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

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

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

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

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

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

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

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

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

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

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

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

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

Assuming, as apparently the propounder does, that the proposition is uncomplicated by any questions of franchises, public rights in the land on which the bridge and its approaches are built, etc., then there is no question but that the owners of either bridge have a perfect right to charge what toll they please. On the other hand, suppose the permission of the War Department, or some other governing body, had to be obtained in order to build piers in the river, or even to build the bridge at all; the argument used in asking for this permission is that the bridge is needed as a public convenience; or it is desired to occupy certain streets for the approaches, again is used the argument of public convenience, and so on. These privileges are granted on the tacit understanding, at least, that the public convenience is to be served, and the Courts rule that, in such cases, in consideration of the equity which the public has in the property by reason of the rights granted, a fair return on the value of the property, but no more, should be the basis for establishing the rates of toll. Would the Sun claim that the value of the rights and franchises given by the public in such a case, be included in the value of these bridges, and that a higher total income should be derived from one bridge than the other because the value of the streets on which the approaches had been built is greater in one case than the other; or that a greater income should be derived in one case than another because the cities furnish more people than the villages? Is there any particular reason, except for the slightly larger depreciation and cost of maintenance, and, bearing in mind the fact that both bridges cost the same, why, if there is ten times as much traffic on one bridge as on the other, the toll should not be proportioned accordingly, to provide the same income on each?

If the Sun had imagined a bridge built by private individuals, with their own money, between two villages, the inhabitants of which, at the time the bridge was built, having been willing to grant almost any franchises or privileges in order to get the bridge, the villages in course of time growing to large cities, and the old bridge having been replaced by a heavier modern structure, the example might have been more nearly comparable to the railroad situation. In this case, the original toll, of say 10 cents a head, may have, in the early days, only barely returned a meager rate of interest on the investment, or even for some years resulted in a deficit. Would the Sun uphold the owners of the bridge if, since the villages have grown to cities, they still insisted on collecting the original toll, if it could be shown that a new bridge could be built and would be a paying investment with a toll of, say, 2 cents, except for the fact that the original bridge was built in the only location where it was practical to build a bridge at all? Or is it reasonable to say that the foresight and energy of the owners of the bridge, even though it may have been one of the principal factors in enabling the villages to grow into cities, entitle them to capitalize their enterprise on the basis of a 10-cent toll? It cannot be denied that the energy and foresight of the original builders should be recognized in fixing the rate of toll, but there is a limit to the value of this, and it is because of the feeling on the part of the general public that the capitalization of similar intangible values on the part of the railroads and other public service corporations is too large, which, whether true or not, has caused the present agitation against them. If the capitalization is reasonable, there must be some way to demonstrate the fact, and it seems as if a properly made physical valuation, with due allowance for the intangible values, is at least a step in the right direction.

The Sun states in its editorial that:

"The scheme of physical valuation, as a basis for rate making, is flatly rejected as unworkable by practically all the ablest railway authorities of the country, and that the only true measure of value is the earning capacity."

To quote only one, namely: Dr. Emory R. Johnson, who is generally regarded as an authority and not by any means predisposed in favor of the public as against the railroads, it is found that he states in his "American Railway Transportation" that:

"The earning capacity of the railroad cannot be equitably or logically made the sole criterion of value, because the rates, and hence the earnings, should depend to some extent, at least, upon the amount of capital justly entitled to profit."

It would seem to be self-evident that the earnings alone, either gross or net, are not necessarily an indication of the value of the road. Gross earnings are not, because, if a minimum proportion of them is used for maintenance and betterment, the value of the property will steadily decrease; whereas, if the opposite policy be followed, it will increase. On the same principle, the net earnings offer no criterion as to the manner in which the property has been kept up, and alone are, therefore, no measure of its true value.

As an example of the arguments used by some of the opponents of physical valuation, the following quotations are made from an article by Mr. Henry Fink, Chairman of the Board of the Norfolk and Western Railway.^[21] Referring to the fluctuation in the costs of construction, he says:

"As the cost of materials and labor fluctuates ... it follows that what may be a fair valuation of a railroad one year may not be so one or two years later. Hence, it would be necessary to make new valuations from time to time."

Further, in the same article, referring to a valuation based on the market value of bonds and stocks, he says:

"Unlike the physical valuation, this method has a rational basis.... It is true that prices of stock fluctuate—at times violently—but this difficulty can be overcome in a measure by using the average prices for long periods."

It is strange that it did not occur to so able a man as Mr. Fink that the value of the physical property might also be based on average prices for long periods; the cost of railroad construction and equipment as a whole does not fluctuate nearly so violently as the stock market.

The report on "The Basis of Unit Prices,"^[22] by W. D. Pence, M. Am. Soc. C. E., the Engineer of the Wisconsin Railroad Commission, in connection with the Appleton Water-works case, is an excellent example of a fair and impartial study of this phase of the subject, and the conclusion of the Commission in this matter can only be regarded as reasonable by any one who is disposed to be at all fair-minded. It says:

"If the standard by which the reasonableness of charges is to be determined should fluctuate with the market prices of material, labor and land, no schedule of rates could be established for any length of time, for, under the circumstances, a rate that would be reasonable to-day might be very unreasonable to-morrow. The principles of the law applicable to the subject certainly involve no such absurd consequences."

Another instance of an argument based on technicalities is found in the Railway Age Gazette.^[23] In an editorial on Valuation and Rate Regulation, it is said:

"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 the Gazette advocates 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 the Gazette say 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."

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"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 its legal 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

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 true relation 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.

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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." It would 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 are replaced 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 a reductio 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 different understanding 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 called a "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 the future 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 available for 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 seasoning and 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; and many 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 secured was 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.

In each supplemental appraisal the land values will be corrected to correspond to the changes in surrounding values, as the railway company is entitled to any increase, due to natural causes, based on the cost to reproduce at the time of appraisal. This is a well-established theory, as shown by Mr. Riggs.

No allowance was made for the item commonly known as "adaptation and solidification," except in the item of contingencies and in the consideration of the present value of the ballast. In some recent appraisals, large sums, based on a percentage of the cost of grading, have been allowed for this item. While there is no question that large sums of money are expended in maintaining a safe track on a new bank, and that this expense gradually diminishes as the roadbed becomes solid, due to the pounding of the trains and the action of the elements, this expense is, and properly so, charged to maintenance, and is paid for out of the operating revenues. Now, in the trial of a rate case, exhibits showing the operating expenses, including maintenance charges, are introduced, and to include this same item in the appraisal of the physical property leads to a duplication, for if the passenger or shipper pays for this maintenance charge, it should not be counted as an item of physical value as a basis for determining what is a reasonable rate.

The case is similar to that of a locomotive: When new, it is kept in the vicinity of the shops, because trouble from lack of proper adjustment and weak parts is likely to develop, and the maintenance charges may be much higher than a few months later when the machine has "found itself" and, as an operating machine, is more efficient than when new. However, no one will insist that it has an added physical value in dollars and cents, or that the excess cost of repairs and maintenance during its early life should be added to its cost of reproduction now; in fact, it is a second-hand machine, and the maintenance charges must be paid for out of its use.

Generally, when a roadbed is turned over to the operating department by the construction department, it is in good line and surface, and if an appraisal were made at that time its condition would be 100%; but as soon as it is placed under traffic, it begins to depreciate, as shown by the fact that it requires constant attention to keep it up. If the roadbed is cross-sectioned at each station and actual quantities calculated from cross-section notes, there would be no depreciation, but if the grading quantities are calculated from profiles of the line, as constructed some time previously, and for a standard width of sub-grade, with a percentage added for shrinkage, and allowance made where banks have been widened, etc., it will probably be found to exceed the actual measured quantities, because the action of the elements in washing the slopes, the wearing of the shoulders of the embankment due to foot traffic, etc., will show some depreciation in quantities. It is common practice to carry the item for grading over to the present-value column at 100%, or, with no depreciation. This practice, together with the present condition of the ballast due to maintenance, and that part of contingencies which covers washing of slopes, filling of ditches, sink holes, etc., certainly takes care of all adaptation and solidification which should enter into a valuation of physical property.

No appraisal was made of the intangible assets. A great many arguments have been advanced for and against such an appraisal, and in South Dakota it was held that the earning ability of any corporation due to its franchise, strategic location, efficient organization, going-concern value, etc., while perhaps an element of value to be considered in a transfer of the property or if assessed on an income basis, should not enter into a valuation which would be used for determining a just and reasonable return on the investment, because the greater the earning power the greater would be the return, and that this condition would produce a never-ending increase in returns; whereas, when the returns reach a point at which they will not only pay a fair dividend on the investment, but take care of any depreciation in the physical condition of the property and make all needed improvements in roadbed, buildings, and equipment, demanded by the traveling public, shippers, increased traffic, or natural causes, they should be kept to that point. There are several hundred miles of railway in South Dakota which have been built out of the surplus earnings of the parent corporation—in other words, with money supplied by the traveling and shipping public—but which are owned by the railways and on which they may earn another surplus for constructing more extensions, etc., etc.

The original South Dakota appraisal, as of June 30th, 1908, on forms similar to those used in Minnesota, has been supplemented by yearly appraisals corrected for all additions and deductions made during the fiscal year. For this purpose a new set of forms^[29] was prepared, with the various items classed in accordance with the "Classification of Expenditures for Road and Equipment," as prescribed by the Interstate Commerce Commission, and arranged so as to facilitate showing the yearly changes.

R. A. Thompson, Assoc. M. Am. Soc. C. E.^[30] (by letter).—This paper is considered by the writer to be the most complete treatise ever written on the valuation of public service corporation property, and the author deserves the sincere thanks of the entire Engineering Profession and all others interested in this most important question. Its presentation is most timely, in view of the agitation, particularly on the subject of railroad valuation, which is now engaging the attention of Congress and the law-making bodies of the several States, as it contains much valuable information relative to decisions of Courts, in addition to clear and concise expositions of the methods in vogue for the appraisement of corporate property, etc.

It is a fact—rapidly coming to be recognized by legislative and judicial bodies—that the prescription and regulation of tolls, charges, and assessments against public corporations cannot be made systematic and intelligent unless there is provided some estimate of the value of the property involved, based on the cost of its replacement or reproduction. Particularly is this true of railroads; and such regulation of the affairs of these corporations as has heretofore been essayed by State and National commissions, has generally been on illogical bases, unsatisfactory alike to the proponents and the companies. Results have been had, it is true, after a fashion, but there have been endless disputes and litigation, with the prime questions involved no nearer solution than before. One has but to contemplate the varied and often antagonistic legislation promulgated by the several States, relating to corporation management, and the many rulings and decisions of the different courts and commissions on the subject of regulation, assessment, and adjudication of corporate rates, revenues, taxes, and tolls, to become convinced of the complicated and tangled condition of the situation, and to realize the necessity for the early establishment of some logical basis on which to establish the fabric of corporate control.

While it is not maintained that an appraisement of the physical property of public service corporations will be the panacea for all such ills, the writer firmly believes with the author that such appraisal, as a beginning, is absolutely necessary, and when effected on some fair and reasonable basis, will contribute largely to the successful solution of many of these intricate problems.

With the estimate of the physical value of a property before it—which represents money actually invested, together with such accruals to costs as it may be determined that the owner is reasonably entitled to have considered—any Court, tribunal, or commission is in a better position to mete out impartial justice, whether it be the regulation of a rate, the assessment of a tax, or the imposition of a fine.

Although the author's experience in valuing corporate property has been principally in connection with the Michigan appraisal of railroads, and to him is largely due the credit for devising methods for, and carrying forward to successful completion, this thorough and most excellent work, it is refreshing to note his inclination to give credit to the work of others along the same line in other States, which, it is to be regretted, has not always been the case with writers on this subject. There is no doubt that the work of the Michigan and Wisconsin Boards of Appraisal—conducted under the advice and direction of some of the most eminent and talented engineers and economists in the United States, and practically without regard to expense—is the most complete and perfect of its kind heretofore attempted; yet there are many features in regard to the organization and execution of its details about which there may be an honest difference of opinion, as viewed by those who have been similarly employed.

It is but natural—as suggested by the author—to find the "individual" character of the appraiser (which has been moulded by his environment, training, and former service) reflected in his opinion, and this would be most probable in the organization for, and carrying on the work of, appraising a railroad property, which involves consideration of practically every phase of engineering and economics. The judgment of any man is essentially warped along the lines of his experience, and he is necessarily biased and prejudiced in favor of or against certain practice. As a consequence, therefore, it is not reasonable to suppose that any one man, or set of men, can formulate a system for valuing corporate property which will be perfect in all its details, and be free from objection and criticism.

The writer was employed for a number of years as Engineer for the Railroad Commission of Texas, and had charge of the valuation of railroad property under the Railroad Stock and Bond Law of that State. A paper on the methods used by this Commission was prepared by him and published by the Society.^[31] This Stock and Bond Law was enacted in 1893, and the railroads then existing were valued in 1894 and 1895. The average value of 8,860 miles was $15,844 per mile. This valuation was made by Charles Corner, M. Am. Soc. C. E., now Resident Engineer of the Rhodesia Railways, South Africa, and Mr. H. J. Simmons, now General Manager of the El Paso and Southwestern Railway System. The actual cost of this work is not available, but is estimated at about $2 per mile. The engineers making the appraisal secured maps, profiles, and all available information from the offices of the railroad companies, including all the construction records and estimates of quantities which were preserved. Appraisal was made only after one of the engineers had made a personal examination on the ground, accompanied by assistants to aid in measuring structures and estimating quantities.

All valuations made since 1895 have been of new railroads making application for issuance of securities, and in all cases the deeds for right of way and depot grounds, the contracts for construction, the actual quantities of construction of all kinds, the plans and specifications for all structures and construction, and all other information which the engineer desired, were submitted by the railroad companies to enable an accurate appraisal of the value of the property to be made. It is not possible for valuations of this character to be made under more favorable circumstances. Up to October, 1909, more than 3,500 additional miles had been valued, and in all cases the estimates limited the securities which the companies might issue.

Writers on railroad valuation have generally been inclined to discredit the work of the Texas Railroad Commission and the system of appraisal used by it. One writer, of more or less prominence, has referred to it as the "cheap" method. While it may be true that other appraisals have been more expensive, it is a fact that those of the Texas Commission have served their purpose well, and the railroads, as a rule, have made little complaint. As a matter of fact, it is highly probable that the valuations of railroad property made by the Texas Commission have been of greater utility, as far as the public is concerned, than those of all other States combined, and, at the same time, no injustice has been done the railroads.

It appears that those who have interested themselves in investigating the Texas method of railroad valuation—including the author—have failed to construe the real meaning and intention of the Stock and Bond Law. Apparently, it was passed for the purpose of limiting railroad indebtedness—and is referred to by Mr. Riggs as serving only this purpose—but while its effect has been to accomplish this most successfully, its enactment carried with it a deeper significance.

This law was passed at the same time as the General Railroad Commission Act of the State, which gave to this Board absolute control over all freight rates and tariffs, and also other powers not possessed at that time by any other State commission. The decisions of the highest Courts at that time laid stress on the right of carriers to maintain rates which would afford a reasonable return on stocks and bonds outstanding. Hence, to delegate the regulation of rates to any tribunal by any law which did not carry with it also the right to supervise and restrict mortgage indebtedness to some reasonable extent, appealed to the legislators as being essentially ineffective. The effect of the law has been to reduce steadily the average outstanding stocks and bonds of the railroad companies of the State from an average of $40,802 per mile in 1894 to $31,910 in 1909—and this, too, in the face of a recognized increase in the physical value of the properties—thus depriving the railroads of one of their most potent weapons of offense when contending against the Commission's orders. It is a matter of common knowledge that the indebtedness per mile of railroads of other States has increased greatly during this period. It is also a fact that the railroads of Texas have, except in rare instances, contended that injustice has been done them in the enforcement of this law, and the market value of their stocks and bonds has steadily risen. Also their physical condition is on a par with that of railroads in other Southern and Western States, and their incomes from operation are as substantial. The practice of "watering" their securities has been effectually stopped, as regards local issuance, and any interest which might have accrued on such securities has been saved to the public.

It has been contended that the Texas valuations of 1894-95 were too low, and did not, even at that time, represent the fair value of the properties. This is perhaps true to a certain extent, but it must be remembered that the costs of materials and construction then were less than at any time before or since; and, viewed from the present-day standpoint, they seem to have been inadequate. It must also be considered that real estate values throughout the entire State were very low, compared with present values and with those of lands in other States. Although the writer admits that the margin was very narrow, still he is of the opinion that the valuations as made represented closely the cost of reproduction of the physical properties at the time.

The valuations of 1894-95 stand to-day on the Commission's records as "the value of the property," except in cases where there has been application and necessity for re-valuation. The machinery of the law did not provide that these appraisals should be kept "up to date." The mortgages on these railroads are still outstanding, and there has been no call for another appraisal, except in a few instances. The Commission has decided that in its opinion the "present value" of any of the railroads already appraised is represented by the original valuation plus the value of all permanent improvements and betterments added. This principle has been carried out with those railroads which have applied for re-valuation for any purpose, and the Commission has admitted the same in testimony which it has given before the Courts.

Since the appraisals which the Texas Commission makes are primarily for the purpose of limiting indebtedness, and the carriers are entitled to have these at least equal the cost of their property—the investment with certain additions to cover promoters' profits—no consideration can be given to depreciation of structures and equipment, although the application for valuation and process of issuing of securities may be had several years after completion. The writer holds that there is strong argument in favor of not taking into account "depreciation," and of estimating the value of the property as being entirely "new," whatever purpose the valuation is proposed to serve. This is apparent, as already stated, when the valuation is to serve as a basis for limiting the issue of stock and bonds. Is there any logical reason why a valuation for this purpose should not also serve—as far as it pertains—as a basis for taxation or for regulating freight rates? As far as the State is concerned—and to be consistent—should not "one" valuation serve all purposes?

Suppose that a State should create a board clothed with powers of rate regulation, taxation, and authority to restrict indebtedness, and also prescribe that it should appraise the value of the property of the railroads, and use that appraisal as the basis for its acts. Would it be logical for that board to make and apply one system of valuation for one purpose and another system for another purpose? Manifestly, it would have declared that a valuation was a "valuation" for all purposes, at least as far as the physical property was concerned; and, when devising a method for making its appraisals, it should incorporate therein all the elements of value which might apply logically to either purpose. The writer believes that "depreciation" of roadbed and structures would have no place in such an appraisal, on the one hand, nor its negative, but fully as intangible and difficult of concrete estimate, "adaptation and solidification of roadbed," on the other.

It should not be understood that the writer maintains that taxation boards should not go beyond the valuation of physical property to arrive at a final basis for assessment. There are certain intangible elements which should be taken into consideration when taxing property, chief of which is the net income. It is only as far as physical valuations apply in either case that he considers that there should be uniformity.

He does not approve at all of incorporating in an estimate of the physical value of a railroad property such an element as "adaptation and solidification of roadbed," which is credited with so much importance in the Minnesota valuation. In the first place, such an element is incapable of being measured in tangible terms and reduced to a dollars-and-cents basis; second, it cannot be reproduced in the sense that other property is reproduced, and its value does not appear in the capital account of the railroad; and third, it results from the action of the seasons on the one hand, and the working over of the roadbed by the maintenance forces on the other, the cost of which appears in operating expenses. One is constrained to believe that the engineer who insists on incorporating such an element in an appraisal of the physical value of a railroad is hard put to find material with which to swell his estimate. When noting the large difference in value per mile of the railroads of Minnesota, as compared with those of Michigan and Wisconsin—adjoining States—it would appear that undue prominence had been given to this and similar factors.

The writer's experience as appraising engineer for more than 10 years with the Texas Railroad Commission, and for the past 2 years as a construction engineer—having built about 160 miles of railroad in Oklahoma and Texas—confirms his belief that, in the absence of actual figures of cost, right of way and other railroad real estate should be appraised at but little in excess of the market value of abutting property. The practice of the Texas Commission has been to add from 25 to 50 per cent. The conditions under which railroads were built in Michigan, Wisconsin, Iowa, and Minnesota cannot have been radically different from those in the Southern and Western States. In Texas it has been a rare instance when a railroad has had to purchase all of its right of way. Also, contiguous lands have greatly increased in value since the advent of the railroads. It would appear highly illogical to advocate that these increased values should be multiplied by 3—or even 1½—and used as a basis for taxing the railroads on the one hand, or taxing the public on the other, by permitting indebtedness to be issued against it, the interest on which the latter must pay. The railroad recently constructed by the writer traversed fertile and thickly populated areas, already quite well served with transportation facilities. Only a small fraction of the necessary real estate was purchased by the railroad company, and only in a few cases of such purchase did it pay largely in excess of the market value of the land—and these were where the road interfered with houses and other farm improvements. In cities and towns, land was acquired at practically its fair market value. For rural property, the ratios used by Professor Taylor in the Wisconsin appraisal appear to be quite fair, but in cities they are too high—especially for the Southwest. The Minnesota ratios appear to be unreasonably high.

Any appraisal of the physical value of railroads—in the absence of figures as to their actual cost—is necessarily only approximate, and is correct only within certain limits. Especially with regard to the old roads, where original cost data cannot be had, the values applied to property and construction must be largely speculative. It is impossible to build two railroads in the same territory, on the same specifications, for the same amount; yet, on the basis of cost of reproduction, an appraisal board must apply the same value to each.

The writer believes that unless there is more uniformity as to methods of valuing corporation property, as between the States, all valuations will be more or less discredited, as they should be, by the Courts. It is to be hoped that this paper will be generally discussed by the Profession, and will lead to the adoption of more uniform methods.

Charles H. Ledlie, M. Am. Soc. C. E. (by letter).—The following is suggested as a method of procedure for determining the fair and equitable value of a property:

1st.—Examine carefully the statutes governing corporations of the class under examination.

2d.—Form an opinion as to whether or not the locality can support such a property, by inquiry regarding the different businesses carried on, bank clearings, railroad facilities, what the surrounding country produces, etc.

3d.—Find from the archives of the company a general description of the property, from its conception to the date of appraisement.

4th.—By close examination of the minute books, directors and executive committees, there can be ascertained all the details of organization, issuing of stock, bonds, and other forms of indebtedness, contracts for equipment, supplies used in the construction, etc.

5th.—Obtain from the general manager or the superintendents an explanation of the details of operating and maintaining the property, including the different classes of service, rates, etc.

6th.—Go over the property, examine it carefully, and talk to any and all employees from whom it is thought that any information can be gained.

The foregoing will give a general knowledge of the property under examination, and will enable one to begin the real work. The examiner's assistants must be competent and experienced men.

7th.—Examine all the vouchers, from the beginning of the company down to the date it began operation; classify their contents under the respective heads for the different classes of material used in the construction, for example, pipe, engines, cable, etc.; then prepare blank tables for each heading, having columns for size, quantity, prices, and total; and abstract each voucher. Do the same with the vouchers for labor, general office salaries, general expenses, interest, taxes, legal, etc. This, when completed, will give the detailed cost, as shown by the vouchers.

Next check the vouchers back through the books, and draw up a statement, which will show the total book cost and, no doubt, will differ from the voucher total. It is likely that many items will be found for which no vouchers exist, a list of these is made and if the officers cannot give a satisfactory explanation of any of them they are omitted. The total of what remains is added to the voucher total and represents the cash expended for the benefit of the original property, as shown by the books and vouchers.

8th.—Take all the remaining vouchers of the company (it is supposed that the examiner has already been informed by the officers, and by his inspection of the records, of the extensions and betterments which have been made), separate the vouchers for materials, labor, etc., from those on operating, etc. Next classify them by years, and then proceed as set forth in 7th, and add the different yearly amounts to the total of the original plant. This will show the amount of cash expended (according to the vouchers and books) on the property, for its physical plant, organization, etc., from its beginning to the date of appraisement.

Every examining engineer should know (or can obtain) the prices for materials, labor, etc., during these periods of original construction, extension, etc. If the prices are the same, or about the same, as at the time of purchase, the above total stands as the cash expended; if there should be much difference—and sometimes there is—take the detail of the materials as found in the vouchers, affix the proper prices, and do the same with labor, etc., and this total will be what, in the judgment of the examining engineer, the plant should have cost. A mean between this latter total and that in 8th is taken, in order to be fair and equitable. This amount, in place of that given by 8th, is then used as the cash expended on the physical property. If no difference is found in prices, then the total cash as shown by 8th is considered as the total to be hereafter used.

9th.—A careful detailed inventory is now made of the physical property as it exists at the date of examination. This often requires some excavation in order to determine sizes, quantities, and conditions. The prices used to ascertain the total of the inventory are made by taking the average of all those paid for materials, labor, etc., of the same class, during each year of the property's existence. (The writer considers it manifestly unfair to use the current prices in this calculation, for they may be very much below or above those actually paid, and in either event an injustice would be done, whereas, if the average prices are used, the examiner cannot be accused of unfairness.) To this total cost, as shown by the inventory, 5% is added for engineering and superintendence; 3% for general office salaries, 2% for general expenses, 1½% for legal and organization expenses, and from 5 to 10% for contingencies. (This latter percentage depends on the judgment of the examiner, who, after studying the local conditions carefully, can determine from his own experience what difficulties have been met in the construction. It is not believed that a hard-and-fast rule can, in equity, be laid down for this latter percentage.) This total represents the value of the tangible property, based on the inventory. The inventory cost and that set forth in 8th (or possibly as modified by prices current when the plant was built) are averaged, and this result, plus the supplies on hand, is the fair and equitable amount of cash which has been expended on the property. This is used in finding the "Fair and Equitable Value."

10th.—Next take the inventory of the plant set forth in 9th, affix the current prices at the date of appraisal, and to this total add the same percentages for engineering, etc., as set forth in 9th. This gives the cost of reproducing the property, with the same classes of materials, size and make of engines, etc., as is now in it, to which total add the cost of materials on hand for the total of cash required to be expended at current prices to reproduce the plant as it exists.

It is often found that this latter total is greater than that set forth in 8th, for the reason that the engines, etc., may be of types which are now abandoned or obsolete, and the manufacturing company, having to make patterns, etc., would charge more for them than the original price at the date of purchase.

This reproduction cost at current prices is only to give the examiner information he may or may not require later in the investigation to determine some point that might arise in ascertaining the "Fair and Equitable Value."

The writer considers it unfair to call the reproduction value the cost of a modern plant which will give the same service and output, because one is not dealing with the value of a modern plant, but with that of an existing property.

11th.—From this cost (using the detailed inventory to find the extent of property still in existence), calculate the amount of depreciation for each section of the plant, this being based on the present condition of the different parts and what their future life may be. The total depreciation is then deducted from the result found in 9th, and this remainder is used as the "Fair and Equitable Value" of the tangible property at the date of appraisal.

The intangible value (called by many names) must now be determined. It consists of rights, from the State, county, city, or any one or more combined, which the company must have in order to carry on its business. These rights in nearly all States are taxable, and taxes are collected on them. The Supreme Court of the United States has in the past held that they are property, notwithstanding what State "Courts and Commissions" have set forth on this subject, and in the writer's examinations they will be treated as property until the Supreme Court of the United States decides otherwise.

There are in general three classes of franchises, namely:

I.—Those granted by the State to conduct a business, where no county or city franchise is necessary, only requiring the company to obey the ordinances for excavation, etc. The charter of the Laclede Gas Company, of St. Louis, Mo., is an example of this class.

II.—Those granted by the State to carry on a business subject to a county or city franchise.

III.—Those granted by a city to an individual, singular or plural, or a company, to do business within its limits or a section thereof.

In each case the right may be a contract, for it may require a payment for the franchise granted, either in a lump sum or in yearly installments, or in the form of services rendered, such as for light, etc., free service of some kind, or a combination of any two or all of them.

The manner of determining the value of "Intangible Property" is as follows:

(a) The gross collected earnings are audited for each year during the period the company has carried on its business. The same is done for all vouchers, i. e., operating, maintenance, salaries, legal, general expenses, interest, insurance, and taxes, and includes every item disbursed. Whatever this latter amounts to, is deducted from each year's gross earnings as already found, and the result is the true net earnings or deficit for each year.

(b) The true net earnings are added together and the mean taken; if, in the period from the beginning to the date of appraisement, any deficits are found, these are deducted from the total of the plus-earnings, the result is divided by the total number of years, and this gives the true average net earnings. This is then capitalized at the legal rate of interest of the State in which the property is located. The result is used as the value of the "Intangible Property."

12th.—The amount given by 11th is added to the result obtained by 9th, and this total is the "Tangible and Intangible Value" of the property, and the "Fair and Equitable Value" of the property at date of appraisement.

If it is found that grave mistakes in design or judgment have been made by not employing competent people, and money has been wasted in construction, the plant is re-designed, for the original plant, and its cost estimated. The same is done for each extension, using the prices paid at the different periods, and this result is used in place of 9th, as the cash cost at the date of appraisement.

In determining the intangible value, if it is found that the management has been careless in order to make large net earnings, at the expense of the physical property, estimates are made of what the property can be operated and cared for (here the practical knowledge of operation, etc., is necessary), and these results, plus taxes, etc., are subtracted from each year's collected earnings. The mean or average of these results is considered as the true net earnings, which are capitalized and added as set forth in 12th.

The writer holds that consumers or purchasers should not pay for avoidable error or ignorance, and the amount of the securities issued on the property is not considered as entering into the matter of "Fair and Equitable Value"; when they do, the method is somewhat different.

The mean true net earnings are used in determining the intangible value, because franchises have average values, as earnings and expenses fluctuate in corporations, and, when intangible values are to be considered, they must not be based on the last year's net earnings, for if they are, they may give a very large result in one year and a small one in the next; therefore, to be fair, the mean true net earnings should be the basis of the intangible value. If the company has been over-capitalized, and no sinking fund or depreciation has been set aside, it is the present owner's misfortune. If the company calls something a betterment, and it is found that the betterment has only replaced something, it is not allowed, but is classed as maintenance; on the other hand, if the replacement is larger, and capable of rendering greater results, such as a larger engine, pipe, cable, etc., the cost, less the cost of what it replaces, is allowed as a betterment, and if the old part is sold the proceeds are deducted from the betterment charge, for if it is credited to maintenance, it increases the true net earnings. This is often done, but is not the correct way to treat the matter, for it increases the intangible value.

13th.—When new rates are to be established for a period of future years, the manner of determining the "Fair and Equitable Value" is the same as has been heretofore set forth. The new rates are based on averages, and the first step necessary is to ascertain what gross revenue the company must have in order to pay all classes of operating expenses, maintenance, depreciation, taxes, interest on the "Fair and Equitable Value" of the property, and a reasonable profit.

To obtain this amount, the procedure is as follows:

(a) Find the percentage of increase of the operating expenses for each year over the prior one, for a period of generally five years preceding the date of examination (a longer time may be taken if, in the opinion of the examiner, it is necessary), and then ascertain the average annual increase of the percentages. The result thus obtained is taken as the increase percentage for the operating expenses for the new period of time.

(b) In order to determine what the operating expenses will average during the time the new contract is to run, take the amount of the last year's operating expenses as a basis and add to it the percentage found by (a). This total is the operating cost for the first year of the new contract. The amount for the second year is found by adding to the cost of the first year the percentage found by (a), and so on for each year of the new period. These results are added together and their average is then used as the mean cost of operation for each year during the full period.

(c) The same method is followed for maintenance and taxes, in order to find the average maintenance and taxes for the new contract's life.

(d) Depreciation on the plant begins from the date of appraisement, and is estimated on the physical property by using for each section the percentages used in determining the "Fair and Equitable Value."

(e) Interest at the rate of 6% is allowed on the "Fair and Equitable Value," and 6% profit.

The question of extensions and betterments to the original plant must now be taken into consideration.

(f) The amount of the betterments and extensions have already been found for each year of the property's existence, and an average of them is taken as the amount the company will spend on extensions, etc., during each year of the new contract. On this sum 6% interest and 6% profit is allowed, and, for depreciation, the same percentage as used in the original plant.

It will be seen that all the expenses of operation, etc., of these extensions have been allowed in (b), where the increase has been added for each year for these extensions and betterments, as they are assumed to increase the cost of operation, etc.

(g) The amounts found by (b), (c), (d), (e), and (f) are now added together, and to the sum 5% is added for interest, taxes, operation, etc., which may be caused by the necessary increase in capital expenditures, for a greater growth than could be foreseen at the time the new rates were established, for losses, etc. This total is used as the basis for establishing the new schedule of rates.

14th.—The next step is to determine what part of the amount found by (g) must be paid by the different classes of consumers.

(I) First ascertain the yearly percentage of increase in the output of the plant for the five years before the new contract is to go into effect (or longer if, in the opinion of the examiner, it is necessary); then find the average increase of percentage during the before-mentioned five years. Add to the last year's output the percentage found above, this result representing the output for the first year of the new contract. Continue this operation for each year in the same way as the operating expenses were found in 13th (b). The average of these results will be the average estimated output during the life of the new contract.

(II) Next find the amount of the total output each class of consumers used during each of the five years, and then find the average yearly use during this period. Put these into percentages of the amount of the average output for the five years, and then use the percentages as the amount each class of consumer will use of the average output found in (I) during the period of the new contract.

This gives the average amount of the output each class of consumers will use during the average life of the new contract.

(III) Next find the average percentage of the total revenue each class of customers paid during the five years. Take these percentages as the average percentage each class will pay of the average revenue necessary during the time the new contract is to run.

(IV) Having found the average amount of the required revenue that each class must pay, and the average amount of the total output each class will use, dividing the former by the latter for each case will give the rate each class is to pay during the new period.

It is often found in plants that large extensions have been made to supply a special contract for a long period of time, and these extensions are set aside for the exclusive use of this contract. In such cases exclude the cost, etc., of this part of the plant from the "Fair and Equitable Value" in the matter of adjustment of rates.

In determining the operating expenses, etc., in such a case, find the percentage of the total output this special output amounts to; then, using this percentage, find what part of the total power-house expenses of all kinds are caused by this special contract. This result is deducted from the total power-house expense, and the remainder is the power-house cost of furnishing the consumers with their share of the total output. If it is found that special employees are required to deliver this special output, their cost is deducted, and the same for the maintenance material used. Taxes and interest on the cost of this special equipment are found by ascertaining the percentage this cost of the special equipment bears to the whole plant.

The above results are deducted from the total operating, maintenance, taxes, and interest disbursements, and "Fair and Equitable Value," and the remainders are used as the cost of the last year's expenses for furnishing the consumers with their share of the product and the "Fair and Equitable Value."

The same method is used in determining the revenue paid by the consumer.

The above result, i. e., cost of operating, etc., is then used as the basis for estimating the expenses for the period of the new contract, as heretofore set forth.

If the charter comes under Class II or III, the city no doubt has incorporated a clause for the adjustment of rates, and the method used above is followed.

15th.—Where the franchise has expired and is going to be renewed, the same method holds.

16th.—Where the franchise has expired and the city has paid a certain amount for service, and is to buy the property, the same method is used, except in determining the intangible value. For determining the latter, the amount the city pays for service is deducted from the gross collected revenue. From expenses is deducted the same percentage as the amount of the city's payment is of the gross revenue; a net revenue is found from this, the taxes paid are deducted, the remainder is capitalized as heretofore set forth, and is the intangible value. Whatever the latter amounts to is added to (or deducted from, in case of deficit) the "Fair and Equitable Physical Value," and the result is the price the city should pay.

Cities generally claim, and so do their "experts," that they should only pay junk value, or the cost of a modern plant to give the same results. This is eminently unfair, because the city buys a property which is in full operation and it receives the full revenue, in addition to obtaining service for itself at a less cost than it heretofore paid. The difference between the cost to the city of furnishing the service itself, and what it paid the company, is profit, but there is a charge against this of loss in taxes. These two latter items, namely, profit and taxes, generally balance each other, although the writer has known of cases where the city was the gainer.

There are many points which can be advanced to establish the fairness of the methods outlined herein, but they would take some time to explain, and therefore the writer has only set out the plan he follows in his examinations, hoping that it may be of some aid in establishing a uniform method which will be upheld by the Courts.

It may be stated that recently this method was used in an examination, going back thirty-five years, and the results were accepted by both sides without question.

The writer has refused a number of examinations when told in advance what result must be found, as well as in "expert" work, where the examiner is expected to help make a case, regardless of his honest judgment, for, by accepting such work, the engineer hurts his reputation and lays the Profession open to such remarks as Judge Lacombe recently made in the case of the Peoria Water-Works Company vs. Central Railway Company.

The writer is fast coming to the conclusion that a great deal of legal trouble is caused by the decisions of commissions, the members of which have not had experience in these matters. If a commission consisted of an able lawyer, a financial man, and an engineer who has had a broad operating experience, its decisions would carry weight, and the Courts would not be burdened with so many appeals.

William G. Raymond, M. Am. Soc. C. E. (by letter).—This is, perhaps, the best paper on the valuation of public service property that has yet appeared. The author's analysis is very clear, and his arguments are convincing. Three points the writer would like to consider; two of them briefly.

The item, "going value," even if it is determined on logical reasoning, as suggested by Professor Mead, would seem to be a dangerous item, and one which might result in absurdities when estimated by an unscrupulous, ignorant person. Moreover, the term has been differently defined, and there is no certainty as to just what it means. The writer sees no reason for the existence of such a term, or of such a separate quantity as this term is supposed to represent.

The term, "franchise value," or, "value of the franchise," is used to represent the difference between the capitalized net earnings and the value of the physical property. Of course, there is such a difference, either positive or negative, but there seems to be some objection by the Courts to calling this "franchise value." The writer, therefore, would suggest that, since franchise value is a very elusive item, depending on the life of the franchise, the attitude of the community toward the corporation, the activity of competing corporations, and numerous indeterminate items, the term, "business value," or, "going concern value," be used instead of "franchise value." "Going concern value" is not as good a term as "business value" or "value of the business," because it may be assumed to include both the value of the business and the value of the property. "Value of the business" would presumably include the value of the franchise, and perhaps would not always be represented exactly by the difference between the capitalized net earnings and the value of the physical property, but would be this difference affected by some judgment percentage resulting from a consideration of the probable continuance of the franchise.

Mr. Riggs has truly said that the value of the physical property must not be made to depend on the purpose for which the valuation is made; that, for the business for which it is used, the value of the physical property is the same, regardless of the purpose for which a valuation is desired; but valuations are made for different purposes, and, while there is room for argument as to the proper valuation to be used for capitalization, taxation, or sale, there are perfectly definite methods suggested for valuing property for these purposes. The writer has never seen a statement—that appealed to him as at all rational—of a proper method of valuing property for rate-making. Indeed, the writer has said^[32] that "proper traffic rates have no relation to valuation except that the minimum net income should be at least sufficient to pay interest on the physical valuation." The writer is not absolutely certain of the correctness of this position, for a study of the public right to regulate a corporation which is performing a semi-public function seems to indicate that the public has a right to say, not only that rates shall be non-discriminatory, but also that they shall be reasonable.

Now, the writer is familiar with three bases for the determination of what constitutes reasonableness of rates. One, which applies to rates as a whole, is this: That the net income should produce not more than a reasonable interest rate on the actually invested capital. Another is the rate that the traffic will bear, and the third is a rate that represents what the service is worth to the purchaser. Of course, a difficulty arises in determining reasonable rates on any one of these three bases.

The only difficulty with the first one is in determining what is a reasonable interest rate on invested capital, and, as far as the writer has read, no Court has yet determined what this is, although some Courts have held that 5% is a not unreasonable return, that 8% is a not unreasonable return, and, if the writer's memory serves him right, that even 15% is a not unreasonable return.

There is great difficulty in the determination of what the traffic will bear. It is a matter of the exercise of judgment and of experiment, and must be applied to a considerable extent to particular rates, for particular commodities, for particular places.

The third basis would seem to be the most difficult to use, although it is one which has recently been established in important Court decisions, and is mentioned by Mr. Riggs. What is a monopoly-provided service worth to the user or purchaser? Suppose that a gas company charges $1.60 per 1,000 cu. ft. for gas, and a very considerable part of the populace living in the city served purchases gas at this price. Presumably the purchasers pay what the service is worth to them, and what they are willing to pay rather than suffer the inconvenience of tallow candles, oil lamps, or to pay a high price for electric lights. Suppose that through a period of five years, by a series of reductions voluntarily made, the price of gas finally reaches $1.15 per 1,000 cu. ft. Is this gas worth any less to the consumer at the end of the five-year period than it was at the beginning? So far as the writer can see, it is, for only one reason, namely, that it can be had for less; but this has been a voluntary reduction on the part of the supply corporation, and who shall say that the service is not worth less than $1.15 to the consumer, or who shall say that it was not worth less than $1.60 at the beginning of the period suggested? The figures here given represent an actual case which has occurred during the last five years, within the writer's knowledge. There seems to be a growing feeling among the people that rates as a whole must be fixed so as to yield only a reasonable return to the corporation, and, apparently only for want of the suggestion of a better method, a reasonable return has been held to mean a reasonable return on the capital invested. Believing that there may be some ground for the claim that rates as a whole should be thus fixed, and that the return should not be unreasonable, let us consider how what is reasonable may be determined.

In the first place, it appeals to the writer that the invested capital is not the proper basis for estimating reasonable rates. If it shall be finally established that a corporation is entitled to realize only a reasonable interest rate on the capital invested, there will be no more public service corporations organized; but, if the reasonableness of the return may be based on the capital invested and the business done, there will still be good inducement to capable men to engage in public service business.

It would seem that the rate of return that is reasonable differs for the capital invested and for the business done—that is to say, if the capital invested is $1,000,000, an ordinary investment return of from 4 to 5% may be sufficient; and if the business done with this million-dollar plant amounts to $10,000,000 a year, a reasonable return may be 10% or even 15% of the whole.

Now, as has been suggested by Mr. Riggs, it is manifestly impossible to capitalize the net earnings as a basis for determining reasonable rates, because these net earnings are the result of certain rates already established, the reasonableness of which may be in question; and if, instead of speaking separately of interest rate on capital actually invested and profit rate on business done, it is desired to obtain a value on which to base reasonable rates, the following is suggested as a method: Determine the physical value and the annual interest on this physical value at an assumed reasonable rate, say 5%; determine the annual expense of conducting the business, and assume a business man's profit rate, say 15%, and find the profit that should be earned on the business done. This, added to the total interest charge, should give the net income, over and above operating expenses, that may be considered reasonable, and this sum, capitalized at any given assumed reasonable interest rate, would give a value which might with reason be used as a basis for rate-making, rates being deemed to be reasonable as a whole which furnish from year to year a simple reasonable interest rate on this established value. Of course, there is no necessity for establishing such a value, as the reasonableness of the rates will be determined when it is learned that they produce not more than a fair interest rate on the actual physical value of the property plus a fair profit rate on the business done.

This method is not free from the objection that what is a reasonable interest rate and what is a reasonable profit rate have never yet been fixed, but it is much easier to fix these separately than to fix what is a reasonable return on the capital actually invested or the physical valuation of the property.

W. H. Williams, Esq. (by letter).—Before entering upon the discussion of the more essential elements of the problem presented by this paper, it seems worth while to correct one or two misapprehensions under which Mr. Riggs seems to labor, and to call attention to the rather extraordinary temper in which he approaches the grave questions with which he deals.

Mr. Riggs' first serious misapprehension is that railway officers, as a class, are, with substantial unanimity, opposed to any official valuation of railway properties, and that this opposition was voiced through the writer's discussion of Professor Henry C. Adams' paper in favor of valuation, at the last annual (December, 1909) meeting of the American Economic Association. Of course, on that occasion, the writer spoke, as he now speaks, only for himself, but, more than that, he then expressly disclaimed any such opposition, undertook to make suggestions as to the manner in which a proper valuation could be obtained, and directed his criticisms plainly at a proposal which contemplated, as he then observed:

"An incomplete and misleading valuation bearing the stamp and carrying the weight of governmental sanction, which can be of no practical advantage to the Government, the public, or the railways; but may easily injure the public and the railways by disturbing the confidence of the former and hampering the activities of the latter."

The writer then added:

"It seems very clear that such a valuation as is proposed would be wholly useless to the Government for any practical purpose, because it would omit so many factors essential to any fair appraisement of the worth of the enterprises as going concerns."

Bearing in mind that the foregoing was addressed to the particular proposal made by Professor Adams, that being the topic on which the writer was invited to speak, a proposal expressly limited to the ascertainment of cost of reproduction less depreciation (the equivalent of cost of replacement with second-hand materials in a condition equivalent to that of the materials in use and hereinafter referred to as "cost of replacement") under the pseudonym of "physical value" (or sometimes "inventory value"), it would seem as though Mr. Riggs should sympathize with the writer's view, rather than with that of Professor Adams. Certainly, Mr. Riggs is fully aware of the inadequacy of mere cost of replacement to serve any useful purpose, for, after saying that:

"No account may be taken of the purpose for which the resultant figure of value is to be used; and the result should not vary, no matter what the purpose may be."

He says, in another place:

"* * * it is clear that the worth of the physical property, being the cost of reproduction less depreciation, is not necessarily the value of the property. * * *"

And, defining what he calls the "non-physical or intangible elements of value," says:

"These are those things which, added to or taken from the worth of the physical property, make up the value, and include whatever accrues to the property by reason of its operation, or by reason of grants, contract rights, competition, or location, which at the time of appraisal affect favorably or unfavorably the worth of the property."

The second misapprehension that is worthy of notice seems to have grown out of a curious sensitiveness, on the part of Mr. Riggs, as to any suggestion, other than his own, of criticism of any work undertaken or theories advanced by Professor Adams. As to every reader, other than Mr. Riggs, it is surely quite unnecessary to say that no attack has been made upon Professor Adams by the writer at the New York meeting of the American Economic Association or anywhere else. Certainly, it will be conceded that some difficulty would attend an effort to respond to an invitation to discuss before a scientific body a paper written by one of its members without making any allusion to the author of the paper or to his views or work, and those who have any knowledge of the history of official railway valuations in the United States, and especially of the proposal to undertake a Federal investigation of cost of replacement, are fully aware that Professor Adams has been from the beginning, and now is, the Hamlet of the drama, without whom it would become dull and lifeless. Strangely enough, Mr. Riggs seems to wish to deny to Professor Adams this prominence, for he says:

"Professor Adams was associated with the Michigan appraisal, but had no connection whatever with the 'physical valuation,' to which such objection is taken, and his appointment was made after the work of physical valuation had been fully outlined and was well under way."

It is true that the scheme devised by Professor Adams, and adopted at his suggestion by Governor Pingree, required the employment of civil engineers for the preliminary work which necessarily had to precede the final "valuation" by Professor Adams, but the bare statement of this fact is utterly misleading. Professor Adams' own testimony in one of the Michigan tax cases happily places his responsibility for the whole plan entirely beyond controversy. He said:

"In 1900 I was called upon by the Michigan State Tax Commission to determine whether railroads were paying a tax rate on their value equal to the rate on other property. With that problem in view, I formulated this inventory plan. * * *"^[33]

Any discussion of the proposal for a National inquiry concerning cost of replacement which omits to show that its most persistent advocate, Professor Adams, has advocated and actually conducted or controlled several successive "valuations," in Michigan, as Statistician to the Interstate Commerce Commission, and as special employee of the Bureau of the Census, made in accordance with other methods than those which he now proposes to apply, is seriously inadequate; as seriously inadequate as it would be to omit to state that, using what purported to be the same method, Professor Adams, by changing the details of its application and decreasing the rates of interest used in his computations, raised his "valuation" of Michigan railways from $152,958,202 to $177,689,292 or 16.17%, each of the two calculations being presented to the public, with assurances that it disclosed the actual taxable value, and there being barely eighteen months between them. The writer is by no means alone as an object of Mr. Riggs' dissatisfaction because of public criticisms of Professor Adams' plan for estimating cost of replacement. Thus, of a statement in which Professor Taylor, who conducted the Wisconsin inquiry, questioned the validity of some of Professor Adams' methods, he writes:

"Undoubtedly this statement was made in good faith, and has gained currency by not having been corrected, but it is not the fact."

In another place, referring to a statement of comparative costs to the respective States for valuation work, made by the Railroad Commission of the State of Washington, he says:

"It does not appear to be good taste either to criticize costs of work in other States, or compare the costs in Wisconsin and Michigan with the cost in Washington."

Referring to a paper by Charles Hansel, M. Am. Soc. C. E., who took part in the Michigan valuation, Mr. Riggs says:

"The one point to which special attention is drawn is Mr. Hansel's astonishing misconception of Professor Adams' plan of work. This misleading statement appears in the first paper and is reiterated in the second."

Again, of the report of the expert of the Washington Railroad Commission, who had the temerity to declare that it found "little value" either in Professor Adams' methods or his estimates of the cost of the work, Mr. Riggs says:

"Such sentences, and others which, by inference if not by name, reflect on work executed by men of high professional standing, are hardly in good taste, even if true, in a report to a railroad commission of another State."

Yet Mr. Riggs does not fail to criticize the method of "valuation," applied by Professor Adams in Michigan, in terms quite as definite as any used by others.

Thus, he condemns the method used to estimate the value of the non-physical elements appertaining to the Michigan railways, on the grounds (first) that it made this value a mere derivative of the rates existing, and (second) that it made no allowance for negative values when cost of replacement exceeded real value, saying:

"It will be seen that, in the case of a property in which the surplus earnings depend on excessive rates for service, it will fail as a method of determining a value for use as a basis of rate-making; and it fails, in the form in which it was used in 1900 and 1902, to bring out those negative or subtractive elements which may be determined from the income accounts, in the case of properties which do not earn a fair return on the investment."

Of the published statistics of American railways, compiled in the office of which Professor Adams is the responsible head, derived from annual reports made in accordance with forms prescribed by the Interstate Commerce Commission under his guidance, and containing items selected from and depending on the uniform railway accounting system devised by Professor Adams and imposed on the carriers by the Commission, Mr. Riggs writes:

"The published statistics are in such form that only the careful student of affairs can understand or analyze them, and but few of the public officials who receive them are able to read the reports of the properties and comprehend them."

Railway officers fall quite generally under Mr. Riggs' condemnation, for, of them he says:

"As a body * * * it is doubtful if any equal number of men, of equal intelligence, have as limited a knowledge of the fundamental truths of government, or knowledge so colored by bias. It is also doubtful whether any equal number of men have in their ranks so few who bear an active part in the duties and activities of citizenship, or who exercise large influence on their neighbors."

Such assertions as the foregoing need no comment; their intemperance is their most effective refutation; yet a few recent examples may be cited: Paul Morton resigned as Vice-President of the Atchison, Topeka and Santa Fe to become Secretary of the Navy in Mr. Roosevelt's cabinet; Jacob M. Dickinson, General Solicitor of the Illinois Central, became Mr. Taft's Secretary of War; his successor with the Illinois Central, William S. Kenyon, later became Special Assistant of the Attorney-General; Lloyd W. Bowers, General Solicitor of the Chicago and Northwestern, was Solicitor-General of the United States from early in Mr. Taft's administration until his death a few months ago. Thus, within but four or five years, the Federal Government took four of its highest officers from the railway officers located in only one of the country's great cities—Chicago.

Of a recent address by one of the ablest and most public-spirited of railway officers, he says:

"This address well expresses the spirit of the railway managers and employees toward all forms of investigation, and the complete lack of understanding, on the part of these managers, of the legal and moral relations which they bear to the communities which they serve."

Belonging to this so hateful class, and having also ventured to question whether Professor Adams has said the last and most perfect word on the subject of railway valuation, the writer is neither surprised nor disheartened to find that he, also, has caused Mr. Riggs undisguised dissatisfaction. It is a misfortune apparently inseparable from his profession and his conception of his obligations to his employers and to the public.

As has been already noted herein, the question is not whether railway property shall be officially "valued," but rather (first) as to how the "value" which is to be ascertained is properly to be defined, and (second) how the determination of "value," as properly defined, can be made most accurate.

The essential difference between the view advocated before the American Economic Association by Professor Adams and that of the writer was, and is, that the former now desires to exclude all elements of value which are not physical and tangible, while the writer holds that, if it is worth while to ascertain, on a general scale, at the cost of a necessarily large expenditure of taxpayers' money, and as to a particular date, so unstable a fact as railway value, the kind of value the ascertainment of which could be of sufficient utility to warrant the effort can be nothing less significant than the "fair value" which the Courts have said is a proper element for consideration in fixing reasonable rates of charge. The fundamental difference between these two conceptions of value is admirably indicated by the following quotations, both of which rest on the authority of the Interstate Commerce Commission.

"The present value of a railroad property is necessarily very largely a matter of opinion only; it depends upon a vast number of contingencies and uncertainties, a road apparently of great value to-day may soon become worthless by the opening of a competing line having superior advantages or by the competitive struggles of other lines which operate to reduce the income of all; the value of a railroad largely results from the personal characteristics of its officials; the policy pursued by directors for the conservative and economical or progressive and daring, is a great factor in the determination of the current value of the property; a railroad property is not necessarily worth what it would cost to replace it and, on the other hand, it may be worth very much more than that."^[34]

Replacement Cost.

"The bill in question makes use of the phrase 'fair value.' Unless there is some legislative necessity, which we do not perceive, we question the advisability of using this phrase.

"It would seem to us preferable to substitute a phrase which indicates the fact that Congress desires an inventory valuation of railway property. By inventory valuation is meant that the property of the several railways shall be listed in detail, and that each kind or class of property so listed shall have assigned to it a valuation to be determined from the point of view of the contracting engineer, and not from the point of view of a court or board of arbitration which, from the nature of the case, cannot judge of what is 'fair value' except in the light of some specific use to be made of the valuation."^[35]

As has already been noted herein, and amply verified by quotations, Mr. Riggs is fully aware that replacement cost and real value can rarely, if ever, coincide, and therefore plainly agrees, as to that elementary and essential point, with the writer and disagrees with Professor Adams, who would ignore or destroy every non-physical element of value in the property of all public service corporations. Mr. Riggs' recognition of the inadequacy of mere replacement cost is shown also by the excellent and convincing example which he cites^[36] of competitive railway routes between two Michigan cities which were built and are maintained and operated under such conditions that the far more costly of the two, which inferentially has correspondingly higher replacement cost, has much lower earning capacity, both as to gross and net, and is therefore actually worth much less than its less costly competitor. Mr. Riggs explicitly favors full recognition of the non-physical elements in every valuation; and, therefore, may be ranked as an opponent of any such scheme of valuation as that advocated by Professor Adams before the American Economic Association, or in the letter of the Chairman of the Interstate Commerce Commission, hereinbefore quoted.

Mr. Riggs, however, believes that the determination of the cost of replacement is an essential first step toward the ascertainment of real value. He says:

"The worth of the physical property is primarily that on which the value of the whole property rests."

The thought which the writer would place in opposition to the foregoing is that: Physical property has no value which is not an expression of its adaptation to economic needs. This is only another way of expressing the inevitable economic law, from which there is no escape, either in theory or in practice, that has been stated and sanctioned by the Supreme Court of the United States, as follows:

"But the value of property results from the use to which it is put, and varies with the profitableness of that use, present and prospective, actual and anticipated. There is no pecuniary value outside of that which results from such use."^[37]

Mr. Riggs' own definition of value is not inconsistent with the foregoing. He says:

"The value of a property is its estimated worth at a given time, measured in money, taking into account all the elements which add to its usefulness or desirability as a business or profit-earning proposition."

The view of Mr. Riggs is that:

"While ... the worth of the physical property, being the cost of reproduction less depreciation, is not necessarily the value of the property, ... the physical worth must bear some very definite relation to value...."

And he is, further:

"Strongly of the conviction that this relation is such that 'value' cannot be ascertained without a determination of physical worth."

It is exceedingly difficult to comprehend just what Mr. Riggs means when he describes the relation between real value (which he recognizes so clearly as value in use) and cost of replacement as "very definite." Certainly, he does not mean that it is a constant relation, or one which can be ascertained until there has been independent determination of both of the aggregates whose relation it expresses. In fact, the emphasis which Mr. Riggs places on replacement cost has led him into the grotesque fallacy of arguing that a correct estimate of real value is only to be attained by ascertaining: (first) cost of replacement, (second) real value, and (third) correcting the aggregate first obtained by applying whatever "very definite" relation (ratio) is necessary to make it agree with the second aggregate, which was from the beginning the only aggregate really wanted. The accuracy of this characterization of his proposed procedure is made perfectly clear by the following quotation:

"... the true method of valuing a corporate property is first to determine the cost of reproduction of the property and its depreciation, and modify this figure by any applicable positive or negative non-physical elements of value."

It is submitted that the clear meaning of the foregoing is that both replacement cost and real value as derived from use must be separately and independently ascertained, and that, these aggregates having been compared, the former is to be corrected by whatever allowance for non-physical value may be required to make it agree precisely with the latter. The obvious suggestion flowing from this discovery of his theory is that only value in use is wanted, as that is the only real value, and as it must be separately ascertained in any event, no other and pseudo value need be taken. The essential character of the method is as described, even when it is applied through determination of the annual value of the use and the assignment of one portion of such annual value to return on the capital value of the physical property and another portion to return on the capital value of non-physical property. The real nature of the method is not even effectually concealed by the capitalization of the income assigned to physical property at one rate and the income assigned to non-physical property at a different and higher rate. In fact, if it is necessary to conclude that a portion of the net annual income of railway property is normally paid to, or in respect of, a portion of capital entitled to a lower rate of return, and the remainder to or in respect of a remainder of capital entitled to a higher rate, the appraisal of the physical property is an excessively costly, cumbersome, and inaccurate expedient for determining the amount or value of either portion of the capital. Yet that is exactly what was done in Michigan by Professor Adams, the "valuation" he then made being completed before he altered his view by deciding that the non-physical elements of value are entitled to no consideration whatever, and that only cost of replacement is worthy of inclusion in an official "valuation."

But is there any real distinction between the "physical properties" and the "immaterial elements," such as the foregoing extract seems to assume? Is not the superficial appearance of such a distinction plausible but deceptive? A locomotive is an entity; so is a railway. The separate parts of a locomotive are most of them independently valuable; so are the separate parts of a railway; but a large share of the value of the locomotive is the result of the nice adjustment of these separate parts to each other and to the work to be done.

Take a hundred different-sized locomotives, each adapted to different work under different conditions, and separate each piece of metal; it would be possible to value all these parts, but the aggregate would be far less than the value of the locomotives from which they were taken. Again, it would be possible to construct from these parts a hundred locomotives of such poor design, their respective parts so out of adjustment and balance, that they would be worth even less than the parts out of which they were assembled. The highest paid intelligence has not yet contrived the perfectly balanced locomotive, but a large part of the so-called "physical value" of every locomotive represents this sort of highly paid intelligence put forth at every stage from the opening of the mine where the ore was obtained to the delivery of the completed locomotive. Take ten railways of a thousand miles each, every one of them efficiently constructed, and equipped with proper terminals, stations, signals, rolling stock, and trained employees, and each properly adapted to the requirements of its territory and traffic; separate them into piles of ties and rails, groups of locomotives and cars, acres of land, unorganized bodies of men of varied capacity and training; what sort of intelligence will it require to build up out of these masses ten railways as efficient and useful as those that originally existed? Why, then, should the "physical value" of the locomotive include the assembling of its parts in proper balance and the "physical value" of the railway exclude the cost of the much more complicated adjustment of its elements of machinery and labor and location to each other?

At an early point in his discussion, Mr. Riggs makes an announcement, highly becoming on the part of one who proposes to deal with the problem solely from the point of view of a civil engineer, that he does not intend to argue the public utility of any sort of valuation, but only the method by which it may best be made, should one be determined upon. He says:

"This 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—it does not take up questions involving the propriety of those figures when reached. The propriety or legality of using such figures as a basis for an assessed valuation, as a basis for rate-making (rate-making being an art in itself involving complications as great as those encountered in valuation), or any arguments as to the justice or injustice of legislation restricting issues of stocks or bonds, will be conceded no place in this paper. It is assumed that all these questions would have been taken up and a satisfactory answer reached before a valuation could have been ordered."

Two pages after the foregoing paragraph, under the sub-heading "The Relation of Public Service, or Quasi-Public Corporations, to the People," Mr. Riggs proceeds to violate the wise, though self-imposed restriction, and devotes no less than eleven pages to a defense of the project on grounds of alleged public policy. In these pages he concludes that such a valuation as he proposes—not a mere determination of replacement costs, but a real valuation, with proper allowance for all elements of value in use—would be of service in connection with (a) taxation, (b) public control of rates, and (c) public control of issues of capital securities.

In supporting valuation as an expedient in taxation of railway property, Mr. Riggs seems to rely on a table made up from Professor Adams' Bulletin No. 21, as expert employed by the Federal Bureau of the Census, which table shows that the assessment of the railways of Wyoming for taxation purposes in 1904 was but 7.5% of their commercial valuation, as estimated by Professor Adams, and that this ratio varied greatly throughout the different States, running as high as 114.4 in Connecticut. Of course, nearly every one knows, even if Mr. Riggs does not, that the relation between the real value and the assessed value of all other kinds of property varies greatly from State to State, and even in different portions of the same State. On account of this variation, no table such as that offered by Mr. Riggs in support of his argument can have any value unless supplemented and explained by data covering the assessment of other kinds of property. It is worth noting, en passant, that the so-called "Commercial Valuation," on which Mr. Riggs rests this part of his argument, assigns a value equivalent to $32,054 per mile to the railways of Michigan and one of $45,211 per mile to the railways of the prairie State of Nebraska. Possibly this variation in the estimate of value is partly expressed in the conclusion that Michigan railways are assessed at 70.9% of their value and Nebraska railways at but 18.5 per cent. Obviously, there is no more need of uniformity among the States in the taxation of railway property than in their methods of deriving revenue from other kinds of property.

Also, Mr. Riggs admits that, when the Michigan valuation for taxation was made, it was not diminished, as it should have been, by the use of negative, non-physical value. This is fully equivalent to an admission that the method was unjust to every railway not capable of earning the full return on its replacement cost. He says:

"The use of a negative or subtractive non-physical value was considered, and advised by Professor Adams....

"Professor Adams and his associates, therefore, applied only positive values, where any such were found, although advocating the use of negative values."

And, of the method then used, he says:

"... it fails, in the form in which it was used in 1900 and 1902, to bring out those negative or subtractive elements which may be determined from the income accounts, in the case of properties which do not earn a fair return on the investment."

And again:

"... where the earnings have been fairly uniform and stationary for a period of years, and the property does not earn a sufficient sum to care for depreciation and annuity, it is clear that the value as an earning investment is less than the determined physical value, and that the physical valuation should be reduced by some amount to arrive at the 'fair value.'"

In his argument favoring the use of a valuation in rate-making, Mr. Riggs affords no support to Professor Adams' contention that, for that purpose, only replacement cost should be considered, and that, after fixing the rates on the basis of the least favorably located and least efficient line, so as to afford it a bare return on its replacement cost, the surplus earnings at the same rates of its more favorably located or better operated competitors should be confiscated under the guise of a special tax. This extraordinary proposal, the character of which is so illuminating as to the attitude toward railway property and investments of the most prominent and persistent advocate of so-called "physical valuation," is best stated in Professor Adams' own words, which are as follows:

"I cannot evade the conclusion that equity, as between various classes of roads, can never be attained until all the excess of revenue over the Constitutional limit be made a contribution to the public treasury, and that this contribution be made as a substitute for all taxes of all kinds and all sorts."^[38]

On the contrary, Mr. Riggs distinctly upholds the right to earnings in excess of the bare return, at the minimum rate of interest, upon the cost of replacement, saying, inter alia:

"It is contended that the determination of rates that will be just and fair to all competing companies involves other consideration than the valuation of either physical or intangible properties, and that when all these rate-making problems are properly solved, there will remain large intangible values on the well-designed plants."

Professor Adams has himself admitted that there is no possibility of utilizing any valuation for the purpose of fixing specific rates, as such a task is far beyond the capacity of any conceivable system of cost accounting. Supplementing this admission, Mr. Riggs' opposition to the plan proposed by the former and its gross injustice, so apparent to every one but its author, destroys the last element of plausibility in the suggestion that any sort of valuation could be of utility in that connection. The writer is not overlooking the fact that the Courts, when under the necessity of repelling efforts to confiscate railway properties under the guise of rate regulation, and in view of the form in which this necessity has commonly presented itself, have accepted "fair value" as an element of importance in their inquiries; but if the railways are entitled to charge rates based on the value of the services they perform, it is clear that the question whether a rate or a schedule of rates is reasonably adjusted to the value of the service or services is very different from the question whether a fair return upon fair value has been allowed. Assuming, however, the need of an appraisement in every litigated case involving railway schedules, it is evident that each case would have to have its own appraisement, for value is ever changing and unstable. Mr. Riggs himself says:

"It is true that the 'value' of a property is an unstable figure, subject to fluctuations due to natural or artificial causes, and that a material change in value may occur suddenly...."

Professor Adams proposed to keep his replacement cost up to date by annual accretions equal to annual expenditures for extensions and betterments; but this plan is illogical and inconsistent, for it proposes to ignore that very essential difference between original cost (less a proportionate allowance for wear and tear) and present worth, which is the very basis of the argument in favor of any valuation at all. Equally obvious objections, growing out of the instability of the ascertained value of any particular date, apply to any plan which does not provide for a re-appraisement every time the aggregate is to be used.

The objections to the use of any valuation for rate-making which have been cited are valid, and should be convincing, but they are insignificant by the side of the fundamental objection that, as Mr. Riggs says, "as a business proposition, the value of any property depends on its earnings," while those who would thus utilize a valuation are attempting to reverse the fact and make earnings depend on the value. Such a reversal is impossible. Ascertain real value and you have a consequence of earnings, past, present, and prospective, nothing else; use this as a basis for a rate schedule and you get, as a mathematical result, the present rates. The only way to derive any other result from this method would be to use as the basis some figure other than the real value, a method which would only be resorted to through moral turpitude or intellectual incapacity. One might almost assume that Mr. Riggs knows this, for he says:

"Value is given to a property, either by reason of the fact that it is an instrument for earning profit, or that it does earn profit or gives promise of profit."

The substance of Mr. Riggs' argument on capitalization control is that American railways are not often over-capitalized, but such evils do obtain in other industries, and therefore railway issues of capital securities ought to be restricted.^[39] Unfortunately, he gives no clue to the methods he would have applied, nor as to how far he would go in interference with the normal action and interaction of commercial forces in determining what securities can and ought to be issued. Railways are not over-capitalized. Table 9, a comparison of official valuations and capitalization, originally compiled by Mr. Slason Thompson, is instructive.

State.	Year.	Valuation by commission or tax board.	State proportion of capitalization.
Minnesota	1907	$411,735,194	$334,979,691
South Dakota	1909	106,494,503	108,911,000
Wisconsin	1909	284,066,000	249,299,060
Texas	1909	413,000,000	412,465,743
Washington	1908	186,007,490	153,493,940
Total		$1,401,303,187	$1,259,049,434

Excess of total valuation over total capitalization

$142,253,753

In view of frequent suggestions, in the public press and elsewhere, which indicate that there is a widespread opinion that the securities of railways have generally been watered, Table 10 is given. It is an analysis of the consolidated balance sheet as given in the reports of the Interstate Commerce Commission for 1908 and 1890.

Table 11 shows the length, in miles, of main and other tracks in 1908 and 1890.

The Commission, in its annual report, shows the securities issued per mile of road (first main track), but does not show the results per mile of main track (i. e., 1st main track, 2d, 3d, 4th, and other main tracks), nor does it show the results per mile of all tracks (i. e., main tracks, yard tracks, passing tracks, and industrial tracks). From the consolidated balance sheet, it will be noted that the securities per mile of road have increased 29%, while per mile of main track they have increased only 24%, and per mile of all tracks they have increased but 14 per cent. However, deducting the investments in stocks and bonds of other corporations, and showing the results only for the securities issued on account of the cost of road and 12% equipment, we have an average per mile of road of $62,388, an increase of 12%; and an average per mile of all main tracks of $56,166, an increase of 8%; and an average per mile of all tracks of $42,864, or a decrease of 0.7 per cent. It will be noted that a considerable part of these increases is due to increased cost of equipment, and the advantageous results obtained from such investment have been clearly shown. Of the investment in the track itself (cost of road), it will be noted that the cost per mile of main track has increased only 5%, while the cost per mile of all tracks shows a slight decrease in 1908 as compared with 1890.

These comparisons are more significant and convincing in the light of the large expenditures since 1890 for the reduction of grades, revision of line, interlocking towers, automatic block signals, increased weight of rail, increased capacity of bridges, improved stations and terminals, elevation of tracks, and the many other items going to make up the additions and betterments, and increasing the book cost of the property. The figures plainly prove that there has been no general practice on the part of the railroads of the country, from 1890 to date, of issuing capital securities without securing full value for the vast amount referred to. Why, then, should any restriction be placed on the form or manner of their future appeal for the very large volume of capital necessary to keep abreast of American industrial development? Why should they be limited as to what form of security they may offer in return for the cash capital which they must obtain if they are to serve the public adequately and properly?

	Assets.
	Total.		Per mile of road.		Per Mile of main tracks.		Per mile of all tracks.
	1908.	1890.	1908.	1890.	1908.	1890.	1908.	1890.
Railroad:
Cost of road	$12,035,195,403	$7,333,096,430	$56,268	$51,400	$50,656	$48,109	$38,659	$40,033
Cost of equipment	1,178,571,137	422,290,951	5,510	2,960	4,961	2,770	3,786	2,305
Material and supplies	226,250,462	63,785,950	1,058	447	952	419	727	348
Total	$13,440,017,002	$7,819,173,331	$62,836	$54,807	$56,569	$51,298	$43,172	$42,686
Investments:
Stocks owned	$2,115,313,379	$489,049,859	$9,890	$3,428	$8,903	$3,208	$6,795	$2,670
Bonds owned	1,271,311,512	241,115,665	5,944	1,690	5,351	1,582	4,083	1,316
Total	$3,386,624,891	$730,165,524	$15,834	$5,118	$14,254	$4,790	$10,878	$3,986
Current Assets:
Cash and current assets	$1,213,575,272	$307,871,188	$5,674	$2,158	$5,108	$2,020	$3,898	$1,681
Sinking, Insurance, and other funds	154,975,409	125,095,987	724	877	652	820	498	683
Total	$1,368,550,681	$432,970,175	$6,398	$3,035	$5,760	2,840	$4,396	$2,364
Miscellaneous	$1,277,458,795	$710,300,536	$5,973	$4,979	$5,377	$4,660	$4,103	$3,878
Grand total—All assets	$19,472,651,369	$9,692,609,566	$91,041	$67,939	$81,960	$63,588	$62,549	$52,914
	Liabilities.
Securities Issued:
Capital stock	$7,289,597,964	$4,179,156,990	$34,081	$29,293	$30,682	$27,417	$23,415	$22,815
Bonds	9,441,200,261	4,462,577,079	44,141	31,280	39,738	29,277	30,327	24,362
Total	$16,730,798,225	$8,641,734,069	$78,222	$60,573	$70,420	$56,694	$53,742	$47,177
Current Liabilities:
Accrued interest		$25,341,994		$177		$166		$188
Other current liabilities	$1,151,233,255	440,513,629	$5,382	3,088	$4,845	2,890	$3,698	2,405
Total	$1,151,233,255	$465,855,623	$5,382	$3,265	$4,845	$3,056	$3,698	$2,543
Miscellaneous	$845,115,552	$394,918,201	$3,952	$2,768	$3,557	2,591	$2,715	$2,156
Grand total—All liabilities	$18,727,147,032	$9,502,507,893	$87,556	$66,606	$78,822	$62,341	$60,155	$51,876
Profit and loss balance	745,504,337	190,101,673	3,485	1,333	3,138	1,257	2,394	1,038
Grand total—All assets	$19,472,651,369	$9,692,609,566	$91,041	$67,939	$81,960	$63,588	$62,549	$52,914

It ought also to be borne in mind, in this connection, that, while there could be no lawful mode for the revision of existing capitalization, should it in any instance be found to be too small or too great when measured by the results of such a valuation, the future issue of securities must be controlled by the necessities of the carriers and the state of the market, and is also practically restricted by the Interstate Commerce Commission's accounting system, which declares what expenditures may and what may not be carried into the capital account. The law cannot compel any company to repudiate any existing security, and if it could it is not to be supposed that Congress would compel such an impairment of contract rights; public policy will not permit in practice restrictions that would prevent the issue of securities to meet the actual needs of the public and the carriers; the accounting system prevents issues of any other sort. Further restrictions would be cumulative and superfluous.

Track.	1908.	1890.	Increase.	Percentage of increase.
Single track	213,888.36	142,665.89	71,222.47	49.9
Second track	20,209.05	8,437.65	11,771.40	139.5
Third track	2,081.16	760.88	1,320.28	173.5
Fourth track	1,408.99	561.81	847.18	150.8
Total, all main tracks	237,587.56	152,426.23	85,161.33	55.9
Yard track and sidings	73,728.57	30,750.17	42,978.40	139.8
Total mileage operated (all tracks)	311,316.13	183,176.40	128,139.73	69.9

"The Interstate Commerce Commission in 1908 report that their Balance Sheet covers 'miles of road' aggregating 213,888.36 miles, whereas their statement of mileage represents all roads reporting to the Commission whether or not they furnished a Balance Sheet.

"To analyze the Consolidated Balance Sheet, we have revised the statement of mileage to cover same roads as are included in the General Balance Sheet. The 'miles of road,' i. e., miles of first main track, are actual. The Commission's report not showing separately for each line the miles of other main tracks or yard tracks and sidings, the figures shown in the statement of mileage are approximate. It includes mileage of all second, third and fourth tracks. Undoubtedly, practically all of the second tracks, third tracks and fourth tracks are owned, or operated by, roads furnishing the Commission with a Balance Sheet. Mileage of Yard Tracks and Sidings is based on the proportion which the single-track mileage of roads represented in the Balance Sheet bears to the total single-track mileage of roads reporting to the Commission."

Mr. Riggs considers seriatim nine objections to the ordinary methods of estimating cost of replacement which were mentioned specifically by the writer, as among the most important commonly omitted items, in an address before the New York Traffic Club, delivered during January, 1909. He concedes that the writer is correct in urging that allowances for "working capital with which to carry on the business" and for "impact and adaptation" ought to be included, and were omitted in Michigan and have been usually omitted. These are two of the nine objections specifically raised. As to five others, Mr. Riggs seems to be in considerable doubt. Concerning the objection that an allowance of 3% for interest during construction is too low, he contends that it was justified in Michigan by the "assumption," that the whole work of replacement would be accomplished in one year, and also "that on long roads partial operation would commence as various sections of the line were completed." He admits that these assumptions "clearly would not be proper" under different conditions, but appears to hold that they were warranted as to the Michigan work.

Another of the writer's objections was the absence of an allowance for "wear and tear of materials during the period of construction." As to this, Mr. Riggs says:

"This deterioration is a necessary incident to any construction work. It has not been customary or usual to take account of it. To add to the amount capitalized on account of this item would be manifestly improper. The only way in which this could be cared for would be in an adjustment of the depreciation reserve when raised to cover that which takes place during the construction period."

Of course, the depreciation account, when there is one, is a charge to operation. Therefore, Mr. Riggs' anxiety to disagree with the writer has led him into a frame of mind in which he is prepared to find that it is "manifestly improper" to charge to capital the real cost of construction, but is quite proper to charge to operation a part of the cost of construction, even though this results in carrying into the operating account items of expense incurred long before operation began or could have begun.

Mr. Riggs thinks that the writer was incorrect in objecting that "a uniform price for earthwork was used, thus ignoring the varying character of soil and length of haul," but he admits that there was "practically no classification in the Southern Peninsula of Michigan, or, in fact, on 90% of the mileage of the State," and his defense goes no further than to assert that "the price * * * was not much out of the way when considered as a fair average for the territory."

His criticism of the objection to the use of a uniform price list for materials, and ignoring the source of supply and the cost of delivery at the point of use, is equally forced, for it admits that "no effort was made to use different unit prices as between counties," and only contends that "in a number of cases" differences in prices were made.

The absence of an allowance for interference by labor troubles, weather conditions (which he admits are "a frequent source of annoyance, delay, and sometimes of expense"), Mr. Riggs defends on the ground that it is "an expense difficult to separate and set up," and therefore ought to be covered by an allowance for contingencies. On the same ground, he could easily carry every item of cost of replacement into the contingent account.

The two remaining objections specifically raised by the writer are squarely attacked by Mr. Riggs. As to one of them, the propriety of an allowance for carrying charges up to the time of attaining a revenue basis, has been admitted by the Railroad Commission of Wisconsin, but it is a broader question than ought here to be discussed. The writer will only suggest, at present, that in some form or other, these charges must be on the whole and in the long run met out of net operating income, and that the cheapest way, for the user of the services supplied, is to carry them into the capital account—otherwise there must be an early amortization of this item, which cannot do otherwise than to throw a heavy burden on the early schedules of charges. The language of the Wisconsin Railroad Commission on this subject merits quotation, and is as follows:^[40]

"But new plants are seldom paying at the start. Several years are usually required before they obtain a sufficient amount of business or earnings to cover operating expenses, including depreciation and a reasonable rate of interest upon the investment. The amount by which the earnings fail to meet these requirements may thus be regarded as deficits from the operation. These deficits constitute the cost of building up the business of the plant. They are as much a part of the cost of building up the business as loss of interest during the construction of the plant is a part of the cost of its construction. They are taken into account by those who enter upon such undertakings, and if they cannot be recovered in some way, the plant fails by that much to yield reasonable returns upon the amount that has been expended upon it and its business. Such deficits may be covered either by being regarded as a part of the investment and included in the capital upon which interest is allowed, or they may be carried until they can be written off when the earnings have so grown as to leave a surplus above a reasonable return on the investment that is large enough to permit it. When capitalized, they become a permanent charge on the consumers. When charged off from the surplus, they are gradually extinguished. (These facts alone, however, do not always furnish the best or most equitable basis for the disposal of such deficits.) Whether they should go into the capital account, or whether they should be written off, as indicated, are questions that largely depend on the circumstances in each particular case."

The other objection that is squarely opposed by Mr. Riggs is the refusal to allow for unavoidable discounts on the securities sold. Here he quotes with complete approval an unnamed writer, who contends that the impropriety of such an allowance is proven because, as between an issue of $10,000,000 in bonds (par value) at 4% and at 4½%, the 4% bonds bringing 90 and the 4½% selling at par, there is an annual saving, in issuing the 4% of $50,000 in interest, and that, if the issue is to be for fifty years, this saving is $2,500,000, or $1,500,000 in excess of the discount. Of course, these figures are correct, but both Mr. Riggs and his unnamed authority seem strangely to have overlooked the fact that if a railway construction requires $10,000,000, it cannot be obtained by issuing $10,000,000 in par value at 90. The comparison, of course, ought to be based on the issue of enough bonds at each rate to obtain equal sums of money. As $10,000,000 in par value of bonds sold at 90 would produce $9,000,000, the following comparison is based on the issue of enough bonds at each rate payable in fifty years to secure that sum.

	Fifty-Year Bonds,
	4½% sold at par.	4% sold at 90.
Amount of capital required	$9,000,000	$9,000,000
Par value of bonds necessary	9,000,000	10,000,000
Annual interest charge	405,000	400,000
If 4% bonds are used:
Annual saving in interest		$5,000
Fifty years saving in interest		250,000
Loss, original discount		1,000,000
		_________
Net loss		$750,000

Of course, the foregoing figures are not absolutely accurate, for the real net loss in the issue of the 4% rather than the 4½% bonds at these prices would be the difference between the $5,000 annual saving in interest and the amounts which would have to be set aside annually for fifty years to produce $1,000,000, the amount of the discount, at the end of that period. But the table is sufficiently accurate to expose the curious error into which Mr. Riggs has fallen. Perhaps it will convince him that it would be better, hereafter, not to stray so far outside the field of civil engineering.

Mr. Riggs has little sympathy with those railway men who venture to express the opinion that regulation ought not to extend so far as to render it impossible to conduct the railway business in a business-like way. His animadversions on railway men in general have already been illustrated herein. He finds nothing worse with which to characterize a previous utterance of the writer's than to say of it:

"The manifest impatience with all forms of governmental interference with corporations, which so often characterizes the utterances of prominent railway officials, appears in this paper to a marked degree."

At the risk of incurring further displeasure, the writer will not omit now to observe that, in his judgment, the whole question whether railways shall be generally and officially valued, and how and by whom the task shall be performed, is primarily conditioned by the country's need of managing its legislative control of railway methods so as not to restrict unduly the flow of capital into that industry. The steady pressure for legislation during the last five years has so extended legislative regulation that, for the first time, the sturdy, frugal, conservative, "small investor" stands in the forefront of the problem. His views of the stability and future prosperity of the American railway industry now dominate the situation. What they are may be read in the facts attending recent efforts to finance necessary improvements of old and prosperous railways. It developed before the Interstate Commerce Commission during the recent hearings in connection with the proposed partial adjustment of rates to the diminished purchasing power of the money in which they are paid, that one of the greatest of Eastern railway systems, paying 8% annual dividends on its stock, which is very widely distributed, had offered new shares to its stockholders at a premium of 25%, and had found them unsalable at that figure, so that it was obliged to recall the offer and put them out at par. Other testimony disclosed the failure of one great company to obtain an offer of more than 85 for its 4% bonds, while another had been forced to go to France to raise $10,000,000, and many others have been forced to the expedient of issuing short-term notes at relatively high rates of interest. It also appeared that extensive proposals for new branch lines had been abandoned or postponed, in view of the impossibility of obtaining funds on reasonable terms.

Other testimony shows that locomotive shops and car builders are putting out not more than half of their capacity; that the supply trade is receiving no new orders. Never, since the beginnings of the American railway industry, has the American and foreign investor been so reluctant to supply necessary capital, or so doubtful of the future of railway enterprises. This fact is not due to absence of confidence in the industrial future of the American people, but is directly attributable to the unanswered inquiry as to how far the policy of legislative control is to extend. Either this question must be answered in a manner satisfactory to the investor, or the credit of the Government must be made available for the extension and improvement of railway facilities, either through Governmental guaranties of adequate returns to capital, or through Government ownership; for adequate and properly constructed and equipped railways the public must and will have. Thus far, the American public is ready neither for Federal guaranties nor for Federal ownership; it is to be hoped that it will never be ready for either. In this situation, if a Federal valuation is to be undertaken, it is primarily important that it should be under such auspices and by such methods that the investor will not be alarmed as to its consequences. This is not a suitable occasion to attempt to lay down all the considerations applicable to such a valuation, but it ought to be perfectly clear that it must relate to value in use, not to some concept of value limited to replacement cost which excludes some of the most important elements of value (which are also those most worthy of a return, because they represent the highest and most difficult social and industrial services), in order to obtain a means of excluding these same elements from possibilities of adequate reward.

One of the most important items to be considered is the "cost of progress," which is sometimes referred to as "abandoned property," or as "obsolescence." For illustration, in the revision of the grade and line of a road, whereby the capacity of existing track is doubled, the present instructions of the Interstate Commerce Commission require the charge to operating expenses of the cost of that portion of the old line no longer continued in use. If, however, the doubling of the capacity of the line be secured by the construction of a second main track, the entire cost of the new work can be charged to capital account and paid for from the proceeds of the sale of capital securities. The latter method becomes the easier to finance, but what of the comparative results? Say, for example, the original cost of material of existing property, including equipment, stations, yards, etc., was $10,000,000, that the first main track cost $1,000,000, and that to double the capacity of the main track would require a present expenditure of $1,000,000, either for (1) a reduction of the grades and curves of the first main track, or (2) for the construction of a second main track. The increase in capacity is identical, but in the first case the cost of train service to handle the tonnage is decreased 50%, and some reduction in maintenance is secured, while in the second case no economies of operation are effected, but the expenses may be increased. Undoubtedly, Road (1) would be much more favorable than Road (2), yet the Commission says a portion of the cost of perfecting Road (1) must be charged to operating expenses, and cannot be capitalized. What general manager will dare recommend such extensive improvements when the charging of a portion of the cost to operating expenses will show the dividend as unearned, and thus render the securities of the company no longer legal investments for savings banks, trustees of trust funds, etc.? As an alternative, he might permit the old line to remain, and by placing thereon a few cars occasionally, could consider it as still in use, and carry it in his capital account, thus avoiding the charge to operating expenses. Thus, again, is it the method and not the result that is controlled by these instructions. What should be done is to permit the cost to be charged against the surplus accumulated during the years in which the property to be abandoned was used. This would not affect adversely the operating income of the year, and would not impair the credit of the Company.

Plainly, the instructions of the Commission tend to compel a method that is contrary to the economic law.

Obviously, any requirement as to valuation which would impose on the carrier such a result as that shown would compel the continuance of the less efficient service and prevent the progress which such replacements express. The railway business is a continuing one, and an improvement ought to be made whenever it can earn income, not only on its own cost, but on that of the property abandoned, even though it cannot afford income sufficient to wipe out the whole capital charge for the latter in a single year. There is no reason for requiring each item of capital to earn its cost in addition to its interest during its individual life. Such a requirement would cry halt to progress. It is reasonable and proper that such charges to operation should be made as far as the rapid development of the art of transportation permits, and such is the practice of every well-managed railway; but, to make the practice uniform and compulsory, permitting no exceptions and allowing no scope for individual judgment, is quite another thing. When the conditions warrant such a course, the railway ought to be permitted to adjust its accounts in a manner of which the following is typical:

	Replacing.	Not replacing.
Capital account	$19,750	$5,000
Additional net operating income attributable to this item	1,000	250
Charge to operation for abandoned property	250
	______	_____
Operating gain	$750	$250

A valuation adjusted in recognition of this developmental need would include, in addition to the item of $15,000 for the replacement cost of the new locomotive, an item representing "cost of progress" of $4,750 for the former locomotive. It is not to be overlooked that in actual practice it would be easy to obtain this allowance by cumbering the yards and round-houses with obsolete and superfluous equipment. The plan of Professor Adams places a premium on such a course, and there are many conditions under which it could and would be followed where it would be less obvious and more detrimental. For example, it might be that an additional track over a steep grade and a new alignment which would avoid it would cost the same. The new alignment would give greater operating efficiency, but it would require the charging off of the old line; the new track over the grade would be more costly to operate, but would leave the apparent capital unimpaired. It is such possibilities as this that are giving pause to the investors who would otherwise supply funds for the needed development of the American railway system. How far this development has so far required the abandonment of property capable of further use and having genuine capital value is indicated by available records. The aggregate capacity of all equipment has increased much faster than the increase in number of locomotives and cars. The reports of the Interstate Commerce Commission only show this information for the years 1902 to 1908, both inclusive. The average tractive power of locomotives in 1908 was 26,356 lb., as compared with 20,485 lb. in 1902, being an increase of 5,871 lb., or 28.7% per locomotive. The average capacity of freight cars in 1908 was 35 tons, as compared with 28 tons in 1902, an increase of 7 tons, or 25 per cent. Undoubtedly, the average capacity of locomotives and the average capacity of freight cars in 1908 was not less than 60% above the average capacity of 1890.

L. F. Loree, M. Am. Soc. C. E., President of The Delaware and Hudson Company, as Reporter (For United States) to the International Railway Congress, held in Paris in 1900, communicated with all roads in the United States then operating 500 miles of line, or more, relative to the capacity of cars actually in service. The result is shown in Table 12.

As a result of these improvements in roadway and equipment, the average number of tons of freight handled per freight train in 1908 was 351.80 tons, as compared with 296.47 tons in 1902, an increase of 55.33 tons, or 18.6 per cent. The average tons per freight train in 1908 was 351.80, as compared with 175.12 in 1890, an increase of 176.68 tons, or 100.8 per cent.

These improvements have not been solely or mainly for the benefit of the carriers, though there is no question that they have been prompted by railway self-interest. The new car of 40 tons capacity is but 20% longer than the old car of 13 tons, which means a great augmentation of the efficiency of the private sidings and tracks of the manufacturers, as well as the side tracks and terminals of the railway. Who would retrace the steps of progress of the last decade or of the last two decades? Yet the project to tie railway earnings to replacement cost, which makes no allowance for the costly steps in such progress, is in reality a project to tie them to their present state of development and to prohibit future progress. Nor can it be forgotten that it is an inviolable law of Nature that that which does not go forward must go backward—nothing can remain stationary.

The story of the crude millionaire who wanted to know the value of the "plant" of Oxford University, in order that he might duplicate it, is not inappropriate, and ought to have some significance to those who imagine that replacement cost would tell the story of railway values. Do they imagine, because they are ignorant of them, that a great railway organization carries no traditions of loyalty, of persistence in the face of overwhelming difficulty, of generous recognition of public needs and rights, of courageous adherence to the real interests of its shareholders that inspire its personnel and provide a genuine esprit du corps? Do they find no superiority in one organization over another, no systematic economies of method, no especial adaptation to economic needs that has value more genuine than any replaceable element, and is at least equally worthy of compensatory return?

If there were not abundant evidence that the railway industry is not excessively profitable, there would be more reason on the side of those who continually put forward new schemes of restriction; but, not only is such evidence ample, but there is no evidence of any sort tending to establish the contrary. Limiting the inquiry to the region east of the Mississippi and north of the Ohio and Potomac Rivers, commonly known as Official Classification Territory, the statement in Table 13, based on the book cost of railways, with their equipment, supplies, and materials on hand, is instructive. The data are from the reports of the Interstate Commerce Commission.

The amounts shown in Table 13 as "operating income" are, as should be remembered, those earned, and not those distributed as interest on bonds and dividends on shares, which were necessarily much smaller. Bearing this in mind, it is significant that the percentage of such operating income to cost of property has not but once in the last twelve years, the most prosperous duo-decade in the Nation's history, exceeded 6%, and then only by a very small fraction; and that the average for the whole period is less than 5½ per cent. Every one knows that the real value and the actual cost of the railway property in this region greatly exceeds its book cost, so that these percentages are undoubtedly much in excess of the real rates of net earnings to value or cost of property.

P. E. Green, Assoc. M. AM. Soc. C. E. (by letter).—It is not often that there is presented to the Society a paper which shows such thoroughness of understanding of a difficult problem, and as much real experience in its solution, as is manifested therein; and the author is certainly to be congratulated on such a logical and forcible presentation of the subject. There may be some points on which engineers who have been engaged in such work cannot agree with him; but certainly it cannot be said that he has not argued very clearly and logically on nearly all the debatable questions.

Those who have not had actual experience in making a valuation of a railway company's property cannot have any idea of the enormous amount of detail and labor necessary to make such a compilation of any real value. It simply means that every detail of every structure of whatever kind must be investigated, together with the various considerations covering "intangible values," which the author has so ably discussed.

The writer was fortunate enough to be employed on the valuation of the Chicago and Northwestern Railway property in Minnesota in 1906, and possibly some details of the manner in which the actual field work of the survey was done may be of interest.

The work consisted of making a compilation from records, or from actual surveys when necessary, of about 625 miles of railway property, including several important terminals. The property had been built between 1860 and 1901, mostly in the early part of this period. The portions which had been constructed during the latter part of the period, say from 1890 to 1906, presented no difficulties, as the records were very clear and complete, but the portions constructed in the Sixties had practically no records. Some had been built by small independent companies, which were acquired later by the Northwestern System. On these old lines the records were practically nil, and those in existence were soon found to be of absolutely no use. Even on the newer lines it was found that many changes had been made within a few years after their construction, and that it was sometimes more economical, as regards time at least, to make a new survey of the property than to use the records.

After examining all the old records very thoroughly, and endeavoring to get some order and information out of them, it was decided that the only way to do the work properly was to make a complete survey and valuation of all the physical property. Several field parties were organized and also an office force, about twenty men being put on the work. The parties ran levels for profile purposes, cross-sectioned cuts where necessary, noted evidences of clearing and grubbing, of the character of the cuts, and the disposal of the material, examined the ballast for depth and character, examined the rails for age, weight, and condition, and noted the kind and condition of the fences, gates, farm crossings, planking, whistle and highway-crossing posts, culverts, bridges, and in fact every detail of construction. Advantage was also taken of the survey to re-station the lines, to paint such stations on the rails, and to set permanent posts, so that afterward the stationing could be picked up at any time with little trouble.

In this way there was accomplished much work of value to the railway company, for which there had been a demand by the division officials for years, but which had not been done because of lack of men and money.

No attempt was made to assign depreciation, as regards the rails; this was determined afterward, from the age of the steel in the track. It was necessary, however, to make quite a thorough inspection of the ties, and to note their condition, as they were replaced year by year singly as they wore out. Almost every conceivable kind of timber had been used for ties at one time or another. Treated and untreated ties lay side by side; and thus there was great difficulty in classifying them with regard to the kind of timber. With bridge ties and timbers of frame and pile bridges, there was not so much difficulty, as they were open to inspection, and had been inspected twice yearly by the Division Engineer and the Superintendent of Bridges and Buildings, and accurate records of their condition and renewals had been kept. The depth and condition of the ballast also varied very widely.

In a very short time all the men on the survey became well acquainted with the character of the work they had to do, and, as the work went on, the progress of the party day by day was very much more rapid. At the beginning of the survey, a progress of 6 or 7 miles of single track was considered a very good day's work; at the end of the survey, the parties were making from 12 to 15 miles per day.

There was considerable difficulty in setting proper values on the hundreds of buildings, large and small, owned by the railroad. Most of these buildings had never been constructed from plans, and it was difficult to calculate what they had cost originally, and what it would have cost to build them at the time of the survey. However, time books were searched, and the contents of the buildings in board feet were calculated, and, while in many cases their age was not known from any records, it was nearly always possible to find out from somebody just when they were erected.

As intimated before, the railway company derived much actual benefit from the work, outside of the accurate knowledge obtained as to the value of the property itself. Steel charts, bridge records, etc., were established, and profiles, stationing, continuous bench-levels, etc., were all re-run or re-established; thus making the engineering work of the future more consistent and uniform, and enabling more work to be done with a smaller force. New maps of all the station grounds and terminals were obtained, and all the records were put in better shape than they had ever been before.

Examination of some of the old terminals brought to light many strange and out-of-date conditions. Old wrought-iron rails of antiquated pattern, old cast-iron frogs, etc., of a pattern which had not been in general use for fifty years, were found in the track. On some of the little-used sidings, the old wrought-iron rails were so worn that the tread of the rail was entirely gone, only the web remaining to carry the traffic, and such rails were still in use.

In such a valuation, also, many items, some of considerable magnitude, were found which were extremely difficult to classify and assign to their proper place. Such a one, for instance, as a soft, sand rock deposit beside the track, which for many years had furnished engine sand. Many thousand cubic yards of this material had been excavated, but it had not gone into the roadbed as ballast, or to make fills, or to widen embankments. It would hardly have been proper to classify such excavation as grading, for it was an item of engine maintenance and train operation. This is only one of numerous problems which had to be solved.

After all the survey had been made, most of the work of compilation had to be done. Some of it had already been done in the office by the small office force, but the great mass had to be done by the men who did the work in the field. This task was of almost incomprehensible magnitude. There were thousands and thousands of items, and such a great mass of figures that the ordinary man would become lost in the maze. The data had to be checked and re-checked by men who were not accountants, and sometimes most ludicrous mistakes were discovered. However, it was at last accomplished, and the writer's recollection of the "Present Value" of the Chicago and Northwestern property in Minnesota is that it was somewhat more than $23,000,000 for the entire mileage (about 625 miles), or an average of about $37,000 per mile of track. Hardly any of the mileage would be called high-class or trunk-line track, but most of it might be classed as second-class or important branch-line railway.

