Chapter 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_.

TABLE 15.

╒═════════════════╤════════╤════════╤═════════════════════════════════╕ │ Item. │ Per- │Present │ COST PER MILE, ON BASIS OF: │ │ │centage │ value. │ │ │ │of each │ Cost │ │ │ │item to │ per- │ │ │ │ entire │centage.│ │ │ │cost of │ │ │ │ │ repro- │ │ │ │ │duction.│ │ │ ├─────────────────┼────────┼────────┼──────┬────────┬────────┬────────┤ │ │ │ │ Main │ Main │ Main │ Main │ │ │ │ │track.│ track │ track, │ track, │ │ │ │ │7,082 │ and │ bran- │ bran- │ │ │ │ │miles.│ bran- │ ches, │ ches, │ │ │ │ │ │ ches. │ spurs, │spurs, 2│ │ │ │ │ │ 7,813 │ and │sidings,│ │ │ │ │ │ miles. │sidings.│ and │ │ │ │ │ │ │ 10,718 │ second │ │ │ │ │ │ │ miles. │ track. │ │ │ │ │ │ │ │ 10,883 │ │ │ │ │ │ │ │ miles. │ ├─────────────────┼────────┼────────┼──────┼────────┼────────┼────────┤ │ 1. Engineering │ 2.7│ 100│ 761│ 689│ 503│ 495│ │ 2. Right of way │ 13.7│ 100│ 3,918│ 3,551│ 2,589│ 2,542│ │ 3. Real estate │ 0.4│ 100│ 122│ 110│ 81│ 79│ │ 4. Grading │ 10.7│ 99.9│ 3,064│ 2,777│ 2,025│ 1,994│ │ 5. Tunnels │ 0.6│ 95.2│ 162│ 147│ 107│ 100│ │ 6. Bridges │ 4.0│ 78.9│ 1,133│ 1,027│ 749│ 738│ │ 7. Ties │ 5.5│ 55.2│ 1,578│ 1,426│ 1,040│ 1,024│ │ 8. Rails │ 14.1│ 76.2│ 4,052│ 3,673│ 2,678│ 2,637│ │ 9. Track │ 1.9│ 77.7│ 543│ 492│ 359│ 353│ │ fastenings │ │ │ │ │ │ │ │10. Frogs, │ 0.7│ 70.7│ 207│ 188│ 137│ 135│ │ switches │ │ │ │ │ │ │ │11. Ballast │ 1.8│ 100│ 525│ 477│ 347│ 342│ │12. Track laying │ 3.2│ 97.6│ 926│ 839│ 612│ 602│ │13. Fencing │ 1.4│ 58.9│ 390│ 354│ 258│ 254│ │14. Crossings │ 0.3│ 70.5│ 86│ 78│ 57│ 56│ │15. Interlockers │ 0.2│ 89.4│ 71│ 64│ 47│ 46│ │16. Telegraph │ 0.1│ 52│ 36│ 33│ 24│ 24│ │17. Stations │ 0.2│ 75.7│ 580│ 526│ 384│ 378│ │18. Shops │ 0.1│ 68│ 305│ 276│ 202│ 198│ │19. Shop │ 0.5│ 79.6│ 156│ 142│ 104│ 102│ │ machinery │ │ │ │ │ │ │ │20. Water │ 0.4│ 71.9│ 103│ 93│ 68│ 67│ │ stations │ │ │ │ │ │ │ │21. Fuel stations│ 0.1│ 66.4│ 43│ 38│ 29│ 28│ │22. Elevators │ 0.6│ 75.5│ 189│ 171│ 125│ 123│ │23. Warehouses │ 0.1│ 71.1│ 37│ 35│ 24│ 24│ │24. Docks and │ 2.7│ 69.3│ 781│ 708│ 516│ 507│ │ wharves │ │ │ │ │ │ │ │25. Miscellaneous│ 0.6│ 69.4│ 174│ 158│ 115│ 113│ │ structures │ │ │ │ │ │ │ │26. Locomotives │ 4.4│ 56.4│ 1,274│ 1,154│ 342│ 829│ │27. Passenger │ 1.6│ 71.2│ 452│ 409│ 299│ 294│ │ equipment │ │ │ │ │ │ │ │28. Freight │ 9.7│ 69.4│ 2,787│ 2,525│ 1,841│ 1,813│ │ equipment │ │ │ │ │ │ │ │29. Miscellaneous│ 0.3│ 60.3│ 99│ 90│ 66│ 65│ │ equipment │ │ │ │ │ │ │ │30. Ferries and │ 0.8│ 63.5│ 244│ 221│ 161│ 159│ │ steamers │ │ │ │ │ │ │ │31. Electric │ 0.004│ 96.6│ 13│ 12│ 9│ 9│ │ plants │ │ │ │ │ │ │ │32. Terminals │ │ │ │ │ │ │ │33. Legal │ 0.3│ 100│ 95│ 86│ 63│ 62│ │ expenses │ │ │ │ │ │ │ │34. Interest │ 2.6│ 100│ 747│ 677│ 494│ 486│ │35. Organization │ 1.3│ 100│ 373│ 339│ 247│ 243│ │36. Contingencies│ 9.1│ 82│ 2,602│ 2,358│ 1,712│ 1,695│ │37. Total cost │ 100 │ 82.1│28,623│ 25,945│ 18,914│ 18,627│ ╘═════════════════╧════════╧════════╧══════╧════════╧════════╧════════╛

