Aside, however, from the accuracy of the above quotation and of Mr. Riggs' apparent acceptance of it as the final word on discounts, one may ask if it recognizes all the elements necessarily involved in a discussion of the problems raised by discount financiering. From the literature of the subject one may read the following claims: Discount is a measure of the risk involved in a new enterprise; discount is a market adjustment that reflects the current value of money; discount is a sacrifice of principal for a slightly reduced interest annuity; discount is a dividend declared before the dividend is earned; and many cases are cited in which a discount is merely a promoter's fee for services rendered.
The writer does not care to discuss at this time these various points of view from which discounts may be regarded. They are mentioned merely to suggest that the subject is not as simple as some writers seem to think. Any valuation of public service industries, from whatever point of view it may be regarded, must, from the nature of the case, touch the problem of fundamental equities; and one of the elements of this problem which has not as yet been fully analyzed is this element of discounts. From the point of view of taxation, such an analysis is not perhaps essential; but if the valuation is to be used as a basis of determining reasonable rates, or as a measure of reasonable capitalization, it seems to be essential.
The writer is sure this discussion will not be construed as in any sense a criticism on Mr. Riggs' paper; it is rather a suggestion of an unwritten chapter in the literature of valuation. The American Society of Civil Engineers is to be congratulated in securing from one of its members so complete and satisfactory a discussion of the principles and methods for the valuation of public service corporation property.
Carl C. Witt, M. Am. Soc. C. E. (by letter).—The appraisal of the railway property in Michigan was a wonderful performance in a great many ways, not the least of which was the thoroughness of the work, considering the short time available, and the writer desires to express his appreciation of this paper, as it is a valuable addition to the meager literature on this subject.
More recent appraisals, made by States traversed by the same railway systems as those involved in the Michigan appraisal, have been made with a freedom from opposition by railway companies due to the educational effect of this pioneer work. Particularly is this true of the recently completed appraisal, by the Board of Railroad Commissioners of South Dakota, of the physical property of the railways in that State, of which work the writer was the Engineer in charge. No opposition was met; in fact, some of the railway companies had established regular departments for furnishing inventories and appraisals, had completed the necessary field work in South Dakota before the inventory had been requested by the State, and were able to furnish a very complete appraisal in a short time after the request for it was made.
This appraisal was made in compliance with an act of the Legislature of 1907, which required the Board of Railroad Commissioners to ascertain the true cash value of all the property of every railroad company in South Dakota used in the operation and maintenance of their respective roads. No attention was paid to the purpose of the appraisal, but one of the first uses made of the information thus secured was in the litigation following the passage of an act by the Legislature of 1909, prescribing a maximum passenger fare of 2 cents per mile on all railroads operating within the State. In connection with a rate case of this kind, some questions have been raised regarding proper bases for land values, the use of an item for adaptation and solidification as an element of physical value, the value of the intangible assets, etc.
The lands of all railway companies were appraised at a cost to reproduce or re-purchase at the time of appraisal, regardless of the original cost of the property. The sales method was used for determining the market value of adjoining property. There has been a very large land movement in South Dakota in the last five years, and as most of the country is prairie, with similar soil over large areas, it was not difficult to determine the average market value of the land for farm purposes, at the date of the appraisal, and the gradual trend of values for five years previous to that date. An average multiple of 250% was used to arrive at the cost of reproducing or purchasing the right of way. This multiple was based on investigations made of recent right-of-way purchases, and inasmuch as there are no large terminals in South Dakota, the same average multiple was used throughout the State for both town and farm property, investigation showing that town property could be secured for slightly less and farm property for slightly more than the average multiple used.
In each supplemental appraisal the land values will be corrected to correspond to the changes in surrounding values, as the railway company is entitled to any increase, due to natural causes, based on the cost to reproduce at the time of appraisal. This is a well-established theory, as shown by Mr. Riggs.
No allowance was made for the item commonly known as "adaptation and solidification," except in the item of contingencies and in the consideration of the present value of the ballast. In some recent appraisals, large sums, based on a percentage of the cost of grading, have been allowed for this item. While there is no question that large sums of money are expended in maintaining a safe track on a new bank, and that this expense gradually diminishes as the roadbed becomes solid, due to the pounding of the trains and the action of the elements, this expense is, and properly so, charged to maintenance, and is paid for out of the operating revenues. Now, in the trial of a rate case, exhibits showing the operating expenses, including maintenance charges, are introduced, and to include this same item in the appraisal of the physical property leads to a duplication, for if the passenger or shipper pays for this maintenance charge, it should not be counted as an item of physical value as a basis for determining what is a reasonable rate.
The case is similar to that of a locomotive: When new, it is kept in the vicinity of the shops, because trouble from lack of proper adjustment and weak parts is likely to develop, and the maintenance charges may be much higher than a few months later when the machine has "found itself" and, as an operating machine, is more efficient than when new. However, no one will insist that it has an added physical value in dollars and cents, or that the excess cost of repairs and maintenance during its early life should be added to its cost of reproduction now; in fact, it is a second-hand machine, and the maintenance charges must be paid for out of its use.