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

The results are of prime interest, as they show the valuation of all railway property in all the States, based on uniform methods of appraisal and distribution, which enables a comparison to be made with work done by the States.

The method adopted in this work was so radically different from that of the various State appraisals as to make a detailed description a matter of interest, and it is to be regretted that it cannot be included. The method is really a capitalization of net earnings.

Owing to the nature of the inquiry, namely, to determine what part of the wealth of the nation is devoted to railway transportation, it was obligatory on the appraisers to adopt a method which would disclose as nearly as possible the true market value.

Certain restrictions and limitations on the term, "value," and on the use of the resultant figures of the appraisal, are suggested by Professor Adams, as follows:

"The valuation submitted in this report may be properly defined as the commercial value of property used by railways in connection with the business of transportation. By 'commercial value' is meant the estimate placed upon the worth of property regarded as a business proposition. This must, of course, be the market estimate and not the arbitrary estimate of a public official. The two fundamental considerations by which the market is influenced in placing a value upon property when bought or sold, are the expectation of income arising from the use of the property, and the strategic significance of the property. These two considerations are made the basis of the valuation of railway property submitted in this report. The material made use of in this valuation is, first, the operating and financial accounts of the railways; second, inter-railway contracts and agreements; and, third, the published records of the stock market.

"This is no place to enter upon a discussion of the nature and classification of different kinds of value, but a word of caution may be allowed in order to guard against an unwarranted use of the figures here submitted. The commercial valuation of railway property, in so far as it depends on income arising from the sale of transportation, is the result, among other things, of an established schedule of freight and passenger rates, from which it follows that such a valuation cannot be used for determining the reasonableness or unreasonableness of the rates in question. The solution of the rate problem demands a separate valuation of the physical property.

"Again, in so far as the Government is precluded by its political character from following commercial rules in the sale of any service which it renders, a commercial valuation which assumes that property is administered under the rules of private rather than public financiering, might differ from the valuation of the same property regarded as a public property. The purpose of this remark is to preclude a discussion of the problem of the Government purchase of railways on the basis of the values submitted in this report. It would of course be necessary to modify these values by considerations of public utility, in order to determine a public purchase price.

"Whether or not the commercial valuation here submitted can be used as the basis of assessing railway properties for the purpose of taxation depends entirely upon the taxing laws of the state for which the question is asked. If these laws confine the appraisal of railway property to its physical elements, the values here submitted would, in the case of prosperous roads, exceed an appraisal for the purpose of taxation. If, on the other hand, it is the purpose of the taxing law to appraise railway property at its true cash value, unusual or abnormal conditions being excluded, it may be that the commercial valuation of operating property submitted in this report fairly measures its appraisal for the purpose of taxation."

The methods are explained in the most minute detail by a series of papers in the Bulletin.

The work of Professor Adams and his associates is of great practical value in that it shows the discrepancy in the taxation laws of the different States as relating to railroad properties, and in that it gives a set of values determined by a uniform method, which, within reasonable limits, furnishes a check on the work of the State appraisals.