Part 23

"Expert Valuation of Railway and Other Corporate Property in Michigan." E. E. R. Tratman, Assoc. M. Am. Soc. C. E. _Engineering News_, December 20th, 1900. A descriptive paper.

"What is the Value of a Railroad for the Purpose of Taxation?" Charles Hansel, M. Am. Soc. C. E. _Railroad Gazette_, April 19th, 1901. Discussion of the work done by Professor M. E. Cooley, and on valuation in general.

"Michigan Railroad Appraisal—Valuation of Physical Properties." Professor Mortimer E. Cooley. Bulletin 21, U. S. Bureau of the Census, p. 76.

"Michigan Railroad Appraisal—Valuation of Non-Physical Elements of Railway Property." Professor Henry C. Adams. Bulletin 21, U. S. Bureau of the Census, p. 78.

_The Minnesota Appraisal._—

"Valuation of Railway Property." A. S. Cutler. _Year Book_, University of Minnesota, 1908. An account of the methods used for obtaining and checking the information.

Report on the Valuation of Railways in Minnesota, January, 1909. Minnesota State Railroad Commission.

"Valuation of Railways in Minnesota." _Railway Age Gazette_, February 5th, 1909. A descriptive article.

_The Texas Appraisal._—

"Railroad Franchise Values in Texas." W. H. Coverdale, Assoc. M. Am. Soc. C. E. _Railroad Gazette_, February 12th, 1904. Discussion of methods used in Texas.

"Methods Used by the Railroad Commission of Texas Under the Stock and Bond Law, in Valuing Railroad Properties." R. A. Thompson, Assoc. M. Am. Soc. C. E., with discussion by Messrs. E. L. Corthell, F. Lavis, W. H. Coverdale, and W. D. Taylor. _Transactions_, Am. Soc. C. E., Vol. LII, p. 328, _et seq._

_The Washington Appraisal._—

"Report to the Washington Railroad Commission on the Valuation of Railways in Washington." Halbert P. Gillette, M. Am. Soc. C. E. _Engineering-Contracting_, April 7th, 1909.

_The Wisconsin Appraisal._—

"Wisconsin Railroad Valuation." W. D. Taylor, M. Am. Soc. C. E. Bulletin 21, U. S. Bureau of the Census, p. 82.

"The Appraisement of the Physical Value of Wisconsin Railways for the Purpose of Taxation." W. D. Taylor, M. Am. Soc. C. E. _Engineering News_, March 31st, 1904.

Discussion on "Valuation of Railroad Properties." W. D. Taylor, M. Am. Soc. C. E. _Transactions_, Am. Soc. C. E., Vol. LII, p. 353.

"Report to the Tax Commission." W. D. Taylor, M. Am. Soc. C. E. Report of the Wisconsin Tax Commission, 1907, p. 269.

"The Work of the Joint Engineering Staff of the Wisconsin Tax and Railroad Commissions." W. D. Pence, M. Am. Soc. C. E. _Journal_, Western Society of Engineers, Vol. XIV, p. 73. (Abstract.) _Engineering News_, March 4th, 1909.

_Water-Works Valuation._—

"Water-Works Valuation and Fair Rates, in the Light of the Maine Supreme Court Decisions, in the Waterville and Brunswick Cases." Leonard Metcalf, M. Am. Soc. C. E. _Transactions_, Am. Soc. C. E., Vol. LXIV, p. 1. (A complete bibliography of the subject of water-works valuation may be found on p. 69 of Mr. Metcalf's paper.)

TABLE OF CONTENTS.