E. Kuichling, M. AM. Soc. C. E. (by letter).—This paper is a very valuable addition to the literature of a comparatively new subject that is rapidly attaining great political importance, and it gives abundant evidence of deep research and thought by the author. The reasons for determining the true value of such properties, as well as the general principles of making the valuation or appraisal, have been set forth so clearly and convincingly that little can be added in this respect; hence, there is room for comment only about details.

One of the perplexing questions is the determination of the proper value of the right of way and real estate of a railroad. The land was originally acquired at a certain cost, essentially for public use, and in the course of time its value, as determined by reproduction cost, usually becomes greatly increased by the development of the adjacent land by its various owners. Without the railroad, such development and appreciation of land values would probably not have occurred, and, therefore, it has been argued by many persons that, for taxation purposes, the railroad lands should be appraised at only their original cost, while, for capitalization purposes, they should be appraised at a value measured by that of the adjacent land at the present time. This claim is based on the theory that the railroad is like any other piece of public work, such as a canal, highway, or pavement, which is built for the use of the public, and on which no tax is levied by State or municipality. On the other hand, it has been held by some of our Courts that a proper valuation must take into account the appreciation or depreciation of land values; but, as the opinion of a Court is not unalterable, the soundness of this doctrine cannot be regarded as permanently established.

The author states^[41] that there can be no serious objection to this doctrine in relation to rights of way in the country and small towns, although he admits that it is subject to exceptions in the case of cities and terminal and dock properties. It will be of great interest to learn his reasons for making such exceptions in the case of the most costly lands, and whether the valuation of such lands should be more or less than that of similar adjacent lands used for other purposes. From the context the inference may be drawn that the valuation should be somewhat higher than that of adjacent similar land in the case of a steam or interurban railroad, because its holdings form a continuous strip; but to the writer this reasoning does not appear satisfactory. The statement of the Court, that "the value of land depends largely upon the use to which it is put and the character of the improvements upon it," does not necessarily involve a higher valuation of the property than its cost, and it is quite conceivable that the actual value of the property after being taken by a railroad may be much less than it was before. The only reason in such a case for maintaining the purchase price is to conserve the general valuation of the adjacent similar real estate.

In dealing with the subject of depreciation, the author has been very brief, as he did not consider it essential for the purposes of the paper. This is to be regretted, as depreciation is an important feature in every valuation, and so few trustworthy data concerning it are available. The value of the paper would be greatly enhanced if the author would give the assumed average life of the principal components of a railroad, based on some definite traffic, and normal grades and curves. Much diversity of practice in this respect prevails, and the final judgment of the numerous experts who were engaged in the Michigan valuations cannot fail to be of great interest. The same remarks are also applicable to the unit prices adopted for construction and equipment.

The subjects of expenses for organization, engineering, administration, contingencies, and non-physical values are treated very thoroughly by the author, and particularly interesting is his discussion of the complex question of franchise value. After quoting from numerous judicial opinions, he reaches the conclusion that the franchise simply protects the owners of the property in their enjoyment of the earnings, and that its value merges into the "fair value" of the property and becomes inseparable from the other non-physical elements of value; also, that the aggregate non-physical value of the property depends only on the net income for a period of years. This method of estimation certainly has the merit of being simple, rational, and free from all hypothetical considerations. It is, however, obviously governed by the rates charged for the services rendered, and if these are likely to be altered at any time by governmental action, a corresponding alteration in the "fair value" of the property will take place.

This consideration brings us at once to the intricate question of reasonable rates, which involves the matter of reasonable design and construction of the property. In most cases the working capacity of the plant must be much greater than the average annual demand for the service performed, as so-called "peak loads" of relatively short duration must be provided for. The magnitude of these peak loads, however, varies with the subsequent development of the territory, which is necessarily conjectural; hence it follows that a comparatively large amount of capital is often invested in an enterprise for the purpose of taking care of such anticipated temporary demands, and on this investment a "fair return" should be granted. This condition is particularly noticeable in municipal water-works plants, where provision must be made for supplying water for fire service to an extent which may be several times greater than the normal hourly rate of consumption. In the case of railroads, such demands can usually be met by adding to the rolling stock at moderate expense, while in a water-works the outlay is relatively greater because the entire plant must be adapted in the outset to the anticipated maximum delivery in the course of a comparatively long period of time.

The problem of rate-making has been excluded by the author from his present paper on valuation; but, inasmuch as he is so well qualified for the task, and also because the non-physical value of the property depends mainly on the rates obtained for the service rendered, it is hoped that he will deal with this feature in a subsequent paper, thereby bringing out a discussion on the obscure subject of "fair return." It is noticeable that these phrases occur frequently in judicial opinions, but the fundamental principles on which a definite conclusion should be reached are seldom set forth clearly.

Richard T. Dana, M. AM. Soc. C. E. (by letter).—The solution of this problem includes practically all the factors in the general subject of economics, in which engineering occupies a large but by no means preponderant part. Mr. Riggs has done some very valuable and pioneer work in contributing this paper at this time; and the writer, in calling attention to what appears to be a radical error in it, does not wish to be taken as attempting to detract in any way from its great value as a whole. It is most important, in the inception of such an investigation, on the part of the members of this Society, to remove from the subject the stumbling blocks as they appear.

The author makes the following statement:

"It is true that the 'value' of a property is an unstable figure, subject to fluctuations due to natural or artificial causes, and that a material change in value may occur suddenly, but the 'value' of any given property on any given date is, or should be, from an engineering standpoint, a definite sum which may not be varied or changed to suit the whim or will of the people for whom the work is done."

The fundamental conception of a value is so important in an investigation of this kind that it is worthy of careful and thorough discussion.

The appraisals which the writer has had occasion to make have generally been for one or other of the following purposes, namely:

(I)

Taxation, in the interest of the community or corporation taxed;

(II)

Bonding, in the interest of the banker or representative of persons who contemplated lending money on the property;

(III)

Rate-making, in order to determine what was a fair amount of money that the property should be allowed to earn for the owners.

Now, in general, a proper value for any property for any one of these purposes is different from its proper value for any of the others. This proposition is of immense significance, for the reason that, if the value for the property arrived at, on one basis, be accepted and applied for one of the other purposes, it will inevitably result in gross injury and financial loss to some one.

In attacking this problem, one must be careful to take the correct standpoint, which is not necessarily that of engineering. Engineering science is indispensable for a large part of the work, but there are other indispensables, which would not ordinarily be recognized as engineering. The writer takes the view that engineering is a part of economics, rather than economics being a part of engineering.

To illustrate this point, consider two objects, one of which is concrete and simple and the other more complex.

(1) A steam shovel belonging to a railroad, costing $10,000, new;

(2) The entire railroad as an operating entity.

Assume for (1) that the shovel has been purchased recently, is in perfect condition, and that the railroad has some work for it to commence on as soon as it can be properly installed. What is its:

(I)

Taxable value,

(II)

Bonding value, and

(III)

Rate-making value?

(I) The tax assessor cannot properly appraise it at $10,000, because it certainly would not sell for that sum, and if the community should have to sell it for taxes the actual return minus the charges would be so much less than the $10,000 that the community's books would show a heavy loss; and this practice, if largely indulged in, would bring the community into financial straits. The community must be exceedingly conservative in its estimate, for this very reason; and, therefore, it has been customary, almost universally, to tax such articles practically on their sale value at what might be called panic prices. The company which sold the shovel to the railroad would not buy it back two days after the sale for more than the original price minus what that company considers its selling charges, say 20%; so that, in this case, even if a customer were at the door, the shovel would not be worth more than $8,000, and a fair tax appraisal could not consistently be more than $8,000 minus charges of, say, $250, or $7,750.

(II) Assuming that the railroad is a very small one, that it wants to borrow money, and desires to put up the shovel as collateral for the loan. What would be its loan value to the lender? In considering this point, it is necessary to assume that no aid is rendered by the credit of the railroad itself, but that the protection for the loan is to be furnished by the shovel only. Now, the banker will reason that, in the event of the note remaining unpaid, he will have to sell the shovel to reimburse the bank for its loan, and he will be required to consider the matter on a conservative basis. He cannot lend on the shovel up to its full value, for in the first place it is not a "negotiable security." If it were a security, with a free market on some stock exchange, he would probably lend to the amount of 80% of its value, but a steam shovel in a sand bank on a railroad is by no means as convenient of exchange, nor as easy to foreclose on as a stock certificate in a banker's box; therefore he will lend, or he ought to lend, less than 80% of its sale value, minus the selling charges. If he lends more than this, he is lending on the credit of the owner of the shovel rather than on the shovel itself. Granted that the maker of the shovel is willing to buy it back at its full selling price less the selling cost, the maximum loan value of the shovel would be a little less than 64% of its purchase price, or $6,400. To lend more than this on the shovel would not be conservative banking.

There is another bonding or loan value to this shovel, when it is considered as part of the assets of the railroad, the bonds of which are to be held by the banker, under which circumstances a higher value than $6,400 would be admissible.

(III) If the value is to be determined with a view of ascertaining what is a reasonable figure that the owner of the shovel ought to be allowed to earn as a public utility organization, the problem is entirely distinct from the foregoing two cases. Assume that the railroad is entitled to earn at least 6% on its investment in the shovel. Now, its investment is $10,000, because that is the money that it cost; and nothing had been credited to its account, since the shovel had just been purchased and had not yet done any work. The shovel cannot be considered as being worth more than its cost, and it can easily be shown it is not worth less for rate-making purposes.

These three illustrations, which are very briefly outlined, should demonstrate the fact that there is almost no relationship between any two of the different kinds of value which are being considered.

Now, from the standpoint of the railroad as a whole:

(I) Should railroad property be taxed on the basis of what the entire railroad would bring on a foreclosure procedure? Obviously not, because the railroad is taxed in sections. The Town of Squedunk will tax the portion of the railroad that lies within that town, and will have considerable difficulty in putting down as security for its own bonds the locomotives and cars which go through once a week or twice a day at 40 miles per hour. To cover partly the flitting assets, it taxes the railroad on a franchise value. It may tax a railroad's land on the same basis that it taxes land owned by private individuals, notwithstanding the fact that when the railroad buys the right of way it generally has to pay more money per acre than the householder or the farmer. This unit cost to the railroad may be two or three times that to the farmer, yet the writer has never heard of a community attempting to tax railroad property two or three times as heavily as adjoining property used for private or commercial purposes.

(II) On the other hand, this same property is an absolutely sound asset for the railroad, and the railroad probably bought the property from the proceeds of the sale of bonds. If the public service commissions were to rule that the railroad may be allowed to issue bonds only to the amount of the taxable value of the property which is to be held as security for the bonds, the result would be an absolute paralysis of railroad construction. A bond is an obligation to pay so much interest for so many years, and to pay back the principal at the end of its term. The bondholder is interested in the absolute regularity of his interest, and in the security that lies behind the principal, and it is to-day the custom of banking houses to consider a bond well secured when, in a territory of reasonably rapid growth, the principal is earning say twice the interest on its bonds, and when the cost of reproduction is in excess of the amount of the bonds, provided that the property is in good physical condition. If it should be necessary to foreclose on the bonds, it is then reasonable to suppose that some one else will buy it in for at least the amount of its bonded indebtedness. What can this possibly have to do with the taxable value of the track in the Town of Squedunk? One may be 1.5 times the other, or three times the other, depending on a multitude of circumstances.

(III) The value of the property for rate-making is a complex one to determine, and, of course, there is no opportunity for a full discussion of it here. One point, however, will serve to establish thoroughly the difference between this and taxable or bonding value. If the community is prosperous and the business is a good one and honestly managed, the railroad ought to be allowed to earn a reasonable percentage, say, at least 6%, on what has been put into it. If the community should decree otherwise, then people will not build railroads for investment purposes, and all will lose money. Now, it is a well-known fact that a new railroad's earnings have to grow for several years before they are on a normal basis, and part of what the owners of the property have put into it is, for example, the interest on its cost before its earnings are on a normal basis. This may amount to a considerable percentage of the original construction cost of the property, if the business is several years in developing. Granted that the community ought to allow the property to earn a reasonable interest on what has been put into it, then the rate-making value will be very much larger than the sum of the taxable valuation of all its different parts. It will also be much greater than its bonding value, because, as a bond proposition, it can borrow money up to a limited percentage of what it is actually worth.

George T. Hammond, M. Am. Soc. C. E. (by letter).—The engineer called on to fix the valuation of public service corporation property has so little engineering literature on this special subject to guide him that he must feel grateful to the author of this excellent paper for adding so much of a kind that is very desirable.

Estimating the cost of an engineering structure in advance of its construction is one of the most ordinary professional duties, but how difficult it actually is, and how much engineers differ with one another in their estimates on the same structure! Perhaps there is no professional duty which calls for so much study and so much experience, or which tests so closely the ability and capacity of the engineer. How seldom professional estimators agree with each other; or designing engineers with contracting engineers; as witness the bids received at the public lettings of contracts when compared with the engineers' estimates of cost; and, if this is true, which no one will attempt to deny, how much more so is it probable that estimators will disagree when they attempt to place a value on works already completed, and in service, perhaps, for many years, in which various changes in value have occurred, and in which questions of fact are mixed with legal questions involving legal rights, as well as financial questions.

The tendency in all such valuations appears to be a mixing up of things in general—like the witches' stew. Everything goes into the pot and is boiled together until all becomes soup, at least until the official commission, like the witches, considers it done and ready to be served up in the form of a report. It is then observed that the substance served out is of a complex nature; that the valuation of engineering structures has become mixed with other and uncertain values; that the whole value, as stated, is, after all, little better than the commission's opinion of the value; and that another commission would reach a different conclusion.

The author states that the valuation of corporation property:

"Should be the honest judgment of the men composing the commission, as to the actual cost of reproduction, present physical value, or 'fair value,' and should be ascertained by a systematic and scientific method which takes into account all the facts concerning the property, its physical value, its strategic location, its operating revenues and expenses, and its franchises, rights, competition, opposition, and all other tangible or intangible elements, which would affect values. The method of valuation should be such as to minimize or entirely eliminate all differences due to errors of personal judgment."

This, it seems, complicates actual present values with conditions which might, or might not, continue. Outside of the physical valuation of the plant, which offers the easiest problem presented, how can one fairly put a value on operating expenses and revenues, which might be affected favorably or advisedly by good or bad management, and by numerous other complex and almost incomprehensible circumstances.

The tendency of all such commissions seems to be to confuse together and mix up some things which are logically separate. Thus, the value of the plant and franchise, good will, and present investment or income value, etc., are too often taken together. The value of the plant is dependent on the cost of reproduction, and also the depreciation of the structures, as engineering structures, and should be based on present prices for which the work could be replaced, minus the depreciation, which is a question of engineering judgment and experience. The other items of value are largely dependent on the situation of the plant and its prospects as an income-producing property, and this again is a matter of opinion, in which the opinions of financiers and investors are sometimes of more moment than those of engineers. The opinion of lawyers as to the value of the franchises and the cost of the legal complications possible or probable must also enter into any seriously worthy opinion as to value.

The few salient lights in the picture of valuation, presented by the author, serve especially to reveal the darkness which involves the whole subject of valuation, estimating, and the use of cost data for such purposes, and to suggest that, with all the wonderful progress on the theoretical side of the profession, engineers have as yet advanced but little in this division of the practical side—cost data, valuation, and estimating. Engineers cannot compare the results of different estimators and appraisers without sorrow and even shame for their ignorance, or their incapacity to agree in the application of scientific principles and the results of practical experience to this branch of their work.

At present we would seem to be a long way from a method of valuation, "such as to minimize or entirely eliminate all differences due to errors of personal judgment."

The method described as having been used by Professor Adams seems to be at least an advance toward a logical and rational method of getting at the value of corporation property, but it must be acknowledged that we are as yet a long way from a perfect method of appraisal, even of the physical values, to say nothing of the non-physical. He held that as nothing visible or tangible gave support to the latter value, it must be determined on the basis of information secured from the income accounts of the company. This method of measure, it would seem, is not unlike the celebrated dictum on the length of the Chancellor's foot, "some Chancellors have a long foot, and some an indifferent foot, and some a short foot"; therefore, a great English Chancellor says, "the length of a Chancellor's foot should not be taken as a measure of rights in equity." Thus, if the income of the company is to be taken by the appraising engineers, or the gross income, it may have to be given a different interpretation from the net income, and if the surplus earnings depend on transient causes or on excessive rates for service it will lead to a totally erroneous conclusion. The same may be said if the rates for service are too low, or if the company is badly managed, or is carrying a great deal of "dead wood," either in the form of property or of servants. Therefore, it seems evident that he who attempts to follow this method of appraisal must possess almost superhuman judgment of present conditions, and prescience to forecast the future, as well as a grade of wisdom and knowledge of existing conditions of trade and industry which may be also characterized as superhuman. In order to apply Professor Adams' method justly, we must know whether the company is wisely managed, whether its income is a fair income, whether its physical property is all useful and needful, whether its service is what it ought to be as to efficiency and economy, etc. We must assume an ideal condition of commerce and industry, and of property value and management, and then appraise the company's property by comparing it, consciously or unconsciously, with this ideal. Possibly this is the best method devised so far, but surely it leaves a great deal to be desired; and it is difficult to see how different engineers, on different sides of the question, representing different interests, can find any common ground of agreement in Professor Adams' method. Under such circumstances, engineers are likely to differ in their results as much as the length of the different Chancellors' feet.

Leonard Metcalf, M. Am. Soc. C. E. (by letter).—Mr. Riggs has done engineers, and more particularly those interested in valuation works, a genuine service in presenting to the Society this admirable paper.

No shrewd observer can fail to recognize the increasingly insistent demand of the public for greater publicity in the accounting, and a larger measure of governmental control in the operation, of public service corporations. In its best form, such control will be welcomed by the corporations, as giving greater stability to investment in such property; in its worst, it may prove a serious limitation to prompt development of the best standards of service. In the water-works field, the anti-corporation movement has resulted in taking over by the public many such plants. It does not seem likely, however, that we are ready to go farther in the railroad field of operation than to demand reasonable regulation of such corporations.

While the writer has had no experience in railway management or valuation, he has devoted much time and thought to the valuation of, and determination of fair-rate schedules for, water-works properties; therefore, what he may have to say in comment on this paper may be assumed to have direct application to water-works valuation, and to railroad valuation only as the similarity in the public service rendered by these corporations may imply.

In the main, the writer subscribes heartily to the views expressed by the author and the temperate way in which he has expounded them. Space forbids discussion in detail of all the matters alluded to and so well covered by Mr. Riggs. On one important subject, however—the inclusion of the going value, or going concern value, of public service corporation property, in the intangible property values, rather than in physical plant value, and the consideration of it as an intangible value rather than as a real and substantial item of cost to the public service corporation—the writer differs from the author. It is clear, from what Mr. Riggs has said, that this is debatable ground, and, from the care and fairness with which he has expressed his views on this subject, one might almost be led to infer that he invites attack on it. It is in no carping spirit of criticism, however, that the following views are expressed.

As the writer has recently submitted to the Publication Committee of this Society a paper on the "Going Value of Water-Works," written by him in collaboration with John W. Alvord, M. Am. Soc C. E., in which a detailed discussion of this subject will be found, only enough will be said to outline clearly his point of view.

The author says:

"The physical property is that which enables the corporation to do business. Without physical property it could not produce the commodity which it sells. The amount of money actually invested in acquiring that physical property represents the measure of capital on which it is morally entitled to earn interest and profit; and, in the stage of promoting and financing the enterprise, all hope of earnings is based on the amount of money required to construct the property."

He also says:

"It would seem reasonable to say that this difference between the physical value and the value based on earnings represents the 'good will,' 'established business,' or 'going value,' and all other non-physical elements of value."

In referring to going value, he says:

"* * * Yet, to fix a value on it by the method described by him [Mr. Alvord] involves going into the realm of conjecture and speculation to a degree that could never be sustained. * * * It can be readily seen that the physical present value is not always—indeed, is not often—the 'fair value.' The 'fair value' may be more, or less, than the present value of the physical property."

"* * * Is it not, then, proper to conclude that the non-physical or intangible value, composed of all these various elements of value, can only be determined absolutely by a study of the earnings and operating expenses? * * *"

He also says:

"The contention that all the different elements of non-physical value merge into one intangible value, not capable of separation, will doubtless be objected to by many engineers and corporation managers. * * *"

"The writer does not concede that 'going concern' is a proper element to consider in the physical value, as it does not represent any part of the cost chargeable to capital, and the physical valuation should be confined to the determination of capital invested."

Quotations might be multiplied. Those cited, however, will suffice to recall the author's view, and to make clear the point with which issue is taken.

Is Mr. Riggs right in his contention that going value is in fact an intangible value; that going value is not an element of real cost to the company, involving investment of capital; that going value, therefore, should not be included in physical plant value; and that the company is not morally entitled to earn interest and profit on it?

The writer contends that going value is as real an element of cost, in the property of any public service corporation, as is the cost of any portion of its physical plant. It pertains, however, to the business, rather than to the physical plant, of the corporation.

Whatever the difficulties of its computation may be, whatever the methods used—whether that adopted by the Wisconsin Public Service Commission (which is essentially one of determining the original cost of the going value and not its reproduction cost), or whether that perhaps first outlined by Mr. Benezette Williams and George H. Benzenberg, Past-President, Am. Soc. C. E., in the Middle West, and by William Wheeler, M. Am. Soc. C. E., in the East,^[42] a method which seeks to determine the reproduction cost of the going value, rather than its original cost—the going concern value has come to be recognized, by water-works appraisers at least, as a substantial element in the cost of the plant, and hence as differing essentially from the franchise element or so-called unearned increments of value.

Is not going value in a "between" class—a middle ground between tangible and intangible values—tangible in that it has involved real cost and expenditure of money; intangible in that it is not as readily calculated as are other reproduction cost items, is dependent fundamentally on the earnings of the company, and that there is no tangible equivalent to show for the expenditure, except the existing income of the corporation? Surely its character is quite different from that of the franchise, as ordinarily found, the value of which, while real, from the rate-payers' point of view, seems to be made out of whole cloth; in short, seems to be of fictitious value.

Certainly, the conjectural and speculative character of the computations—as referred to by Mr. Riggs—involved in the determination of going value is no excuse for failure to recognize going value as a real element of cost, rather than as an intangible value. As a matter of fact, the variation in the views on going value, by engineers who have given this subject particular study, while greater than the variation in their estimates of the reproduction cost of the physical plant, is still far less than the variation in their views on franchise value.

As bearing on the proper basis for rate-making, the author's statement, that the "* * * physical property represents the measure of capital on which it [the public service corporation] is morally entitled to earn interest and profit * * *" cannot be admitted, equitably or legally; and it is not to be assumed that Mr. Riggs desired to imply that this sentence summed up his final views.

Are we not, however, approaching a basis of rate-making, predicated on the earning, by public service corporations, of operation and maintenance expenses, depreciation allowance, and return (i. e., interest and profit) on reproduction cost of the property, less accrued depreciation, plus going value, plus a nominal allowance for the franchise and other intangible values of the corporation? Is it not possible that the recent depression in the business world has been due, in considerable measure, to the shrinkage in the values ascribed to franchise and other intangible value in public service corporation property?

If we are approaching such a limitation, it is the more important that the public should be educated to the fact—not theory, for it is a fact—that going value, or going concern value, is a real element of cost, covering an outlay in effort and money on the part of the corporation, and as such is as much entitled to earn a return (interest and profit) as is the other capital invested in plant. It is not on any items of real and necessary cost to the corporation that the public objects to paying tribute, but on the "unearned increments" and the virtual monopoly "privileges" enjoyed by the corporation and created, in large measure at least, by the public itself and by normal conditions of growth and development for which the public, rather than the corporation, was perhaps responsible—though in many cases it may be urged truly that the corporation itself, rather than the public, has been responsible for the development.

Such a basis of rating, while still dependent on sound judgment and judicial treatment, is nevertheless not beset with the speculative element involved in the capitalization theory, which, Mr. Riggs himself admits, fails as a basis of rate-making except when predicated on fair rates.

