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                  AMERICAN SOCIETY OF CIVIL ENGINEERS
                            INSTITUTED 1852

                              TRANSACTIONS




                             Paper No. 1190
        THE VALUATION OF PUBLIC SERVICE CORPORATION PROPERTY.[1]


                BY HENRY EARLE RIGGS, M. AM. SOC. C. E.

  WITH DISCUSSION BY MESSRS. F. LAVIS, CHARLES H. HIGGINS, S. D.
      NEWTON, WILLIAM V. POLLEYS, C. P. HOWARD, J. E. WILLOUGHBY,
      HENRY C. ADAMS, CARL C. WITT, R. A. THOMPSON, CHARLES H.
      LEDLIE, WILLIAM G. RAYMOND, W. H. WILLIAMS, P. E. GREEN, E.
      KUICHLING, RICHARD T. DANA, GEORGE T. HAMMOND, LEONARD
      METCALF, CHARLES HANSEL, J. MARTIN SCHREIBER, CLINTON S.
      BURNS, HALBERT P. GILLETTE, ARTHUR L. ADAMS, C. D. PURDON,
      A. MORDECAI, W. B. RUGGLES, AND HENRY EARLE RIGGS.




                             INTRODUCTORY.


The industrial and economic development of the past two decades has
opened many new lines of special work in the Profession of Engineering,
none of which is more difficult and complicated or of greater ultimate
value to the public at large than that of the appraisal or valuation of
the property owned and operated by public service corporations; and none
of the fields of engineering specialization requires greater care or
calls for more skill, experience, integrity, or sound judgment.

The individual engineer, or commission of engineers, entering upon an
appraisal of large magnitude, particularly one including properties of
more than one company, will find conditions varying in every one, and
each property presenting new, complex, and confusing elements of value
to pass upon and determine.

Prior to 1900 there had been few calls on engineers for large
appraisals, and the literature descriptive of engineering effort along
this line was practically nothing. Since 1900 many extensive appraisals
have been undertaken by States, by railroad and banking corporations,
and by cities; certain well-defined lines of practice have been
developed; many differing opinions as to certain methods and principles
have been brought out; and enough has been added to the printed
literature to enable one to compare methods of work and to fix with
reasonable certainty upon some as correct, and to discard others as
improper.

There are so many complex factors entering into the problem of
valuation, so many widely different plans have been presented, and there
are so many thinking men who have opposed and do honestly and sincerely
oppose any form of valuation, that a most thorough study of the subject
should be made. It should be examined from all angles, and every
possibility of danger from legislation regarding it should be weighed
with utmost care.

The question of railroad valuation, involving as it does the largest
industry of the nation, naturally takes first place in such a
discussion, but so many of the general principles of railroad valuation
are applicable to the appraisement of corporate property, so many
arguments have been advanced by engineers and others, and so many
judgments of the Courts have been rendered in connection with
water-works and gas-works valuations, that it is not desirable to limit
this discussion wholly to the problem of railroad valuations.

The reasons for requiring that valuations be made may be broadly divided
into two general classes:

_First.—As a Matter of Public Interest._—The public, and particularly
the investing public, requires valuations in order to guard against
unworthy and dishonest corporation securities, to be assured that
corporations are bearing their legitimate and proper share of the burden
of taxation, and to furnish a proper basis for fixing equitable and just
rates for the services rendered by the corporation.

Under this class would come all appraisals made for information to be
used as a basis for legislation relative to:

  (_a_) _Taxation of Corporations._—Such were the valuations in
      Michigan and Wisconsin.

  (_b_) _Rate Regulation._—This was the reason which prompted the
      work in Minnesota and Nebraska.

  (_c_) _Limitation of Capitalization._—The regulation of issue of
      stocks and bonds was the purpose of the Texas valuation.

  (_d_) _Fixing a Price for Sale._—Many of the water-works and
      electric light valuations were made in order to determine a
      fair price to be paid for the property at the expiration of
      the franchise.

  (_e_) _The General Information of the Public._—To be used in
      connection with the fixing of terms for franchise renewals,
      etc., etc.

_Second.—As a Matter of Corporation Necessity or Expediency._—Valuations
are made in order to guide large investors, to secure a safe and
up-to-date basis on which to negotiate a sale, a purchase, or a
reorganization of the property, or a consolidation with other like
properties, and to secure justice to honestly administered corporations.

The great majority of appraisals under this head have been in accordance
with some other methods than those adopted in the State valuations. It
is not intended in this paper to engage in any argument as to the
various purposes of appraisals, or even to urge the necessity or
desirability of a general appraisal of properties. An absolutely
accurate and correct statement of the cost of reproduction of all the
physical properties of the railroads of the country, a correct statement
of the actual capital needed to reproduce these properties as they
exist, and, along with this, a statement of the actual physical
depreciation, would be a document of vital interest.

This paper is confined to a discussion of the methods which should be
used in arriving at a correct figure of cost of reproduction and
depreciation—it does not take up questions involving the propriety of
those figures when reached. The propriety or legality of using such
figures as a basis for an assessed valuation, as a basis for rate-making
(rate-making being an art in itself involving complications as great as
those encountered in valuation), or any arguments as to the justice or
injustice of legislation restricting issues of stocks or bonds, will be
conceded no place in this paper. It is assumed that all these questions
would have been taken up and a satisfactory answer reached before a
valuation could have been ordered.

The different elements of value in property, the relations of this
property to the public, the method of determining the worth of these
elements of value which have been adopted in the past by men engaged on
valuation work, a comparison of these methods, a discussion of the
objections that have been made to them, and a presentation, not only of
the writer's views as to proper methods, but those in which he disagrees
with usages adopted by others—these define the scope of this paper.

No matter what particular end is to be served by a valuation, the
commission engaged upon it will be asked to furnish a fair value,
perhaps with reasonable limitations in the instructions, perhaps with a
general and indefinite instruction to find the value. They will
encounter, among other difficulties:

_First._—The fact that human machines are not exact duplicates, and that
allowance must be made for a large measure of error, on account of the
personal equation of the men engaged on the work, as individual errors
of judgment are frequent on any work of magnitude. This personal element
must be corrected by uniformity of method, by constant checking, and, as
far as possible, by subordination of personality to system.

_Second._—The fact that human selfishness is a dominant quality—the
railroad manager who opposes methods which he believes will increase
values in an appraisal for taxation, or who, on the other hand, uses
every possible argument to increase values if the work be as a basis for
rate-making or for restriction of bond issues, or the State official who
is desirous of using original cost on a valuation to be used for
rate-making in order to keep the valuation down to a minimum, and the
politician who depends on an unenlightened public opinion to create
sufficient outcry to influence the work to his advantage—are all
actuated by a perfectly human wish to attain ends which seem to them
desirable, and are but typical of men who will endeavor to influence
every appraisal.

In view of these considerations, it is a question whether results are
not frequently affected by the knowledge of their intended use, and
whether a system which will entirely remove such causes of error can be
applied to the work.

If an engineer, or a commission of engineers, is directed to examine a
certain property and report the true cost of reproduction, depreciation,
or present value, taking into account all facts connected therewith, the
final figures should not differ, whether the report is to be used as a
basis for reorganization, sale to another corporation, or is to be used
by a State legislature as a basis for formulating a rate bill, or as a
basis for a value for taxation. The result secured is a necessary
preliminary on which depends the accuracy, fairness, and justice of the
other work which is to follow. This is an engineering work, a statement
of certain physical property, the estimated cost of reproducing it new,
less the estimated depreciation, and, beyond the differences due to
personal judgment, these figures may not vary.

The word "value" is in common use, and yet, in the minds of many people,
its exact meaning is vague. It is true that the "value" of a property is
an unstable figure, subject to fluctuations due to natural or artificial
causes, and that a material change in value may occur suddenly, but the
"value" of any given property on any given date is, or should be, from
an engineering standpoint, a definite sum which may not be varied or
changed to suit the whim or will of the people for whom the work is
done.

In all the subsequent discussion of values and methods of obtaining
values, it is assumed that, unless specifically limited to a
determination of cost of reproduction and depreciation, a valuation
commission should be governed by the following rules:

_1._—No account may be taken of the purpose for which the resultant
figure of value is to be used; and the result should not vary, no matter
what that purpose may be.

_2._—The resultant figure 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.

_3._—All properties being appraised are considered as operating
properties. One which is dead, inert, and not in use, cannot be
considered as coming under such a discussion as this, and such
properties are not treated in this paper. The term "going concern" is
not used in connection with the physical property, any element of value
implied by the term, over and above the "overhead charges," being
treated as an intangible or non-physical element of value.

In stating this position, the writer is aware that it is a difficult
matter indeed to get away from the fact that some specific
purpose—taxation, for example—is the definite end in view in every
valuation, and that, instinctively, men engaged on the appraisal will
find themselves modifying their figures to meet some real or fancied
condition which they conceive might arise, or to prevent some injustice
which they believe might be done. Every subordinate employee needs to be
watched, every man in charge must watch himself, or he will find himself
unwittingly, almost instinctively, coloring his results by some old
prejudice of his early years of employment, or some loyalty to his own
ideas of governmental or economic policy. The writer has noted this in
every appraisal on which he has been engaged, and calls particular
attention to it as the first difficulty which must be overcome in the
organization of the force for a large appraisal.

In the following pages all complications which might arise from the
purpose of the appraisement are considered as eliminated, and the
possibility of erroneous conclusions being reached by reason of the
personal factor (while recognized as being ever present) will not be
specially emphasized.

-----

Footnote 1:

  Presented at the meeting of January 4th, 1911.




     THE RELATION OF PUBLIC SERVICE, OR QUASI-PUBLIC CORPORATIONS,
                             TO THE PEOPLE.


In reference to questions of value, the engineering commission must
hear, consider, and reconcile arguments advanced by adverse and often
hostile interests. On the one side stand the corporations, with large
financial interests involved, often with an excessive amount of stock
and bonds issued on the property, the existence of which issues the
corporation wishes to justify, and, whether properly capitalized or not,
the management being imbued with the perfectly human desire to defend
corporate interests from attack of any kind; on the other side is public
opinion, often unreasonable, often misinformed, and frequently
prejudiced.

It appears necessary, therefore, to consider briefly the relation which
these interests bear to one another, to study the causes which have led
to mutual misunderstandings, and to note the proper relations which
should, if possible, be established and maintained between the people
and those corporations organized to perform certain of the functions of
the State.

A public service or quasi-public corporation is a corporation which is
operating under the terms of rights, grants, or franchises given by the
public, either to this particular corporation direct or granted by
statute to a class of corporations.

The property of the corporation is used to render certain services to
the public, with the expectation of financial gain.

It is not material whether the grant be a franchise permitting a
water-works company to use the streets and alleys of a city for its
mains, and the service be the pumping of water for domestic service and
fire protection, or whether the grant be the statutory rights of
corporate existence and eminent domain, and the service rendered be the
transportation of freight and passengers; the general principle is the
same; the company has secured from the people certain rights which
enable it to do business, and the people are directly benefited by the
services rendered by the company. The increased comfort of living makes
for the growth of the city; the increased transportation facilities
build and develop the country traversed by the railroad; and this growth
and development, not only operate to the advantage of the people, but
also to that of the company in the way of increased business and
increased revenues.

The capital required to build and develop these properties was furnished
in the hope of, and with the expectation of, a proper financial reward.
It has frequently happened that such properties have been built years in
advance of sufficient development to support the enterprise, built, in
fact, without expectation of immediate returns, and long periods of time
have often elapsed before any profit has been secured.

It has also frequently happened that corporations have been aided to a
very large extent by public funds, by the voting of aid bonds, by the
donation of large tracts of land, by payment for certain service at such
rates as would largely relieve the company from loss in operation, by
the remission of taxes, or by the direct donation of funds.

The company is clearly entitled to earn a reasonable profit on the
actual capital invested, in addition to the legitimate cost of
operation, payment of taxes, and sinking funds to cover depreciation and
obsolescence.

The public is clearly entitled to good service at the lowest rates that
will permit the company to earn its reasonable profit and expenses.
Increases in tonnage, population, and consequent net earnings of the
corporation should entitle the public to a benefit in reduced charges
for service, when the increased earning is of a permanent character.

The general tendency of the Courts has been to treat a franchise as a
contract, and to be governed closely by the language and evident intent
of the makers, but to safeguard the rights of the public to the fullest
extent consistent with justice.

A franchise requires specific performance of specific acts. Nothing will
be assumed or implied. The Courts recognize that the investors are
entitled to reasonable returns, and that the public is entitled to fair
rates.

In the case of Los Angeles Water Company _vs._ City of Los Angeles (103
U. S., 711), the United States Courts held that at the expiration of a
30-year franchise, which provided that the city was to pay for the value
of all improvements, when the city failed to agree upon, tender, or pay
such value, so long as the company complied with the terms of the
contract, and until the city terminated it by making or tendering
payment, the passage of an ordinance by the city fixing rates was void.

In the case of Weatherly _vs._ Capital City Water Company (Ala. 22 So.,
140), the Alabama Courts held that the acceptance of a franchise
involved a grave responsibility, and that the company could not stop
furnishing water and fire protection, even if the work was done at a
loss.

In the case of Myer _vs._ Brown (65 Cal., 589), the Court said:

"It is well occasionally to recall the fact that there is no more reason
to permit a municipal government to repudiate its obligations entered
into for value, than to permit an individual to do so. Good faith and
fair dealing should be exacted of one equally with the other."

Judge Brewer, in the Kansas City Water-Works case (62 Fed. Rep., 853),
said:

"All contracts involving property rights and obligations, between
municipalities and individuals, must be presumed to be based upon and to
recognize the ordinary laws of business transactions."

In 1903 the Maine Supreme Court issued a set of instructions to
appraisers appointed to fix values of certain properties. The Court set
forth its views as follows:

"Summarized, these elemental principles are, the right of the company to
derive a fair income based upon the fair value of the property at the
time it is being used for the public, taking into account the cost of
maintenance and depreciation and the current operating expenses, and the
right of the public to demand that the rates shall be no higher than the
services are worth to them, not in the aggregate, but as individuals."

The Supreme Court of the United States has again and again given its
views, which may be summarized as follows:

"It cannot be said that a corporation is entitled, as of right, without
reference to the interests of the public, to realize a given per cent.
upon its capital stock. When a question arises whether the legislature
has exceeded its constitutional powers in prescribing rates to be
charged by a corporation controlling a public highway, stockholders are
not the only persons whose rights and interests are to be considered.
The rights of the public are not to be ignored.

                  *       *       *       *       *

"The public cannot properly be subjected to unreasonable rates in order
simply that stockholders may earn dividends. The legislature has the
authority in every case, where its power has not been restrained by
contract, to proceed upon the ground that the public may not rightfully
be required to submit to unreasonable exactions for the use of a public
highway established and maintained under legislative authority." (164 U.
S., 578.)

"It is not to be inferred that the power of limitation or regulation is
itself without limit. This power to regulate is not a power to destroy,
and limitation is not the equivalent of confiscation. Under pretense of
regulating fares and freights the State cannot require a railroad
corporation to carry persons or property without reward, neither can it
do that which in law amounts to the taking of private property for
public use without just compensation. * * *" (116 U. S., 307.)

In the case of Smyth _vs._ Ames (169 U. S., 466), the Court said:

"If a railroad corporation has bonded its property for an amount that
exceeds its fair value, or if its capitalization is largely fictitious,
it may not impose upon the public the burden of such increased rates as
may be required for the purpose of realizing profits upon such excessive
valuation or fictitious capitalizations; and the apparent value of the
property and franchises used by the corporations, as represented by its
stocks, bonds and obligations, is not alone to be considered when
determining the rates that may reasonably be charged. * * *

"We hold, however, that the basis of all calculations as to the
reasonableness of rates to be charged by a corporation maintaining a
highway under legislative sanction must be the fair value of the
property being used by it for the convenience of the public.

                  *       *       *       *       *

"What the company is entitled to ask is a fair return upon the value of
that which it employs for the public convenience. On the other hand,
what the public is entitled to demand is that no more be exacted from it
for the use of a public highway than the services rendered by it are
reasonably worth."

The relations between the corporations and the public that they serve
have been clearly defined by the Courts, as the foregoing quotations
show.

That the mutual relations existing between the management of the
corporations and the public are far from what they should be, there can
be no doubt. On the one hand, the great mass of the voting public is
uninformed as to actual revenues, disbursements, and operations of the
corporations, as to whether their income is unreasonably large, or
whether they are struggling to exist. The sums of money involved in the
dealings of the corporations are so stupendous in comparison with the
amounts used in an ordinary private business—even in one of considerable
magnitude—that the majority of the public cannot comprehend them. The
published statistics are in such form that only the careful student of
affairs can understand or analyze them, and but few of the public
officials who receive them are able to read the reports of the
properties and comprehend them. As a consequence, the corporation, as a
political issue, has been the subject of jest, gibe, and cartoon; there
has not been an intelligent public discussion of available reports and
statistics, and it may be said that, generally, the mass of the public
has come to class all corporations as grasping, overbearing, and unjust,
and to consider them all as exceedingly prosperous. This has been taken
advantage of by politicians for their own selfish ends, and has led to
sundry legislation, some of which has been unreasonable and unjust to
the corporations, and much of which is aimed at real abuses that never
ought to have existed.

The reasonableness of a rate depends, not alone on the amount of capital
invested, but on the volume of traffic, the density of population, the
actual cost of service, and many other elements. Rate legislation has
been attempted without full investigation. Acts have been passed
compelling the establishment of stations and terminals, the improvement
of roadway and structures, the purchase of new equipment, the
installation of safety appliances and block signals, and many other
requirements have been made, some (but by no means all) of which are
unreasonable and burdensome. Nearly one-half the States of the Union
have by law required a 2-cent, or 2½-cent, passenger fare, regardless of
density of population, amount of traffic, or other considerations which
might render such rates unreasonable. The regulation of the carriers, by
legislature, by railroad commissions, by State officials, and by Courts,
the addition of burdens of expense, and the cutting off of revenue, all
give considerable ground for the opposition of the carriers to anything
that looks like hostile legislation, and compels the student of affairs
to admit that there is justice in the claim of the managements, that
there is grave danger, not only of seriously crippling many roads, but
of so impairing the credit of the railroads as a class that it will be
increasingly difficult to secure capital to provide for the necessary
extensions and development of the transportation facilities of the
country.

On the other hand, perfect frankness compels the admission that the
state of public opinion which compelled the passage of these laws has
been caused largely by the corporation officials themselves. There is
probably no more loyal body of men in America to-day than the officials
and employees of railroads. Their loyalty, however, is all to "our
company." They enter its service as boys or young men; they grow up to
the full strength of manhood working for its good; they take little or
no part in public affairs; they have no time for the study of public
questions. Their friends are almost exclusively among their own
associates in the service of the road, and their development is along
the lines of their own special work in the service. As a body of honest,
honorable, and worthy men, absolutely loyal to their employers, they
have few equals; but it is doubtful if any equal number of men, of equal
intelligence, have as limited a knowledge of the fundamental truths of
government, or knowledge so colored by bias. It is also doubtful whether
any equal number of men have in their ranks so few who bear an active
part in the duties and activities of citizenship, or who exercise large
influence on their neighbors.

While the foregoing statement is believed to be absolutely true, it will
not do to pass over the notable exceptions. Such men as James J. Hill,
F. Am. Soc. C. E., M. E. Ingalls, and others of the higher officials,
who have taken an active part in public affairs, have had commanding
influence. Theirs has been the sound policy, as the property in their
hands has not suffered. The short-sighted policy which, in December,
1909, induced the management of one road to compel all its employees
holding municipal offices to resign, is bound to react and create
hostile feeling on the part of the public.

The entire trend of a training in railway service is to fill a man with
prejudice against all things that undertake to regulate or control the
corporations, and often goes so far as to enable him to do, willingly
and as a matter of right, things which with a broader view of the
interest of the whole community he would not agree with at all. The
result of this intensive training is that the railway service has in it
thousands of men who become impatient with any effort to regulate or
control; who permit their irritation to show; and who, by their own
attitude, create unnecessary hostility. F. A. Delano, M. Am. Soc. C. E.,
President of the Wabash, in an address[2] at Hannibal, Mo., on March
25th, 1909, said:

"In ordinary manufacturing or commercial undertakings, every man has his
own notions about the conduct of his business, and does not want to be
interfered with, or dictated to by people who know less about his
business than he does himself. Now, while it may be argued in the case
of public service corporations that the people who have put their money
into these enterprises, have done it with their eyes open and with full
knowledge that they were subject to governmental regulation and control,
there is nothing in that argument which makes public interference any
more palatable to the man or group of men who are interfered with."

This address well expresses the spirit of the railway managers and
employees toward all forms of investigation, and the complete lack of
understanding, on the part of these managers, of the legal and moral
relations which they bear to the communities which they serve. It is
extremely unfortunate that railway and corporation people have not taken
the public fully into their confidence, and fully and freely given out
correct information as to the operation and depreciation of their
properties; also, it is unfortunate that, when a corporation official
does feel a grievance, he permits himself to make a partisan speech, or
write an unwise article for publication. Much hostility is traceable to
foolish, undiplomatic sayings or writings of corporation managers (which
are often but half quoted), or to equally foolish speeches or newspaper
editorials in opposition to the corporations, which are taken seriously
by the managers. Whatever may be the cause, there is a regrettable
hostility, and, on the part of the corporation officials, there is an
apparent unwillingness to admit right motives to anyone advancing
theories regarding corporate regulation and control, due largely to the
training and atmosphere surrounding the corporate service.

The public has a large bill of particulars, one of which is the
promotion of wildcat companies, such, for instance, as the "New York and
Chicago Air Line" project which, only a year or so ago, drew from
$2,000,000 to $3,000,000 from the people in a limited territory. These
people were "investing" in railway stocks. A Federal control of the
issue of stocks and bonds would have prevented this and hundreds of like
swindles. Any move to secure such a law has always been opposed by the
management of large and legitimately operated corporations, under the
impression that they are about to be persecuted, and, naturally, the
victim classes these corporations with the alleged one that secured his
money.

The issue of stocks and bonds far in excess of any possible cost or
value of railroad, street railroad, and other properties, and the making
of large personal fortunes by the promoters, are matters of such
frequent occurrence that it is difficult, indeed, to dismiss them with a
mere denial. There is hardly a community of any size which has not had
its example of "consolidation," "combine," or "merger," which has
resulted in the issue of excessive securities; and there is hardly a
citizen of any intelligence who has not either seen or had experience
with some form of corporation promotion carried on strictly within the
law, but which, nevertheless, in plain language, was a swindle. These,
to say nothing of some gigantic deals involving millions, will sooner or
later compel some form of regulation of the issues of stocks and bonds.
In the last analysis, it is the money of the people, the hundreds of
thousands of small investors, depositors in banks, and owners of life
insurance, whose money goes into corporation securities, and, until the
officers of the great railroads co-operate in securing such forms of
control of stock and bond issues as will make impossible the purely
speculative "wildcat" corporations, and thus safeguard minor
corporations, as to furnish at least reasonable security to those whose
money is invested, all forms of corporation security must be under
suspicion with the public, and the agitation for control must continue.

It is not, as Mr. Delano says, a case of put your money in with your
eyes wide open; it is an effort on the part of the people to safeguard
this form of corporate security in such a way that it can be treated as
any other form of sound investment. It should not be necessary to
require that all investors in corporate securities be financial experts.
It is the writer's opinion, based on his observation and professional
practice, that the railroads are not generally open to charges of
over-capitalization. While there are flagrant instances, the chief
culprits are among other classes of corporations. If such be the fact,
it would seem that the interests of the great railway corporations would
be in no wise jeopardized by sane and reasonable control.

The theory of taxation is that every one shall bear his proportionate
burden of the cost of maintaining the government.

Regardless of any opinions that may be held as to the propriety of the
methods adopted in the Interstate Commerce Commission's commercial
valuation of railroad properties, it will be conceded that the results
gave a set of figures for all the States of the Union, secured by a
uniform method of computation and distribution. Table 1, which is a
compilation from Tables 1 to 11 of Bulletin 21, shows clearly why, in
certain States, corporate taxation is a live issue, and if (as suggested
by Mr. Williams in his article, elsewhere referred to) amendment of the
Constitutions of some of the States is necessary, it is safe to assume
that the condition of inequality shown by this table is such as to
compel these changes.

It is needless to cite further instances; enough has been said to
indicate:

  _First._—That the corporations and the public have such intimate
      business relations that a blow at either must necessarily
      injure the other seriously;

  _Second._—That the Courts have defined quite clearly the legal
      relation existing between the two interests;

  _Third._—That there is lacking a proper spirit of mutual
      confidence, and the two interests at the present time are
      generally hostile;

  _Fourth._—That there have been errors and abuses on the part of
      both corporations and public; and

  _Fifth._—That capital invested in corporations is, and should
      be, the money of the people, and should be safeguarded so as
      to prevent its loss by manipulation, and insure a fair
      return.

        TABLE 1.—COMPARISON OF ASSESSED VALUATION AND COMMERCIAL
                      VALUE OF RAILWAY PROPERTIES.

 ═══════════════╤══════════╤══════════════╤═════════════════╤═══════════
    State or    │ Miles of │  Commercial  │  VALUATION FOR  │ Ratio of
   territory.   │  single  │ value: June  │   ASSESSMENT.   │assessed to
                │  track.  │ 30th, 1904.  │                 │commercial
                │          │              │                 │valuation:
                │          │              │                 │Percentage.
 ───────────────┼──────────┼──────────────┼─────┬───────────┼───────────
                │          │              │Year.│    Amount.│
 ───────────────┼──────────┼──────────────┼─────┼───────────┼───────────
 Alabama        │  4,669.35│  $150,211,000│ 1905│$53,926,026│       35.9
 Arkansas       │  4,126.44│   124,626,000│ 1904│ 34,709,623│       27.8
 California     │  6,262.54│   350,694,000│ 1904│ 92,378,550│       26.3
 Colorado       │  4,976.24│   198,261,000│ 1903│ 49,492,135│       25.0
 Connecticut    │  1,017.72│   105,369,000│ 1904│120,493,648│      114.4
 Florida        │  3,555.84│    80,467,000│ 1904│ 21,817,478│       27.1
 Georgia        │  6,304.72│   156,603,000│ 1903│ 63,105,810│       40.3
 Idaho          │  1,461.53│    91,877,000│ 1904│ 10,115,378│       11.0
 Illinois       │ 11,622.74│   805,057,000│ 1904│425,709,055│       63.8
 Indiana        │  6,917.85│   375,541,000│ 1904│165,863,367│       44.2
 Iowa           │  9,859.23│   344,847,000│ 1904│ 57,535,160│       16.7
 Kansas         │  8,811.43│   356,356,000│ 1904│ 60,093,534│       16.9
 Kentucky       │  3,253.00│   155,772,000│ 1904│ 77,658,040│       49.9
 Louisiana      │  3,898.74│   123,401,000│ 1904│ 29,044,195│       28.9
 Michigan       │  8,660.29│   277,597,000│ 1904│196,795,000│       70.9
 Minnesota      │  7,811.04│   466,734,000│     │           │
 Mississippi    │  3,480.25│   107,884,000│ 1902│ 29,847,640│       27.7
 Missouri       │  7,711.05│   309,768,000│ 1903│ 97,916,869│       31.6
 Montana        │  3,267.10│   196,209,000│ 1904│ 36,759,827│       18.7
 Nebraska       │  5,820.88│   263,170,000│ 1904│ 46,082,853│       18.5
 Nevada         │    986.56│    43,745,000│ 1904│ 13,778,049│       31.5
 New Hampshire  │  1,275.97│    79,786,000│ 1904│ 22,625,000│       28.3
 New Jersey     │  2,277.85│   333,568,000│ 1904│231,655,525│       69.5
 New York       │  8,297.29│   898,222,000│ 1903│229,582,064│       25.6
 North Carolina │  4,075.00│   113,146,000│ 1904│ 69,480,974│       61.4
 North Dakota   │  3,190.77│   689,797,000│ 1904│133,858,945│       19.4
 Oklahoma       │  2,611.03│    78,668,000│ 1905│ 11,936,317│       15.2
 Pennsylvania   │ 11,023.24│ 1,420,680,000│     │           │
 Rhode Island   │    211.89│    25,719,000│ 1904│ 15,832,003│       61.6
 South Carolina │  3,175.28│    75,500,000│ 1903│ 29,467,716│       39.0
 South Dakota   │  3,047.14│    49,646,000│ 1904│ 14,354,930│       28.9
 Tennessee      │  3,480.83│   131,166,000│ 1903│ 58,536,566│       46.6
 Texas          │ 11,848.03│   237,718,000│ 1904│ 95,209,785│       40.0
 Utah           │  1,779.69│    90,325,000│ 1904│ 20,682,461│       22.9
 Vermont        │  1,063.25│    37,311,000│ 1902│ 27,344,020│       73.3
 Virginia       │  3,932.33│   211,315,000│ 1904│ 63,269,623│       37.7
 West Virginia  │  2,836.83│   201,799,000│ 1904│ 28,771,358│       14.2
 Washington     │  3,355.83│   182,837,000│ 1904│ 26,066,949│       14.3
 Wisconsin      │  7,048.76│   284,510,000│ 1904│218,024,900│       76.6
 Wyoming        │  1,247.70│   100,307,000│ 1904│  7,498,232│        7.5
 Arizona        │  1,751.35│    68,356,000│ 1904│  6,667,349│        9.7
 District of    │     32.00│     5,578,000│ 1904│  2,486,024│       44.6
   Columbia     │          │              │     │           │
 New Mexico     │  2,504.66│     8,640,000│ 1904│  8,511,538│        9.9
 ───────────────┼──────────┼──────────────┼─────┼───────────┼───────────
  Total, U.S.A. │213,932.13│11,244,852,000│     │           │
 ═══════════════╧══════════╧══════════════╧═════╧═══════════╧═══════════

In concluding this subject, it may not be amiss to quote the language of
the Supreme Court in the Knoxville Water Case (212 U. S., 1), as
follows:

"Regulation of public service corporations, which perform their duties
under conditions of necessary monopoly, will occur with greater and
greater frequency as time goes on. It is a delicate and dangerous
function, and ought to be exercised with a keen sense of justice on the
part of the regulating body, met by a frank disclosure on the part of
the company to be regulated. The Courts ought not to bear the whole
burden of saving property from confiscation, though they will not be
found wanting when the proof is clear.

"The legislatures and subordinate bodies to whom the legislative power
has been delegated ought to do their part. Our social system rests
largely upon the sanctity of private property, and that State or
community which seeks to invade it will soon discover the error, in the
disaster that follows. The slight gain to the consumer, which he would
obtain from a reduction in the rates charged by Public Service
Corporations, is as nothing compared with his share in the ruin which
would be brought about by denying to private property its just reward,
thus unsettling values and destroying confidence. On the other hand, the
companies to be regulated will find it to their lasting interest to
furnish freely the information upon which a just regulation can be
based."

-----

Footnote 2:

  _Railroad Age Gazette_, April 16th, 1909, p. 857.




                         EXPLANATION OF TERMS.


In order that there may be no doubt as to the exact meaning of the terms
used throughout this paper, a few definitions or explanations are
submitted:

_Appraisal, or Valuation._—These words are used interchangeably, and
refer to the engineering work of determining the present worth of both
physical and intangible properties of corporations.

_Cost of Reproduction._—This expression refers to the estimate of cost
of reproducing the physical properties as they exist on the date of the
appraisal, all elements entering into the cost being considered as new
and not affected by the elements of depreciation or obsolescence.

_Cost, or Original Cost._—These terms refer to the actual amount of
money paid for the property, either when it was originally constructed,
or in its condition at the time of appraisal, the latter case being the
original cost plus the cost of additions and betterments, less
abandoned, replaced, or worn-out property. This figure ought to be
represented by the "book cost," but it is not often that "book cost" and
"actual cost" are the same.

_Present Value, or Present Physical Value.[3]_—These terms are used in
describing the physical property as reproduced after it is affected by
all elements of depreciation or appreciation. The use of the word
"value" in this expression is unfortunate, as it may lead to some
confusion. It must be kept clearly in mind that, where this term is
used, it refers only to physical property as depreciated, and is in no
case intended to refer to the final or "fair value" of the property.

_Non-physical, or Intangible, Value._—These terms are used to represent
those elements, entering into the final worth of the property as a
business concern, which arise out of the operation of the property and
are not attachable to the physical property.

All the foregoing terms have to do with the determination of the
elements which enter into the final value.

What is "value"? In defining the exact meaning of this term, as applied
to the property of a public service corporation, many elements must be
taken into account. Standard authorities give many definitions of
"value," none of which appears to meet fully the requirements of the
term as used herein. Before considering the elements which enter into
the value of corporation property, or attempting to determine the
methods to be used in fixing proper figures of worth for each of these
elements, it is proper and necessary to obtain a clear definition of
"value," the thing sought to be ascertained by the inquiry.

The term, "commercial value," has been considered in place of "value,"
but is not used because it is held to be more properly applicable to the
selling or exchanging value of fractional interests in the property, and
the methods of computing the commercial value of securities which are in
common use cannot be adopted in an engineering valuation. The Standard
Dictionary definition of "commercial value" is:

"The source of commercial value, according to different schools of
economists, is (1) the degree of want felt for a commodity as shown in
the relation of supply and demand, (2) the amount of labor embodied in
it, or (3) the cost of reproduction. Practically, commercial value is
that for which a thing can be sold or exchanged at a given time and
place."

The definition given by Professor Adams is:

"The estimate placed upon the worth of a property, regarded as a
business proposition."

Both these definitions are in a measure involved, and the writer
considers that the term, "Commercial Value," is too narrow and
restricted to be properly used.

As a definition of that estimate of worth which an engineering
commission should report as the result of a complete appraisal, the
writer submits the following:

The value of a property is its estimated worth at a given time, measured
in money, taking into account all the elements which add to its
usefulness or desirability as a business or profit-earning proposition.

There are two classes of elements entering into the final value:

_(1) The "Physical Property" Element of Value._—This consists of those
things which are visible and tangible, capable of being inventoried,
their cost of reproduction determined, their depreciation measured, and
without which the property would be unable to produce the commodity on
the sale of which income depends. This physical property is considered
as an operating entity, and not as collateral of inert and partly
worn-out equipment, and, being so considered, carries, as part of the
physical value, those costs and charges which are an inseparable part of
the cost of construction but do not appear in the inventory of the
completed property.

_(2) The "Non-Physical" or "Intangible" Elements of Value._—These are
those things which, added to or taken from the worth of the physical
property, make up the value, and include whatever accrues to the
property by reason of its operation, or by reason of grants, contract
rights, competition, or location, which at the time of appraisal affect
favorably or unfavorably the worth of the property.

The worth of the physical property is primarily that on which the value
of the whole property rests.

While it is clear that the worth of the physical property, being the
cost of reproduction less depreciation, is not necessarily the value of
the property, it is equally clear that the physical worth must bear some
very definite relation to value, and the writer is strongly of the
conviction that this relation is such that "value" cannot be ascertained
without a determination of physical worth. The physical property element
represents the investment on which a fair return is to be earned, and in
most cases an appraisal is necessary for the determination of the amount
of money actually invested. As illustration of the fact that "physical
value" and "value" are not the same, the case of two railroads actually
existing and in operation between two cities in Michigan may be cited.

Road "A" occupies a narrow valley through high and abrupt hills. Its
alignment is fair for hilly country; its maximum grade is 1 per cent. It
has a number of bridges, all short and low. Its cost of reproduction
might reasonably be placed at $28,000 per mile. A mining town at one end
ships a heavy tonnage down grade to a lake port at the other.

Road "B" was constructed several years later, and, being barred from the
only valley, built a line across the hills, involving heavy grading,
very long and high steel trestles, a longer line, maximum grades of 2%,
and a heavy climb from the mining town to the summit before starting to
drop to the lake. The cost of construction was more than double that of
Line "A," and the tonnage which can be hauled in either direction is but
a small fraction of that which can be hauled with the same power by Road
"A." A reasonable figure for cost of reproduction may be given as
$60,000 per mile.[4]

Here is clearly a case where the older, less expensively built road has
a value as an earning proposition far in excess of that of the new road.
The rate on commodities does not affect the relative difference. A
higher rate, while permitting Road "B" to live, greatly adds to the
value of Road "A," while the latter can operate at a profit on rates
which would not permit Road "B" to pay expenses.

This example indicates the existence of non-physical values, not only
positive in the case of Road "A," but also negative as to Road "B."

Many properties have been built in the United States, representing large
investments of capital, which are not, and some of which can never be,
profitable business investments. In all such the physical valuation will
exceed the final value where the property is considered as an operating
concern, and a negative factor to cover improper location, uneconomical
design, ill-advised investment, or whatever the trouble may be, should
be applied.

The physical property is that which enables the corporation to do
business. Without physical property it could not produce the commodity
which it sells. The amount of money actually invested in acquiring that
physical property represents the measure of capital on which it is
morally entitled to earn interest and profit; and, in the stage of
promoting and financing the enterprise, all hope of earnings is based on
the amount of money required to construct the property. These
considerations lead the writer to contend that the true method of
valuing a corporate property is first to determine the cost of
reproduction of the property and its depreciation, and modify this
figure by any applicable positive or negative non-physical elements of
value.

-----

Footnote 3:

  The term "present value," as used in this paper, should not be
  confounded with its use by bankers or accountants, or with the present
  worth of a sum of money due at some future time.

Footnote 4:

  In this case, traffic as to Line "B" is limited, and as it is feasible
  to double-track Line "A" at less cost than Line "B," no advantage can
  be assigned to Line "B" on account of development of future business.




                     THE MICHIGAN STATE APPRAISALS.


                             Organization.

The State Legislature of Michigan, at the session of 1899, passed an act
creating a Board of State Tax Commissioners and outlining and
prescribing their duties. This act authorized the board to "inquire into
and ascertain the value of the property of corporations paying specific
taxes under any of the laws of this State."

The object of this valuation was to determine the rate at which the
corporations were paying taxes, to the end that necessary laws should be
passed so that all taxable properties in the State might be taxed
uniformly.

On September 1st, 1900, the Board of Tax Commissioners appointed
Professor Mortimer E. Cooley Appraiser of Properties. Immediately
thereafter the general organization was mapped out along the following
lines of division of labor and responsibility:

_1.—Administration._—All matters of general policy in regard to the
conduct of the work, all matters relating to negotiations and
conferences with officials of corporations, all transactions with the
State Tax Commission, the Governor, or the Board of State Auditors, and
the entire direction of all relations with the public through newspapers
and other channels, were retained by the appraiser, who was the final
arbiter on all matters referred to him regarding the details of the
work.

_2.—Civil Engineering._—The appraisal of all property which in the
course of construction would fall under the supervision of the civil
engineering department of a road, including land, roadway, bridges, and
structures, was in charge of the writer.

_3.—Mechanical Engineering._—The appraisal of all motive power, rolling
stock, and property which in the course of construction would fall under
the supervision of the mechanical engineer, including power and electric
plants, shop tools and machinery, water stations, etc., was in charge of
Mr. Theodore H. Hinchman, Jr., of Detroit, Mich.

In the matter of the final assembling of figures, computation of
percentage values, and compilation of final results, Mr. Hinchman and
the writer worked together with joint general supervision.

_4.—Telegraphs._—The inspection and appraisal of all telegraph
properties was under charge of Mr. William S. Conant, of Detroit, Mich.

_5.—Telephones._—The appraisal of all telephone properties was directed
by Mr. William J. Rice, of New York.

_6.—Vessel Properties._—All vessels belonging to companies whose
property was involved by the appraisal were inspected and appraised by
Herbert C. Sadler, Professor of Naval Architecture and Marine
Engineering at the University of Michigan.

In the following narrative, no special mention is made of the work
executed under the direction of Messrs. Conant, Rice, and Sadler,
because they really had charge of independent appraisals which were
conducted on lines similar to those adopted in the railroad appraisal,
and their methods were not different from those of the latter; hence any
description of their work would be in a large measure repetition. This
omission is in no wise to be construed as any reflection on the
importance or high character of their work.

The organization as just outlined, while necessarily touching and
overlapping at points, was generally defined so clearly that there was
no duplication of work. Each head of department was responsible for the
work of his special division, and directed the laying out and execution
of the work done by his men.

The first task, after deciding on the general organization, was to
determine the general methods to be adopted and the manner of getting
the necessary detailed information. The magnitude of the work was
appalling. There were seventy-eight different incorporated companies,
owning some 10,000 miles of railroad, scattered over 54,000 sq. miles of
territory. In addition, there were a number of small unincorporated
railroads, telegraph, telephone, plank road, and other corporations,
many of which had no records, no complete inventory, and no department
organized so that the information could be readily secured. It was
determined:

  (1) To make or secure a complete detailed inventory of every
      piece or parcel of property belonging to each company;

  (2) To examine each separate thing, place on it an estimate of
      cost of reproduction and depreciation;

  (3) To prepare, as a basis for the final figure of value,
      an estimate of the present value, being the cost of
      reproduction less the depreciation.

Having determined on a detailed physical inventory and appraisal, the
next step was to outline the work so as to secure absolute uniformity.
The difficulties which confronted the appraiser at this period were
many, chief among which were:

(a) _Lack of Complete Understanding on the Part of the State
Officials._—The Governor and Board of Tax Commissioners rendered every
possible assistance, but the Board of State Auditors was not at first
fully committed to the work, and the uncertainty as to whether or not
bills would be paid, delayed seriously the employment of men and the
full commencement of work for 3 or 4 weeks after the first organization
was made.

(b) _The Attitude of the Railroad Corporation Managers._—While this was
not actively hostile, it was a serious cause of delay, as they could not
foresee what effect the work might have on the interests in their
charge, and, while not refusing access to their records, they delayed
and held back information; in fact, a long time elapsed before all the
companies opened their records to the appraiser and his staff.

(c) _The Confused Condition of the Records._ Many small corporations had
absolutely nothing in the way of records of buildings, bridges, land, or
other properties. Others had very complete records in certain
departments and very imperfect ones in others; still others had records
which had every appearance of being complete, but they were not
up-to-date.

Facing an appraisal of this magnitude, with a time limit of only 4
months for the entire work, with delays at the outset which seriously
hampered the organization for 2 or 3 weeks, the appraiser was compelled
to occupy this time in preparing the blank forms to be used on the work,
and in conducting correspondence with the men who were to make up the
working force, investigating their references, etc.

The blank forms, Figs. 1 to 10, were the result of a series of
conferences between the members of the staff. By this time it was quite
evident that no great amount of help could be hoped for from the
corporations. Had it been possible to secure access to the records of
such railroad companies as the Michigan Central or the Lake Shore and
Michigan Southern before the final drafts of the forms were prepared,
the writer believes that several might have been simplified and many
improvements could have been made. However, this was not possible, and
the forms were prepared and printed before access to any railroad office
had been granted.

[Illustration: FIG. 1.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.9         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad       ALIGNMENT AND PROFILE IN      _________________│
 │Date ______                   MICHIGAN              _Field Inspector_│

 ╒══════════╤═════════════════════════════════════════════════
 │DIVISIONS │                    ALIGNMENT
 │ OF ROAD  │
 ├─────┬────┼──────┬──────┬─────────┬───────┬─────────┬───────
 │FROM │ TO │Length│Number│Aggregate│Number │  Total  │What is
 │     │    │Miles │  of  │Length of│  of   │Curvature│Degree
 │     │    │      │Curves│ Curved  │Curves │ over 3  │  of
 │     │    │      │      │  Line   │over 3 │ Degrees │Maximum
 │     │    │      │      │  Miles  │Degrees│         │Curves
 │     │    │      │      │         │       │         │
 │     │    │      │      │         │       │         │
 │     │    │      │      │         │       │         │
 │     │    │      │      │         │       │         │
 │     │    │      │      │         │       │         │
 ├─────┼────┼──────┼──────┼─────────┼───────┼─────────┼───────
 │     │    │      │      │         │       │         │
 ├─────┼────┼──────┼──────┼─────────┼───────┼─────────┼───────
 │     │    │      │      │         │       │         │

 ╤════════════════════════════════════════════════╕
 │                    PROFILE                     │
 │                                                │
 ┼─────────┬───────┬────────┬──────┬──────┬───────┤
 │Aggregate│Sum of │ Sum of │Number│Number│What is│
 │Length of│Ascents│Descents│  of  │  of  │ rate  │
 │  Level  │ Feet  │  Feet  │Miles │Miles │ Your  │
 │ Grades  │       │        │Grade │Grade │Maximum│
 │         │       │        │ 0.4% │ Over │Grades │
 │         │       │        │to 1% │  1%  │  and  │
 │         │       │        │      │      │ what  │
 │         │       │        │      │      │ their │
 │         │       │        │      │      │length │
 │         │       │        │      │      │ Miles │
 ┼─────────┼───────┼────────┼──────┼──────┼───────┤
 │         │       │        │      │      │       │
 ┼─────────┼───────┼────────┼──────┼──────┼───────┤
 │         │       │        │      │      │       │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.4         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad     RIGHT OF WAY AND REAL ESTATE    _________________│
 │Date ______                                         _Field Inspector_│
 │IN FILLING OUT STATEMENT KINDLY SEPARATE LANDS AND RIGHT OF WAY BY   │
 │COUNTIES AS FAR AS POSSIBLE                                          │

 ╒══════╤════════╤═══════════════════════════════════╤═══════╤═══════
 │COUNTY│Trackage│   WIDTH OF RIGHT OF WAY IN FEET   │ Total │ Total
 │      │ Right  │                                   │Acreage│Acreage
 │      │  only  │                                   │  of   │ Lands
 │      │ Miles  │                                   │ Right │ own'd
 │      │        │                                   │of Way │  by
 │      │        │                                   │       │Company
 │      │        │                                   │       │ other
 │      │        │                                   │       │ than
 │      │        │                                   │       │ Right
 │      │        │                                   │       │of Way
 ├──────┼────────┼─────┬─────┬─────┬─────┬─────┬─────┼───────┼───────
 │      │        │Less │40 to│60 to│70 to│ 100 │Over │       │
 │      │        │than │ 60  │ 70  │ 99  │Miles│ 100 │       │
 │      │        │ 40  │Miles│Miles│Miles│     │Miles│       │
 │      │        │Miles│     │     │     │     │     │       │
 ├──────┼────────┼─────┼─────┼─────┼─────┼─────┼─────┼───────┼───────
 │      │        │     │     │     │     │     │     │       │
 ├──────┼────────┼─────┼─────┼─────┼─────┼─────┼─────┼───────┼───────
 │      │        │     │     │     │     │     │     │       │

 ╤══════╤═╕
 │TOTAL │ │
 │ REAL │ │
 │ESTATE│ │
 │      │ │
 │      │ │
 │      │ │
 │      │ │
 │      │ │
 │      │ │
 │      │ │
 ┼──────┼─┤
 │      │ │
 │      │ │
 │      │ │
 │      │ │
 ┼──────┼─┤
 │      │ │
 ┼──────┼─┤
 │      │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.8         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad        MILEAGE, RAIL AND TIES       _________________│
 │Date ______                                         _Field Inspector_│

 ╒════════╤══════╤══════╤══════╤══════╤═════╤═════╤═════╤═════╤═════
 │        │Total │Total │ Yard │Double│Rail │Rail │Rail │Rail │Rail
 │        │Length│Number│Tracks│Track │ 40  │40 to│40 to│60 to│70 to
 │        │Miles │  of  │Miles │Miles │lbs. │ 49  │ 49  │ 69  │ 79
 │        │      │ Side │      │      │ per │lbs. │lbs. │lbs. │lbs.
 │        │      │Tracks│      │      │yard │ per │ per │ per │ per
 │        │      │  or  │      │      │Miles│yard │yard │yard │yard
 │        │      │Spurs │      │      │     │Miles│Miles│Miles│Miles
 ├─────┬──┼──────┼──────┼──────┼──────┼─────┼─────┼─────┼─────┼─────
 │Main │to│      │      │      │      │     │     │     │     │
 │Track│  │      │      │      │      │     │     │     │     │
 │from │  │      │      │      │      │     │     │     │     │
 ├─────┼──┼──────┼──────┼──────┼──────┼─────┼─────┼─────┼─────┼─────
 │  "  │" │      │      │      │      │     │     │     │     │
 │  "  │  │      │      │      │      │     │     │     │     │
 │  "  │  │      │      │      │      │     │     │     │     │
 ├─────┼──┼──────┼──────┼──────┼──────┼─────┼─────┼─────┼─────┼─────
 │     │  │      │      │      │      │     │     │     │     │
 ├─────┼──┼──────┼──────┼──────┼──────┼─────┼─────┼─────┼─────┼─────
 │     │  │      │      │      │      │     │     │     │     │

 ╤═════╤═════╤═════╤══════╤══════════╤══════════╤══════════╕
 │Rail │Rail │Rail │Number│Percentage│Percentage│Percentage│
 │80 to│90 to│over │  of  │  of Oak  │of Hemlock│ of other │
 │ 89  │ 100 │ 100 │ Ties │   Ties   │   Ties   │   Ties   │
 │lbs. │lbs. │lbs. │ per  │          │          │          │
 │ per │ per │ per │ mile │          │          │          │
 │yard │yard │yard │      │          │          │          │
 │Miles│Miles│Miles│      │          │          │          │
 ┼─────┼─────┼─────┼──────┼──────────┼──────────┼──────────┤
 │     │     │     │      │          │          │          │
 │     │     │     │      │          │          │          │
 │     │     │     │      │          │          │          │
 ┼─────┼─────┼─────┼──────┼──────────┼──────────┼──────────┤
 │     │     │     │      │          │          │          │
 │     │     │     │      │          │          │          │
 │     │     │     │      │          │          │          │
 ┼─────┼─────┼─────┼──────┼──────────┼──────────┼──────────┤
 │     │     │     │      │          │          │          │
 ┼─────┼─────┼─────┼──────┼──────────┼──────────┼──────────┤
 │     │     │     │      │          │          │          │

[Illustration: FIG. 2.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T.C. Form R.R.18         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad    INTERLOCKING PLANTS IN MICHIGAN  _________________│
 │Date ______                                         _Field Inspector_│
 │Include all Electric Crossings having full Interlockers.             │

 ╒═╤════════╤════════╤═══════╤═════╤════════════╤═══════════════════
 │ │LOCATION│Crossing│ Style │Wheel│Connections,│Number of Levers or
 │ │        │  with  │  of   │ or  │  Pipe or   │      Wheels
 │ │        │        │Machine│Lever│   Cable    │
 │ │        │        │       │     │            │
 │ │        │        │       │     │            │
 ├─┼────────┼────────┼───────┼─────┼────────────┼───────┬─────┬─────
 │ │        │        │       │     │            │Working│Space│Total
 ├─┼────────┼────────┼───────┼─────┼────────────┼───────┼─────┼─────
 │ │        │        │       │     │            │       │     │
 ├─┼────────┼────────┼───────┼─────┼────────────┼───────┼─────┼─────
 │ │        │        │       │     │            │       │     │