PAGE

INTRODUCTORY 1

_Reasons for Valuation_ 2

_As a Matter of Public Interest_ 2

_As a Matter of Corporation Necessity or Expediency_ 3

_Difficulties of Accurate Valuation Encountered_ 4

THE RELATION OF PUBLIC SERVICE, OR QUASI-PUBLIC CORPORATIONS, TO 6 THE PEOPLE

_Supreme Courts_ 8

_Regulation and Legislation_ 10

EXPLANATION OF TERMS 16

_Appraisal or Valuation_ 16

_Cost of Reproduction_ 16

_Cost, or Original Cost_ 16

_Present Value, or Present Physical Value_ 16

_Non-Physical, or Intangible, Value_ 17

_Elements of Final Value_ 18

_The "Physical Property" Element of Value_ 18

_The "Non-Physical" or "Intangible" Elements of Value_ 18

_True Method of Valuation_ 19

THE MICHIGAN STATE APPRAISALS 20

Organization 20

_Administration_ 20

_Civil Engineering_ 20

_Mechanical Engineering_ 20

_Telegraphs_ 20

_Telephones_ 21

_Vessel Properties_ 21

_Methods of Procedure_ 21

_Difficulties_ 22

_Lack of Complete Understanding on the Part of the State 22 Officials_

_The Attitude of the Railroad Corporation Managers_ 22

_The Confused Condition of the Records_ 22

_Forms Used_ 23

_Board of Review_ 36

Office and Field Methods 37

_Making the Inventories_ 38

_Office Inspection as a Check on Field Work_ 39

_Field Inspection_ 40

_Special Work on the Chicago and Northwestern Railway_ 40

_Special Valuations_ 41

_Computation_ 42

_Filing in Office_ 42

_Computation Tables_ 43

_Unit Prices_ 43

_Classification_ 45

_Compilation_ 46

Special Problems of the Mechanical Department 46

_Assignment of Value to States_ 46

_Freight Car Inspection_ 47

_Locomotives_ 48

_Vessels_ 48

Overhead Charges 49

_Engineering_ 49

_Legal Expense_ 49

_Organization Expense_ 49

_Interest_ 49

_Discount on Bonds_ 49

_The Charge of Ten Per Cent. for Contingencies_ 50

Right-of-Way Values 52

_Comparison of Country Land Values_ 59

_Average Price per Acre for Village Land_ 63

_Comparison of Valuation Figures with Actual Considerations_ 64

Non-Physical Values 64

History and Results of the Michigan Appraisal 67

_Market Value of Stocks and Bonds_ 67

_Error in Published Reports as to Michigan Work_ 67

_The Cost of the Work_ 69

_Grand Summary of Railroad Appraisal of 1900 as to 70 Seventy-eight Incorporated Railroads_

_The Result of the Michigan Appraisal_ 70

RAILROAD APPRAISAL OF THE STATE OF TEXAS 71

_Authority for the Work_ 71

_Method of Physical Appraisal_ 72

_The Result of the Texas Work_ 73

RAILROAD APPRAISAL OF THE STATE OF WISCONSIN 75

THE MINNESOTA STATE RAILWAY APPRAISAL 77

_Land Valuation_ 78

_Forms Used in the Compilation of Information_ 79

THE WASHINGTON STATE APPRAISAL 79

THE VALUATION OF TRACTION PROPERTIES IN CHICAGO 94

THE COMMERCIAL VALUATION OF RAILWAY OPERATING PROPERTY OF THE 97 DEPARTMENT OF COMMERCE AND LABOR

THE EXTENT OF APPRAISAL PRACTICE 99

REVIEW OF SOME METHODS OF VALUATION, AND SOME OF THE CRITICISMS ON 101 THE MICHIGAN APPRAISAL

THE DETERMINATION OF ELEMENTS OF VALUE AND METHODS OF VALUATION BY 112 THE COURTS

PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION 128

_The Preliminary Study_ 132

_The Field Inspection_ 135

_The Computation_ 136

_Classification of Properties_ 137

_Unit Values_ 138

_Right of Way and Real Estate_ 139

_Depreciation_ 141

_Immaterial Elements of Physical Property_ 142

_Organization_ 143

_Legal Expense_ 143

_Engineering_ 143

_Administration_ 143

_General Expense_ 143

_Discount_ 145

_Working Capital_ 145

_Contingencies_ 145

_Design_ 146

_Adaptation_ 146

_Apportionment of Values_ 147

_Terminals_ 147

_Development of the Art_ 148

The Preparation of the Final Figure 150

NON-PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION 150

_"Going Concern" Value_ 154

_Developed Business_ 155

_Cost of Handling Business_ 155

_Good Will and Established Organization_ 155

_Franchise Values_ 156

_Conclusions Regarding Non-Physical Rules for Determination_ 165

CONCLUSION 165

BIBLIOGRAPHY 168

_Railroad Valuation_ 168

_The Chicago Appraisal_ 169

_The Michigan Appraisal_ 169

_The Minnesota Appraisal_ 169

_The Texas Appraisal_ 169

_The Washington Appraisal_ 170

_The Wisconsin Appraisal_ 170

_Water-Works Valuation_ 170

DISCUSSION

FRED LAVIS, M. AM. SOC. C. E.—The author states that his paper is confined to "a discussion of the methods which should be used in arriving at a correct figure of cost of reproduction and depreciation," and that "it does not take up questions involving the propriety of those figures when reached." In so far as this is concerned, it is probably the most complete compilation of the available information on this phase of the subject which has yet appeared in print. The author refuses to recognize that the consideration of the so-called intangible values has any place in a physical valuation. As, however, there exists such a widespread feeling, especially among those interested in railroads, that physical valuations, for any purpose whatever, are absolutely useless, because these intangible values are not or cannot be included, it does not seem out of place to refer to this phase of the subject at this time, and more especially in view of the fact that many persons, the prominence of whose position entitles them to consideration, have taken this point of view very recently, and their remarks have received considerable publicity. Not more than two weeks ago, Judge Lovett, the head of the Harriman System, expressed the opinion that the theory of valuing railroad property by trying to determine the cost of reproduction was utterly impractical. It seems important, therefore, that we, as engineers, interested in having the question properly understood, should be careful, in referring to valuation, to make it plain that other features besides the value of the physical property are to receive due consideration. The speaker, therefore, proposes to examine some of the arguments advanced by the opponents of valuation to see if the objections most generally brought forward are insuperable.

Some critics of valuation go so far as to say that engineers cannot make a close valuation of even the purely physical property. For instance, Mr. W. H. Williams, Vice-President of the Delaware and Hudson Company, in a paper on this subject,[19] states that:

"No engineer in estimating on the several important items of construction work for the year will come within 10 per cent. of the total aggregate cost. Many of the more important items are frequently underestimated 25 to 50 per cent."

He cites, as an especially good illustration, the Panama Canal, the original estimate of the cost of which was $140,000,000, though the present estimate is $300,000,000. Almost every one who has kept in touch with that subject knows why the Panama Canal has cost more than the original estimates, and that the greater cost is no reflection on the judgment of the engineers who made such estimates. One cannot always foresee what changes in plans may be made before construction is completed, and would hardly expect the estimates of the cost of a railroad to be adequate if they were made for a single-track road and a double-track was built. In any event, there is a vast difference in estimating the cost of an engineering work already completed and one which has yet to be started, the difference being largely in favor of a closer estimate of the completed work.

Limitations are often placed on engineers, in connection with work they do, which are afterward forgotten. The speaker was asked not long ago to prepare a report in connection with the valuation of a large railroad property. The time within which the results were required was very limited, and the methods used in the valuation necessarily had to be a combination of the inventory method and reliance, in a great many matters, on the judgment of those making the appraisal. Undoubtedly the result obtained was entirely adequate for the purpose for which it was required, but would hardly stand if an attempt were made to use it as a basis for an argument before a Court of law or a public service commission, though it would not be beyond the range of the experience of many engineers to have a matter of this kind brought forward some time in the future as an absolute statement of fact, with no reference to the way in which the work was done.