If the writer's contention, that going value is a real element of cost in the property of any public service corporation, is sound, Mr. Riggs' statement that, "It appears to be doubtful whether the Court can be construed as approving such an element of value in rate cases," and his interpretation of Judge Tayler's ruling in the Cleveland Street Railway matter,^[43] must be challenged.

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.

In equity it cannot be doubted that going value should be included in the base on which the returns are predicated, if, as contended, it involves real cost to the company; for the company must be permitted to earn a fair return on this cost, or to liquidate it in some way, as otherwise the corporation would suffer substantial property loss—from 10 to 20%, more or less, of the reproduction cost of its property. This would be contrary to public policy, for, with such an outlook, capital would not enter this field of enterprise, except at increased rates of return, commensurate with this added hazard. To assume such increased rates of return is to provide another means of liquidating such a loss.

As to "good will," it has seemed to the writer more proper to use this term in private competitive corporation enterprises, as applied to the element of value corresponding to the going value of the quasi-municipal or public service corporation enterprises, which latter are in effect controlled monopolies. If the term is used in its more colloquial sense, such as the effect on earnings of having, in the office of the corporation, men who meet the public pleasantly, who are good "mixers," and who are active in getting business, the value is substantially included in the consideration of the income, in the manner involved by going value determination and franchise valuation.

The depreciation question has been discussed so fully elsewhere that the writer only calls attention to the fact that, while physical and functional depreciation only are to be considered in a review of the present physical condition of any plant, in considering a fair-rate schedule, provision should also be made for contingent depreciation, covering such items as cost incident to change in street grades or construction of subways; placing structures under ground, which were previously above ground; serious loss due to injury by electrolysis, the distribution of which over a period of years rather than inclusion in the operating cost for one year, is to be preferred, alike from the public and from the corporate point of view, from the fact that it spreads the burden to be borne by the rates, and prevents violent fluctuation in prices or valuation of the public service corporation's property. The public pays dearly for all hazards. It is wise, therefore, to pursue the conservative course in providing adequate funds to meet extraordinary conditions, and to give stability to the investment of the corporation. Moreover, such funds can be carried in a separate account which can readily be watched; any excess can be credited to future reduction in depreciation account requirements, while a prolonged deficit cannot perhaps be recovered by the corporation, in the light of the Knoxville decision.

The comment that no hard-and-fast rule can cover determination of proper depreciation allowances, is amply justified. In its final analysis, it is a matter of good judgment, experience, and judicial temper.

The author's statement that the organization, legal, engineering, administration, and general expense accounts, "should not be considered as affected by depreciation, as long as the property is a going concern," is not quite clear. Obviously, this is true with regard to all the early organization expenses, as these expenses are incurred once for all, and constitute a continuing asset similar to other elements of plant cost. If, however, the author refers therein also to the engineering and contingent item added to many of the reproduction cost items making up the physical property, exception must be made; for when an old structure, the life of which is gone, is replaced with a new structure, new engineering costs are incurred, and the engineering element of cost incident to the installation of the original structure no longer inheres in the plant. It, too, has passed away with the life of the structure, and, therefore, its cost should be liquidated, or provided for in the depreciation account, as well as the cost of the structure to which it was incident.

In the same way the "interest-during-construction" item is not a continuing asset, but should be liquidated with the complete depreciation of the portion of the structure to which it relates. The replacement of the structure will involve new "interest-during-construction" charges, commensurate with the time required for construction. The value of the initial "interest-during-construction" costs will have disappeared with the original structure and, therefore, should be taken care of by the depreciation account.

The method of making allowances for interest during construction, suggested by the author,^[44] accords closely with that used by Mr. Alvord and the writer in a recent valuation of a large water-works property, in which the "interest-during-construction" charges were limited, and the contributions to depreciation account were begun, at the date on which any workable unit of the property was assumed to be available for service and to begin to earn a return on its investment cost, even though the structure, as a whole, was not assumed to be completed for a considerable period of years thereafter. Thus, for instance, it might be assumed that as soon as the supplying works in a water-works project were in operation, the investment in them and in the distribution pipe system laid up to that time, would cease to be credited further with "interest-during-construction" allowances, and would be compelled to earn interest through the water rates or income from water supplied to consumers—the fact that the interest charge could not be wholly met, immediately at this time, being taken care of in the resulting increment in going value.

Such a theory, of course, does involve a determination of the probable order and rapidity of construction of the component parts of the property, and this is usually made, in water-works valuation, in the estimate of the reproduction cost of the property.

For the sake of completeness, in reference to the legal decisions of importance in valuation proceedings, attention is called to the Pennsylvania case, Brymer vs. Butler Water Company (179 Pa., 231), referred to in the closing discussion on the writer's paper on "Water-Works Valuation."^[45]

In this case Justice Williams, speaking for the Supreme Court of Pennsylvania, says:

"By what rule is the Court to determine what is reasonable and what is oppressive? Ordinarily, that is a reasonable charge or system of charges which yields a fair return upon the investment. Fixed charges and costs of maintenance and operation must first be provided for. Then the interests of the owners of the property are to be considered. They are entitled to a rate of return, if their property will earn it, not less than the legal rate of interest; and a system of charges that yields no more income than is fairly required to maintain the plant, pay fixed charges and operating expenses, provide a suitable sinking fund for the payment of debts, and pay a fair profit to the owners of the property cannot be said to be unreasonable."

The Pennsylvania Court, therefore, in the words of William S. Wallace, Esq., recognizes the single standard:

"The Single Standard, according to the Brymer case, while acknowledging the full right of the public to regulate such public corporations, also recognizes as a prime factor its private character and the rights which accrue to it in that capacity, ... and holds to what seems to me the only rational and practicable basis, that a fair return, after deducting the charges above enumerated, is a reasonable rate"; whereas, "the Double Standard basis of fixing a reasonable rate seems to accentuate the public side of the corporation and rather ignores the private element."

As to the propriety of the inclusion of a substantial recognition of franchise value as a basis for rating, the layman may well confess to perplexity, in the light of the conflicting nature of the two important recent United States Supreme Court opinions referred to—the Knoxville case, and the Consolidated Gas Company case—for, while substantial allowance was made for franchise value, in the Consolidated Gas Company case decision, in large measure apparently on account of its earlier recognition by the legislature, in the Knoxville case, in spite of legislative recognition of such value, and similar approval of the issue of securities predicated on such recognition, the United States Supreme Court failed to make similar allowance for franchise value.

The author's treatment of the unit price question and the contingency item is intelligent and creditable. Engineers are prone to make valuations based on "hindsight" instead of "foresight," on the assumption that no substantial difficulties in construction were encountered, when, in fact, substantial difficulties should perhaps have been anticipated, and may actually have been encountered in the original construction, record of them having been obliterated, however, with the lapse of time.

The author's definition of the value of a property, as the "estimated worth at a given time, measured in money, taking into account all the elements which add to its usefulness or desirability as a business or profit-earning proposition," suggests the advisability of recognizing the other side of the ledger by modifying his statement so as to read: "* * * all the elements which add to, 'limit, or detract from' its usefulness or desirability as a business or profit-earning proposition."

While recognizing the author's view, that there is no separate and independent method of determining franchise value, which is not based on the determination of the value of the property as a whole, by capitalization methods, it must be recognized that going value may be determined independently, and may have a positive value, even though the property as a commercial whole is worth less than the sum of the physical value and the going value.

The Court, appraisers, and the author, alike recognize that there is no one method of valuation of universal application. First cost, reproduction cost, reproduction cost less depreciation, commercial value determined by capitalization, worth of the service to the consumer, and market price of the property, if such exists, all have their weight, in varying degree in different cases. Whatever may be said of, for, or against, these several methods of valuation, relates rather to their significance, and the weight which should attach to the results obtained by them, as evidence of value and of the effect of the modifying local conditions, than to the soundness of the methods themselves.

In this connection it may be of interest to refer to a recent valuation of a water-works property, in the appraisal of which the writer chanced to participate, in which there was finally placed before the board of appraisal a summing up of:

1. The original cost;

2. Reproduction cost less accrued depreciation, plus going value;

3. The worth of the service to the consumers, based on a stated assumption of reasonable increment in value in excess of actual cost, upon which a return (or interest and profit) should be earned;

4. The commercial or capitalized value, on certain assumptions based on present conditions, and also on possible future conditions which might be involved in a renewal of the City contract, which was to expire within two years.

That these determinations of value, from different points of view, had an influence in moulding the opinion of the individual appraisers, there can be little doubt; yet it is probably equally true that in no case was like weight attached to the several items or bases of valuation. Nevertheless, in the final valuation, the consensus of opinion as to the value of the property, as a whole, was remarkably close, the extreme variations in opinion being approximately 8%, more, or less, than the final appraised valuation.

Attention should also be called to the necessity, in any valuation by capitalization of income, such as that outlined by Mr. Riggs and used by Professor Adams in the U. S. Government Valuation of Railroads,^[46] of determining whether the plant or property is in what might be termed an over-built, normally developed, or under-built condition; in short, whether the investing public has correctly gauged its momentary physical condition with reference to its bearing on the rates, and whether the earnings are in fact inadequate, commensurate with the service rendered, or excessive. In the long run, due weight will be given to these facts; in a brief period, they may be incorrectly gauged. In water-works properties, unfortunately, there is rarely, if ever, a market price of the securities which can be said to be credible or significant in valuation. Therefore, in the valuation of water-works properties, it is the more important that the appraisers should weigh carefully the present character of the service furnished and the momentary adequacy or inadequacy of the rates as predicated on such service, on the needs of the community, and the existing standards of the day, if full justice is to be done.

In conclusion, the writer reiterates his statement, that he has taken issue with the author in no carping spirit of criticism, but with a recognition of the difficulty and complexity of the work of appraisal, and the conviction that engineers are under a moral obligation to do an educational work in pointedly calling attention to the fact that the going, or going concern, value, of a public service corporation's property is not an intangible value representing an unearned increment, but a very real and substantial item of cost in the property as a whole. While the difficulty may be met by placing going value, as suggested by the writer, in a middle class between physical plant and intangible values, the placing of it in the same class with franchise and other intangible elements of value, as suggested by the author, may, in the judgment of the writer, do a serious injury to corporations, in failing to give expression, in such a manner as shall be clearly within the grasp of the popular mind, to the fundamental idea of the cost of developing going value. While the writer has no personal interest in the matter, on one side or the other, having served both municipality and corporation in water-works valuations, he feels, nevertheless, that engineers can do a genuine service, alike to the public and to the public service corporation, in laying stress on the fundamental elements of cost and value, and particularly those on which rates should be predicated, in public service corporation property valuation and rating.

Charles Hansel, M. Am. Soc. C. E.—So much has been said on the subject of valuation of public utilities that, although the speaker has thought on the subject for ten years, and has done considerable valuation of railroad properties, he finds that he is considerably confused, for the reason that the discussions seem to cover the whole field of engineering, accounting, taxation, and economics; therefore he suggests that, in order to get down to a basis of usefulness, a special committee should be appointed to take this question under consideration.

The speaker had the honor of being associated with the Michigan Commission, as a member of the Board of Review. Professor M. E. Cooley was selected by the State of Michigan to take charge of the work of organization, and Mr. Riggs was the engineer who organized the office and field forces. Both these gentlemen were eminently successful in that very difficult work. Mr. Cooley did this Board the honor of saying that there were so many problems coming up in actually carrying out the work (aside from the theories of taxation, rate-making, accounting, and several other things, which could be found more readily in the Auditor's office than in the Engineer's), that he had asked for the appointment of this Board of Review, to sit as a Court, and to pass on the many complex questions arising from day to day; and he had the satisfaction of coming to the Board every day and saying: "Well, now here is a condition, and how will I handle it?" Of course, actually, he knew more about it than the Board, but he was kind enough to say that he would ask for the Board's opinion. That Board adjudicated all these various questions to the best of its ability, and the speaker has the satisfaction of knowing that the valuation has stood in the Federal Courts. The subjects are so fugitive and so illusive that very much depends on the point of view.

The speaker is now engaged in the actual task of trying to place a valuation on some $300,000,000 worth of property in New Jersey, involving the most important terminals in the United States.

The valuation of public service utilities is the most profound question which has ever been before the Society, and it includes a great deal which is outside of strictly engineering questions; in fact, the discussions do not throw much light on the methods which should be followed in making valuations.

The terminology of a subject is very important; in fact, the speaker has found it so important that in his discussions with the Attorney-General of New Jersey, in reference to the Railroad Tax Law, which he has been asked to re-draft, that draft will be accompanied by a glossary, so that the meaning of certain terms used in that particular Act will be clear.

In this New Jersey work some eighty-seven engineers and assistants are employed, and for their guidance the speaker has prepared thirty-five pages of very carefully considered instructions. These instructions are accompanied by blue prints showing exactly how all field notes must be recorded, with diagrams of trusses, culverts, and the like, and all the elements of railroad construction.

The Tax Law of New Jersey states that, first, the true value of the real estate shall be ascertained; second, the true value of the tangible personal property; and the first law of 1884 stated: "and third, the value of the franchise"; but somebody discovered that there was something besides the value of the real estate, the tangible personal property, and the franchise. They did not know what it was, but there was something else; therefore, in the 1888 law they changed the third division of value to read: "the remaining property, including the franchise."

As an example of one of the difficulties of determining classification, attention is directed to the term, Real Estate, which is broadly, but seldom accurately, understood.

The Interstate Commerce Commission is the highest tribunal in the land, in the matter of railroad accounting, but it affords no help in many important elements of value; for instance, under the Interstate Commerce Commission, real estate includes only such real estate (land) as is not required for railroad purposes. All land actually used for railroad purposes is classified under "Right of Way and Station Grounds."

When the engineers on the New Jersey valuation were sent into the field, it was necessary to specify exactly what elements must be described as real estate, and what as tangible personal property. The division line had to be defined accurately for the reason that all personal property is assessed permanently to the State, while, in the case of real estate, the State receives the taxes on a strip not exceeding 100 ft. in width, and the tax on all property used for railroad purposes outside this strip reverts to the taxing district wherein it is found.

The vexatious question as to whether machinery is to be considered as real estate or personal property was settled by the New Jersey Law, which says that tangible personal property shall include all machinery; but it left unsettled the question: what is machinery? After careful consideration, real estate was divided into 74 classes, and all other tangible elements were classified as personal property. Some of the items of real estate are: ash-handling machinery and the like, chimneys, cisterns, conveyors, dams, locks, lock machinery, electric wiring, piping, heating, interlocking, signaling, pavements, reservoirs, shop fittings, tanks, telegraph lines, track, track scales, transfer tables, water-works, etc., etc. Generally speaking, all items of a fixed character were included in the 74 divisions of real estate.

The difficulties of determining all the elements of real estate are mentioned simply to call attention to what at first glance seems quite simple, but on close examination is found to have great complexities.

The question of useful life depreciation, direct and indirect, due to decrepitude or obsolescence, or both, is one of the illusive questions; and then comes the value of the franchise.

The valuation of railroad property in New Jersey is further complicated by the requirements of the State Tax Law, which specifies that the value of the remaining property, including the franchise, shall be determined after the "true value" of the real estate and tangible personal property have been determined.

The speaker will not attempt a discussion of franchise values, as it is a subject which requires the most profound study.

The author states that he is appalled at the speaker's misconception of the method of determining non-physical value used by Professor Adams in Michigan. The speaker is perfectly familiar with that method, and, although having the greatest respect for Professor Adams' opinions, is compelled to draw attention to two important elements of that formula which are open to objection.

Professor Adams establishes his annuity on the depreciated value, rather than on the cost, or the reproduction cost, which, in the speaker's opinion, does not determine the proper annuity or reasonable fixed charges to be deducted from net income before net surplus is established. Bonds are generally sold at a considerable discount, and represent the full cost plus this discount, consequently, the interest on bonds or fixed charges will be greater than an annuity established on cost, "reproduction cost," or "present value." Would it not more nearly establish fixed charges or annuity, to take the cost plus discount and commissions as the basis on which to apply the annuity rate?

While Professor Adams' formula establishes a larger net surplus for capitalization than the method suggested by the speaker, he in effect destroys this net surplus by charging against it all betterments chargeable to income. It is quite clear that this gives the railroad company a chance to absorb all net income into betterments, and thus wipe out all net income, in which case there would be no net surplus to capitalize, consequently, no non-physical or franchise value, and the total value established under this plan would be less than if the property had not been improved by the betterments—reductio ad absurdum.

In reference to the question of whether or not the method of valuation should be the same, regardless of the purpose to which the value is to be applied, the speaker cannot agree with the author, and believes that it is quite consistent to establish different values for different purposes.

The completion of a large public utility, planned on such a scale as to provide for the requirements of many years to come, utilizing but part of its capacity, and earning less than its operating expenses and fixed charges, with its rates of toll fixed by law, must be considered in a different way than a well-established public utility, with business forcing it to its utmost capacity, and with tolls not fixed by law. There are many important elements bearing on this consideration of value, and the purpose of the valuation should be known before attempting to establish the value.

In New Jersey the work is complicated further by the necessity of establishing the value of 122 separate railroad corporations, and the assignment of all property outside the 100-ft. strip to each of the 450 taxing districts through which the 122 corporations, with their many branches and spurs, are operating.

In order to determine the quantities and materials in the permanent way and structures, nine engineer corps were organized, each corp consisting of six men. With this force the center line of the main running track was measured, and the exact distance in each taxing district recorded. Cross-sections of the roadbed were made as often as changes in the natural surface required, and accurate measurements and notes were made of all structures; and, although in many cases the engineers were able to secure the plans of the more important steel structures, the field parties were required to obtain sufficient data to compute the tonnage in case it was impossible to get these plans.

The field parties were also instructed to note the character of the land and improvements adjoining railroad property, and record such other information as was necessary for a comprehensive understanding of the conditions attendant on the construction of a railroad in that locality.

The time allotted for the completion of the work is one year, and although this is a comparatively short period in which to introduce a premium system in field work, it was decided to inaugurate such a system as would be as nearly satisfactory as possible under the conditions. A record of each field force for each day in each month was made on profile paper, using the horizontal lines to represent the number of tracks, and the vertical lines to represent distance. Two horizontal lines were allowed for single track, four for double track, and so on. One mile was allowed for each vertical division of the paper, and, in awarding the premium, there was taken into consideration, not only the extent of territory covered by each field party, but much consideration was given to the field notes, and a cash prize was awarded each month.

The results of the organization and encouragement to the field parties are shown by the very great increase in the amount of work per man of the field parties, which was nearly 300% during the time the parties were in the field.

A great many questions hinging on interstate commerce, and involving Fundamental, State, Federal, and International Law, are embraced in the broad view of the valuation of railroad properties. The movement of rolling stock through various States, and between the United States, Canada, and Mexico, and the determination of the situs and domicile of floating equipment, are subjects which, not only require considerable knowledge of railroad operation, but involve many questions not clearly determined by the Courts.

The subject is of such great importance that steps should be taken to formulate methods of procedure, and, at the Annual Meeting of the Society, the speaker will offer a resolution requesting the appointment of a Special Committee to determine the proper methods to be used in the valuation of public utilities.

J. Martin Schreiber, M. Am. Soc. C. E.—Engineers and those generally interested in the valuation of public service properties are fortunate in having the valuable information embodied in this paper. Although there are some points on which the speaker differs with the author, the following remarks are only offered in order to bring out, from experience, some further phases of the subject, rather than as an attempt to criticize.

A great deal is heard about the exact cost of reproduction, also arguments in reference to the proper allowance for contingencies, probably only involving a small percentage. The speaker questions the propriety of advocating the exact cost figures. The carefully checked cost figures of reliable contractors, with first-class engineering organizations, submitting proposals on the same construction, are often found to vary from 5 to 15% from the total cost. Different organizations will sometimes be the cause of figures varying 5% or more, depending on the efficiency and experience of the corps. A clever purchasing agent will reduce an apparently precise estimate on equipment or supplies as much as 10%; on the other hand, the condition of the market may be such that the actual price paid exceeds the estimate by the same percentage. Engineers who are responsible for estimating on, and the execution of, construction projects generally add more than 10% for contingencies, as it is practically impossible to anticipate them, and a precise estimate is almost certain to fall short. It is unfortunate that it is almost impossible to sustain contingency figures on the witness stand; for that reason, probably, it would be more satisfactory to the lay mind, and to the various courts, boards, etc., which are required to pass on valuations, and do not thoroughly understand the technicalities of the situation, if engineers would drop the contingency item and modify the quantities or the unit prices.

If it is possible to estimate the exact cost of reproduction, certainly considerable variation may be expected from independent sources in computing depreciation and present values. Yet there are reputable engineers who would have one believe (assuming that they know the cost of reproduction) that by a simple field inspection they are able to compute the exact present value.

Some time ago, the speaker heard an expert testify in the interest of a certain city, for tax purposes, with reference to the value of a piece of street-railway track. He first stated the valuation for reproduction, and then the definite present value. The latter was greatly in excess of the actual value. The expert, who was an engineer of considerable standing, on cross-examination, did not know the height of rail from top of head to bottom of groove, either at the joint or any other part in its length; he did not know the exact depth of flange of the car wheels which operated over that track, the headway, or the exact weight of the cars used. He had assumed the condition of the ties, and that the track was ballasted. Finally, he was compelled to admit that his determination of the depreciation, by simply a field inspection, was a very rough approximation. Now, it is not in every case in the past that a corporation attorney, even with engineering assistance, has been able to point out unfair testimony. Many times the speaker has heard incompetent testimony admitted, on the general principle that the witness was an engineer of note, even though his record had been made in other specialities. Too much stress cannot be put on this phase of the subject, and the speaker is glad that the author has mentioned the fact that the personnel of those doing appraisal work should be of the highest order. In the past it is probable that the failure to discriminate properly in accepting incompetent testimony (not to mention prejudiced testimony) was automatic, and this is the most important reason for much of the hostility of officials of public service properties toward all forms of investigation, as the author mentions.

Company officials know that they are often compelled to employ and train specialists to furnish, within fairly accurate limits, the very information which is being sought, and naturally they are skeptical about the data presented by those who, though not intimate with the property, purport to give exact cost figures. Any one who is able to point out a consistent method whereby these exact figures may be obtained surely will obtain credit for a valuable contribution toward the solution of the complex subject of valuation.

Referring to the valuation of the property of the Detroit United Railroads, mentioned in the paper, the Director of Appraisals for the city estimated that the cost of the complete appraisal of the property, which includes about 220 miles of single track, would be from $3,000 to $4,000. Approximately, $25,000 has already been spent, not including the expense sustained by the company, which furnished a large proportion of the information.

Probably correct present value estimates which include depreciation may not be even fairly approximated without intimate knowledge of the particular property, and this should embody operation, policy of management, past performance, study of historical cost (as far as the records will permit), estimated cost of construction, and actual cost of maintenance. The life of a piece of track or equipment, disregarding obsolescence and extraordinaries, generally depends on the type and details of construction, the service it has done, and the service that will be required of it. Renewals should be made when the cost of repairs reaches a certain figure, other conditions being favorable. It is a fact that able engineers, intimately acquainted with the case at issue, and employed on the same property, often have conflicting ideas in reference to the life of track or equipment, one recommending immediate renewal and another advocating longer operation.

The speaker does not intend to argue against the possibility of placing fairly accurate values on reproduction or present value, but wishes to bring out the fact that it is not as simple as the lay mind is often led to believe. Further than that, he is of the opinion that the following is essential for economical and satisfactory valuations for all concerned:

(1) There should be co-operation of the appraisers with the public service property officials, including operators, engineers, and their records.

(2) Present values should be determined by:

(a) Cost of reproduction,

(b) Mortality tables,

(c) Data of performance,

(d) Field examination.

(3) The organization for the appraisal work should be of sufficient scope, and should be allowed the time and funds which the project reasonably requires.

(4) The appraisers should be carefully selected, the personnel including men who have had wide experience in the particular class of operation; and specialists should be obtained if necessary.

