(1) Organization, (2) Legal expenses, (3) Engineering, (4) Administration, (5) General expense.
(1) Organization.—This includes the cost of the original organization of the company, the cost of securing the charter and franchises, arranging the financial plan, and securing the funds for construction.
The latter item is intended to include all salaries and expenses of officials in soliciting and negotiating for funds, the services of trustees, and all other proper expenses which are usual and unavoidable in the process of exploiting a projected enterprise and interesting capital therein. Discount on bonds is not included, and any allowances for "premium," or "bonus," or other cash payment to any party for services in securing funds, which are in excess of legitimate expenses, should receive scant consideration at the hands of appraisers.
(2) Legal Expense.—This is for attorneys and all legal expenses, costs, and fees in the organization and during the construction of the property.
(3) Engineering.—This includes reconnaissance, preliminary and location surveys, supervision of construction, and design and superintendence of special structures. The cost of engineering on some of the more difficult properties becomes a very large sum; on certain small lines it may be comparatively small; and in some cases no engineers have been employed at all; but the items of cost covered by this charge have in every case been expended, even if done under the direction of some superintendent.
(4) Administration.—This comprises the cost of the management during construction—the direction of the enterprise.
(5) General Expense.—This is the cost of the general office organization during the construction period, also numerous minor expenses, not distributable.
It is not possible to build any public service plant without incurring all these expenses to a greater or less degree. They are essential elements of cost, and must go into the value of the plant when completed. It can hardly be argued that cost, which in a large property runs into thousands or hundreds of thousands of dollars, has no value at the commencement of operation, nor does it appear that the value is subject to depreciation as long as the property is an operating plant. The writer holds the view that the line between physical and non-physical elements of value should be drawn as follows:
Any value which attaches to the property by reason of any money expended during the construction is part of the physical property values; while any value due to the operation of the property which is in excess of the physical value is a non-physical or intangible element. If the correctness of this position be conceded, then all the foregoing items are charges against the physical property, and, as long as it is an operating property, these items of value remain part of the physical property, and the writer contends that they should not be considered as affected by depreciation, as long as the property is a going concern.
Different engineers have included in the appraisal other items which are of a somewhat different nature, and some of which are open to argument; among these are "interest during construction." This item is clearly an allowable one, but serious differences of opinion develop as to a proper amount to allow in making an appraisal.