It is inevitable, of course, that engineers will differ in their opinions as to some details of methods of making an inventory of the property of a railroad or other public service corporation, and also as to exactly what unit prices should be applied, but in general it is safe to say that any engineer of proper experience and training can make a satisfactory appraisal of the value of the physical property of a railroad, and that if two or more such competent fair-minded engineers, unhampered by any consideration of the purpose for which it is to be made, should make such an appraisal, the variation in the result would be so small as to be negligible. The speaker, however, does not entirely agree with the author, that the purpose for which the appraisal is to be used should be entirely ignored by those who are making it. There can be little doubt as to the propriety of using a properly made physical valuation as a basis for taxation, or as information for the owners, although there may be some as to the methods whereby the so-called intangible values are to be determined in these cases, or even whether they should be considered at all. The greatest difference of opinion arises when an attempt is made to regulate the issue of stocks and bonds, or to fix the rates which should be charged for transportation, on the basis of a physical valuation.

Arguments for and against rate regulation revolve in a circle, and, apparently, there is no starting point which will satisfy every one. The Courts have ruled that the railroads are entitled to such rates as will enable them to earn a fair return on the value of their property; the railroads claim that the only way to determine this value is on the basis of the earning capacity; that is, one side claims that the rates must be based on the value and the other that the value should be based on the rates. It is evident, however, by this time, that the railroads must submit to regulation, therefore a way must be found to break into the circle, and it would seem to be incumbent on them to direct their energies along lines which will tend to make such regulation fair and just rather than to oppose it entirely. There is little claim that unduly large dividends are paid, but there is a feeling in the mind of the public that the railroads are over-capitalized. Is it not possible, therefore, to break into the circle at this point, and decide, by means of a proper valuation, as to the fairness or otherwise of the capitalization? The objection to this, on the part of the railroads, is that the value of the purely physical elements is by no means the whole value of their property, but that something should be added for the so-called intangible values.

To emphasize the difficulties of appraising the intangible values in any way which will permit the application of such value to the determination of rates for transportation, the opponents of physical valuation cite what is now the familiar instance of two mythical roads between the same termini, the first with good alignment and easy grades following a valley, and the second forced into the mountains, having not only heavier grades and more curvature, with consequently a higher cost of operation, but also more expensive construction. The value of the purely physical features of the former, of course, would be much less than those of the latter, but its actual value as a property would be greater. How then should the rates on the two roads be fixed? The fallacy of using this example as an argument against physical valuation as a basis for rate-making is in assuming that there would be two railroads built under such circumstances, with no other features than the two termini and the line between.

One has only to call to mind such examples of competing lines as those of the Denver and Rio Grande between Denver and Salt Lake, the Union Pacific between Cheyenne and Ogden, the Lackawanna and New York Central between New York and Buffalo, or many others, to realize that there are, on all roads of this nature, many other factors than the actual cost of operating through trains between the termini, which determine the through rates.

One would hardly suppose that at this late date any one believes that it is proposed to use only the value of the purely physical property of railroads as a basis for rate regulation, yet the _New York Sun_, a paper of national prominence and usually most ably edited, devoted a column of its editorial page[20] to a discussion intended to show that rate regulation, based on physical valuation alone, was an impossibility.

In addition to citing the example given above, the following is put forward as the _reductio ad absurdum_ of the argument for rate regulation based on physical valuation. It is said:

"Suppose there are two bridges over the Ohio, the _cost of the construction of each being the same_, one between Cincinnati and Newport and the other twenty miles below where there is nothing but a village on either shore.... On what basis would the proponents of physical valuation, as the determining value in rate making, adjust a toll charge on these respective bridges?"

The example is far-fetched, and in no way applicable to the question of the adjustment of rates on railroads, but inasmuch as it is seriously put forward from a responsible source, it seems worth while to consider it.