Chapter XII: Conclusion: 165

BIBLIOGRAPHY 168

_Railroad Valuation_ 168

_The Chicago Appraisal_ 169

_The Michigan Appraisal_ 169

_The Minnesota Appraisal_ 169

_The Texas Appraisal_ 169

_The Washington Appraisal_ 170

_The Wisconsin Appraisal_ 170

_Water-Works Valuation_ 170

DISCUSSION

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

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

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

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

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

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

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

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

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

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

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

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

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

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."

* * * * *

"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

"'Something noble, grand, and good
Won by simply wishing we could.'"

Valuation, however, has gone far beyond the point where it can be considered a visionary scheme, or can be held up to ridicule; and it has been worked out far enough to show, at least, that there is a rational basis, on which a determination of values can be made, which will do justice to both sides; furthermore, the Supreme Court of the United States has not only ruled that valuation must necessarily be precedent to rate regulation, but has gone so far as to specify at least some of the elements which must be taken into account, and it may be worth while noting that, in spite of the author's criticisms of the Washington State Valuation, it is the only one, thus far, in which an attempt has been made to comply with the rules laid down by this Court. The results in Washington, however, indicate clearly the need of regulation of the railroads, as a whole, and not varied regulation by individual States of the parts of systems within the borders of each.

Arguments on either side can be prolonged indefinitely, and many good reasons for and against physical valuation are advanced from time to time, just as they may be on any proposition. Some of the principal objections have been referred to here in an endeavor to show that they are not insuperable; the point which concerns us now is that to-day we are confronted with a fact and not a theory, and that fact is that the railroads are going to be regulated, and that their proper development is held back and general business is hampered by the feeling of uncertainty as to the outcome. Physical valuation is not a panacea for all evils, but a properly made valuation of the physical elements, with a due allowance for the intangible values, based possibly on some such method as that developed by the Washington State Commission or by Professor Adams in Michigan, is surely as good a way of breaking into the circle of argument as any that has been proposed thus far.

The equipment of freight trains with air brakes and safety couplers was practically forced on the railroads by the pressure of public opinion led by laymen, yet one will hardly find a railroad man now who will not admit that this is good practice, not only from the standpoint of safe operation, but from that of economy as well. The early attitude of the railroads in this matter is already being quoted by the advocates of valuation, and inasmuch as we have to admit, as we surely do, that a start is going to be made somewhere along the line of obtaining some more definite information in regard to the 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.

* * * * *

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.