Cities generally claim, and so do their "experts," that they should only pay junk value, or the cost of a modern plant to give the same results. This is eminently unfair, because the city buys a property which is in full operation and it receives the full revenue, in addition to obtaining service for itself at a less cost than it heretofore paid. The difference between the cost to the city of furnishing the service itself, and what it paid the company, is profit, but there is a charge against this of loss in taxes. These two latter items, namely, profit and taxes, generally balance each other, although the writer has known of cases where the city was the gainer.
There are many points which can be advanced to establish the fairness of the methods outlined herein, but they would take some time to explain, and therefore the writer has only set out the plan he follows in his examinations, hoping that it may be of some aid in establishing a uniform method which will be upheld by the Courts.
It may be stated that recently this method was used in an examination, going back thirty-five years, and the results were accepted by both sides without question.
The writer has refused a number of examinations when told in advance what result must be found, as well as in "expert" work, where the examiner is expected to help make a case, regardless of his honest judgment, for, by accepting such work, the engineer hurts his reputation and lays the Profession open to such remarks as Judge Lacombe recently made in the case of the Peoria Water-Works Company vs. Central Railway Company.
The writer is fast coming to the conclusion that a great deal of legal trouble is caused by the decisions of commissions, the members of which have not had experience in these matters. If a commission consisted of an able lawyer, a financial man, and an engineer who has had a broad operating experience, its decisions would carry weight, and the Courts would not be burdened with so many appeals.
William G. Raymond, M. Am. Soc. C. E. (by letter).—This is, perhaps, the best paper on the valuation of public service property that has yet appeared. The author's analysis is very clear, and his arguments are convincing. Three points the writer would like to consider; two of them briefly.
The item, "going value," even if it is determined on logical reasoning, as suggested by Professor Mead, would seem to be a dangerous item, and one which might result in absurdities when estimated by an unscrupulous, ignorant person. Moreover, the term has been differently defined, and there is no certainty as to just what it means. The writer sees no reason for the existence of such a term, or of such a separate quantity as this term is supposed to represent.
The term, "franchise value," or, "value of the franchise," is used to represent the difference between the capitalized net earnings and the value of the physical property. Of course, there is such a difference, either positive or negative, but there seems to be some objection by the Courts to calling this "franchise value." The writer, therefore, would suggest that, since franchise value is a very elusive item, depending on the life of the franchise, the attitude of the community toward the corporation, the activity of competing corporations, and numerous indeterminate items, the term, "business value," or, "going concern value," be used instead of "franchise value." "Going concern value" is not as good a term as "business value" or "value of the business," because it may be assumed to include both the value of the business and the value of the property. "Value of the business" would presumably include the value of the franchise, and perhaps would not always be represented exactly by the difference between the capitalized net earnings and the value of the physical property, but would be this difference affected by some judgment percentage resulting from a consideration of the probable continuance of the franchise.
Mr. Riggs has truly said that the value of the physical property must not be made to depend on the purpose for which the valuation is made; that, for the business for which it is used, the value of the physical property is the same, regardless of the purpose for which a valuation is desired; but valuations are made for different purposes, and, while there is room for argument as to the proper valuation to be used for capitalization, taxation, or sale, there are perfectly definite methods suggested for valuing property for these purposes. The writer has never seen a statement—that appealed to him as at all rational—of a proper method of valuing property for rate-making. Indeed, the writer has said[[32]] that "proper traffic rates have no relation to valuation except that the minimum net income should be at least sufficient to pay interest on the physical valuation." The writer is not absolutely certain of the correctness of this position, for a study of the public right to regulate a corporation which is performing a semi-public function seems to indicate that the public has a right to say, not only that rates shall be non-discriminatory, but also that they shall be reasonable.
Now, the writer is familiar with three bases for the determination of what constitutes reasonableness of rates. One, which applies to rates as a whole, is this: That the net income should produce not more than a reasonable interest rate on the actually invested capital. Another is the rate that the traffic will bear, and the third is a rate that represents what the service is worth to the purchaser. Of course, a difficulty arises in determining reasonable rates on any one of these three bases.