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.

-----

Footnote 19:

_Electric Railway Journal_, January 8th, 1910. p. 76.

Footnote 20:

December 4th, 1910.

Footnote 21:

_Railroad Age Gazette_, July 24th, 1908. p. 587.

Footnote 22:

_Engineering News_, June 16th, 1910, p. 697.

Footnote 23:

March 4th, 1910.

Footnote 24:

_Railroad Age Gazette._ July 31st. 1908, p, 627.

Footnote 25:

_Engineering-Contracting_, May 25th, 1910, p. 468.

Footnote 26:

_Railway Age Gazette_, March 4th, 1910, p. 437.

Footnote 27:

_Electric Railway Journal_, January 15th, 1910, p. 110.

Footnote 28:

Professor of Political Economy and Finance, University of Michigan.

Footnote 29:

For convenient reference, a set of these forms is filed in the Library
of the Society.

Footnote 30:

Now M. Am. Soc. C. E.

Footnote 31:

_Transactions_, Am. Soc. C. E., Vol. LII, p. 328.

Footnote 32:

"Elements of Railroad Engineering."

Footnote 33:

Michigan Central _vs._ Powers Record, p. 500.

Footnote 34:

Second Annual (1888) Report of the Interstate Commerce Commission, p.
64.

Footnote 35:

Letter of Hon. Martin A. Knapp, Chairman of the Interstate Commerce
Commission, to Hon. Stephen B. Elkins, Chairman of the Senate
Committee on Interstate Commerce, covering a then pending bill
providing for railway valuation, March 25th, 1908.

Footnote 36:

Pages 18-19.

Footnote 37:

C., C., C. & St. L. Ry. _vs._ Backus, 154 U. S., 445.

Footnote 38:

_Proceedings_ of the 22d Annual Meeting of the American Economic
Association.

Footnote 39:

Page 11.

Footnote 40:

Decision and order of the Railroad Commission of Wisconsin, issued
August 3d, 1909, in the case of Hill _et al._ _vs._ Antigo Water
Company, pp. 84-85.

Footnote 41:

Page 139.

Footnote 42:

Shortly after the Kansas City Water Company case and the classic
decision of Mr. Justice Brewer, and since developed by the suggestions
of a number of engineers, among them John W. Alvord, M. Am. Soc. C.
E., whose admirable article on "Going Value of Water-Works," presented
at the Milwaukee Convention of the American Water-Works Association,
held in 1909, is familiar to all students of water-works valuation.

Footnote 43:

Page 155.

Footnote 44:

Page 144.

Footnote 45:

_Transactions_, Am. Soc. C. E., Vol. LXIV. p. 94.

Footnote 46:

Bulletin 21. Department of Commerce and Labor, U. S. Bureau of the
Census.

Footnote 47:

"The Principles Governing the Valuation for Rate-Fixing Purposes of
Water-Works Under Private Ownership." By Arthur L. Adams. _Journal_,
Assoc. of Eng. Societies. Vol. XXXVI, No. 2.

Footnote 48:

The Minnesota Commission classified all roads as "Carrying Roads" or
"Switching Roads," the latter being mostly Union Depots.

Footnote 49:

This paper will be published in a subsequent volume of _Transactions_,
Am. Soc. C. E.

TRANSCRIBER'S NOTES

1. Used a comma instead of a space after every third digit from right
to left in numbers of more than three digits in keeping with authors
preference.
2. Table 9 on p. 228 has an error in the math. The total of the second
column is $1,259,149,434 instead of $1,259,049,434. The latter does
agree with the difference arrived at in the next line.
3. Added "Grand total—All assets" to last line in Table 10 on p. 230 as
this description agrees with the actual totals provided.
4. Silently corrected simple spelling, grammar, and typographical
errors.
5. Retained anachronistic and non-standard spellings as printed.
6. Enclosed italics font in _underscores_.
7. Adjacent identical columns duplicated more than twice were not shown
in the representations of the forms.
8. The forms that were too wide were split. The following section(s)
originally continued to the right.