The Valuation of Public Service Corporation Property / Transactions of the American Society of Civil Engineers, / vol. LXXII, June, 1911, ASCE 1190

by Henry Earle Riggs

All valuations made since 1895 have been of new railroads making application for issuance of securities, and in all cases the deeds for right of way and depot grounds, the contracts for construction, the actual quantities of construction of all kinds, the plans and specifications for all structures and construction, and all other information which the engineer desired, were submitted by the railroad companies to enable an accurate appraisal of the value of the property to be made. It is not possible for valuations of this character to be made under more favorable circumstances. Up to October, 1909, more than 3,500 additional miles had been valued, and in all cases the estimates limited the securities which the companies might issue.

Writers on railroad valuation have generally been inclined to discredit the work of the Texas Railroad Commission and the system of appraisal used by it. One writer, of more or less prominence, has referred to it as the "cheap" method. While it may be true that other appraisals have been more expensive, it is a fact that those of the Texas Commission have served their purpose well, and the railroads, as a rule, have made little complaint. As a matter of fact, it is highly probable that the valuations of railroad property made by the Texas Commission have been of greater utility, as far as the public is concerned, than those of all other States combined, and, at the same time, no injustice has been done the railroads.

It appears that those who have interested themselves in investigating the Texas method of railroad valuation—including the author—have failed to construe the real meaning and intention of the Stock and Bond Law. Apparently, it was passed for the purpose of limiting railroad indebtedness—and is referred to by Mr. Riggs as serving only this purpose—but while its effect has been to accomplish this most successfully, its enactment carried with it a deeper significance.

This law was passed at the same time as the General Railroad Commission Act of the State, which gave to this Board absolute control over all freight rates and tariffs, and also other powers not possessed at that time by any other State commission. The decisions of the highest Courts at that time laid stress on the right of carriers to maintain rates which would afford a reasonable return on stocks and bonds outstanding. Hence, to delegate the regulation of rates to any tribunal by any law which did not carry with it also the right to supervise and restrict mortgage indebtedness to some reasonable extent, appealed to the legislators as being essentially ineffective. The effect of the law has been to reduce steadily the average outstanding stocks and bonds of the railroad companies of the State from an average of $40,802 per mile in 1894 to $31,910 in 1909—and this, too, in the face of a recognized increase in the physical value of the properties—thus depriving the railroads of one of their most potent weapons of offense when contending against the Commission's orders. It is a matter of common knowledge that the indebtedness per mile of railroads of other States has increased greatly during this period. It is also a fact that the railroads of Texas have, except in rare instances, contended that injustice has been done them in the enforcement of this law, and the market value of their stocks and bonds has steadily risen. Also their physical condition is on a par with that of railroads in other Southern and Western States, and their incomes from operation are as substantial. The practice of "watering" their securities has been effectually stopped, as regards local issuance, and any interest which might have accrued on such securities has been saved to the public.

It has been contended that the Texas valuations of 1894-95 were too low, and did not, even at that time, represent the fair value of the properties. This is perhaps true to a certain extent, but it must be remembered that the costs of materials and construction then were less than at any time before or since; and, viewed from the present-day standpoint, they seem to have been inadequate. It must also be considered that real estate values throughout the entire State were very low, compared with present values and with those of lands in other States. Although the writer admits that the margin was very narrow, still he is of the opinion that the valuations as made represented closely the cost of reproduction of the physical properties at the time.

The valuations of 1894-95 stand to-day on the Commission's records as "the value of the property," except in cases where there has been application and necessity for re-valuation. The machinery of the law did not provide that these appraisals should be kept "up to date." The mortgages on these railroads are still outstanding, and there has been no call for another appraisal, except in a few instances. The Commission has decided that in its opinion the "present value" of any of the railroads already appraised is represented by the original valuation plus the value of all permanent improvements and betterments added. This principle has been carried out with those railroads which have applied for re-valuation for any purpose, and the Commission has admitted the same in testimony which it has given before the Courts.

Since the appraisals which the Texas Commission makes are primarily for the purpose of limiting indebtedness, and the carriers are entitled to have these at least equal the cost of their property—the investment with certain additions to cover promoters' profits—no consideration can be given to depreciation of structures and equipment, although the application for valuation and process of issuing of securities may be had several years after completion. The writer holds that there is strong argument in favor of not taking into account "depreciation," and of estimating the value of the property as being entirely "new," whatever purpose the valuation is proposed to serve. This is apparent, as already stated, when the valuation is to serve as a basis for limiting the issue of stock and bonds. Is there any logical reason why a valuation for this purpose should not also serve—as far as it pertains—as a basis for taxation or for regulating freight rates? As far as the State is concerned—and to be consistent—should not "one" valuation serve all purposes?

Suppose that a State should create a board clothed with powers of rate regulation, taxation, and authority to restrict indebtedness, and also prescribe that it should appraise the value of the property of the railroads, and use that appraisal as the basis for its acts. Would it be logical for that board to make and apply one system of valuation for one purpose and another system for another purpose? Manifestly, it would have declared that a valuation was a "valuation" for all purposes, at least as far as the physical property was concerned; and, when devising a method for making its appraisals, it should incorporate therein all the elements of value which might apply logically to either purpose. The writer believes that "depreciation" of roadbed and structures would have no place in such an appraisal, on the one hand, nor its negative, but fully as intangible and difficult of concrete estimate, "adaptation and solidification of roadbed," on the other.

It should not be understood that the writer maintains that taxation boards should not go beyond the valuation of physical property to arrive at a final basis for assessment. There are certain intangible elements which should be taken into consideration when taxing property, chief of which is the net income. It is only as far as physical valuations apply in either case that he considers that there should be uniformity.

He does not approve at all of incorporating in an estimate of the physical value of a railroad property such an element as "adaptation and solidification of roadbed," which is credited with so much importance in the Minnesota valuation. In the first place, such an element is incapable of being measured in tangible terms and reduced to a dollars-and-cents basis; second, it cannot be reproduced in the sense that other property is reproduced, and its value does not appear in the capital account of the railroad; and third, it results from the action of the seasons on the one hand, and the working over of the roadbed by the maintenance forces on the other, the cost of which appears in operating expenses. One is constrained to believe that the engineer who insists on incorporating such an element in an appraisal of the physical value of a railroad is hard put to find material with which to swell his estimate. When noting the large difference in value per mile of the railroads of Minnesota, as compared with those of Michigan and Wisconsin—adjoining States—it would appear that undue prominence had been given to this and similar factors.