 ╤═══════╤═══════╤══════════╤═══════════╤═╕
 │By Whom│ Date  │Proportion│Proportion │ │
 │Erected│Put in │ of Cost  │    of     │ │
 │       │Service│ Paid by  │Maintenance│ │
 │       │       │ this Co. │  Paid by  │ │
 │       │       │          │ this Co.  │ │
 ┼───────┼───────┼──────────┼───────────┼─┤
 │       │       │          │           │ │
 ┼───────┼───────┼──────────┼───────────┼─┤
 │       │       │          │           │ │
 ┼───────┼───────┼──────────┼───────────┼─┤
 │       │       │          │           │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.8         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad         STATEMENT OF CROSSING       _________________│
 │Date ______            PROTECTION IN MICHIGAN       _Field Inspector_│

 ╒═╤═════════╤═══════════╤═════════╤═════════╤═════════╤═════════
 │ │DIVISIONS│   Total   │ Number  │ Number  │  Total  │  Total
 │ │ OF ROAD │  Number   │  Grade  │  Grade  │Number of│Number of
 │ │         │Unprotected│Crossings│Crossings│ Highway │ Highway
 │ │         │   Grade   │Protected│Protected│  Under  │  Over
 │ │         │ Crossings │by Alarm │by Gates │Crossings│Crossings
 │ │         │           │  Bells  │  What   │         │
 │ │         │           │  What   │Device is│         │
 │ │         │           │Device is│  Used   │         │
 │ │         │           │  Used   │         │         │
 │ │         │           │         │         │         │
 │ │         │           │         │         │         │
 ├─┼─────────┼───────────┼─────────┼─────────┼─────────┼─────────
 │ │  From   │    To     │         │         │         │
 ├─┼─────────┼───────────┼─────────┼─────────┼─────────┼─────────
 │ │         │           │         │         │         │
 ├─┼─────────┼───────────┼─────────┼─────────┼─────────┼─────────
 │ │         │           │         │         │         │

 ╤═══════════╤═════════╤═════════╤════════════╕
 │   Total   │Number of│Number of│    What    │
 │ Number of │Electric │Electric │ Proportion │
 │Unprotected│ Railway │ Railway │ do You Pay │
 │ Electric  │Crossings│Crossings│     of     │
 │  Railway  │Protected│Protected│Installation│
 │ Crossings │   by    │   by    │     or     │
 │           │Derailer │Derailer │Maintenance │
 │           │ without │  with   │of Electric │
 │           │ Signals │ Signals │  Railway   │
 │           │on Steam │on Steam │ Crossings  │
 │           │  R.R.   │  R.R.   │            │
 ┼───────────┼─────────┼─────────┼────────────┤
 │           │         │         │            │
 ┼───────────┼─────────┼─────────┼────────────┤
 │           │         │         │            │
 ┼───────────┼─────────┼─────────┼────────────┤
 │           │         │         │            │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD          T.C. Form R.R.1         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad     ENGINE HOUSES AND TURN TABLES   _________________│
 │Date ______                                         _Field Inspector_│

 ╒═╤═════════╤════════════════════════════════════════
 │ │LOCATION │             ENGINE HOUSES
 ├─┼─────────┼─────────┬──────┬────┬──────────┬─────┬─
 │ │         │ Kind of │ No.  │No. │   Pit    │When │
 │ │         │Structure│Stalls│Pits│Dimensions│Built│
 │ │         │         │      │    │   Feet   │     │
 ├─┼─────────┼─────────┼──────┼────┼──────────┼─────┼─
 │ │         │         │      │    │          │     │
 ├─┼─────────┼─────────┼──────┼────┼──────────┼─────┼─
 │ │         │         │      │    │          │     │

 ╤═══════════════════════════════════════╕
 │              TURN TABLES              │
 ┼──────┬─────┬──────────┬───────┬─────┬─┤
 │Length│KIND │Foundation│CURBING│When │ │
 │ Feet │ OF  │          │       │Built│ │
 │      │TABLE│          │       │     │ │
 ┼──────┼─────┼──────────┼───────┼─────┼─┤
 │      │     │          │       │     │ │
 ┼──────┼─────┼──────────┼───────┼─────┼─┤
 │      │     │          │       │     │ │

[Illustration: FIG. 3.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD          T.C. Form R.R.2         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad        FIELD INSPECTION REPORT                       │
 │Date ______                                                          │
 │_Between ______ and ______ Miles ______ Number of Tracks ______ Ties,│
 │C. to C. _______                                                     │
 │_Highest schedule passenger train ______ miles per hour,             │
 │Freight ______ miles per hour, ______ Inspector_                     │

 ╒═╤════╤══════════════════════╤══════════════╤════════════════
 │ │MILE│        GRADE         │     TIES     │      RAIL
 ├─┼────┼───────┬──────────────┼────┬─────────┼──────┬─────────
 │ │    │Yardage│Classification│Kind│Condition│Weight│Condition
 ├─┼────┼───────┼──────────────┼────┼─────────┼──────┼─────────
 │ │    │       │              │    │         │      │
 ├─┼────┼───────┼──────────────┼────┼─────────┼──────┼─────────
 │ │    │       │              │    │         │      │

 ╤══════════════╤══════════════╤═════════════════════╤════════════════
 │   BALLAST    │    FENCE     │ FROGS AND SWITCHES  │   CROSSINGS
 ┼────┬─────────┼────┬─────────┼──────┬────┬─────────┼──────┬─────────
 │Kind│Condition│Kind│Condition│Number│Kind│Condition│Number│Condition
 ┼────┼─────────┼────┼─────────┼──────┼────┼─────────┼──────┼─────────
 │    │         │    │         │      │    │         │      │
 ┼────┼─────────┼────┼─────────┼──────┼────┼─────────┼──────┼─────────
 │    │         │    │         │      │    │         │      │

 ╤════════╤═════════╤═══════╕
 │DRAINAGE│ALIGNMENT│REMARKS│
 ┼────────┼─────────┼───────┤
 │        │         │       │
 ┼────────┼─────────┼───────┤
 │        │         │       │
 ┼────────┼─────────┼───────┤
 │        │         │       │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.7         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad                BRIDGES              _________________│
 │Date ______                                         _Field Inspector_│
 │Include all wooden, steel or combination trusses, all girders and I  │
 │beams spans - if solid floor and ballast please so state.            │

 ╒═╤══════╤════════╤══════╤══════════════════════════════════════════
 │ │      │        │      │                FOUNDATION
 ├─┼──────┼────────┼──────┼─────────┬─────────┬─────┬─────────┬──────
 │ │Bridge│LOCATION│ NAME │Frame or │Stone or │PIERS│ Approx. │Number
 │ │Number│        │  OF  │  Pile   │Concrete │     │ Cu. Ft. │of Ft.
 │ │      │        │STREAM│Abutments│Abutments│     │ Masonry │Bridge
 │ │      │        │      │         │         │     │Piers and│ Seat
 │ │      │        │      │         │         │     │Abutments│  to
 │ │      │        │      │         │         │     │         │Water
 ├─┼──────┼────────┼──────┼─────────┼─────────┼─────┼─────────┼──────
 │ │      │        │      │         │         │     │         │
 ├─┼──────┼────────┼──────┼─────────┼─────────┼─────┼─────────┼──────
 │ │      │        │      │         │         │     │         │

 ╤═════════════════════════════════════════════════════════════════
 │                            SUPERSTRUCTURE
 ┼──────┬────┬──────┬─────────────┬──────┬─────────┬─────┬─────────
 │Number│KIND│Length│Specification│ No.  │No., Size│Size │   How
 │  of  │    │out to│ for Loading │Panels│and Kind │ and │Supported
 │Spans │    │ out  │  Required   │      │Stringers│Kind │
 │      │    │      │             │      │         │ of  │
 │      │    │      │             │      │         │Beams│
 │      │    │      │             │      │         │     │
 ┼──────┼────┼──────┼─────────────┼──────┼─────────┼─────┼─────────
 │      │    │      │             │      │         │     │
 ┼──────┼────┼──────┼─────────────┼──────┼─────────┼─────┼─────────
 │      │    │      │             │      │         │     │

 ═════╤═════╕
      │     │
 ┬────┼─────┤
 │Size│Date │
 │ of │Built│
 │Ties│     │
 │    │     │
 │    │     │
 │    │     │
 ┼────┼─────┤
 │    │     │
 ┼────┼─────┤
 │    │     │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T.C. Form R.R.17         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad             DRAW BRIDGES            _________________│
 │Date ______                                         _Field Inspector_│
 │In this table furnish data as to draw span and pivot piers only -    │
 │other spans in other bridge record.                                  │

 ╒═╤══════╤════════╤══════╤════════╤════════════════════════════
 │ │Bridge│LOCATION│ Name │Date of │             FOUNDATION
 │ │ No.  │        │  of  │Erection│
 │ │      │        │Stream│        │
 ├─┼──────┼────────┼──────┼────────┼────────┬────┬───────┬──────
 │ │      │        │      │        │Material│Size│Approx.│Height
 │ │      │        │      │        │        │    │ Cubic │Above
 │ │      │        │      │        │        │    │ Feet  │Water
 │ │      │        │      │        │        │    │Masonry│
 │ │      │        │      │        │        │    │       │
 ├─┼──────┼────────┼──────┼────────┼────────┼────┼───────┼──────
 │ │      │        │      │        │        │    │       │
 ├─┼──────┼────────┼──────┼────────┼────────┼────┼───────┼──────
 │ │      │        │      │        │        │    │       │

 ═════════╤══════════════════════════════════════════════════╤═╕
          │                  SUPERSTRUCTURE                  │ │
          │                                                  │ │
          │                                                  │ │
 ┬────────┼──────┬────┬────────┬─────────────┬────────┬──────┼─┤
 │Approx. │Length│Kind│Material│SPECIFICATION│  What  │ Kind │ │
 │ Depth  │ Draw │ of │        │ FOR LOADING │kind of │  of  │ │
 │Footings│      │Span│        │             │ Power  │ Turn │ │
 │ Below  │      │    │        │             │used for│Tables│ │
 │ Water  │      │    │        │             │swinging│      │ │
 ┼────────┼──────┼────┼────────┼─────────────┼────────┼──────┼─┤
 │        │      │    │        │             │        │      │ │
 ┼────────┼──────┼────┼────────┼─────────────┼────────┼──────┼─┤
 │        │      │    │        │             │        │      │ │

[Illustration: FIG. 4.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.10        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad               CULVERTS              _________________│
 │Date ______                                         _Field Inspector_│

 ╒═╤════════╤════════╤════════╤════════╤═════════════╤═════════════
 │ │DIVISION│ Total  │ Total  │ Total  │  18 in. or  │24 inch Iron
 │ │        │ Number │ Number │ Number │smaller Iron │    Pipe
 │ │        │ Stone  │ Wooden │ Wooden │    Pipe     │
 │ │        │  Box   │  Box   │  Open  │             │
 │ │        │Culverts│Culverts│Culverts│             │
 │ │        │        │        │        │             │
 │ │        │        │        │        │             │
 ├─┼────┬───┼────────┼────────┼────────┼─────┬───────┼─────┬───────
 │ │From│To │        │        │        │ No. │Approx.│ No. │Approx.
 │ │    │   │        │        │        │ of  │  No.  │ of  │  No.
 │ │    │   │        │        │        │Lines│Feet of│Lines│Feet of
 │ │    │   │        │        │        │     │ Pipe  │     │ Pipe
 ├─┼────┼───┼────────┼────────┼────────┼─────┼───────┼─────┼───────
 │ │    │   │        │        │        │     │       │     │
 ├─┼────┼───┼────────┼────────┼────────┼─────┼───────┼─────┼───────
 │ │    │   │        │        │        │     │       │     │

 ╤═════════════╤═════════════╤═════════════╤═════════════
 │30 inch Iron │36 inch Iron │48 inch Iron │60 inch Iron
 │    Pipe     │    Pipe     │    Pipe     │    Pipe
 │             │             │             │
 │             │             │             │
 │             │             │             │
 │             │             │             │
 │             │             │             │
 ┼─────┬───────┼─────┬───────┼─────┬───────┼─────┬───────
 │ No. │Approx.│ No. │Approx.│ No. │Approx.│ No. │Approx.
 │ of  │  No.  │ of  │  No.  │ of  │  No.  │ of  │  No.
 │Lines│Feet of│Lines│Feet of│Lines│Feet of│Lines│Feet of
 │     │ Pipe  │     │ Pipe  │     │ Pipe  │     │ Pipe
 ┼─────┼───────┼─────┼───────┼─────┼───────┼─────┼───────
 │     │       │     │       │     │       │     │
 ┼─────┼───────┼─────┼───────┼─────┼───────┼─────┼───────
 │     │       │     │       │     │       │     │

 ╤══════════════════╤════════╤════════╤══════╤═══════╤═╕
 │Iron Pipe Over 60 │ Total  │ Total  │Total │ Total │ │
 │       inch       │  No.   │  No.   │ No.  │  No.  │ │
 │                  │ Sewer  │ Sewer  │ Pit  │Surface│ │
 │                  │  Pipe  │  Pipe  │Cattle│Cattle │ │
 │                  │Culverts│Culverts│Guards│Guards │ │
 │                  │under 24│24 inch │      │       │ │
 │                  │  inch  │and over│      │       │ │
 ┼─────┬────┬───────┼────────┼────────┼──────┼───────┼─┤
 │ No. │Size│Approx.│        │        │      │       │ │
 │ of  │    │  No.  │        │        │      │       │ │
 │Lines│    │Feet of│        │        │      │       │ │
 │     │    │ Pipe  │        │        │      │       │ │
 ┼─────┼────┼───────┼────────┼────────┼──────┼───────┼─┤
 │     │    │       │        │        │      │       │ │
 ┼─────┼────┼───────┼────────┼────────┼──────┼───────┼─┤
 │     │    │       │        │        │      │       │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.11        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad                ARCHES               _________________│
 │Date ______                                         _Field Inspector_│

 ╒═══════╤═════════╤═════════╤═════════╤═════════╤═════════╤═════════
 │       │ Bridge  │LOCATION │ STREAM  │  Date   │Length of│Length of
 │       │   No.   │         │         │  Built  │  Span   │ Arch in
 │       │         │         │         │         │         │Feet Face
 │       │         │         │         │         │         │ to Face
 ├───────┼─────────┼─────────┼─────────┼─────────┼─────────┼─────────
 │ THIS  │         │         │         │         │         │
 │ SPACE │         │         │         │         │         │
 │  FOR  │         │         │         │         │         │
 │BINDING│         │         │         │         │         │
 ├───────┼─────────┼─────────┼─────────┼─────────┼─────────┼─────────
 │       │         │         │         │         │         │

 ╤═════════╤═════════╤═════════╤═════════╤═╕
 │ Height  │ Approx. │ KIND OF │ KIND OF │ │
 │  Feet   │No. Cubic│  ARCH   │MATERIAL │ │
 │         │  Feet   │         │         │ │
 │         │ Masonry │         │         │ │
 ┼─────────┼─────────┼─────────┼─────────┼─┤
 │         │         │         │         │ │
 │         │         │         │         │ │
 │         │         │         │         │ │
 │         │         │         │         │ │
 ┼─────────┼─────────┼─────────┼─────────┼─┤
 │         │         │         │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T.C. Form R.R.29         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad          CAR FERRY TERMINALS        _________________│
 │Date ______                                         _Field Inspector_│

 ╒═╤════════════════════════════════════════════════════════════════
 │ │                      GENERAL DESCRIPTION
 ├─┼─────┬─────┬────┬────────┬─────┬────┬──────┬──────────┬─────────
 │ │Items│Owner│Used│Location│Date │Type│ No.  │Dimensions│ Struc.
 │ │     │     │ by │        │Built│    │Tracks│          │  Steel
 │ │     │     │    │        │     │    │      │          │Iron and
 │ │     │     │    │        │     │    │      │          │  Mech.
 │ │     │     │    │        │     │    │      │          │furnished
 │ │     │     │    │        │     │    │      │          │   by
 ├─┼─────┼─────┼────┼────────┼─────┼────┼──────┼──────────┼─────────
 │ │     │     │    │        │     │    │      │          │
 ├─┼─────┼─────┼────┼────────┼─────┼────┼──────┼──────────┼─────────
 │ │     │     │    │        │     │    │      │          │
 ├─┼─────┼─────┼────┼────────┼─────┼────┼──────┼──────────┼─────────
 │ │     │     │    │        │     │    │      │          │

 ╤═════════════════════════════════════╤═════════════╤═══════╕
 │             QUANTITIES              │   VALUES    │REMARKS│
 ┼──────┬──────┬─────┬──────┬──────────┼─────────┬───┼───────┤
 │ Iron │Bolts │Piles│Lumber│Excavation│Estimated│   │       │
 │ and  │ and  │lin. │ feet │  Fill,   │  Cost   │   │       │
 │Steel │Nails │feet │ b.m. │ Dredging │         │   │       │
 │Pounds│Pounds│Kind │ Kind │ Cu. Yds. │         │   │       │
 │      │      │     │      │          │         │   │       │
 │      │      │     │      │          │         │   │       │
 ┼──────┼──────┼─────┼──────┼──────────┼─────────┼─┬─┼───────┤
 │      │      │     │      │          │         │ │ │       │
 ┼──────┼──────┼─────┼──────┼──────────┼─────────┼─┼─┼───────┤
 │      │      │     │      │          │         │ │ │       │
 ┼──────┼──────┼─────┼──────┼──────────┼─────────┼─┼─┼───────┤
 │      │      │     │      │          │         │ │ │       │

[Illustration: FIG. 5.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.20        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad              COAL CHUTES            _________________│
 │Date ______                                         _Field Inspector_│

 ╒═╤════════╤═══════╤═══════╤═══════════╤════════╤═══════╤════════
 │ │LOCATION│Length │Kind of│Foundations│Size of │Number │Capacity
 │ │        │  of   │Trestle│           │Building│  of   │   of
 │ │        │Trestle│       │           │        │Pockets│Pockets
 │ │        │       │       │           │        │       │
 │ │        │       │       │           │        │       │
 │ │        │       │       │           │        │       │
 │ │        │       │       │           │        │       │
 │ │        │       │       │           │        │       │
 ├─┼────────┼───────┼───────┼───────────┼────────┼───────┼────────
 │ │        │       │       │           │        │       │
 ├─┼────────┼───────┼───────┼───────────┼────────┼───────┼────────
 │ │        │       │       │           │        │       │

 ╤═════╤═══════╤═════════╤═╕
 │Date │Name of│   If    │ │
 │Built│Builder│Hoisting │ │
 │     │       │   or    │ │
 │     │       │Conveying│ │
 │     │       │ Machine │ │
 │     │       │ in use, │ │
 │     │       │  State  │ │
 │     │       │What Kind│ │
 ┼─────┼───────┼─────────┼─┤
 │     │       │         │ │
 ┼─────┼───────┼─────────┼─┤
 │     │       │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.19        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad            WATER STATIONS           _________________│
 │Date ______                                         _Field Inspector_│
 │State whether Power is Steam, Gasoline, Wind, Gravity, or Hydraulic  │
 │Ram.                                                                 │

 ╒═╤════════╤══════╤═══════════╤═══════════╤═════════════════
 │ │LOCATION│Source│   PUMP    │  BOILER   │   PUMP HOUSE
 │ │        │  of  │           │           │
 │ │        │Water │           │           │
 │ │        │Supply│           │           │
 │ │        │      │           │           │
 │ │        │      │           │           │
 ├─┼────────┼──────┼────┬────┬─┼────┬────┬─┼────┬────┬─┬─────
 │ │        │      │Kind│Size│ │Kind│Size│ │Kind│Size│ │Date
 │ │        │      │    │    │ │    │    │ │    │    │ │Built
 ├─┼────────┼──────┼────┼────┼─┼────┼────┼─┼────┼────┼─┼─────
 │ │        │      │    │    │ │    │    │ │    │    │ │
 ├─┼────────┼──────┼────┼────┼─┼────┼────┼─┼────┼────┼─┼─────
 │ │        │      │    │    │ │    │    │ │    │    │ │

 ╤═══════════════════════════════╤═════════╤═╕
 │             TANK              │ Length  │ │
 │                               │and Size │ │
 │                               │   of    │ │
 │                               │ Suction │ │
 │                               │   and   │ │
 │                               │Discharge│ │
 ┼────┬────────┬───────────┬─────┼─────────┼─┤
 │Size│Capacity│Foundations│Date │         │ │
 │    │Gallons │           │Built│         │ │
 ┼────┼────────┼───────────┼─────┼─────────┼─┤
 │    │        │           │     │         │ │
 ┼────┼────────┼───────────┼─────┼─────────┼─┤
 │    │        │           │     │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T.C. Form R.R.28         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad               ORE DOCKS             _________________│
 │Date ______                                         _Field Inspector_│

 ╒═╤══════════════════════════════════════════════════════════════
 │ │                         GENERAL DESCRIPTION
 ├─┼────┬─────┬────────┬─────┬────┬───────────────────────────────
 │ │ITEM│Owned│Location│Date │Type│              DIMENSIONS
 │ │    │ and │        │Built│    │
 │ │    │Used │        │     │    │
 │ │    │ by  │        │     │    │
 ├─┼────┼─────┼────────┼─────┼────┼─────┬────┬────────┬─────┬─────
 │ │    │     │        │     │    │ No. │Cap.│  Hgt.  │Hgt. │Width
 │ │    │     │        │     │    │Pkts.│Tons│Water to│Water│
 │ │    │     │        │     │    │     │    │C.L.Hge.│ to  │
 │ │    │     │        │     │    │     │    │        │Dock │
 ├─┼────┼─────┼────────┼─────┼────┼─────┼────┼────────┼─────┼─────
 │ │    │     │        │     │    │     │    │        │     │
 ├─┼────┼─────┼────────┼─────┼────┼─────┼────┼────────┼─────┼─────
 │ │    │     │        │     │    │     │    │        │     │

 ═══════╤════════════════════════════╤═════════════╤═══════╕
        │         QUANTITIES         │   VALUES    │REMARKS│
 ───────┼──────┬─────┬──────┬────────┼─────────┬───┼───────┤
        │Rods, │Piles│Lumber│Fill and│Estimated│   │       │
        │Bolts,│Lin. │ Feet │Dredging│  Cost   │   │       │
        │Iron, │Feet │ B.M. │        │         │   │       │
        │Pounds│Kind │ Kind │        │         │   │       │
 ┬──────┼──────┼─────┼──────┼────────┼─────────┼─┬─┼───────┤
 │L'gth │      │     │      │        │         │ │ │       │
 │  of  │      │     │      │        │         │ │ │       │
 │Chutes│      │     │      │        │         │ │ │       │
 │      │      │     │      │        │         │ │ │       │
 ┼──────┼──────┼─────┼──────┼────────┼─────────┼─┼─┼───────┤
 │      │      │     │      │        │         │ │ │       │
 ┼──────┼──────┼─────┼──────┼────────┼─────────┼─┼─┼───────┤
 │      │      │     │      │        │         │ │ │       │

[Illustration: FIG. 6.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T.C. Form R.R.15         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad              STOCK YARDS            _________________│
 │Date ______                                         _Field Inspector_│

 ╒════════╤══════╤═══════╤══════════╤════╤══════════════╤════╤════╤════╕
 │LOCATION│Number│Size of│ Date of  │    │    WELLS     │    │    │    │
 │        │  of  │ Yards │Completion│    │              │    │    │    │
 │        │ Pens │ Feet  │          │    │              │    │    │    │
 ├────────┼──────┼───────┼──────────┼────┼─────┬────────┼────┼────┼────┤
 │        │      │       │          │    │Depth│Diameter│    │    │    │
 │        │      │       │          │    │Feet │        │    │    │    │
 ├────────┼──────┼───────┼──────────┼────┼─────┼────────┼────┼────┼────┤
 │        │      │       │          │    │     │        │    │    │    │
 ├────────┼──────┼───────┼──────────┼────┼─────┼────────┼────┼────┼────┤
 │        │      │       │          │    │     │        │    │    │    │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.14        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad        TRACK AND STOCK SCALES       _________________│
 │Date ______                                         _Field Inspector_│

 ╒════════╤═══════╤═════════╤═══════╤══════╤══════╤══════╤══════╤══════╕
 │LOCATION│NAME OF│Capacity │Length │ Date │      │      │      │      │
 │        │SCALES │  Tons   │       │Built │      │      │      │      │
 ├────────┼───────┼─────────┼───────┼──────┼──────┼──────┼──────┼──────┤
 │        │       │         │       │      │      │      │      │      │
 ├────────┼───────┼─────────┼───────┼──────┼──────┼──────┼──────┼──────┤
 │        │       │         │       │      │      │      │      │      │

[Illustration: FIG. 7.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T.C. Form R.R.13         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad      STATEMENT OF MISCELLANEOUS     _________________│
 │Date ______                   BUILDINGS             _Field Inspector_│
 │Include in this report all shops, warehouses, car houses, watchmen's │
 │shanties, flagmen's buildings, elevators, general office buildings   │
 │and all other structures not specifically asked for in other reports.│

 ╒════════╤═══════════╤═══════╤═════════════╤══════════╤═══════╤═══════╕
 │LOCATION│DESCRIPTION│ SIZE  │   Kind of   │ Date of  │       │       │
 │        │OF BUILDING│       │Bldg., Brick,│Completion│       │       │
 │        │           │       │  Stone or   │          │       │       │
 │        │           │       │    Frame    │          │       │       │
 ├────────┼───────────┼───────┼─────────────┼──────────┼───────┼───────┤
 │        │           │       │             │          │       │       │
 ├────────┼───────────┼───────┼─────────────┼──────────┼───────┼───────┤
 │        │           │       │             │          │       │       │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.12        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad           STATION BUILDINGS         _________________│
 │Date ______                                         _Field Inspector_│

 ╒══════════╤═══════════╤══════════╤═════════════╤══════════╤══════════╕
 │ LOCATION │DESCRIPTION│   SIZE   │   Kind of   │ Date of  │          │
 │ STATIONS │OF BUILDING│          │Bldg., Brick,│Completion│          │
 │          │           │          │  Stone or   │          │          │
 │          │           │          │    Frame    │          │          │
 ├──────────┼───────────┼──────────┼─────────────┼──────────┼──────────┤
 │          │           │          │             │          │          │
 ├──────────┼───────────┼──────────┼─────────────┼──────────┼──────────┤
 │          │           │          │             │          │          │

[Illustration: FIG. 8.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │                       THIS SPACE FOR BINDING                        │
 ├─────────────────────────────────────────────────────────────────────┤
 │MICHIGAN RAILROAD         T. C. Form R.R.22        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad              REAL ESTATE            _________________│
 │Date ______        NOT USED FOR RAILROAD PURPOSES   _Field Inspector_│

 ╒═══════════════════╤════════════╤══════════════╤═════════════════════╕
 │     LOCATION      │DESCRIPTION │Assessed Value│     TOTAL TAXES     │
 ├───────┬───────────┼────────────┼──────────────┼──────────┬──────────┤
 │COUNTY │ASSESSMENT │            │              │  AMOUNT  │  AMOUNT  │
 │       │ DISTRICT  │            │              │          │   PAID   │
 ├───────┼───────────┼────────────┼──────────────┼──────┬───┼──────┬───┤
 │       │           │            │              │      │   │      │   │
 ├───────┼───────────┼────────────┼──────────────┼──────┼───┼──────┼───┤
 │       │           │            │              │      │   │      │   │

 ┌─────────────────────────────────────────────────────────────────────┐
 │                       THIS SPACE FOR BINDING                        │
 ├─────────────────────────────────────────────────────────────────────┤
 │MICHIGAN RAILROAD         T. C. Form R.R.23        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad        MISCELLANEOUS EQUIPMENT      _________________│
 │Date ______                 ROLLING STOCK           _Field Inspector_│

 ╒════════╤═════╤══════╤═══════════╤════════╤═══════╤═════════╤════════╕
 │Location│ No. │ Name │Description│Capacity│ Date  │Cost When│Remarks │
 │        │     │      │           │        │ Built │   New   │        │
 ├────────┼─────┼──────┼───────────┼────────┼───────┼─────────┼────────┤
 │        │     │      │           │        │       │         │        │
 ├────────┼─────┼──────┼───────────┼────────┼───────┼─────────┼────────┤
 │        │     │      │           │        │       │         │        │

[Illustration: FIG. 9.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │                       THIS SPACE FOR BINDING                        │
 ├─────────────────────────────────────────────────────────────────────┤
 │MICHIGAN RAILROAD         T. C. Form R.R.24        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad       SHOP MACHINERY AND TOOLS      _________________│
 │Date ______                                         _Field Inspector_│

 ╒═════════════╤════════╤════════════╤═══════╤═══════════════╤═════════╕
 │ Description │ Maker  │ Date Built │ Size  │ Cost When New │ Remarks │
 ├─────────────┼────────┼────────────┼───────┼───────────────┼─────────┤
 │             │        │            │       │               │         │
 ├─────────────┼────────┼────────────┼───────┼───────────────┼─────────┤
 │             │        │            │       │               │         │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.25        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad     STEAM SHOVELS, DREDGES, PILE    _________________│
 │Date ______                    DRIVERS              _Field Inspector_│

 ╒══╤═══════╤═════════╤══════╤═════════╤═══════╤═════╤════════╤════════╕
 │  │MAKE OF│PROPERTY │ Date │ Size of │ Shop  │Cost │Present │REMARKS │
 │  │SHOVEL │   OF    │Built │ Dipper  │Number │When │Value % │        │
 │  │       │         │      │Cu. Yds. │       │ New │ of New │        │
 ├──┼───────┼─────────┼──────┼─────────┼───────┼─────┼────────┼────────┤
 │  │       │         │      │         │       │     │        │        │
 ├──┼───────┼─────────┼──────┼─────────┼───────┼─────┼────────┼────────┤
 │  │       │         │      │         │       │     │        │        │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T. C. Form R.R.26        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad           DOCKS AND WHARVES         _________________│
 │Date ______                                         _Field Inspector_│

 ╒═╤═══════════════════════════════════════════════
 │ │              GENERAL DESCRIPTION
 ├─┼─────┬─────┬────┬────────┬─────┬────┬──────────
 │ │ITEMS│Owner│Used│Location│Date │Type│Dimensions
 │ │     │     │ by │        │Built│    │
 │ │     │     │    │        │     │    │
 │ │     │     │    │        │     │    │
 │ │     │     │    │        │     │    │
 ├─┼─────┼─────┼────┼────────┼─────┼────┼──────────
 │ │     │     │    │        │     │    │
 ├─┼─────┼─────┼────┼────────┼─────┼────┼──────────
 │ │     │     │    │        │     │    │
 ├─┼─────┼─────┼────┼────────┼─────┼────┼──────────
 │ │     │     │    │        │     │    │

 ╤═══════════════════════════════╤═════════════╤═══════╕
 │          QUANTITIES           │   VALUES    │REMARKS│
 ┼──────┬─────┬──────┬───────────┼─────────┬───┼───────┤
 │Rods, │Piles│Lumber│Excavation │Estimated│   │       │
 │Bolts,│Lin. │ Feet │   Fill    │  Cost   │   │       │
 │Nails,│Feet │ B.M. │ Dredging, │         │   │       │
 │ etc. │Kind │ Kind │ Cu. Yds.  │         │   │       │
 │Pounds│     │      │           │         │   │       │
 ┼──────┼─────┼──────┼───────────┼─────────┼─┬─┼───────┤
 │      │     │      │           │         │ │ │       │
 ┼──────┼─────┼──────┼───────────┼─────────┼─┼─┼───────┤
 │      │     │      │           │         │ │ │       │
 ┼──────┼─────┼──────┼───────────┼─────────┼─┼─┼───────┤
 │      │     │      │           │         │ │ │       │

[Illustration: FIG. 10.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T.C. Form R.R. 21        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad    CLASSIFICATION OF FREIGHT CARS   _________________│
 │Date ______                                         _Field Inspector_│
 │NOTE:—Under remarks specify whether box cars are ventilated, stock   │
 │cars are single or double deck, gondolas are plain, hopper or drop   │
 │bottom; also any other special features.                             │

 ╒═╤═══════╤════════╤════════╤══════╤════════════════════════════
 │ │GROUPS │ Class, │Capacity│Total │   DIMENSIONS OF CAR BODY
 │ │  BY   │   as   │in lbs. │weight│
 │ │NUMBERS│ Stock, │        │of car│
 │ │       │Gondola,│        │ and  │
 │ │       │ Flat,  │        │trucks│
 │ │       │  etc.  │        │  in  │
 │ │       │        │        │ lbs. │
 ├─┼───────┼────────┼────────┼──────┼───────┬────────────────────
 │ │       │        │        │      │Outside│       Inside
 │ │       │        │        │      │       │
 │ │       │        │        │      │       │
 ├─┼───────┼────────┼────────┼──────┼───────┼──────┬──────┬──────
 │ │       │        │        │      │Length │Length│Width │Height
 │ │       │        │        │      │ over  │      │      │
 │ │       │        │        │      │  end  │      │      │
 │ │       │        │        │      │ sills │      │      │
 ├─┼───────┼────────┼────────┼──────┼───────┼──────┼──────┼──────
 │1│No.    │        │        │      │       │      │      │
 │ │to No. │        │        │      │       │      │      │
 ├─┼───────┼────────┼────────┼──────┼───────┼──────┼──────┼──────
 │ │       │        │        │      │       │      │      │
 ├─┼───────┼────────┼────────┼──────┼───────┼──────┼──────┼──────
 │ │       │        │        │      │       │      │      │

 ╤══════════════╤═════════╤════════════════════════╤═══════╤════════
 │Superstructure│  Under  │         TRUCKS         │Brakes,│Coupler,
 │ wood, steel, │  frame  │                        │Manual,│  Kind
 │ or composite │  wood,  │                        │or air │
 │              │steel, or│                        │  and  │
 │              │composite│                        │ sand  │
 │              │         │                        │       │
 │              │         │                        │       │
 ┼──────────────┼─────────┼────┬───────┬───────────┼───────┼────────
 │              │         │Kind│Size of│ Bolsters, │       │
 │              │         │    │journal│  wood or  │       │
 │              │         │    │       │   steel   │       │
 ┼──────────────┼─────────┼────┼───────┼────┬──────┼───────┼────────
 │              │         │    │       │Body│Trucks│       │
 │              │         │    │       │    │      │       │
 │              │         │    │       │    │      │       │
 │              │         │    │       │    │      │       │
 ┼──────────────┼─────────┼────┼───────┼────┼──────┼───────┼────────
 │              │         │    │       │    │      │       │
 │              │         │    │       │    │      │       │
 ┼──────────────┼─────────┼────┼───────┼────┼──────┼───────┼────────
 │              │         │    │       │    │      │       │
 ┼──────────────┼─────────┼────┼───────┼────┼──────┼───────┼────────
 │              │         │    │       │    │      │       │

 ╤═════╤═══════╤════════╤═══════╕
 │Date │Number │Cost of │REMARKS│
 │built│  In   │each car│       │
 │     │service│complete│       │
 │     │       │when new│       │
 │     │       │        │       │
 │     │       │        │       │
 │     │       │        │       │
 ┼─────┼───────┼────────┼───────┤
 │     │       │        │       │
 │     │       │        │       │
 │     │       │        │       │
 ┼─────┼───────┼────────┼───────┤
 │     │       │        │       │
 │     │       │        │       │
 │     │       │        │       │
 │     │       │        │       │
 ┼─────┼───────┼────────┼───────┤
 │     │       │        │       │
 │     │       │        │       │
 ┼─────┼───────┼────────┼───────┤
 │     │       │        │       │
 ┼─────┼───────┼────────┼───────┤
 │     │       │        │       │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T.C. Form R.R. 27        __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad          PASSENGER EQUIPMENT        _________________│
 │Division ______                                     _Field Inspector_│
 │Date ______                                                          │

 ╒═╤══════╤════════╤═════════╤══════════════════════════════════════
 │ │NUMBER│ Class  │DIMENSION│                TRUCKS
 │ │      │Coach 1,│ INSIDE  │
 │ │      │ 2, 3,  │         │
 │ │      │  Mail  │         │
 │ │      │Express,│         │
 │ │      │ Comb.  │         │
 ├─┼──────┼────────┼─────────┼─────────────┬─────────────────┬──────
 │ │      │        │         │   WHEELS    │     SPRINGS     │Frame,
 │ │      │        │         │             │                 │Wood,
 │ │      │        │         │             │                 │Steel
 │ │      │        │         │             │                 │  or
 │ │      │        │         │             │                 │Comb.
 │ │      │        │         │             │                 │
 │ │      │        │         │             │                 │
 ├─┼──────┼────────┼─────────┼───┬────┬────┼───────┬─────────┼──────
 │ │      │        │         │No.│Size│Kind│Roleter│Equalizer│
 │ │      │        │         │   │    │    │ Size  │  Size   │
 │ │      │        │         │   │    │    │       │         │
 │ │      │        │         │   │    │    │       │         │
 ├─┼──────┼────────┼─────────┼───┼────┼────┼───────┼─────────┼──────
 │ │      │        │         │   │    │    │       │         │
 ├─┼──────┼────────┼─────────┼───┼────┼────┼───────┼─────────┼──────
 │ │      │        │         │   │    │    │       │         │

 ╤═════════════════════════════════════════════════════════════
 │                                INTERIOR
 │
 │
 │
 │
 │
 ┼──────┬──────┬────────┬───────┬────────┬────────────┬────────
 │FINISH│ Head │ SEATS  │Lights,│ Closet │    SASH    │Curtains
 │      │lining│        │number │  and   │            │   or
 │      │Wood, │        │  and  │Lavatory│            │ Blinds
 │      │Steel │        │ Kind  │        │            │
 │      │  or  │        │       │        │            │
 │      │Canvas│        │       │        │            │
 │      │Comb. │        │       │        │            │
 ┼──────┼──────┼───┬────┼───────┼────────┼──────┬─────┼────────
 │      │      │No.│Kind│       │        │Double│Glass│
 │      │      │   │    │       │        │  or  │Plate│
 │      │      │   │    │       │        │Single│or D.│
 │      │      │   │    │       │        │      │ S.  │
 ┼──────┼──────┼───┼────┼───────┼────────┼──────┼─────┼────────
 │      │      │   │    │       │        │      │     │
 ┼──────┼──────┼───┼────┼───────┼────────┼──────┼─────┼────────
 │      │      │   │    │       │        │      │     │

