5.—If, instead of a surplus, a deficit occurs, a careful study of all the conditions surrounding the operations of the property should be made, and, if there be no reasonable expectation of increase of earnings, or other modifying conditions, a proper figure, based on the average deficit, should be determined, and, as a negative intangible value, deducted from the value of the physical property.
6.—In the determination of rates, to be used in computing income and for capitalizing surplus or deficit, the greatest of care must be exercised to adopt such figures as will be proper and absolutely just.
Conclusion.
The subject of valuation is so appallingly great that, notwithstanding the length this paper has reached, many points have not been covered.
No discussion of the method of valuation by capitalization of net earnings, which is practically that adopted by Professor Adams in his commercial valuation, has been attempted; nor has any attempt been made to describe the stock and bond method. Neither method is adaptable to the requirements of any public appraisal.
The so-called cash investment in property, or the actual cost of construction through the entire history of the property, cannot be sustained by any process of argument as a proper method of valuation, nor can the method of computing the cost of construction of an adequate modern property assumed to replace the existing property. The scope of a valuation must be limited to the property as it exists on the date of the appraisal, and it would be equally fallacious to include non-existent and long-perished facilities, or to assume a hypothetical and never-existing property.
There are many intricate problems in connection with a valuation for rate-making or taxation which really belong to these undertakings, not to valuation. They are usually brought into the discussion of valuation, but have been here excluded. Among these are the separation of interstate from intra-state business, and others, of great interest, it is true, but foreign to the subject of valuation.
The question of the fair return on money invested is not referred to, for the reason that it has no direct bearing on valuation, and for the further reason that it has been quite exhaustively discussed in the papers listed in the Appendix. The writer desires to make clear the fact that he is not advocating low rates per se. The rate must be determined to meet the special requirements of each investigation. The Supreme Court of Maine says (97 Maine):
"The reasonableness of the rate may for a time be affected by the degree of hazard to which the original enterprise was naturally subjected. That is such hazard only as may have been justly contemplated by those who made the original investment, and not unforeseen and emergent risks, and such allowances may be made as is demanded by ample and fair public policy."
While the Supreme Court of the United States, in Willcox vs. Consolidated Gas (212 U. S., 12), fixed a rate of 5½% as reasonable in that instance, they said: