Part 39

Of the other four bridges, the Cincinnati and Covington Elevated Railway and Transfer Bridge—commonly known as the Chesapeake and Ohio Railway Bridge—the Covington and Cincinnati Suspension Bridge, the Central Railway and Bridge Company's Bridge, and the Newport and Cincinnati Bridge, commonly known as the Pennsylvania Railway Bridge (all noted in the order of occurrence, passing up the river), the writer had official or semi-official reports giving such details of at least the principal features of the structures that in a measure they supplied quantities, weights, and some prices; those lacking were either calculated from actual measurements taken on the structures or supplied from plans furnished by the companies, since, as the several companies relied on defeating the efforts of the supervision on legal grounds, they conceded values which otherwise might have been strenuously contested. As long as the writer knew anything of the results, the Board of Supervisors was unsuccessful in its purpose to get the bridges, as such, on the tax duplicates; but that has no particular bearing on the points raised in this discussion. Of the five bridges, three are primarily railroad bridges. The Cincinnati Southern Bridge has one footway only, on which it formerly collected tolls; all the others have footways and wagonways, and the three above the Chesapeake and Ohio Railway Bridge carry electric railways. The Newport and Cincinnati (Pennsylvania Railway) Bridge has all the features of steam and electric railways, wagonways and footways. In some particulars these bridges differ greatly, for instance, the bed-rock of the river lies at the surface of the most easterly (Pennsylvania Railway) bridge, and for each successive bridge is found deeper, as the river is followed westward, the river-span piers of the Chesapeake and Ohio Railway Bridge being 54 ft. below low water and those of the Cincinnati Southern Railway Bridge being likewise very troublesome.

The two bridges with exactly the same uses—double footways, wagonways, and electric lines—are the adjacent Suspension and Central Bridges, one having the City of Covington and the other the City of Newport at its southern terminus, but these differ most widely as to valuation. The Suspension Bridge, as reported to the writer by the late W. Hildenbrand, M. Am. Soc. C. E., with the consent of his company, was valued at only a little short of $1,000,000 as reinforced; that of the Central Bridge Company, as reduced from the reports of the engineers, was very nearly one-third, only, of that amount, both without any right of way, as real estate was in all cases listed separately. At that time, however, the traffic over the Suspension Bridge, counted in persons and vehicles passing over its several lines, was not far from as relatively greater than that of the Central Bridge as its valuation was higher, and it was more indispensably necessary, as the writer views it, than either the Central Bridge above, or the Chesapeake and Ohio Bridge below it, for in the thirty odd years of its use (it was completed in 1867), the adjoining communities had adjusted their lines of traffic to it, while that passing over the other two bridges occurred more because of little differences of convenience (not, however, to be considered otherwise than an important provision in traffic of such magnitude).

Disregarding other differences, such as the unit prices of 10 or 11 cents per lb. for iron paid by the Suspension Bridge Company in the time of the Civil War, compared with 4.47 cents per lb. for the new cable wire or 3.32 cents per lb. for the new structural steel, it appears to the writer that the element of more or less indispensable use by a community, as well as the greater freedom of movement in the river below by reason of there being no piers in the stream, are elements of value; but that they are items to be reduced to figures for the purpose of taxation is not so clear, any more than that there is equity in any demand that might be made that the New York Central and New York, New Haven, and Hartford Railroad Companies should be taxed on the additional $22,000,000 expended in the electrification of their lines about New York City for the comfort, convenience, and edification, not of the patrons of the roads alone, but of the public at large, without—as just concluded by an eminently able board—any marked economies in operation. There is no question in the writer's mind that any one line of railroad is several times more valuable to each individual in inland regions, such as Mexico and Arizona, than an equal mileage in Connecticut with its Sound harbors, steamship lines, good wagon roads, and numerous but non-competing railways, partly because of the relative usefulness, for which no practicable substitute could be found, and partly because these newer States have not entered on all these multifarious lines of governmental activities, such as policing and safeguarding for public health and the like, and, much as funds are everywhere desirable, could possibly defer for a time some of these developments of civic zeal. It does not appear, therefore, that the discriminations in valuations disclosed by the author's Table 1 are altogether without a good basis in relative convenience, although clearly extreme; but, as the law of most States is understood by the writer, such discriminations may not usually be made with strict regard for the legality of tax assessments.

It is true, as remarked by Mr. Riggs, that a bridge is, of itself, not 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.