| PAGE | |
|---|---|
| Introductory | [1] |
| Reasons for Valuation | [2] |
| As a Matter of Public Interest | [2] |
| As a Matter of Corporation Necessity or Expediency | [3] |
| Difficulties of Accurate Valuation Encountered | [4] |
| The Relation of Public Service, or Quasi-Public Corporations, to the People | [6] |
| Supreme Courts | [8] |
| Regulation and Legislation | [10] |
| Explanation of Terms | [16] |
| Appraisal or Valuation | [16] |
| Cost of Reproduction | [16] |
| Cost, or Original Cost | [16] |
| Present Value, or Present Physical Value | [16] |
| Non-Physical, or Intangible, Value | [17] |
| Elements of Final Value | [18] |
| The "Physical Property" Element of Value | [18] |
| The "Non-Physical" or "Intangible" Elements of Value | [18] |
| True Method of Valuation | [19] |
| The Michigan State Appraisals | [20] |
| Organization | [20] |
| Administration | [20] |
| Civil Engineering | [20] |
| Mechanical Engineering | [20] |
| Telegraphs | [20] |
| Telephones | [21] |
| Vessel Properties | [21] |
| Methods of Procedure | [21] |
| Difficulties | [22] |
| Lack of Complete Understanding on the Part of the State Officials | [22] |
| The Attitude of the Railroad Corporation Managers | [22] |
| The Confused Condition of the Records | [22] |
| Forms Used | [23] |
| Board of Review | [36] |
| Office and Field Methods | [37] |
| Making the Inventories | [38] |
| Office Inspection as a Check on Field Work | [39] |
| Field Inspection | [40] |
| Special Work on the Chicago and Northwestern Railway | [40] |
| Special Valuations | [41] |
| Computation | [42] |
| Filing in Office | [42] |
| Computation Tables | [43] |
| Unit Prices | [43] |
| Classification | [45] |
| Compilation | [46] |
| Special Problems of the Mechanical Department | [46] |
| Assignment of Value to States | [46] |
| Freight Car Inspection | [47] |
| Locomotives | [48] |
| Vessels | [48] |
| Overhead Charges | [49] |
| Engineering | [49] |
| Legal Expense | [49] |
| Organization Expense | [49] |
| Interest | [49] |
| Discount on Bonds | [49] |
| The Charge of Ten Per Cent. for Contingencies | [50] |
| Right-of-Way Values | [52] |
| Comparison of Country Land Values | [59] |
| Average Price per Acre for Village Land | [63] |
| Comparison of Valuation Figures with Actual Considerations | [64] |
| Non-Physical Values | [64] |
| History and Results of the Michigan Appraisal | [67] |
| Market Value of Stocks and Bonds | [67] |
| Error in Published Reports as to Michigan Work | [67] |
| The Cost of the Work | [69] |
| Grand Summary of Railroad Appraisal of 1900 as to Seventy-eight Incorporated Railroads | [70] |
| The Result of the Michigan Appraisal | [70] |
| Railroad Appraisal of the State of Texas | [71] |
| Authority for the Work | [71] |
| Method of Physical Appraisal | [72] |
| The Result of the Texas Work | [73] |
| Railroad Appraisal of the State of Wisconsin | [75] |
| The Minnesota State Railway Appraisal | [77] |
| Land Valuation | [78] |
| Forms Used in the Compilation of Information | [79] |
| The Washington State Appraisal | [79] |
| The Valuation of Traction Properties in Chicago | [94] |
| The Commercial Valuation of Railway Operating Property of the Department of Commerce and Labor | [97] |
| The Extent of Appraisal Practice | [99] |
| Review of Some Methods of Valuation, and Some of the Criticisms on the Michigan Appraisal | [101] |
| The Determination of Elements of Value and Methods of Valuation by the Courts | [112] |
| Physical Values and Methods for Their Determination | [128] |
| The Preliminary Study | [132] |
| The Field Inspection | [135] |
| The Computation | [136] |
| Classification of Properties | [137] |
| Unit Values | [138] |
| Right of Way and Real Estate | [139] |
| Depreciation | [141] |
| Immaterial Elements of Physical Property | [142] |
| Organization | [143] |
| Legal Expense | [143] |
| Engineering | [143] |
| Administration | [143] |
| General Expense | [143] |
| Discount | [145] |
| Working Capital | [145] |
| Contingencies | [145] |
| Design | [146] |
| Adaptation | [146] |
| Apportionment of Values | [147] |
| Terminals | [147] |
| Development of the Art | [148] |
| The Preparation of the Final Figure | [150] |
| Non-Physical Values and Methods for Their Determination | [150] |
| "Going Concern" Value | [154] |
| Developed Business | [155] |
| Cost of Handling Business | [155] |
| Good Will and Established Organization | [155] |
| Franchise Values | [156] |
| Conclusions Regarding Non-Physical Rules for Determination | [165] |
| Conclusion | [165] |
| Bibliography | [168] |
| Railroad Valuation | [168] |
| The Chicago Appraisal | [169] |
| The Michigan Appraisal | [169] |
| The Minnesota Appraisal | [169] |
| The Texas Appraisal | [169] |
| The Washington Appraisal | [170] |
| The Wisconsin Appraisal | [170] |
| Water-Works Valuation | [170] |
DISCUSSION
Fred Lavis, M. Am. Soc. C. E.—The author states that his paper is confined to "a discussion of the methods which should be used in arriving at a correct figure of cost of reproduction and depreciation," and that "it does not take up questions involving the propriety of those figures when reached." In so far as this is concerned, it is probably the most complete compilation of the available information on this phase of the subject which has yet appeared in print. The author refuses to recognize that the consideration of the so-called intangible values has any place in a physical valuation. As, however, there exists such a widespread feeling, especially among those interested in railroads, that physical valuations, for any purpose whatever, are absolutely useless, because these intangible values are not or cannot be included, it does not seem out of place to refer to this phase of the subject at this time, and more especially in view of the fact that many persons, the prominence of whose position entitles them to consideration, have taken this point of view very recently, and their remarks have received considerable publicity. Not more than two weeks ago, Judge Lovett, the head of the Harriman System, expressed the opinion that the theory of valuing railroad property by trying to determine the cost of reproduction was utterly impractical. It seems important, therefore, that we, as engineers, interested in having the question properly understood, should be careful, in referring to valuation, to make it plain that other features besides the value of the physical property are to receive due consideration. The speaker, therefore, proposes to examine some of the arguments advanced by the opponents of valuation to see if the objections most generally brought forward are insuperable.
Some critics of valuation go so far as to say that engineers cannot make a close valuation of even the purely physical property. For instance, Mr. W. H. Williams, Vice-President of the Delaware and Hudson Company, in a paper on this subject,[[19]] states that:
"No engineer in estimating on the several important items of construction work for the year will come within 10 per cent. of the total aggregate cost. Many of the more important items are frequently underestimated 25 to 50 per cent."
He cites, as an especially good illustration, the Panama Canal, the original estimate of the cost of which was $140,000,000, though the present estimate is $300,000,000. Almost every one who has kept in touch with that subject knows why the Panama Canal has cost more than the original estimates, and that the greater cost is no reflection on the judgment of the engineers who made such estimates. One cannot always foresee what changes in plans may be made before construction is completed, and would hardly expect the estimates of the cost of a railroad to be adequate if they were made for a single-track road and a double-track was built. In any event, there is a vast difference in estimating the cost of an engineering work already completed and one which has yet to be started, the difference being largely in favor of a closer estimate of the completed work.
Limitations are often placed on engineers, in connection with work they do, which are afterward forgotten. The speaker was asked not long ago to prepare a report in connection with the valuation of a large railroad property. The time within which the results were required was very limited, and the methods used in the valuation necessarily had to be a combination of the inventory method and reliance, in a great many matters, on the judgment of those making the appraisal. Undoubtedly the result obtained was entirely adequate for the purpose for which it was required, but would hardly stand if an attempt were made to use it as a basis for an argument before a Court of law or a public service commission, though it would not be beyond the range of the experience of many engineers to have a matter of this kind brought forward some time in the future as an absolute statement of fact, with no reference to the way in which the work was done.
It is inevitable, of course, that engineers will differ in their opinions as to some details of methods of making an inventory of the property of a railroad or other public service corporation, and also as to exactly what unit prices should be applied, but in general it is safe to say that any engineer of proper experience and training can make a satisfactory appraisal of the value of the physical property of a railroad, and that if two or more such competent fair-minded engineers, unhampered by any consideration of the purpose for which it is to be made, should make such an appraisal, the variation in the result would be so small as to be negligible. The speaker, however, does not entirely agree with the author, that the purpose for which the appraisal is to be used should be entirely ignored by those who are making it. There can be little doubt as to the propriety of using a properly made physical valuation as a basis for taxation, or as information for the owners, although there may be some as to the methods whereby the so-called intangible values are to be determined in these cases, or even whether they should be considered at all. The greatest difference of opinion arises when an attempt is made to regulate the issue of stocks and bonds, or to fix the rates which should be charged for transportation, on the basis of a physical valuation.
Arguments for and against rate regulation revolve in a circle, and, apparently, there is no starting point which will satisfy every one. The Courts have ruled that the railroads are entitled to such rates as will enable them to earn a fair return on the value of their property; the railroads claim that the only way to determine this value is on the basis of the earning capacity; that is, one side claims that the rates must be based on the value and the other that the value should be based on the rates. It is evident, however, by this time, that the railroads must submit to regulation, therefore a way must be found to break into the circle, and it would seem to be incumbent on them to direct their energies along lines which will tend to make such regulation fair and just rather than to oppose it entirely. There is little claim that unduly large dividends are paid, but there is a feeling in the mind of the public that the railroads are over-capitalized. Is it not possible, therefore, to break into the circle at this point, and decide, by means of a proper valuation, as to the fairness or otherwise of the capitalization? The objection to this, on the part of the railroads, is that the value of the purely physical elements is by no means the whole value of their property, but that something should be added for the so-called intangible values.
To emphasize the difficulties of appraising the intangible values in any way which will permit the application of such value to the determination of rates for transportation, the opponents of physical valuation cite what is now the familiar instance of two mythical roads between the same termini, the first with good alignment and easy grades following a valley, and the second forced into the mountains, having not only heavier grades and more curvature, with consequently a higher cost of operation, but also more expensive construction. The value of the purely physical features of the former, of course, would be much less than those of the latter, but its actual value as a property would be greater. How then should the rates on the two roads be fixed? The fallacy of using this example as an argument against physical valuation as a basis for rate-making is in assuming that there would be two railroads built under such circumstances, with no other features than the two termini and the line between.