"Should be the honest judgment of the men composing the commission, as to the actual cost of reproduction, present physical value, or 'fair value,' and should be ascertained by a systematic and scientific method which takes into account all the facts concerning the property, its physical value, its strategic location, its operating revenues and expenses, and its franchises, rights, competition, opposition, and all other tangible or intangible elements, which would affect values. The method of valuation should be such as to minimize or entirely eliminate all differences due to errors of personal judgment."
This, it seems, complicates actual present values with conditions which might, or might not, continue. Outside of the physical valuation of the plant, which offers the easiest problem presented, how can one fairly put a value on operating expenses and revenues, which might be affected favorably or advisedly by good or bad management, and by numerous other complex and almost incomprehensible circumstances.
The tendency of all such commissions seems to be to confuse together and mix up some things which are logically separate. Thus, the value of the plant and franchise, good will, and present investment or income value, etc., are too often taken together. The value of the plant is dependent on the cost of reproduction, and also the depreciation of the structures, as engineering structures, and should be based on present prices for which the work could be replaced, minus the depreciation, which is a question of engineering judgment and experience. The other items of value are largely dependent on the situation of the plant and its prospects as an income-producing property, and this again is a matter of opinion, in which the opinions of financiers and investors are sometimes of more moment than those of engineers. The opinion of lawyers as to the value of the franchises and the cost of the legal complications possible or probable must also enter into any seriously worthy opinion as to value.
The few salient lights in the picture of valuation, presented by the author, serve especially to reveal the darkness which involves the whole subject of valuation, estimating, and the use of cost data for such purposes, and to suggest that, with all the wonderful progress on the theoretical side of the profession, engineers have as yet advanced but little in this division of the practical side—cost data, valuation, and estimating. Engineers cannot compare the results of different estimators and appraisers without sorrow and even shame for their ignorance, or their incapacity to agree in the application of scientific principles and the results of practical experience to this branch of their work.
At present we would seem to be a long way from a method of valuation, "such as to minimize or entirely eliminate all differences due to errors of personal judgment."
The method described as having been used by Professor Adams seems to be at least an advance toward a logical and rational method of getting at the value of corporation property, but it must be acknowledged that we are as yet a long way from a perfect method of appraisal, even of the physical values, to say nothing of the non-physical. He held that as nothing visible or tangible gave support to the latter value, it must be determined on the basis of information secured from the income accounts of the company. This method of measure, it would seem, is not unlike the celebrated dictum on the length of the Chancellor's foot, "some Chancellors have a long foot, and some an indifferent foot, and some a short foot"; therefore, a great English Chancellor says, "the length of a Chancellor's foot should not be taken as a measure of rights in equity." Thus, if the income of the company is to be taken by the appraising engineers, or the gross income, it may have to be given a different interpretation from the net income, and if the surplus earnings depend on transient causes or on excessive rates for service it will lead to a totally erroneous conclusion. The same may be said if the rates for service are too low, or if the company is badly managed, or is carrying a great deal of "dead wood," either in the form of property or of servants. Therefore, it seems evident that he who attempts to follow this method of appraisal must possess almost superhuman judgment of present conditions, and prescience to forecast the future, as well as a grade of wisdom and knowledge of existing conditions of trade and industry which may be also characterized as superhuman. In order to apply Professor Adams' method justly, we must know whether the company is wisely managed, whether its income is a fair income, whether its physical property is all useful and needful, whether its service is what it ought to be as to efficiency and economy, etc. We must assume an ideal condition of commerce and industry, and of property value and management, and then appraise the company's property by comparing it, consciously or unconsciously, with this ideal. Possibly this is the best method devised so far, but surely it leaves a great deal to be desired; and it is difficult to see how different engineers, on different sides of the question, representing different interests, can find any common ground of agreement in Professor Adams' method. Under such circumstances, engineers are likely to differ in their results as much as the length of the different Chancellors' feet.
Leonard Metcalf, M. Am. Soc. C. E. (by letter).—Mr. Riggs has done engineers, and more particularly those interested in valuation works, a genuine service in presenting to the Society this admirable paper.
No shrewd observer can fail to recognize the increasingly insistent demand of the public for greater publicity in the accounting, and a larger measure of governmental control in the operation, of public service corporations. In its best form, such control will be welcomed by the corporations, as giving greater stability to investment in such property; in its worst, it may prove a serious limitation to prompt development of the best standards of service. In the water-works field, the anti-corporation movement has resulted in taking over by the public many such plants. It does not seem likely, however, that we are ready to go farther in the railroad field of operation than to demand reasonable regulation of such corporations.
While the writer has had no experience in railway management or valuation, he has devoted much time and thought to the valuation of, and determination of fair-rate schedules for, water-works properties; therefore, what he may have to say in comment on this paper may be assumed to have direct application to water-works valuation, and to railroad valuation only as the similarity in the public service rendered by these corporations may imply.
In the main, the writer subscribes heartily to the views expressed by the author and the temperate way in which he has expounded them. Space forbids discussion in detail of all the matters alluded to and so well covered by Mr. Riggs. On one important subject, however—the inclusion of the going value, or going concern value, of public service corporation property, in the intangible property values, rather than in physical plant value, and the consideration of it as an intangible value rather than as a real and substantial item of cost to the public service corporation—the writer differs from the author. It is clear, from what Mr. Riggs has said, that this is debatable ground, and, from the care and fairness with which he has expressed his views on this subject, one might almost be led to infer that he invites attack on it. It is in no carping spirit of criticism, however, that the following views are expressed.