reasons for a valuation: Taxation, rate-making, purchase, and control of the issue of securities, one of which is usually the primary cause for the valuation being made; and he argues that there can be but one "fair value" of the physical property, whichever of these reasons may prompt the appraisal. This is fundamental, for "fair value" is used in the sense of true value, which, to the writer, seems to be a more apt expression. It is rather surprising that it does not appear in the paper. Its use, of course, is old; in the Constitution of New Jersey, 1875, we find: "Property shall be assessed for taxes under general laws, and by uniform rules, according to the true value." Each of the three matters, taxes, rates, and authorized capitalization, are interdependent and, in the long run, cannot be considered separately. This can be emphasized by areductio ad absurdum: Modern civilization is so dependent on transportation by rail that unquestionably all taxes could be raised by assessment on the railroads, if these roads were allowed to fix their rates and were protected in the collection of them; but how would this method differ from that of the Romans, of farming out the collection of taxes? Not materially, and no one advocates a return to that method. This is absurd, but it serves to emphasize the relation between taxes and rates. Taxes can only come from the rates.
Overhead Charges versus Unit Values.—There is much in various parts of this paper concerning overhead charges, but very little about the items considered in determining the unit values or unit prices used; and does not the latter greatly affect the former? For example, in discussing the Michigan appraisal, the author says:
"For many items, such as clearing, grubbing, earthwork, masonry, etc., the price was fixed by agreement during the discussion at a figure which represented the fair average cost of this particular item during the 5-year period preceding the appraisal."
The "fair average cost" under what conditions? This word "cost" is understood by different men in as many different ways as the word value. Mr. Riggs very clearly gives the items included in "fair value" as finally arrived at by him, but it would seem to be as important to define "fair cost" as used in arriving at the unit prices, for otherwise the chain has a weak link.
What may be considered a fair cost per unit of measure for a particular item differs greatly: First, with the point of view and breadth of horizon of the man stating such cost; and second, with the methods of letting contracts and accounting with which he may be familiar, as applied to such items of work. Because of the first, a fair average unit cost may mean one thing to a contractor, another to a division engineer, still another to a chief engineer, and a fourth to a manager or consulting engineer; and because of the second, the understanding of the term may differ among men of the same class. All of this quite aside from what may be termed the personal equation of the individual. Thus the subject of overhead charges can only be discussed profitably in the light of knowledge concerning what has already been included in fixing the unit prices used. For example, the element of hazard common to all construction, but differing in degree on different classes of work, may be included in the unit cost used, or it may be added as a percentage to resulting sums, but it cannot rightly be included twice. This is equally true of other elements of cost of a similar character.
The foregoing is pertinent, for any valuation will probably be attacked in the Courts, and the unit values will be one of the most tempting points for assault, for the very reason that this wide difference of understanding in regard to cost, and particularly in regard to unit costs, exists. This same difference of understanding is usually the reason for the wide difference in unit costs testified to by able engineers and, consequently, for the distrust often felt for such testimony. The methods followed in taking expert testimony usually work to make "confusion worse confounded." The judge or layman, hearing two engineers testify to widely different unit prices as a fair average cost for certain work, forms a low opinion of their judgment, or worse, whereas the real difficulty may, and usually does, lie in a differentunderstanding of the meaning of the term "cost," or "unit cost." To the speaker, this seems to be the weakest point in an admirable paper.
Paving.—Whether the value of the paving between and for a space outside of the tracks is an element of value in a street-car line, or whether the cost incidental to the construction and maintenance is in the nature of a tax, is a much disputed point in all valuations of street-railway properties, and an important one, for it may amount to $15,000, or more, per mile. It is interesting to remember that the custom of requiring street-railway companies to maintain the pavement between the rails and for a space of about 2 ft. outside of them, which has become almost universal, developed during the use of horses to draw the cars, the animals causing great wear on that portion of the street. This question of values is a difficult one. It would seem that the most tenable position is that: If the fee to the pavement is not in the company, and if the rule concerning cost of reproduction less depreciation is to be followed, the cost of taking up and relaying the pavement is an element of value in the physical worth of the track, for it would be impossible to reproduce the track without incurring the cost of such work.
S. D. Newton, Assoc. M. Am. Soc. C. E.(by letter).—The general scope of this paper is admirable. The author's views and definitions are unusually sound, clear, and forcibly expressed. To one minor detail, however, the writer is unable to subscribe. Referring to "the physical property element of value," he states that:
"This consisted 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."
Take the case of an industrial spur for some minor industry along a line of railroad. It is often a question in the minds of the management whether or not the car-load business done by such an enterprise is sufficient in quantity to warrant the expense of a spur track. There are probably other facilities in the neighborhood which could be used to take care of this business at the expense of some inconvenience; in a large proportion of cases, the railroad will handle the business anyway, and the spur can in no sense be called a necessity. Still, it is visible, tangible, and capable of being inventoried, and should be included in an inventory of the property the same as any track or section of track belonging to the Company. This may also be said of an extra settling basin or filter bed in the case of a water-works plant. If such basin or bed were not in existence, and a leak should occur in the original plant, the business of supplying water to its customers could, in all probability, be carried along in some manner until the break could be repaired; nevertheless, such a tank or bed is desirable, and its value should most certainly be included in an inventory.
Take the extreme case of a piece of machinery which is utterly broken down or so far out of date as to be entirely worthless for the purposes for which it was designed. Yet such machinery has, at least, a scrap value, and as such it should be included in the inventory as part of the tangible assets of the concern at the date in question.
Of course, in many instances, certain interests endeavor to have inventoried items which should either be omitted altogether or included at a much reduced valuation from that sought to be placed on them, and, in such cases, the very best judgment of the appraising engineer must be called into play in order that injustice may not be done to either party; but to say, as Mr. Riggs' definition virtually does, that nothing should be inventoried which can, either with or without inconvenience, be dispensed with, is absurd, and the writer does not believe that such is the meaning the author intended to convey. Probably, if the word "economically" were inserted in the definition, it would more nearly represent the proper idea.
William V. Polleys, M. Am. Soc. C. E.(by letter),—In his very thorough and painstaking paper Mr. Riggs states that it is confined to a discussion of methods for arriving at a correct figure of cost, and disclaims any intention of considering the propriety of using said figure when reached.
Inasmuch, however, as he devotes the next eight or ten pages to a dissertation on law, political economy, rate-making, finance, and advice to railroad employees, with a word of encouragement to the good, and firm reproof to the bad ones, it is fair to assume that he intends this disclaimer in a Pickwickian sense, and that the real intent of the paper is to show that the physical valuation of property is, with certain determinative, corrective factors, a proper standard for gauging taxation, bond issues, and kindred evils.
Is it not a fact, however, that taxation is based on a much more intangible structure, and that the net earnings must necessarily have more to do with it than the physical valuation of the property—whether it be that of a wicked public service corporation, or that of an honest haymaker—rather on what their property can produce, than on what it would cost to produce the property? Is it not rather a battle of business acumen between the taxer and taxee, a battle which, among other things, is regulated more or less by the fact that an extreme in either direction will bring disaster to one or both, followed by the inevitable reaction and readjustment?
Take, for instance, an extreme case: A manufactory is erected on comparatively worthless ground. A million dollars or more is invested in a plant, with the result that surrounding real estate values go up with a bound. Supposing that the manufacturer has not made any previous arrangements for immunity, and the assessors are both acute and honest, the property will be taxed for a large figure, which tax,if the factory is making money, will be paid, with more or less grumbling, up to the economical breaking point. Suppose that, owing to a sudden permanent change in business conditions, it becomes impossible to operate this plant, and it is abandoned. A corps of experts may be thrown into the mill, before the last employee has left the building, and may carefully scrutinize and caliper the machinery, count the bricks in the wall, tap the stay-bolts in the boilers, and bore into the furniture to see whether it is solid or veneer, and when they are through and their figures are all in, they have not arrived at anything that is of the slightest use as a basis for a bond issue or taxation, and very little that would be of use for sale. In such an extreme (but by no means unheard-of) case physical value bears no relation to real value.
This is not to say that a physical valuation is without worth, and even great worth in some cases; it is merely offered as an opinion that the physical value is in many (and probably most) instances a very treacherous guide to the real value—a far poorer guide, as a general rule, than the accounting department; a minor quantity, in fact.
It seems doubtful whether there is a scientific way of arriving at the true value of a going property by the physical-valuation route. There is too large a percentage of values which, being intangible, are matters of judgment. At best, the determination of value must be that of opinion, and the worth of that opinion hinges principally on the practical qualifications and disinterestedness of the person who gives it.
Unfortunately, or fortunately, as the point of view may be, the disinterested person is not apt to be qualified, nor the qualified person to be disinterested, and it seems extremely probable to the writer that, while weapons may be changed and excuses vary, the tax war will be waged as of yore, and the fool and his money will continue along diverging paths until something more ingenious than physical valuation is invented, however well the valuation may be made.
C. P. Howard, M. Am. Soc. C. E.(by letter).—While there may be no material differences of opinion as to the principles on which a physical valuation should depend, such a detailed description of organization and methods as that presented by the author should be of great service to others undertaking similar investigations.
It may not be amiss, however, to mention certain features affecting the non-tangible values which should be more fully considered in any general discussion of the subject.
The author calls attention to one or more particulars in which the methods of the Michigan appraisal may "fail as a method of determining a value for use as a basis of rate-making." Later, after quoting various court decisions, he dismisses this phase of the subject with the words: "In view of these dicta, it is needless to argue whether a rate of 6% or 10%, or 15%, or more, be reasonable."
A value for purposes of rate-making might more properly be calleda "permissible value." The writer holds no brief for the corporations, and would not like to fall under the imputation of being "apparently incited by, either the direct interest of corporations, * * * or an effort to confuse the subject of valuations," but will venture the following, which, while it does not exactly represent any particular case, it is hoped may be recognized as an illustration drawn from life.
A, B, C, and their associates, being familiar with a certain territory, its resources, transportation facilities, and growing development, believe that the time has come to build another railroad through their State or States. They have made careful estimates of the amount of tonnage that may be expected from the development of its mines, timber, farms, etc., and conclude as follows:
First.—The road, completed along the most approved lines, will cost, with equipment, $50,000,000.
Second.—It will take five years to construct and equip the road and put it in fair running order.
Third.—The traffic, when fully developed according to their hopes and expectations, will eventually afford at usual tariffs a handsome profit, say, from 8 to 12% per annum on the capital invested. This condition, they believe, in all human probability, will be attained in from 5 to 10 years after completion.
Fourth.—That half the traffic anticipated will pay 5% on the investment.
Fifth.—They are obliged to admit (though the chances of this are so remote as to be in their opinion negligible) that, due to unforeseen causes, obstruction, competition, etc., there is a possibility that, as has so often happened in the past, the enterprise may prove a financial failure, or that the period of prosperity may be postponed so far into the future as to amount to practically the same thing.
Here is a bold undertaking; but were it $5,000,000 instead of $50,000,000, the conditions would be essentially the same. Nevertheless, they have the courage of their convictions and go ahead.
Now, with all the risks and uncertainties attending an enterprise of this sort, if the ultimate profits were limited in advance to 5 or 6% on the capital invested, less depreciation, who but the Government itself could afford to build a railroad?
Evidently, when an existing railroad makes small additions from time to time to extend or take care of its business, the risk is not so great. Such extensions will continue more or less under any limitations.
For rate-making, it is evident that an appraisal based on earnings will utterly fail of its purpose if made during the lean years immediately following construction. If made some years later, when the property has begun to pay, the risk and necessary financial loss of the lean years should be remembered, as any one building a road in thefuture will necessarily have the same problems to meet, together with the expenses of interest, depreciation, loss from operation, etc., both during the construction and the lean years following, all of which must properly be considered a part of the real cost of constructing and developing a property.
J. E. Willoughby, M. Am. Soc. C. E.(by letter).—The determination of the cost of reproducing the property of any steam railway involves, together with other items, an estimate of the present cost of:
First.—The acquirement of the right of way, to the extent, in the form, and on the location of that held in connection with the railway to be reproduced;
Second.—The construction thereon of the roadway, to the form and dimensions, and of the materials which the roadway to be reproduced exhibits; and
Third.—The seasoning and adaptation of the roadway to the state of perfection which the roadway to be reproduced exhibits at the time the estimate of cost of reproduction is made.
The first conception, for fixing the cost of the several items, is to consider the railway to be reproduced as being non-existent at the time the estimate is made, but having the environment which then exists along the operated railway, although that environment may be largely of the railway's own creating. The cost of the right of way is to be fixed as ungraded and unimproved property attached and forming a part of the adjoining improved property, which adjoining property will be entitled to receive, in addition to the market value of the land taken, all consequential damages due to the taking off of the right of way in the form and location that the land has actually been taken, and for the purpose of railway construction and operation. This adjoining property is to give credit on the consequential damages for the incidental benefits which it derives, if any, from the construction and operation of the railway.
In fixing these values, the drift of public sentiment—the bias of juries of view and of trial juries—at the time the estimate of cost of reproduction is made must be considered, since that sentiment may affect enormously the cost of the right of way. The amount to be paid for a right of way is in the end that which a condemnation court will award. The question as to whether or not the right of way was originally donated can no more enter into the determination of the cost of reproduction, for the purpose of lessening the estimate of cost of acquiring the right of way, than the fact that donations of lands or bonds (or of convict labor and slave labor, as in the South prior to 1860) made by governmental authority or private enterprise, at the time of the original construction, can be used to reduce the reproduction cost of the excavation made in the formation of the roadway.
No rule as to the sale of property for commercial purposes in the vicinity of an operated railway can be rightfully adapted as covering the line as a whole. While the cost of right of way through farm or timber lands bears a general relation to the value of those for agricultural purposes, where improvements thereon bear but a small proportion to their total value, this relation is wholly wanting in the cost of a right of way through a village or city or at any point where the improvements on the property bear a large proportion to its total value. The relation is also wanting where a right of way is obtained through agricultural lands devoted to special purposes, like that of country homes for the rich. It is also wanting where the right of way is taken out of the narrow river lands in the Appalachian Mountains, where the total value of the whole farm is dependent on the small acreage of flat land along the river bank. The general rule of prefixing a constant to the current selling price of lands, in order to determine the estimated cost of right of way, should be limited to agricultural and timber lands, and to those which, owing to their extent, the carving out of the right of way does not wholly destroy for the continuation of agricultural and timber operations.
For villages and cities, and for lands devoted or adapted to special purposes, an accurate estimate of the cost of reproduction of the right of way can be determined only by a specific investigation of the conditions in each community. While it is difficult to conceive all the activities and sentiments which have growth in, from, and of railway operation, as being in existence without the railway, it is only through such an assumption that one can estimate correctly the make-up of the items of cost of reproducing a railway as such railway may now exist. To assume that the railway, not existent for the purpose of estimating the cost of reproduction, will now receive the donations of land and moneys that were made half a century ago, is merely going back to a determination of what the road has actually cost; and that is contrary to the intent of the theory of the cost of reproduction. The conception of a parallel line is not correct, for it imposes thereby a further burden on properties which have already contributed to the public good, probably to an extreme extent, and gives an abnormal cost for right of way, as shown when a railway seeks to enlarge its terminals in a crowded community, or to find a new entrance into a populous city.
