"The value of real estate and plant is to a considerable extent a matter of opinion, and the same may be said of personal estate when not based upon the actual cost of material and construction. Deterioration of the value of the plant, mains, and pipes is also to some extent based upon opinion. All these matters make questions of value somewhat uncertain."
The Supreme Court permitted the tangible values found by the lower Court to stand. It concurred with the lower Court in that it was not a case for a valuation of good will. It concurred with the lower Court in holding that the company was entitled to the benefit of any increase in tangible values, and that such increases should appear in the appraisal. It did not agree with the Court in the increase of franchise value above that which was capitalized in 1884, with the consent of the State of New York, and reduced the franchise value figure to $7,781,000. On this basis, the estimated return, under the new rate on the valuation of $55,612,435, was 5½%, which rate, in view of all the circumstances, is held to be not confiscatory and to be a not unreasonable return on the investment. The franchise value, as commented on in these cases, is referred to at considerable length in the following pages.
On January 4th, 1909, the case of Knoxville vs. Water Company (212 U. S., 1) was decided. This, in some respects, is of greater value to the engineer than any others cited, in its determination of methods. In this the appraisement of the tangible property was made in minute detail, the sum of $10,000 was added for "organization, promotion, etc.," and $60,000 for "going concern."
"The latter sum we understand to be an expression of the added value of the plant as a whole over the sum of the values of its component parts, which is attached to it because it is in active and successful operation and earning a return. We express no opinion as to the propriety of these two items in the valuation of the plant for the purpose for which it was valued in this case, but leave that question to be considered when it necessarily arises. We assume without deciding, that these items were properly added in this case. This valuation was determined by the master by ascertaining what it would cost to reproduce the existing plant as a new plant. The cost of reproduction is one way of ascertaining the present value of a plant like that of a water company, but that test would lead to obviously incorrect results if the cost of reproduction is not diminished by the depreciation which has come from age and use.... The cost of reproduction is not always a fair measure of the present value of a plant which has been in use for many years. The items composing the plant depreciate in value from year to year in a varying degree. Some pieces of property, like real estate for instance, depreciate not at all, and sometimes, on the other hand, appreciate. But the reservoirs, the mains, the service pipes, structures upon real estate, stand-pipes, pumps, boilers, meters, tools, and appliances of every kind begin to depreciate with more or less rapidity from the moment of their first use. It is not easy to fix at any given time the amount of depreciation of a plant whose component parts are of different ages with different expectations of life. But it is clear that some substantial allowance for depreciation ought to have been made in this case.
"The company's original case was based upon an elaborate analysis of the cost of construction. To arrive at the present value of the plant large deductions were made on account of the depreciation. This depreciation was divided into complete depreciation and incomplete depreciation. The complete depreciation represented that part of the original plant which through destruction or obsolescence had actually perished as useful property. The incomplete depreciation represented the impairment in value of the parts of the plant which remained in existence and were continued in use. It was urgently contended that in fixing upon the value of the plant upon which the company was entitled to earn a reasonable return, the amounts of complete and incomplete depreciation should be added to the present value of the surviving parts. The Court refused to approve this method, and we think properly refused. A water plant with all its additions begins to depreciate in value from the moment of its use. Before coming to the question of profit at all the company is entitled to earn a sufficient sum annually to provide not only for current repairs but for making good the depreciation and replacing the parts of the property when they come to the end of their life. The company is not bound to see its property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any given term of years the original investment remains as it was at the beginning. It is not only the right of the company to make such a provision but it is its duty to its bond and stockholders, and, in the case of a public service corporation at least, its plain duty to the public. If a different course were pursued the only method of providing for replacement of property which has ceased to be useful would be the investment of new capital and the issue of new bonds or stock.... If, however, a company fails to perform this plain duty and to exact sufficient returns to keep the investment unimpaired, whether this is the result of unwarranted dividends upon over issues of securities, or of omission to exact proper prices for the output, the fault is its own. When, therefore, a public regulation of its prices comes under question, the true value of the property then employed for the purpose of earning a return cannot be enhanced by a consideration of the errors of the management which have been committed in the past."
The Court holds that there was error in only considering the operations of the company for a period of one year, and that this should have extended to enough time to remove danger of abnormal business conditions and observe the effects of certain ordinances.
The decision of the Supreme Court, in the Omaha Water-Works case, decided on May 31st, 1910 (Supreme Court Reporter, July 1st, 1910), is of general interest in its discussion of the procedure of appraisers in making a water-works appraisal, and in the distinction drawn between appraisals and arbitrations; but it does not touch on appraisal methods or elements of value, except to discuss "going values." The language of Judge Lurton on this point is as follows:
"The option to purchase excluded any value on account of unexpired franchise, but it did not limit the value to the bare bones of the plant, its physical properties, such as its lands, its machinery, its water-pipes or settling reservoirs, nor to what it would take to reproduce each of its physical features. The value, in equity and justice, must include whatever is contributed by the fact of the connection of the items making a complete and operating plant.
"The difference between a dead plant and a live one is a real value, and is independent of any franchise to go on, or any mere good will as between such a plant and its customers. That kind of good will, as suggested in Willcox vs. Consolidated Gas Company (212 U. S., 19), is of little or no commercial value when the business is, as here, a natural monopoly, with which the customer must deal, whether he will or not. That there is a difference between even the cost of duplication, less depreciation, of the elements making up the water company plant and the commercial value of the business as a going concern is evident. Such an allowance was upheld in National Water Works Company vs. Kansas City (62 Fed., 853), where the opinion was by Mr. Justice Brewer. [This decision is quoted in the foregoing pages.] We can add nothing to the reasoning of the learned Justice, and shall not try to. That case has been approved and followed in Gloucester Water Supply Company vs. Gloucester (179 Mass., 365, and 60 N. E., 977), and Norwich Gas and Electric Company vs. Norwich (76 Conn., 565). No such question was considered in Knoxville Water Company (212 U. S., 1) or in Willcox vs. Consolidated Gas Company (212 U. S., 19). Both cases were rate cases and did not concern the ascertainment of value under contracts of sale."
The writer does not read into the language of this decision an approval of a separate element of value to be called "going concern value" or "going value" in addition to other non-physical values, but rather a recognition of the fact that certain non-physical elements of value, by whatever name they may be called, must be taken into account in arriving at the fair and equitable final figure of value of a live and operating concern for the purpose of carrying out a contract of sale.