Generally, when a roadbed is turned over to the operating department by the construction department, it is in good line and surface, and if an appraisal were made at that time its condition would be 100%; but as soon as it is placed under traffic, it begins to depreciate, as shown by the fact that it requires constant attention to keep it up. If the roadbed is cross-sectioned at each station and actual quantities calculated from cross-section notes, there would be no depreciation, but if the grading quantities are calculated from profiles of the line, as constructed some time previously, and for a standard width of sub-grade, with a percentage added for shrinkage, and allowance made where banks have been widened, etc., it will probably be found to exceed the actual measured quantities, because the action of the elements in washing the slopes, the wearing of the shoulders of the embankment due to foot traffic, etc., will show some depreciation in quantities. It is common practice to carry the item for grading over to the present-value column at 100%, or, with no depreciation. This practice, together with the present condition of the ballast due to maintenance, and that part of contingencies which covers washing of slopes, filling of ditches, sink holes, etc., certainly takes care of all adaptation and solidification which should enter into a valuation of physical property.
No appraisal was made of the intangible assets. A great many arguments have been advanced for and against such an appraisal, and in South Dakota it was held that the earning ability of any corporation due to its franchise, strategic location, efficient organization, going-concern value, etc., while perhaps an element of value to be considered in a transfer of the property or if assessed on an income basis, should not enter into a valuation which would be used for determining a just and reasonable return on the investment, because the greater the earning power the greater would be the return, and that this condition would produce a never-ending increase in returns; whereas, when the returns reach a point at which they will not only pay a fair dividend on the investment, but take care of any depreciation in the physical condition of the property and make all needed improvements in roadbed, buildings, and equipment, demanded by the traveling public, shippers, increased traffic, or natural causes, they should be kept to that point. There are several hundred miles of railway in South Dakota which have been built out of the surplus earnings of the parent corporation—in other words, with money supplied by the traveling and shipping public—but which are owned by the railways and on which they may earn another surplus for constructing more extensions, etc., etc.
The original South Dakota appraisal, as of June 30th, 1908, on forms similar to those used in Minnesota, has been supplemented by yearly appraisals corrected for all additions and deductions made during the fiscal year. For this purpose a new set of forms[[29]] was prepared, with the various items classed in accordance with the "Classification of Expenditures for Road and Equipment," as prescribed by the Interstate Commerce Commission, and arranged so as to facilitate showing the yearly changes.
R. A. Thompson, Assoc. M. Am. Soc. C. E.[[30]] (by letter).—This paper is considered by the writer to be the most complete treatise ever written on the valuation of public service corporation property, and the author deserves the sincere thanks of the entire Engineering Profession and all others interested in this most important question. Its presentation is most timely, in view of the agitation, particularly on the subject of railroad valuation, which is now engaging the attention of Congress and the law-making bodies of the several States, as it contains much valuable information relative to decisions of Courts, in addition to clear and concise expositions of the methods in vogue for the appraisement of corporate property, etc.
It is a fact—rapidly coming to be recognized by legislative and judicial bodies—that the prescription and regulation of tolls, charges, and assessments against public corporations cannot be made systematic and intelligent unless there is provided some estimate of the value of the property involved, based on the cost of its replacement or reproduction. Particularly is this true of railroads; and such regulation of the affairs of these corporations as has heretofore been essayed by State and National commissions, has generally been on illogical bases, unsatisfactory alike to the proponents and the companies. Results have been had, it is true, after a fashion, but there have been endless disputes and litigation, with the prime questions involved no nearer solution than before. One has but to contemplate the varied and often antagonistic legislation promulgated by the several States, relating to corporation management, and the many rulings and decisions of the different courts and commissions on the subject of regulation, assessment, and adjudication of corporate rates, revenues, taxes, and tolls, to become convinced of the complicated and tangled condition of the situation, and to realize the necessity for the early establishment of some logical basis on which to establish the fabric of corporate control.
While it is not maintained that an appraisement of the physical property of public service corporations will be the panacea for all such ills, the writer firmly believes with the author that such appraisal, as a beginning, is absolutely necessary, and when effected on some fair and reasonable basis, will contribute largely to the successful solution of many of these intricate problems.
With the estimate of the physical value of a property before it—which represents money actually invested, together with such accruals to costs as it may be determined that the owner is reasonably entitled to have considered—any Court, tribunal, or commission is in a better position to mete out impartial justice, whether it be the regulation of a rate, the assessment of a tax, or the imposition of a fine.
Although the author's experience in valuing corporate property has been principally in connection with the Michigan appraisal of railroads, and to him is largely due the credit for devising methods for, and carrying forward to successful completion, this thorough and most excellent work, it is refreshing to note his inclination to give credit to the work of others along the same line in other States, which, it is to be regretted, has not always been the case with writers on this subject. There is no doubt that the work of the Michigan and Wisconsin Boards of Appraisal—conducted under the advice and direction of some of the most eminent and talented engineers and economists in the United States, and practically without regard to expense—is the most complete and perfect of its kind heretofore attempted; yet there are many features in regard to the organization and execution of its details about which there may be an honest difference of opinion, as viewed by those who have been similarly employed.
It is but natural—as suggested by the author—to find the "individual" character of the appraiser (which has been moulded by his environment, training, and former service) reflected in his opinion, and this would be most probable in the organization for, and carrying on the work of, appraising a railroad property, which involves consideration of practically every phase of engineering and economics. The judgment of any man is essentially warped along the lines of his experience, and he is necessarily biased and prejudiced in favor of or against certain practice. As a consequence, therefore, it is not reasonable to suppose that any one man, or set of men, can formulate a system for valuing corporate property which will be perfect in all its details, and be free from objection and criticism.
The writer was employed for a number of years as Engineer for the Railroad Commission of Texas, and had charge of the valuation of railroad property under the Railroad Stock and Bond Law of that State. A paper on the methods used by this Commission was prepared by him and published by the Society.[[31]] This Stock and Bond Law was enacted in 1893, and the railroads then existing were valued in 1894 and 1895. The average value of 8,860 miles was $15,844 per mile. This valuation was made by Charles Corner, M. Am. Soc. C. E., now Resident Engineer of the Rhodesia Railways, South Africa, and Mr. H. J. Simmons, now General Manager of the El Paso and Southwestern Railway System. The actual cost of this work is not available, but is estimated at about $2 per mile. The engineers making the appraisal secured maps, profiles, and all available information from the offices of the railroad companies, including all the construction records and estimates of quantities which were preserved. Appraisal was made only after one of the engineers had made a personal examination on the ground, accompanied by assistants to aid in measuring structures and estimating quantities.