(III) If the value is to be determined with a view of ascertaining what is a reasonable figure that the owner of the shovel ought to be allowed to earn as a public utility organization, the problem is entirely distinct from the foregoing two cases. Assume that the railroad is entitled to earn at least 6% on its investment in the shovel. Now, its investment is $10,000, because that is the money that it cost; and nothing had been credited to its account, since the shovel had just been purchased and had not yet done any work. The shovel cannot be considered as being worth more than its cost, and it can easily be shown it is not worth less for rate-making purposes.
These three illustrations, which are very briefly outlined, should demonstrate the fact that there is almost no relationship between any two of the different kinds of value which are being considered.
Now, from the standpoint of the railroad as a whole:
(I) Should railroad property be taxed on the basis of what the entire railroad would bring on a foreclosure procedure? Obviously not, because the railroad is taxed in sections. The Town of Squedunk will tax the portion of the railroad that lies within that town, and will have considerable difficulty in putting down as security for its own bonds the locomotives and cars which go through once a week or twice a day at 40 miles per hour. To cover partly the flitting assets, it taxes the railroad on a franchise value. It may tax a railroad's land on the same basis that it taxes land owned by private individuals, notwithstanding the fact that when the railroad buys the right of way it generally has to pay more money per acre than the householder or the farmer. This unit cost to the railroad may be two or three times that to the farmer, yet the writer has never heard of a community attempting to tax railroad property two or three times as heavily as adjoining property used for private or commercial purposes.
(II) On the other hand, this same property is an absolutely sound asset for the railroad, and the railroad probably bought the property from the proceeds of the sale of bonds. If the public service commissions were to rule that the railroad may be allowed to issue bonds only to the amount of the taxable value of the property which is to be held as security for the bonds, the result would be an absolute paralysis of railroad construction. A bond is an obligation to pay so much interest for so many years, and to pay back the principal at the end of its term. The bondholder is interested in the absolute regularity of his interest, and in the security that lies behind the principal, and it is to-day the custom of banking houses to consider a bond well secured when, in a territory of reasonably rapid growth, the principal is earning say twice the interest on its bonds, and when the cost of reproduction is in excess of the amount of the bonds, provided that the property is in good physical condition. If it should be necessary to foreclose on the bonds, it is then reasonable to suppose that some one else will buy it in for at least the amount of its bonded indebtedness. What can this possibly have to do with the taxable value of the track in the Town of Squedunk? One may be 1.5 times the other, or three times the other, depending on a multitude of circumstances.
(III) The value of the property for rate-making is a complex one to determine, and, of course, there is no opportunity for a full discussion of it here. One point, however, will serve to establish thoroughly the difference between this and taxable or bonding value. If the community is prosperous and the business is a good one and honestly managed, the railroad ought to be allowed to earn a reasonable percentage, say, at least 6%, on what has been put into it. If the community should decree otherwise, then people will not build railroads for investment purposes, and all will lose money. Now, it is a well-known fact that a new railroad's earnings have to grow for several years before they are on a normal basis, and part of what the owners of the property have put into it is, for example, the interest on its cost before its earnings are on a normal basis. This may amount to a considerable percentage of the original construction cost of the property, if the business is several years in developing. Granted that the community ought to allow the property to earn a reasonable interest on what has been put into it, then the rate-making value will be very much larger than the sum of the taxable valuation of all its different parts. It will also be much greater than its bonding value, because, as a bond proposition, it can borrow money up to a limited percentage of what it is actually worth.
George T. Hammond, M. Am. Soc. C. E. (by letter).—The engineer called on to fix the valuation of public service corporation property has so little engineering literature on this special subject to guide him that he must feel grateful to the author of this excellent paper for adding so much of a kind that is very desirable.
Estimating the cost of an engineering structure in advance of its construction is one of the most ordinary professional duties, but how difficult it actually is, and how much engineers differ with one another in their estimates on the same structure! Perhaps there is no professional duty which calls for so much study and so much experience, or which tests so closely the ability and capacity of the engineer. How seldom professional estimators agree with each other; or designing engineers with contracting engineers; as witness the bids received at the public lettings of contracts when compared with the engineers' estimates of cost; and, if this is true, which no one will attempt to deny, how much more so is it probable that estimators will disagree when they attempt to place a value on works already completed, and in service, perhaps, for many years, in which various changes in value have occurred, and in which questions of fact are mixed with legal questions involving legal rights, as well as financial questions.
The tendency in all such valuations appears to be a mixing up of things in general—like the witches' stew. Everything goes into the pot and is boiled together until all becomes soup, at least until the official commission, like the witches, considers it done and ready to be served up in the form of a report. It is then observed that the substance served out is of a complex nature; that the valuation of engineering structures has become mixed with other and uncertain values; that the whole value, as stated, is, after all, little better than the commission's opinion of the value; and that another commission would reach a different conclusion.
The author states that the valuation of corporation property: