In dealing with the subject of depreciation, the author has been very brief, as he did not consider it essential for the purposes of the paper. This is to be regretted, as depreciation is an important feature in every valuation, and so few trustworthy data concerning it are available. The value of the paper would be greatly enhanced if the author would give the assumed average life of the principal components of a railroad, based on some definite traffic, and normal grades and curves. Much diversity of practice in this respect prevails, and the final judgment of the numerous experts who were engaged in the Michigan valuations cannot fail to be of great interest. The same remarks are also applicable to the unit prices adopted for construction and equipment.
The subjects of expenses for organization, engineering, administration, contingencies, and non-physical values are treated very thoroughly by the author, and particularly interesting is his discussion of the complex question of franchise value. After quoting from numerous judicial opinions, he reaches the conclusion that the franchise simply protects the owners of the property in their enjoyment of the earnings, and that its value merges into the "fair value" of the property and becomes inseparable from the other non-physical elements of value; also, that the aggregate non-physical value of the property depends only on the net income for a period of years. This method of estimation certainly has the merit of being simple, rational, and free from all hypothetical considerations. It is, however, obviously governed by the rates charged for the services rendered, and if these are likely to be altered at any time by governmental action, a corresponding alteration in the "fair value" of the property will take place.
This consideration brings us at once to the intricate question of reasonable rates, which involves the matter of reasonable design and construction of the property. In most cases the working capacity of the plant must be much greater than the average annual demand for the service performed, as so-called "peak loads" of relatively short duration must be provided for. The magnitude of these peak loads, however, varies with the subsequent development of the territory, which is necessarily conjectural; hence it follows that a comparatively large amount of capital is often invested in an enterprise for the purpose of taking care of such anticipated temporary demands, and on this investment a "fair return" should be granted. This condition is particularly noticeable in municipal water-works plants, where provision must be made for supplying water for fire service to an extent which may be several times greater than the normal hourly rate of consumption. In the case of railroads, such demands can usually be met by adding to the rolling stock at moderate expense, while in a water-works the outlay is relatively greater because the entire plant must be adapted in the outset to the anticipated maximum delivery in the course of a comparatively long period of time.
The problem of rate-making has been excluded by the author from his present paper on valuation; but, inasmuch as he is so well qualified for the task, and also because the non-physical value of the property depends mainly on the rates obtained for the service rendered, it is hoped that he will deal with this feature in a subsequent paper, thereby bringing out a discussion on the obscure subject of "fair return." It is noticeable that these phrases occur frequently in judicial opinions, but the fundamental principles on which a definite conclusion should be reached are seldom set forth clearly.
Richard T. Dana, M. AM. Soc. C. E. (by letter).—The solution of this problem includes practically all the factors in the general subject of economics, in which engineering occupies a large but by no means preponderant part. Mr. Riggs has done some very valuable and pioneer work in contributing this paper at this time; and the writer, in calling attention to what appears to be a radical error in it, does not wish to be taken as attempting to detract in any way from its great value as a whole. It is most important, in the inception of such an investigation, on the part of the members of this Society, to remove from the subject the stumbling blocks as they appear.
The author makes the following statement:
"It is true that the 'value' of a property is an unstable figure, subject to fluctuations due to natural or artificial causes, and that a material change in value may occur suddenly, but the 'value' of any given property on any given date is, or should be, from an engineering standpoint, a definite sum which may not be varied or changed to suit the whim or will of the people for whom the work is done."
The fundamental conception of a value is so important in an investigation of this kind that it is worthy of careful and thorough discussion.
The appraisals which the writer has had occasion to make have generally been for one or other of the following purposes, namely:
(I) Taxation, in the interest of the community or corporation taxed; (II) Bonding, in the interest of the banker or representative of persons who contemplated lending money on the property; (III) Rate-making, in order to determine what was a fair amount of money that the property should be allowed to earn for the owners.