Mr. Riggs states that the valuation should be the same, regardless of the principles at issue. It seems questionable to consider the fair value which involves the non-physical value in costs or tax regulations. Certainly, in the case of street railways in cities, where a percentage is levied on the gross receipts, the non-physical valuation, only representing present value, is necessary. Again, a physical present value for taxation should not include the value of paving in the street in the strip occupied by street-railway tracks. That the street-railway company often pays an arbitrary assessment tax and keeps the paving in repair, though it is in no way responsible for the wear, should be sufficient to offset any obligation for other taxes. In some States this is fixed by the Courts. The physical valuation, however, intended to be used in connection with rates, cost, or capital regulation, should include the cost of paving the railway strip. Referring further to the question of including the paving in the physical valuation of street railways, in the case of a decision of R. W. Tayler, Arbitrator, in the proceedings between the Cleveland Electric Railway Company and the City of Cleveland, on a basis of a renewal of franchises, Judge Tayler said:

"Paving represents actual money expended. It belongs to capital account, and in its depreciated form is worth all the allowance that I have given it."

Also for rate-making and the capital regulation some consideration is certainly due to obsolescence and change of art, while in taxation they should not be included.

In conclusion, the speaker is optimistic enough to believe that the problem of physical valuations will be solved satisfactorily for all concerned. Co-operation of officials of the public service properties, reliable testimony, with a better understanding by the Courts, will certainly tend to clarify the situation. Non-physical values are very difficult to determine, and their intelligent treatment will require some well-defined procedure. Mr. Riggs' valuable paper will go a great way toward producing a correct idea of the general proportion, and will, no doubt, assist in the formulation of proper methods for valuation.

Clinton S. Burns, M. Am. Soc. C. E. (by letter).—The author is to be congratulated on the detailed care shown in the presentation of this subject. Perhaps few engineers who have not been called on to cope with the subject of valuation of properties, realize or appreciate the real complexity of the many varied problems encountered in work of this class. To those who are engaged directly in appraisement work, this paper will be a welcome contribution to the literature on the subject.

The author's statement that if a commission of engineers is directed to report the true cost of reproduction, depreciation, or present value of a certain property, the final figures should not differ, whether the report is to be used as a basis for reorganization, sale, rate purposes, or taxation, is open to argument. It seems proper that, if a property is appraised in order to fix a selling price to a Government or municipality exercising its right to purchase, the final figures should be based on current prices of labor and material, because this does no injustice to either party. It is evident that if the seller secures payment for his property based on current prices, he may, if he desires, reinvest the proceeds of the sale in similar enterprises at current prices, so that thereby he secures the same benefits, whether prices are high or low.

It is equally evident that if the purchaser (the municipality) chooses to purchase the property, the right to purchase must be exercised at the particular time permitted by the franchise. If prices chance to be abnormally high at that time, the municipality is exactly on a par with what it would be if compelled to build its own plant at that particular time; while, if prices be abnormally low, the same relative situation still exists. There seems, therefore, to be no possible injustice to either party in using current prices, when the object is a sale or transfer of the property. However, in determining a proper value as a basis of rates, another factor must be considered. It is inexpedient and against public policy to make frequent changes in the rate charged for such commodities as water, gas, or electric current. Theoretically, the rate could be fixed each year, based on an annual valuation of the property, thus permitting a high rate one year and perhaps an abnormally low rate another year; but, practically, this is impossible, for, aside from the inconvenience of such a cumbersome system, no community is well enough informed as individuals to comprehend any reason whatever for ever raising rates. Raising rates is invariably accompanied by a wave of indignation. However, it is apparent that a series of rates based on an annual current price valuation of the property would average exactly the same, during a term of years, as though the property were valued once for all on the basis of the average prices of labor and material for the same term of years, and the rate based on the one valuation thus determined.

If the object of the valuation is to afford data for taxation, the same argument applies as in a case of fixing rates. It thus seems proper that the object of the appraisement should be taken into consideration before it is determined whether to use average prices, or current prices, of material and labor; and, if this is correct logic, the final figures must differ according to the object in view; but, having determined the proper unit prices to be used throughout any appraisement as being the most equitable for the object in view, then, as the author well says, the appraiser must not allow personal prejudices or fancied conditions to influence his course. Above all, an appraiser must not be afraid of his client. He must not allow his personal judgment to be swerved by the latter's desires. It perhaps seldom if ever occurs that an appraiser, representing a municipality, or State, is subjected to this unconscious influence, inasmuch as his employer is merely a temporary public official, and consequently he has no client to fear. He goes into the work with a full knowledge that his employer knows little or nothing of the subject, and his only desire is to reach results which will be unquestionably fair to both parties.

On the other hand, the appraiser who is chosen by the owner of a plant takes hold of the work with a feeling that he is expected to report a value as favorable as possible to his client, and this feeling is reflected in the report, regardless of how sincerely or conscientiously he tries to avoid it.

One of the most intricate and yet interesting problems in appraisement work is the computation of the "going value," or "business value" which should be allowed in addition to the physical value.

In considering a competitive enterprise, such as a railway serving a community in competition with another independent railway, this problem must be treated in a different way than in a non-competitive business, such as a water-works, gas-works, electric plant, street railway, or similar enterprise operating under the protection of an exclusive franchise, or under natural conditions equivalent to an exclusive privilege.

In considering competitive enterprises, it is manifest that a railway operating under conditions more advantageous than its competitor possesses an intangible value equal to the measure of that advantage. It is not clear, however, whether it is more proper to say that the railway possessing the advantage has a positive going value, or whether the less fortunate one has a negative going value. Using the rule formulated by the author, being that of Professor Adams, with some modifications, it is evident that many properties would show negative going values; but, as pointed out by the author, the Courts hold that public service corporations are entitled to earn:

(a) Operating expenses;

(b) Expenses of maintenance and running repair;

(c) Taxes;

(d) A sinking fund to cover depreciation and obsolescence;

(e) A reasonable profit on the fair value of the property.

It is improbable that a reasonable profit on the fair value of the property could be construed to mean less than the interest or revenue from a like amount of Government bonds or other non-taxable securities.

This ruling of the Courts fixes the rates at such a figure as to preclude the possibility of a deficit; from which it must follow that a negative going value cannot be created by a compulsory reduction in rates, for such action would be confiscation of property to the extent of the negative intangible value thus created; that is to say, if the Courts are right in the above ruling, then all intangible or going values are positive, and must be determined by using the most unfavorably situated railway as the basis of computation in determining the question of reasonableness of rates; and the rates in turn must be reasonable and proper before they can be applied to determine the intangible value. This raises an interesting and far-reaching query. Assume that a negative going value is the result of real competition between two roads such that the "fair value" of the less fortunate competitor is 20% less than its physical value.

If rates are based on this valuation, are they really fair rates? For, suppose the rates had always been maintained at a point where the less fortunate road could just support its physical valuation. Clearly, no rate could then be enforced which would compel it to operate for less than a reasonable profit on the fair value of its property, and the fair value under this assumption is 25% greater than before, due to no effort of its own, but simply to the fact that its competitor has not cut rates, and has thereby preserved the original "fair value" of the less fortunate road, and at the same time increased its own positive going value by an equal amount.

In view of this analysis it is doubtful if it is ever proper to consider the existence of negative intangible values, although it is true that the commercial value does fluctuate, and may be less than the physical value, due to rates which are too low, perhaps, or due to other temporary causes.

The method quoted from Mr. Alvord for determining going value applies to non-competitive enterprises only, as was stated by Mr. Alvord in his paper before the American Water-Works Association. This method is open to the criticism that the forecast of the business of the older works, and of the new hypothetical works as well, is reduced to a monetary value, based on the present rates, regardless of whether or not such rates are reasonable. Rates are subject to legislative control in many States, and there is absolutely no assurance that any other State may not adopt legislation at any time permitting regulatory ordinances to be enforced. Therefore, any forecast of the value of future business must be based on reasonable rates, for otherwise it is merely an unwarranted estimate based on a fond hope.

Taking into consideration the fact that rates must be reasonable, either by virtue of present laws or laws which may become effective at any time, perhaps in the immediate future, going value may well be defined as the present worth of the amount by which the anticipated profits of a going plant, operating at reasonable rates, exceed the present worth of the anticipated profits of a similar hypothetical starting plant, operating at those same rates. With this conception of going value, it is impossible for a non-competitive property to have a negative going value, and every operating plant has a positive going value, even though operating at a loss.

The whole problem hinges on the question of "what is the reasonable rate or proper return," and this should be determined in the aggregate as the starting point. The Courts have persistently dodged the issue, and properly so, whenever that question has arisen, leaving it for consideration in each particular case, depending on the stability of the business, the hazard involved, and various other local factors.

It may safely be conceded that this fair profit is something in excess of the return from Government bonds, and for the purpose of this discussion it matters not what figure is assumed as the fair profit—whether 5, 6, or 10%, or what-not—the theory is the same in any case. This is perhaps best explained by a practical illustration:

Take, for example, a water-works system, the physical present value of which has been determined by the method of reproduction to be $1,000,000, and denote the going value by the unknown quantity, x; suppose, further, that 6% is considered a reasonable return on the "fair value"—not yet determined, the "fair value" being $1,000,000 plus the going value, x. Therefore, the rates must be such as to produce in the aggregate an amount equal to the operating expenses, maintenance, taxes, sinking fund, and depreciation, and still have a profit of 6% on the fair value of the property. The anticipated profits of the going plant, therefore, are exactly 6% of ($1,000,000 + x) = $60,000 + 6x/100 per annum. The anticipated profits of the hypothetical starting plant will be negative at the start, and gradually increase, finally reaching a maximum of $60,000 + 6x/100 per annum.

It must be remembered that, in estimating the operating expense and income of the starting plant, as well as the going plant, the figures must be confined rigidly to the plant as it is found at the date of valuation, and in no case should any account be taken of income or operating expenses due to probable future extensions of the distribution system. Many appraisers overlook this point, and predicate the anticipated profits of the going plant on the past growth of the income account, forgetting that a considerable portion of this growth is due to extensions into new territory, and not to any material increase in revenue from the territory already served. To include income from new territory in the forecast of income is just as fatal an error as to include the anticipated expenditure of new capital in the present physical valuation. Either of these procedures is really an estimate or appraisement of some other plant, rather than the one actually under consideration.

To complete the numerical illustration, suppose it is determined that the time required to construct the hypothetical starting plant is 3 years; that a portion of the plant is put into operation at the end of the second year, taking over fire-hydrant rental equivalent to $20,000; that the revenue from private sources aggregates $20,000 during the last year of construction; that the expenses of operation, maintenance, taxes, and depreciation amount to $30,000 during this year. After the time of completion of the plant has elapsed, it has the total credit for fire-hydrant rental, and it is assumed that the revenue from private sources and the cost of operation, maintenance, taxes, and depreciation increase as shown in Table 14, which illustrates the method of computing the going value, and gives the resulting value for the case just stated.

Therefore, 171,005 + 0.2597x = x; hence, x = $231,000. This result is based on the assumption that the starting plant earned no interest during the construction period. If an allowance for lost interest during construction has been made and added to the capital account already being included in the physical appraisement of $1,000,000, then this must be charged back against the going value found above. This is clearly evident, because the calculations to determine going value date from the beginning of the construction period, and the lost interest during construction, therefore, is provided for in the result. Most appraisers allow an item for lost interest amounting to the legal rate of interest running for half the construction period, which, in the illustration under discussion, would be $90,000; deducting this sum, if previously included, gives $141,000 as the going value.

There seems to be no good reason for allowing lost interest during construction as an item in the physical valuation of a property, any more than for allowing all of the lost interest, up to the time when the property begins to yield a return equal to the rate of interest. It is one of the problems in finance, and is much better treated as an element in the going value, as shown in the above illustration.

One of the most difficult factors on which to agree in computations of this nature is the element of time required for the hypothetical starting plant to acquire the business. Were it not for this uncertainty, going value could be computed with mathematical precision by the method suggested.

In determining the physical valuation on the basis of cost of reproduction, such items as cost of taking up and replacing street paving over the pipe lines, cost incurred by reason of sewers and drains encountered, interference due to electric wires and conduits, interference of traffic, and other metropolitan conditions which add greatly to the cost of construction, must be allowed. Wherever such metropolitan conditions exist, there must also be present a corresponding necessity for the use of water under pressure. People use water because of necessity or convenience, and not on account of any feeling of obligation or loyalty to the water company.

Year, dating from beginning of construction.		Legitimate profits of the going plant.	Hydrant, rental taken over by starting plant.	Domestic revenue of starting plant.	Interest on the starting plant.	Operation, maintenance, taxes, and depreciation on starting plant.	Total difference in anticipated profits of the two plants.	Present worth factor.	Present worth of the excess of anticipated profits of the going plant.
Construction period.	1st	$60,000 + 0.06x	0		If the physical validation contains an item for lost interest during construction, the same amount must be credited to the starting plant as interest earned.	0	$60,000 + 0.06x	95.2	$57,120 + 0.0571x
	2d	60,000 + 0.06x	0			0	60,000 + 0.06x	90.7	54,420 + 0.0544x
	3d	60,000 + 0.06x	$20,000	$20,000		$30,000	50,000 + 0.06x	86.4	43,200 + 0.0518x
Business	4th	60,000 + 0.06x	40,000	55,000		50,000	15,000 + 0.06x	82.3	12,345 + 0.0494x
development	5th	60,000 + 0.06x	40,000	80,000		65,000	5,000 + 0.06x	78.4	3,920 + 0.0470x
period.	6th	60,000 + 0.06x	40,000	90,000 + 0.06x		70,000	0	74.7

If highly developed metropolitan conditions are present, new business will be acquired in the hypothetical starting plant much more rapidly than where such conditions are yet to be developed. For this reason the problem cannot be based on the early growth of the same plant, and, there being no exact duplicate of conditions in existence elsewhere, the estimate of time required for the business development period is purely speculative, and must be assumed with great care and judgment, else injustice may be done to one party or the other in the resulting going value.

It is interesting to note that, in the Michigan appraisal, the allowance of a percentage for contingencies was bitterly contested by the railroads as improper. Probably every appraiser who has been connected with rate cases has seen this same item strenuously insisted on by the corporations.

The author's query: should a corporation which is compelled to abandon appliances while yet serviceable, in response to public clamor, be allowed any item of value in the appraisal on account of such appliances, seems to be best answered in the negative. If the appraisal is for the basis of making rates, the corporation is fully compensated by the fact that its depreciation account provides for all abandoned machinery, and the average past depreciation is usually considered a fair criterion of the future. If the appraisal is for purposes of taxation, it would seem improper to levy tax on abandoned or rejected machinery or equipment. If the appraisal is to determine the present value of a property for sale under condemnation proceedings, it is likewise difficult to conceive any reason for allowing any present value on account of property abandoned or rejected, and, indeed, if such abandoned material had any value at the time of its removal, it is more than likely that such value was converted into cash at that time.

The statement that no appraiser would be justified in placing a going concern value on a property 3 years old, or 10 years old, unless the net earnings were such as to indicate that the property had a commercial value in excess of the physical property, is questionable. "Commercial value" is not exactly synonymous with "going concern value," for, as usually considered, the term "going concern value" represents the difference between a dead structure and a live one. A property might be compelled to operate temporarily at rates insufficient to return the legal rate of interest on the physical value of the property, and while this condition continued, its commercial value would be less than its physical value, and yet this same property is worth more while running than if operation ceased and the business was allowed to die.

Halbert P. Gilette, M. Am. Soc. C. E. (by letter).—In common with others who have written on the subject of appraisals, the author omits consideration of one of the most important elements of the cost of producing the property of a public service corporation, namely, the development expense.

Development expense is the deficit in "fair return" on the investment during the early years of operation, while the business is being developed to a point that will yield a "fair return" on the investment. Unless this development expense is charged to the capital account as fast as it occurs each year, it should draw compound interest up to the end of the development period. Development expense might be regarded as a part of the non-physical value of a plant, and a few years ago the writer so regarded it. Latterly, however, he has come to see that it does not differ one iota in principle from "interest during construction," and, therefore, is properly a part of the cost of production or of reproduction of the property. During the construction period, interest on the investment is charged, and properly so, as a part of the physical cost. Does this interest cease the day after operation begins? Not a whit. The owners of the property are entitled to a fair interest—a "fair return"—on their money, from the day it is invested. At first they receive it in the form of "interest during construction," which is charged to capital account. After operation begins they must either be allowed to earn more than a "fair return" during the fat years following the development period, or the deficit below a fair return incurred during the development period must be treated exactly like "interest during construction" and added to the capital account. If public service corporation managers have chosen the first of these two methods, it does not relieve the appraiser of the duty of adopting the second method; for the object of appraisals for rate-making purposes is to limit capital to a "fair return" on the investment. In brief, if there are to be no "fat years," then every "lean year" must be credited with its deficit as fast as it occurs.

This, the writer concedes, is a radical departure from such precedent as already exists, but we must not overlook the fact that we of to-day are establishing the precedents for appraisals in the future. The whole matter of valuations for rate-making purposes is still in a nebulous form, as far as the public, and indeed, as far as the Courts, are concerned. In the end it will devolve upon engineers to establish logical methods of appraisal. To do so, they must be able to look on the problem both as engineers and as jurists. Up to the present, however, this broadness of vision has not characterized most engineering appraisers, nor is it to be wondered at when the Courts themselves are in a maze.

A great deal has been heard lately about "going concern value." Ultimately, the Courts will hold that, as far as rate-making is concerned, there is no such thing as "going concern value" in the present meaning of the term. "Going concern value," in the final analysis, consists of two elements: First, development expense (as previously defined), and, second, capitalized surplus earnings. Surplus earnings are ascertained by deducting from net earnings both taxes and a low rate of interest on the investment, equivalent to interest on bonds. Many factors may affect surplus earnings; but, that "going concern value" consists largely of capitalized surplus earnings, cannot be denied. What are surplus earnings? The public replies that they are mainly the result of extortionate charges. This is doubtless correct in many cases; hence, any investigation of costs which has for its object rate-making must inevitably lead to repudiation of that part of "going concern value" which is based on surplus earnings, if the surplus is at all large. In a word, we reason in a circle if we capitalize surplus earnings, calling the result "going concern value," and then undertake to use "going concern value" as one of the factors in judging the fairness of rates. To express the problem mathematically, we cannot solve for a variable when the variable is allowed to exist on both sides of the equation. Yet that is precisely what some rate-making bodies are trying to do, and it is precisely what the Courts have often attempted to do.

To escape this confusion there is but one possible step, and that is to eliminate "going concern value" entirely. We must first determine the element of cost, which the writer terms development expense, and we must regard this item as a part of the cost of reproduction. We must next cease to consider small rates of interest as being a "fair return" on this cost of reproduction. When first-class mortgages draw 5%, it is folly to talk of 6% as being a "fair return" on capital invested in a business enterprise, especially when this 6% is figured on the actual cost of reproduction of the property. It may be that 7% is an ample "fair return" in some cases, but in others 10% will be found none too much, considering the small size of the business and the risks involved.

The writer will not at this time discuss methods of determining how a "fair return" should be estimated, but, in general, the process should be as follows: From the gross earnings deduct the operating expenses and taxes to obtain the net earnings. From the net earnings deduct a small rate of interest (equivalent to interest on bonds) on the cost of reproduction. The remainder is profit, and should be expressed as a percentage of the gross earnings. This percentage of profit can then be compared with similar percentages made by merchants, manufacturers, farmers, and other capitalists, and then it can be determined logically by comparison whether or not the profit made by a public service corporation is "fair." We must adopt this method of attacking the problem or we shall inevitably drive capital away from railway and other fields of public enterprise.

The writer estimates roughly that a profit of 10% on gross earnings, as above deduced, is about the same as a direct return of 7% on the cost of reproducing the average steam railway.

In a recent appraisal of a street-railway system, the writer determined the actual development expense of the property, deducing it from the accounting records. It was an astonishingly high sum, even assuming only 7% on the cost of reproduction as being a "fair return." During his appraisal of all the railways in the State of Washington, for the Railroad Commission, the writer made a similar study of development expense, but this was not included in his estimate of the cost of reproduction, as it was then regarded as being a part of the "going concern value" and he was not commissioned to ascertain the "going concern value" of the railways. Not a single railway, as far as he knows, has ever presented to a State Railway Commission, or to the Interstate Commerce Commission, an estimate of its development expense along the lines indicated. Instead, the railway companies have talked in general terms of long construction periods—often claiming 20 years or more—and of great expense incurred in building up the business, and of franchise value, and of a score or more of non-provable costs. The consequence is that they have frequently lost entirely the one great item that they are clearly entitled to, namely development expense, which is an item which can be absolutely proved from their accounting records, and, therefore, rests not on the "hot air" testimony of experts, but on facts that are incontrovertible. In like manner, other public service corporations have often signally failed to prove the full worth of their properties, because their claims for "going concern value" have been ignored entirely. When a franchise expires, the "going concern value" is usually looked on by the public as worthless, nor is this view to be wondered at.

Mr. Riggs proposes adding to the physical value a minus "going concern value," and he is logical in doing so, if it is conceded that values for rate-making rest on profits; but this the writer does not concede for an instant. Values for rate-making cannot rest on the very thing that it is aimed to regulate, to wit, the rates charged. Until engineers and public service commissions and Courts free themselves from this confusion of cause and effect, there can be no rational theory of rate-making.

Values for rate-making must rest primarily either on the actual costs of the production of a property or on estimated costs of reproduction, including therein both interest charges during construction and the sequel thereto—development expense.

Of almost as great moment as the item of development expense is the question of depreciation. The author, in common with most engineers, holds that depreciation should be deducted. This is a consequence of regarding a public service plant as if it were a machine bought in a second-hand store. A public service plant is a device which is intended to perform a given service forever. It is true that its parts are subject to wear, and must be renewed from time to time; but the plant as a whole is everlasting, or practically so. Managers of public service corporations, perceiving this fundamental truth, have rarely established sinking funds for the redemption of any considerable part of the plant. In a great railway system the renewal of a freight car is not a proportionately larger item of expense than is the renewal of a tooth in a steam shovel bucket owned by a contractor. This fact, coupled with the permanence of the railway plant as a whole, has led railway owners to make no provision for a return of the money lost in depreciation. Railway ties in a large railway system inevitably reach a condition such that their average age is exactly half the life of the average tie. Shall a sinking fund be provided for ties? If not, where does logic place a line of demarcation? When does an element of the railway plant attain a condition of sufficient importance to warrant "writing off" some of its value from the capital account? The facts are that railway managers have not "written off" anything worthy of mention for depreciation, and, in the writer's opinion, they have been perfectly logical. Consequently, the operating expenses have been much less than they would have been during the early years, had a sum been placed annually in a sinking fund. Therefore, the development expense, as deduced from the accounting records, is less than it would be if a sinking fund were provided; and the amount of this difference is precisely the amount of the depreciation. In other words, if depreciation is to be deducted from the cost of reproduction, it must be added to the development expense ascertained from the accounting records; so that, in the final analysis, depreciation should be ignored entirely in any appraisal of a public service corporation where the object is either rate-making or purchase of the corporation by the public. One qualification to this statement is needed, however, and that is that the depreciation shall not have gone far enough to result in an average age of plant less than half the life of the plant—that being the ultimate normal operating condition.

Engineers have a duty to perform, in making an appraisal of the sort under consideration, which is judicial in its character and should not savor in the least of the pawnshop. The engineer engaged by a public service commission should not for an instant make it his object to "beat down the price," no matter by what far-fetched theory he may effect the result. Nor are engineers inclined to do this, except when they regard themselves merely as agents of the public by whom they are employed. Unfortunately, many appraisers have as yet failed to realize that there is a vital distinction between the dealings that should exist in public affairs and those that actually exist in private matters involving the purchase and sale of property. In the latter case, the buyer usually takes every possible advantage of the helplessness of the seller. Is the seller ignorant? See that he remains so. Is the seller hard-pushed for money? Grind down the price accordingly. Does the seller offer goods which are a bit shop-worn? Dwell on that fact, to the exclusion of all else. Such are the tradesman's arts, and such, the writer fears, have been the arts of some appraisers of public service property.

The writer believes that, under one form of agreement or another, nearly every kind of public service can be more economically and better performed by a public service corporation than by the public itself through employees directly hired. But if America is not to pass speedily into Government ownership and operation of all public utilities, there must be a pronounced change of attitude on the part of the public toward capital now invested in public service corporations. Even as engineers, we are apt to be unconsciously influenced in our attitude toward public service corporations, not only because of the present public attitude, but because we are often put to great inconvenience by the ill-considered resistance of the corporations whose property we are called on to appraise for the public. Our duty plainly consists, first, in regarding a public service corporation as a public agent, and, second, in allotting such values that this public agent will receive a full and fair return for every dollar judiciously and honestly spent in building and developing its property. In carrying out this plan, the writer finds it wise to study the entire financial history of a corporation, going carefully through both the construction accounts and the operating accounts from the beginning.

The desirability of analyzing the actual costs of construction, betterment, and operation of public service corporations, preparatory to estimating the cost of reproduction, cannot be too strongly urged upon appraisers. Unfortunately, many corporations refuse access to their records, or claim that the records are too incomplete to be of value. However, when they realize that from those very records can be deduced one of the largest items of cost of reproduction, namely, the item of development expense, they are certain to show as much willingness as they now show aversion to disclosing their records.

The writer has recently completed an appraisal of a street railway system, the managers of which placed at his disposal the entire accounting and engineering records. From these the development expense was deduced, and forms an item which can be demonstrated in Court, if need be, instead of being the subject of unsupported "expert testimony." As far as the writer knows, this is the first time that a street railway corporation has voluntarily opened all its books for use in an appraisal which may be made public. May it not be one of the harbingers of a far-sighted action on the part of public service corporations, which will result eventually in eliminating entirely the hostile attitude of the public toward its accredited agents?

Reverting again, and finally, to the question of development expense, it will be seen, after study, that the method of deducing it from the accounting records provides for every possible item. The cost of advertising, the cost of colonization, and canvassing by agents engaged in building up the business tributary to the corporation, the cost of developing an efficient business organization and an efficient plant—every possible item of developing the business finds accurate record in the development expense deduced from the accounting records as outlined. This may not be apparent at first glance, but a little consideration proves it to be so. If, for example, $20,000 has been spent annually for ten years in advertising to secure business, the operating expenses have been increased exactly $20,000 for each of the ten years. Consequently, the annual deficit below a "fair return" on the investment has been made $20,000 greater each year than it would have been had no expense for advertising been incurred. In other words, the deficit below a "fair return," which is the development expense, shows automatically the amount spent for every such item as advertising. The writer regards this automatic register of development expenses as being one of the most important features of his method for determining such expense. It removes the entire problem from the realm of guess-work and expert testimony, and makes it a problem in engineering economics. It involves no question as to whether or not the existing rates charged for freight, or for any other service, are fair.

Arthur L. Adams, M. Am. Soc. C. E. (by letter).—This paper, in spirit, diction, and contents, is a masterly presentation of the best thought and argument, by engineer specialists and the higher Courts, concerning this difficult subject—a presentation which only one intimately associated with the question for years, as has been the author, could hope to make. It is of special interest, too, because it deals fundamentally with the Michigan railroad valuation, now ten years old, and deservedly considered somewhat ancient in the evolution of what may be termed the logic of valuation methods. The frank acknowledgment of the now apparent deficiencies or errors of that work, notably in the defective method and resulting under-valuation of real estate, as well as the upholding of that which still appears to the author to be sound in principle, are excellent manifestations of the constructive and judicial spirit so necessary to the making of any substantial contribution to the art.

Unanimity of opinion in matters of detail, even among those specializing in this line of practice, cannot be expected, especially in a general discussion. Details must receive their emphasis from local coloring and local conditions. Making allowance for these local conditions in Michigan and other contiguous States—notably conditions of population and flat topography—and remembering that the basis of the paper is a railroad valuation for purposes of taxation, and not a water-works appraisal for annual rate-fixing in a semi-arid region of rapid development, or some other widely differing utility, it seems to the writer that the author has been singularly fortunate in giving expression to views with which specialists will for the most part agree.

The limitations of the logical application of the methods suggested, however, are not sufficiently defined. Early in the paper an effort is made to avoid the necessity for this, and to simplify the treatment by limiting the scope of the paper, in the following language:

"This 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—it does not take up questions involving the propriety of those figures when reached. The propriety or legality of using such figures as a basis for an assessed valuation, as a basis for rate-making, ... will be conceded no place in this paper."

Such a restriction, however, seems to the writer to leave the subject much confused. It is impossible to judge of the propriety or soundness of a method of valuation while ignoring its purpose and failing to point out the limitations of its logical application. To confine discussion to a consideration only of cost of duplication and depreciation of physical properties is presumably an attempt to avoid the difficulties incident to the application of such results to specific purposes, and is in line with the frequent argument of some attorneys in litigated valuations, that the engineer must not encroach on the province of the Court by having, much less expressing, any idea relative to the application of his figures to the final solution.

With this doctrine the writer has no sympathy. The engineer is essentially an economist, and no one is more fully qualified to aid, either directly or as an adviser to the Court, in the final determination of value for specific purposes, provided he is trained in the construction, operation, and valuation of such properties as are under consideration. To accept any less responsibility than this is to become party to inferior measures leading to popular misconception, and is justified only as a practicable first step toward the final realization and acceptance of the larger duty.

All suggested methods of valuation should be subjected to close logical analysis, with a view to their purpose. The unsuitability of the method used in the Michigan appraisal to many classes of appraisals is apparent, and can be readily indicated. Much space is given to justifying the appraisal of all so-called non-physical elements by the capitalization of the residue of net earnings after allowing interest on the investment in the physical properties. This the author refers to as Professor Adams' method. The addition of the physical to the non-physical values, as thus determined, is supposed to give the value of the property as a whole. It is evident that it gives, by indirection, the same total valuation as would be obtained by the direct capitalization of net earnings without any determination of physical values, per se, and, as a method, is therefore not what it purports to be. Since value, by this method, is in reality dependent on earnings, it follows that where rates are fixed by governmental authority, with the property value as the base, as is done annually in California in cases of privately owned water and lighting plants, the method suggested is without logical application, and the property values of such corporations must be determined and justified on other or modified grounds. Hence the necessity for dealing with such elements as so-called "going concern," franchise, and other possible assets, each independently, as is usually done in water-works appraisals, instead of collectively, as in the Michigan appraisal.

It should be made clear, therefore, that the method used in this railroad appraisal, for the determination of non-physical values, simply reduces the whole to one of capitalization of net earnings, and presupposes no governmental regulation of rates with the value of the property as the base; and, unmodified, has a comparatively narrow range of application.

The author seems to see difficulty ahead in dealing with rate-making by this method, for he says, near the close of his paper: "There are many intricate problems in connection with a valuation for rate-making or taxation which really belong to these undertakings, not to valuation," but, in stating some of these difficulties, he does not point out the impropriety of determining value by capitalizing that (earnings) which it may be the object of the valuation to determine and fix.

Regulation of rates by governmental authority, which means their limitation to that which is reasonable and just, will probably in the future be the purpose in the making of most valuations of the property of public service corporations, and no methods or rules for the making of appraisals can be considered as being at all complete or fairly comprehensive which do not meet the logic of such an end.

If capitalization of net earnings is to determine railroad values for rate-fixing, whatever the process, it must presuppose a fair and equitable rate, thus following the rate, instead of the rate following the property value. This is but a shifting of the difficulty; for, what constitutes a fair and just rate, irrespective of the value of the property used, is at least as difficult of determination as is the property value, irrespective of its earnings. Valuations, to be useful, must have their purposes carefully predetermined, that the right application of principles may be made.

Perhaps nowhere more than in California has thought been directed along this line, for the organic law of the State for thirty years has required the annual fixing of rates for water and light companies by public official bodies, and many important cases involving rates and valuations of large properties, chiefly in later years, have been tried. Unfortunately, the most important and best tried of these have not yet reached the United States Supreme Court. The result, thus far, is too long a story to be told now, but it may be said that capitalization of earnings in any form is not regarded as a logical basis of value under such conditions. Franchises, as they exist here, are not regarded as having value, unless from unusual circumstances. "Going concern" value is recognized, but its money measure is sought through other channels than present net earnings.

The author's emphasis on the necessity for eliminating the personal equation, as far as possible, is commendable, but a large exercise of discretionary judgment is inseparable from the process of appraisal. The fullest investigation of all pertinent facts should be made. Too much must not be expected from rules and formulas. They are education only. Governing principles must be understood, and subsequent procedure the writer cannot better express than in the words substantially as used on a former occasion:^[47] Having considered the various factors likely to influence the value of any property under consideration, and having summarized the results, it will remain to determine the varying degrees of importance and weight to attach to each, and to decide, in view of all the attendant circumstances, what the amount is on which the company is entitled to receive a suitable return. This final solution can never be reduced to a mathematical formula applicable to all cases. The inquiry will have established approximate limitations, both as to maximum and minimum, but there will then usually be found remaining quite a wide intervening field for the exercise of discretionary judgment.

That the final result will depend to some extent on the personal equation, does not of necessity detract from its worth. It only shows the greatness of the problem, which requires for its solution the exercise of faculties higher than the application of mere formulas and mere routine, faculties which are rooted in laborious thought, in ripe experience, in moral worth.

A word concerning the use of experts on work of this class: Most valuations grow out of or grow into cases at law. Under the prevailing order, the litigants secure the services of the necessary expert appraisers, who, in the course of examination, are subjected to processes usually much better calculated to magnify than to harmonize differences, and to cloud rather than to clarify issues, to the detriment of the record, the confusion of the Court, and the attempted discredit of the witnesses and their profession. Self-defense is calculated to lead witnesses into undue reliance on rules and mathematical formulas, as direct means of obtaining the desired result, instead of aids for the final exercise of a right judgment as to the real value of the property for the purpose intended, simply because it is easier in dealing with attorneys to justify mere mathematical processes than to support opinion resting on considerations of a general character, not always readily measurable in figures. This tendency leads also to under-valuations. A change in the process of Court procedure relative to such expert evidence is needed, and the influence of the Profession, both individually and collectively, might be used to secure the appointment of such witnesses at the instance of the Court, instead of the litigants, to the great advantage, both of society and of those more immediately concerned.

C. D. Purdon, M. Am. Soc. C. E. (by letter).—A comparison of some of the more important items in the Minnesota valuation may be of interest. In the "Cost of Construction of Roadbed and Track," the principal items are:

Land	25.46%
Clearing and grading	21.49%
Rails	12.72%
Bridges	7.01%
Ties	6.72%

These five items amount to 73.40% of the total cost, and "Adaptation and Solidification of Roadbed" to 4.53%, the other twenty-three items amounting to 22.07 per cent.

The estimated value of "Adaptation and Solidification of Roadbed" ranges from $543 to $1,542.80 per mile, averaging $1,231.92, which includes 4½% for engineering. If engineering is omitted, the average for all roads is $1,124.95, and for "Carrying Roads"^[48] $1,128.16.

The "multiplier" for cost of right of way was ascertained from the market value of land in the vicinity, as shown by late transfers, and the prices paid for right of way at about the same time; this cost ranged from 195 to 891% of the market value. Taking "all roads," the cost of land for terminals was 71.05% of the total cost of land for all purposes, but only 3.78% of the quantity.

A. Mordecai, M. Am. Soc. C. E. (by letter).—Mr. Riggs has done a valuable service in preparing this very able and painstaking paper, as the subject of the proper value of Public Service Corporation property is one but lately demanding attention. When the country was undeveloped, and the railroad companies struggling for existence, and often ahead of the needs of the people, no criticism was made; but, during the last few years, securities have increased so largely, the increased issue often being manipulated so as to accrue to the benefit of a few individuals in place of the great mass of original security holders, rates have been made and defended on the plea that the increase was necessary to pay a fair interest on the capital invested, and increases in assessments for taxes were fought and criticized to such an extent by the companies that the public seems to think it absolutely necessary to have some investigating and regulating power. It argues that the history of the past shows that we cannot depend on the officials themselves, not from any desire to be dishonest or unfair, but merely that they cannot reach the proper point of view. After years of struggling, they cannot see the justice of being obliged to show their books or have their incomes disturbed, while they see a neighboring factory, owned by a like chartered company protected by patents and copyrights, greatly enlarged, and the company paying a very handsome return on an ever-increasing capital, without investigation of any kind.

No one supposes that any body of legislators or a committee selected from one should understand the situation better than the managers themselves, but the public, forced to look somewhere, demands that its representatives try to regulate these matters and see that no abuses occur, fully aware that the machinery is not perfect. It asks:

As to Capital: that the company can show proper value for the securities issued, and, if an increase is made, the sum obtained should be used for the betterment of the property;

As to Rates: the Courts have said that what the company is entitled to ask is a fair return on the value of that which it uses for the public convenience;

As to Taxes: what is the true value of the property of the company, treating it with absolute equality, as compared with that of other taxpayers?

It is to determine what these values are that the Engineer among others has been called on. The literature on the subject is increasing, and there are some decisions of the Courts which help, but there are yet perplexing and intricate questions to be determined; not to be answered by captious criticism and indignant retort, but by an honest effort to arrive at some common ground of fairness to both State and Corporation; for, after all, the Corporation is a part of the State, a great distributor of money, a large taxpayer, its stockholders men of worth and capacity, and there should be no desire to penalize it or interfere with its legitimate prosperity. The Corporation is surely dependent on the State and the good will of the people for its welfare. Mistakes have been made, no doubt, just because this common ground has not been reached, and the writer thinks that it is largely within the province of the Engineer to establish it.

In arriving at either of these values, the chief tangible asset is the value of the physical property. This can be determined with a great degree of accuracy, and though by no means alone representing any of the values, it seems to be indispensable as a basis and starting point. The balance sheets of the Corporation commence with a statement of the cost of road, plant, etc., and must be checked to permit correct deductions from the results of operation shown in them; and, for purposes of taxation, they would seem to be particularly reliable.

The Engineer called on to make such a valuation for whatever purpose should, under like conditions, value each item the same for all, but it does not follow that every item, including the percentages added, should appear in the total valuation for all purposes. There are legitimate charges in valuations made to determine capital which should not appear in one made for assessment for taxes. Unit prices should not change, but the purpose for which the valuation is made should properly be considered in arriving at the final figure.

To or from this valuation, especially if made to determine proper capital, there must be added or subtracted certain values for intangible property, often found by a study of the income account of the Corporation. This makes the official ask: Why make a valuation of the physical property at all if your final result depends on the income? Because it is one item which cannot be manipulated; it does not change materially from year to year; it is not dependent on rates or income; it forms a very large item in the assets of the Corporation; and it is a sound basis on which to stand.

For the purpose of determining the proper amount of securities, the cost of reproduction at present prices would seem to be the value sought; whereas, for taxation purposes, or to determine a proper selling price, the present value is what is required, allowance being made for depreciation. A railroad, for instance, might be considered as an instrument for transporting passengers and freight, and, though the ties are not new, the rails worn, and the locomotives of an old type, they do their work just as safely and expeditiously, and, if no account is to be taken of the cost of maintenance, the road might be considered to be worth as much as if new.

The officials of the Corporation are generally perfectly willing to give any facts or to furnish access to any records they may have, but are not willing to state their opinions as to prices, depreciation, etc. The Engineer is making the valuation, not they; and they reserve the right to criticize, at the proper time, both the results and the conclusions drawn from them. The Engineer should be absolutely fair and just, not using improperly the information obtained, but endeavoring to reach results which appear to be unquestionably correct. He must divest his mind of the innate desire to minimize the consequences of his decision to the Corporation, on the one hand, or to favor the State or his employer, on the other; it may be difficult, but on his ability to do this depends the success or failure of his work.

Considering the subject generally: in making the valuation of the physical property, the organization should consist of one man in charge, and under him a field organization and an office organization. The property, if large, should be divided into convenient districts, with a division engineer and necessary assistants in charge of each. Care should be taken that these assistants are competent men, though they are often hard to obtain for temporary work of this character, and there is not sufficient time in which to weed out and perfect an organization. They should be men of experience on the particular class of work to which they are assigned, and should be tactful and courteous. Stress should be laid on keeping plain, neat notes, not too crowded; on watchful care of the party working in the field, to prevent accidents, and on the necessity of absolute correctness in calculations and figures, in the multitude of which it is surprising how many mistakes will creep in unless special care is taken to check every step thoroughly. The office engineer should be equally competent, and accustomed to systematizing and analyzing, so that the results will be arranged systematically, not only as considered by themselves, but as far as possible according to the classification of the Interstate Commerce Commission, so that, no matter where made, they can be easily compared.

The work, if large, should be standardized. Everything to be reported should have a form for the purpose. These should be as concise as possible, calling attention to the essential information, but not in too much detail. Unit prices should be established after proper consideration.

Reproduction Value.—In ascertaining the reproduction value, the aim should be to obtain prices for which the material could be purchased and the work let to responsible parties at the date of the valuation. Real estate and depreciation are probably the two items in which there will be the largest differences in opinion as to values, and both should be determined by the personal examination of experts, following some prearranged system. One founded on the Somers system might do for the land, and certain percentages of depreciation per year, varying for the three conditions of good, fair and poor, for the structures and equipment, but the results in any case should be examined and passed upon by some one person so as to eliminate the individual equation as far as possible.

It is when the figures thus reached are before him that the Engineer finds himself confronted with many perplexing problems. To what items should percentages be added, and in what amounts? A small change in such items often makes a large difference in the total. There is not much trouble about general expenses, legal expenses, engineering, etc., as these are undoubtedly proper items to be added, and the amounts of the percentages are not difficult to determine from sufficient study of the property. Opinions on such matters will not vary greatly, but there is a difference with regard to such items as leasehold interests, solidification, contingencies, interest and taxes during construction, commissions and discounts on securities, working capital, value of the good will, and considering the property as a "going concern," about which opinions will differ much more widely.

Leases from the company are like any other book asset. Leases to the company should be considered as the land is considered. What is the present value of the leasehold interest for the remainder of the term for which the rental is fixed?

Present Value.—In ascertaining the present value, it would seem that something should be allowed for solidification, the amount depending on the manner in which the work was built, its age, the likelihood of damage by the elements, etc. Possibly a percentage of appreciation on the value of the earthwork and masonry would be the fairest manner in which to consider it. Due care must be taken, however, to give proper credit to good work and not put a premium on inferior construction.

A percentage should be allowed for contingencies in all cases, but this is not necessarily the same for every piece of property. The estimate is made on a completed piece of work, consequently, if done with proper care, this item should not be as large as if the estimate were made for work to be constructed; but there are many things, not seen by the estimating engineer or disclosed by available records, which must be covered by this item, such as buildings bought with the land and afterward destroyed, damages paid for reasons not now apparent, difficulties encountered in excavating wet or hard material, amounts spent in dredging, in artificial and difficult foundations, losses during construction on account of strikes, washouts, etc. These are perfectly legitimate charges, and are likely to have occurred, and proper allowance should be made for them.

It would seem that interest and taxes during construction is a legitimate charge, and therefore, in the cost of reproduction, sufficient amounts should be added to cover it. Care should be taken to make the time long enough, as engineers are often too sanguine as to the length of time necessary to complete a certain piece of work. It is true that a part of a railroad, for instance, may be completed and opened for operation, but the net revenue derived would be very different from that of the completed road with its terminals and connections.

A new corporation can rarely market its securities at par, not only on account of the chances taken by the investor, but also because, being human, he likes to think he is buying at a bargain, getting something a little below its value; consequently, inducements vary from a small discount on bonds to a share or two of stock thrown in. To what extent a reasonable discount is a proper charge against construction may be considered an open question. It might seem fair that a certain fixed percentage be allowed in valuations, to determine capital for commissions and necessary discounts, varying according to the amount of the securities. This need not cover the whole amount of the discount, but only that portion which experience would consider essential in marketing unquestioned securities.

Consideration of the items working capital, good will, etc., may not properly belong to the Engineer, but rather to the Statistician, except as the former hears of such items being used as an argument against the necessity for a valuation of the physical property of a corporation. It is often asked, for instance, how can a value be placed on the property of the Pennsylvania Railroad Company, with its great commercial position, its magnificent terminals, and its splendid organization, all the result of the expenditure of much time and money? It is certainly a difficult problem, but the Pennsylvania Railroad is one of the greatest properties in America, possibly in the world, and because the proper valuation of this property is surrounded with difficulties it does not follow that the valuation of the properties of all other public service corporations are equally troublesome. The very difficulty of the task shows the importance of having firm ground for the first step. Having that, it may not be as hard as imagined to take others.

Thus it is seen that there are many perplexing questions for the Engineer to consider, and many details for him to work out, in doing which Mr. Riggs' paper will materially help. Above all, the Engineer must aim to be impartial; he must arrive at such a point of view as to see both sides with equal distinctness, and judge fairly and justly, trying to determine some well-defined laws and formulas which will serve as a basis in ascertaining the values desired.

W. B. Ruggles, M. Am. Soc. C. E. (by letter).—In his discussion Mr. Lavis quotes the case assumed by the New York Sun, of two bridges over the Ohio River—one between Cincinnati and Newport and one 20 miles below, between villages, etc.

In 1898 the writer was employed by the Board of Supervisors of Cincinnati to put a valuation on its Ohio River bridges for purposes of taxation, and the many points of view, as to their cost and their actual value to the owners and to the communities, were at that time, and have been frequently since, considered by him. In this particular valuation the duties of the Engineer were comparatively simple and plain, for, as there were sure to be controversies on two points at least, first, as to the right of the city to levy any tax on the bridges as such, and second, as to whether any control by the city extended to the center of the river, informally but generally recognized to be the division between the cities for police and similar purposes, or only to the northerly low-water mark, the limiting boundary to the "Territory Northwest of the River Ohio," as recognized by the ordinance of 1787, it appeared to the Board to be advisable, in the earlier stages of their efforts, to avoid, as far as reasonable, any controversies concerning details of the valuation, and the writer was instructed to give the bridge companies the benefit of any doubts.

The railroad bridge of the Cincinnati Southern Railway, the one lowest on the river and having the little village of Ludlow at its southern end, and thus most nearly filling the conditions of one of the assumed structures of the Sun, is, with its railroad, the property of the city, and the Supervisors believed that, under the terms of the lease to the operating company, it should not be taxed.

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.

The writer does not care to permit to go unnoticed the imputation that he has attacked railroad officials as a class. If such inference is to be drawn from this paper, he desires to correct it.

The writer was in railway service for some years, for six years in an official position. For the past fifteen years he has been, at frequent intervals, on special service for railroads. He is at present under employment by two of the principal railways of the country. He has many warm friends in the service, many in official capacities, and he is fully cognizant of the high ability, integrity, and loyalty of railway employees, and by employees he means to be understood as including all classes, from the highest officials down.

Inasmuch as our railroads form our greatest industry, and inasmuch as the active heads of the large roads have under their control such properties as but few in other fields are called to administer, it follows that there are hundreds—yes, thousands—of men in railway service, competent to fill any office in the land. The writer repeats: it is a pity that the demands of their work are such that they cannot give more of the benefit of their highly specialized training to the public service, and that they have so often apparently misunderstood or misconstrued the perfectly honest attempts of public officials to find a remedy for real evils.

In closing, the writer desires to say that he regrets the impossibility of treating the subjects of depreciation and fair return in a satisfactory manner without unduly lengthening this discussion.

It may not be out of place to say that, in the writer's opinion, a fair return on the average public service corporation property should be considerably in excess of the figures usually named. There is but little incentive to invest in railways, street railways, or other public service corporations, if the limit of return is to be 7%, or 8%, or even 10%, on the actual investment. This is especially true where the hazard of investment is increased by term franchises under which the companies are operating. The writer has the most absolute confidence in the ability and integrity of our Supreme Court, and is led to believe that, on a proper showing, confiscation will not be permitted.

He also believes that, in general, the great mass of intelligent people wish only absolutely fair dealing with the corporations.

On making a full and frank showing of facts and conditions, the public service corporation which is honestly financed and honestly operated, need have little fear of ultimate justice.

The public service corporation which is administered, not to render service to the public, but to permit stock speculators to reap a harvest, can hardly hope for the same brand of justice, and it is hardly to be expected that such a corporation will welcome publicity.

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