So, too, in estimating on the formation of the roadway, one must consider the roadway to be reproduced as being obliterated—all cuts and borrow-pits refilled, and all embankments and spoil banks removed from the right of way—but all other lines of transportation, except the railway to be reproduced, must be considered as being in existence as they actually are at the date when the estimate of cost of reproduction is made, and that such other lines of transportation are availablefor bringing in machinery, tools, teams, materials, and supplies for the construction of the railway to be reproduced. It is only by such an assumption that the benefit of the improved means and methods of construction now prevalent can be obtained; but it is not permissible to estimate for the construction of a railway with different grades, alignment, roadbed, widths, or with different materials than that of the railway to be reproduced merely because such construction at this day might be actually cheaper or better than to construct it in exact duplication. For example, if the rock cuts on the roadway to be reproduced be only 18 ft. wide, with ¼:1 slopes, one must not figure on the greater economy of steam-shovel excavation, because the steam shovel cannot be worked in cuts of that width; nor can the spoil from such cuts be carried long distances to eliminate a possible solid-rock borrow originally made elsewhere, because long hauls are practicable in steam-shovel work, but wanting in excavations where the mule is the transportation force. So, too, it is not permissible to estimate on reinforced concrete bridges to take the place of more costly cut-stone arches, if cut-stone arches are the structures that have been actually built. The idea of cost of reproduction is not synonymous with the idea of the cost of building a railway capable of serving the same transportation purpose. If all our railways were to be built anew, in the light of our present knowledge, and with our present traffic offerings and financial resources, vast changes would be made in the character of construction. The physical fact of existing construction prevents a theoretical substitution of what is the best construction for any community, together with its costs for the construction which was actually made years ago.
In the event that an estimate of reproduction costs be made for a State as a whole, or for a great railway system as a whole, the conception of reproduction is modified so that the construction may take the form of progressive construction, the principal lines being built first and the less important lines afterward. This method will require the estimate for interest during the construction period to be greater.
The money cost of the seasoning and the adaptation of the roadway to such a condition as will permit heavy trains to be run at high speeds, is great, but the amount is not readily ascertained. An estimate of cost of reproduction, to be true, must consider this item; and probably the more usual method of ascertaining it is to assume it to be an amount in some proportion to the cost of the excavation. This proportion will vary with the character of the material through which and of which the cuts and fills are made, and with the methods of construction necessarily adopted. There are many railways on which this cost will exceed 25% of the total cost of excavation.
After the estimate has been made, including the item for seasoningand adaptation, there should be added a contingent fund to cover the omitted work, consisting of small borrow-pits and ditches, undetermined foundations, unexpected conditions encountered, unavoidable "force account" work, minor changes of streams and highways, damages to adjoining lands due to the methods of construction and to diversion of water, etc. This item will not exceed 5% of the cost of the roadway if the estimate be accurately made.
The more convenient form into which an estimate of cost of reproduction of a steam railway is to be put is to follow the sub-accounts, as prescribed by the Interstate Commerce Commission for Expenditure for Road. Each item given in that accounting has a place in the estimate. These comments are confined to the items covering the roadway, namely, Right of Way and Station Grounds, Grading, Tunneling, Bridges, Trestles, and Culverts.
Henry C. Adams, Esq.[28](by letter).—To the writer this paper seems to be the most complete and comprehensive discussion of the general question of valuation of property invested in public service industries that has come under his notice. It is especially important in that it is a summary of the discussion on this most difficult subject during the past ten years, and the writer thoroughly agrees with the general conclusions reached by Mr. Riggs.
There is one point, however, which might possibly have been developed more completely, and that is the treatment of discounts, which presents itself from time to time in the general discussion. Mr. Riggs quotes with approval the following:
"If a company can market its 50-year, 4 per cent, bonds at 90 per cent. of par, it means that the company's credit is on a 4½ per cent. basis; that it could market a like security paying 4½ per cent. at par."
This is, of course, correct as far as the mathematics of the proposition is concerned, but it seems to overlook that peculiar psychology of the market which enables a corporation to secure a larger amount of actual cash for a given interest annuity when bonds are sold at a discount than when they are sold at par.
Aside, however, from the accuracy of the above quotation and of Mr. Riggs' apparent acceptance of it as the final word on discounts, one may ask if it recognizes all the elements necessarily involved in a discussion of the problems raised by discount financiering. From the literature of the subject one may read the following claims: Discount is a measure of the risk involved in a new enterprise; discount is a market adjustment that reflects the current value of money; discount is a sacrifice of principal for a slightly reduced interest annuity; discount is a dividend declared before the dividend is earned; andmany cases are cited in which a discount is merely a promoter's fee for services rendered.
The writer does not care to discuss at this time these various points of view from which discounts may be regarded. They are mentioned merely to suggest that the subject is not as simple as some writers seem to think. Any valuation of public service industries, from whatever point of view it may be regarded, must, from the nature of the case, touch the problem of fundamental equities; and one of the elements of this problem which has not as yet been fully analyzed is this element of discounts. From the point of view of taxation, such an analysis is not perhaps essential; but if the valuation is to be used as a basis of determining reasonable rates, or as a measure of reasonable capitalization, it seems to be essential.
The writer is sure this discussion will not be construed as in any sense a criticism on Mr. Riggs' paper; it is rather a suggestion of an unwritten chapter in the literature of valuation. The American Society of Civil Engineers is to be congratulated in securing from one of its members so complete and satisfactory a discussion of the principles and methods for the valuation of public service corporation property.
Carl C. Witt, M. Am. Soc. C. E.(by letter).—The appraisal of the railway property in Michigan was a wonderful performance in a great many ways, not the least of which was the thoroughness of the work, considering the short time available, and the writer desires to express his appreciation of this paper, as it is a valuable addition to the meager literature on this subject.
More recent appraisals, made by States traversed by the same railway systems as those involved in the Michigan appraisal, have been made with a freedom from opposition by railway companies due to the educational effect of this pioneer work. Particularly is this true of the recently completed appraisal, by the Board of Railroad Commissioners of South Dakota, of the physical property of the railways in that State, of which work the writer was the Engineer in charge. No opposition was met; in fact, some of the railway companies had established regular departments for furnishing inventories and appraisals, had completed the necessary field work in South Dakota before the inventory had been requested by the State, and were able to furnish a very complete appraisal in a short time after the request for it was made.
This appraisal was made in compliance with an act of the Legislature of 1907, which required the Board of Railroad Commissioners to ascertain the true cash value of all the property of every railroad company in South Dakota used in the operation and maintenance of their respective roads. No attention was paid to the purpose of the appraisal, but one of the first uses made of the information thus securedwas in the litigation following the passage of an act by the Legislature of 1909, prescribing a maximum passenger fare of 2 cents per mile on all railroads operating within the State. In connection with a rate case of this kind, some questions have been raised regarding proper bases for land values, the use of an item for adaptation and solidification as an element of physical value, the value of the intangible assets, etc.
The lands of all railway companies were appraised at a cost to reproduce or re-purchase at the time of appraisal, regardless of the original cost of the property. The sales method was used for determining the market value of adjoining property. There has been a very large land movement in South Dakota in the last five years, and as most of the country is prairie, with similar soil over large areas, it was not difficult to determine the average market value of the land for farm purposes, at the date of the appraisal, and the gradual trend of values for five years previous to that date. An average multiple of 250% was used to arrive at the cost of reproducing or purchasing the right of way. This multiple was based on investigations made of recent right-of-way purchases, and inasmuch as there are no large terminals in South Dakota, the same average multiple was used throughout the State for both town and farm property, investigation showing that town property could be secured for slightly less and farm property for slightly more than the average multiple used.