 ═══════════╤═════════════════════════╤══════╤════════╤═════╤═══════
            │        PLATFORM         │Heat, │BUILDERS│Date │Number
            │                         │Direct│        │Built│now in
            │                         │Steam │        │     │Service
            │                         │  or  │        │     │
            │                         │Heater│        │     │
            │                         │      │        │     │
 ┬──────────┼─────┬───────────┬───────┼──────┼────────┼─────┼───────
 │Decoration│Steel│ Vestibule │Coupler│      │        │     │
 │          │ or  │Ventilator,│or Hook│      │        │     │
 │          │Wood │  Wide or  │       │      │        │     │
 │          │     │  Narrow   │       │      │        │     │
 │          │     │           │       │      │        │     │
 │          │     │           │       │      │        │     │
 │          │     │           │       │      │        │     │
 ┼──────────┼─────┼───────────┼───────┼──────┼────────┼─────┼───────
 │          │     │           │       │      │        │     │
 │          │     │           │       │      │        │     │
 │          │     │           │       │      │        │     │
 │          │     │           │       │      │        │     │
 ┼──────────┼─────┼───────────┼───────┼──────┼────────┼─────┼───────
 │          │     │           │       │      │        │     │
 ┼──────────┼─────┼───────────┼───────┼──────┼────────┼─────┼───────
 │          │     │           │       │      │        │     │

 ╤════╤═══════╕
 │Cost│REMARKS│
 │when│       │
 │new │       │
 │    │       │
 │    │       │
 │    │       │
 ┼────┼───────┤
 │    │       │
 │    │       │
 │    │       │
 │    │       │
 │    │       │
 │    │       │
 │    │       │
 ┼────┼───────┤
 │    │       │
 │    │       │
 │    │       │
 │    │       │
 ┼────┼───────┤
 │    │       │
 ┼────┼───────┤
 │    │       │

 ┌─────────────────────────────────────────────────────────────────────┐
 │MICHIGAN RAILROAD         T.C. Form R.R. 5         __________________│
 │APPRAISAL                                          _Office Inspector_│
 │______ Railroad              LOCOMOTIVES            _________________│
 │Division ______                                     _Field Inspector_│
 │Date ______                                                          │
 │NOTE:-Cost when new should include original cost of engine and tender│
 │plus original cost of all accessories, as  brakes, bell ringer,      │
 │sander, water scoop etc. added when engine was purchased.            │

 ╒═╤══════════╤═══════╤══════╤═══════╤════════╤═════════════╤══════
 │ │ PLACE OF │No. of │ Type │Builder│Size of │   Weight    │Pass.,
 │ │INSPECTION│Engines│  of  │  and  │Cylinder│   without   │ Frt.
 │ │          │       │Engine│ Class │        │Tender, lbs. │  or
 │ │          │       │      │       │        │             │Switch
 │ │          │       │      │       │        │             │ P.F.
 │ │          │       │      │       │        │             │or S.
 ├─┼──────────┼───────┼──────┼───────┼────────┼───────┬─────┼──────
 │ │          │       │      │       │        │Working│Empty│
 │ │          │       │      │       │        │ Order │     │
 │ │          │       │      │       │        │       │     │
 │ │          │       │      │       │        │       │     │
 ├─┼──────────┼───────┼──────┼───────┼────────┼───────┼─────┼──────
 │ │          │       │      │       │        │       │     │
 │ │          │       │      │       │        │       │     │
 │ │          │       │      │       │        │       │     │
 ├─┼──────────┼───────┼──────┼───────┼────────┼───────┼─────┼──────
 │1│          │       │      │       │        │       │     │
 ├─┼──────────┼───────┼──────┼───────┼────────┼───────┼─────┼──────
 │2│          │       │      │       │        │       │     │
 ├─┼──────────┼───────┼──────┼───────┼────────┼───────┼─────┼──────
 │ │          │       │      │       │        │       │     │

 ╤═════════╤═════════╤══════════════════════════════╤═════════
 │When New │  Last   │       Coupled Drivers        │ Kind of
 │         │  Heavy  │                              │Headlight
 │         │ Repairs │                              │
 │         │         │                              │
 │         │         │                              │
 │         │         │                              │
 ┼────┬────┼────┬────┼──────┬───────────┬───────────┼─────────
 │Date│Cost│Date│Cost│Number│  Centres  │   Tires   │
 │    │    │    │    │      │           │           │
 │    │    │    │    │      │           │           │
 │    │    │    │    │      │           │           │
 ┼────┼────┼────┼────┼──────┼─────┬─────┼─────┬─────┼─────────
 │    │    │    │    │      │Diam.│Steel│Diam.│Maker│
 │    │    │    │    │      │     │ or  │     │     │
 │    │    │    │    │      │     │iron │     │     │
 ┼────┼────┼────┼────┼──────┼─────┼─────┼─────┼─────┼─────────
 │    │    │    │    │      │     │     │     │     │
 ┼────┼────┼────┼────┼──────┼─────┼─────┼─────┼─────┼─────────
 │    │    │    │    │      │     │     │     │     │
 ┼────┼────┼────┼────┼──────┼─────┼─────┼─────┼─────┼─────────
 │    │    │    │    │      │     │     │     │     │

 ╤═══════════════════════════════════════╤══════╤══════
 │                BOILER                 │ Bell │Sander
 │                                       │Ringer│
 │                                       │      │
 │                                       │      │
 │                                       │      │
 │                                       │      │
 ┼────┬──────┬─────┬────┬─────────┬──────┼──────┼──────
 │Kind│Steam │Total│G.S.│Last New │Steam │      │
 │    │Press.│H.S. │Sq. │ Boiler  │Heater│      │
 │    │Built │ Sq. │Ft. │         │      │      │
 │    │ For  │ Ft. │    │         │      │      │
 ┼────┼──────┼─────┼────┼────┬────┼──────┼──────┼──────
 │    │      │     │    │Date│Cost│      │      │
 │    │      │     │    │    │    │      │      │
 │    │      │     │    │    │    │      │      │
 ┼────┼──────┼─────┼────┼────┼────┼──────┼──────┼──────
 │    │      │     │    │    │    │      │      │
 ┼────┼──────┼─────┼────┼────┼────┼──────┼──────┼──────
 │    │      │     │    │    │    │      │      │
 ┼────┼──────┼─────┼────┼────┼────┼──────┼──────┼──────
 │    │      │     │    │    │    │      │      │

 ╤═════════════════╤══════════════════════════╤═══════╕
 │      BRAKE      │          TENDER          │REMARKS│
 │                 │                          │       │
 │                 │                          │       │
 │                 │                          │       │
 │                 │                          │       │
 │                 │                          │       │
 ┼────┬─────┬──────┼───────┬─────┬──────┬─────┼───────┤
 │Size│Kind │Train │ Water │Coal,│Weight│Water│       │
 │ of │ of  │Signal│Gallons│Tons │Empty │Scoop│       │
 │Pump│Brake│      │       │     │ lbs. │     │       │
 │    │     │      │       │     │      │     │       │
 ┼────┼─────┼──────┼───────┼─────┼──────┼─────┼───────┤
 │    │     │      │       │     │      │     │       │
 │    │     │      │       │     │      │     │       │
 │    │     │      │       │     │      │     │       │
 ┼────┼─────┼──────┼───────┼─────┼──────┼─────┼───────┤
 │    │     │      │       │     │      │     │       │
 ┼────┼─────┼──────┼───────┼─────┼──────┼─────┼───────┤
 │    │     │      │       │     │      │     │       │
 ┼────┼─────┼──────┼───────┼─────┼──────┼─────┼───────┤
 │    │     │      │       │     │      │     │       │

That a few changes were made in 1904 was to have been expected; that
these forms were almost in their entirety made a basis for the similar
work of the Wisconsin appraiser, some three years later, was in the
nature of a high compliment and goes far toward answering the criticisms
of this part of the work, generally to the effect that the forms call
for much more information than could possibly be used, and that they
show lack of care in arrangement.

It may be said here, properly, that the uncertainty as to the final
attitude of the companies made it essential that the appraiser prepare,
if need be, to make his inventory by personal inspection in the field.
Indeed, this was done in the case of several roads, and, while most of
the companies finally accorded every courtesy, either giving the
appraiser access to their records, or furnishing the information
desired, it is not probable that the shortness of the time limit would
have enabled the appraiser to secure any sort of result had a modified
plan been adopted.

The law provided no requirement that the companies should furnish any
information. In order to secure the data, it would have been necessary
to employ a large number of men, and this would have been such a serious
expense to the companies that refusal to comply would probably have
followed such a request. Many of the companies had no men in their
service able to prepare the required data; and, finally, eight or ten
men after having worked in the files of companies owning reasonably full
records, were much better able to take off the desired data
intelligently from the records of other companies than men unfamiliar
with the needs of the appraiser and with no prior experience. Then, too,
the work secured was that of one body of technical men, all experienced
in different phases of railway work, and thus was uniform and
consistent. Had seventy-five or eighty different men or sets of men
prepared these inventories, there would certainly have been a great
variation in their worth and reliability.

It must be kept clearly in mind that lack of time was the main feature
which kept the appraiser from considering any such plan of co-operation
with the railroads as was adopted later in Wisconsin and Minnesota, and
that no distrust of the railroads, or lack of desire to co-operate, had
anything to do with the appraiser's decision to use the method which was
adopted.

Shortly after the preparation of the blanks, access was granted to the
records of the Ann Arbor Railroad, and almost immediately thereafter
several other companies opened their files to the appraiser; the State
Board of Auditors determined to pay the bills, as approved by the
appraiser; and the initial difficulties were so far removed that it was
possible to carry out, without any further delays, the plan of
organization which had been perfected.

The personnel of the staff was considered to be of the greatest
importance, and, in the selection of men, the requirements desired were:
experience in the construction and operation of railroads, thorough
technical training, high standing in the Profession, as shown by
membership in the American Societies of Civil or Mechanical Engineers,
or of other Societies of high standing, and high moral character.
Politics, residence in the State, or local influence, had absolutely no
weight in the selection of any of the men. In a number of cases men were
secured who had for some years occupied the position of Chief Engineer
of important lines. In a very large number of cases men who were engaged
on this work have since its completion held the position of Chief or
Principal Assistant Engineer of important railroads, and practically all
of them returned to railway service. Dozens of these men are well known,
and their work deserves that full credit should be given to each, but it
is impossible to do so within the limits of this paper.

The minor positions, such as assistants in the field and in the
computing and compiling rooms, were assigned to younger men, generally
with some railroad experience, and in many cases they were graduates of
technical schools, Cornell, Yale, Rensselaer, Michigan, Ohio State, and
other schools having representatives.

The writer believes that no more harmonious or loyal organization was
ever gathered together before, or has been since. Men who had held Chief
Engineer-ships trudged miles in the wilds of Michigan on foot,
inspecting and inventorying property, and came into the office and
worked long hours at the computing tables with the utmost cheerfulness
and _camaraderie_. There was complete harmony, absolute loyalty, and as
perfect a spirit of unselfish devotion to the work as the writer has
ever seen in any organization.

The fact that such a staff of engineers, of wide experience in railroad
construction and maintenance, had been assembled, made it feasible to
carry out a plan of the appraiser which proved to be of great value. At
frequent intervals, during the progress of the work, conferences were
held which were attended by all the heads of departments and by many of
the older and more experienced engineers. Matters of policy, details,
general principles, and rules and methods for conducting the appraisal,
were fully discussed, and stenographic records were made of the
discussion and conclusions. These conferences covered practically every
question that arose; they were of such a nature as to draw out the
opinions of the men fully and freely; and their effect was to eliminate
the error due to individual judgment, and harmonize and unify the
methods and results of the appraisal.

Special emphasis has been laid on the organization of the staff, because
the criticism has been made that this work was lacking in care, was
hurriedly done, and was unreliable. The work must be judged by its
results, but the criticism that it did not receive proper care is
absolutely unjustified in fact. The men engaged were of the highest type
of experienced, technically educated, and highly qualified engineers;
they entered the work unreservedly, and gave the best there was in them.
The Michigan appraisal was not a one-man job; it was the work of many
men, and all are entitled to credit.

That some men in an organization such as this, gathered from all over
the United States, should prove to be lacking, and should fail to hold
their place with their fellows, was to have been expected. That the
number of such men should not exceed half a dozen was remarkable. In
fact, almost every such case was found when the first notes were
returned to the office, and in only two or three instances was it
necessary to send a second man to do work which had been once covered.
In several cases men were sent over certain sections which had been
inspected by some one else, with a view of getting an idea of the
personal judgment of the different men, but in such cases the results
were astonishingly close, and created the greatest confidence in the
figures of depreciation which were being received.

Looking back on this work, after the lapse of 10 years, after having
fully reviewed it twice, and examined all records, after having heard
the men engaged on it testify in court, and knowing the record of these
men since the completion of the work, the writer believes himself fully
justified in stating that, no matter what opinion may be held as to the
accuracy, reliability, or value of the result, no charge of
carelessness, neglect, undue haste, or lack of consideration can be
sustained as against the staff.

To strengthen the work further, to eliminate the element of personal
error, to guard against the danger of dulled perceptions due to constant
application to the work, and to forestall, if possible, every point of
objection to methods, a Board of Review was chosen by Appraiser Cooley
to whom were referred:

  (_a_) The methods of inventory and valuation, as determined by
      the staff;

  (_b_) All points on which special discussion or difference of
      opinion were noted in the working conferences;

  (_c_) Questions as to elements of value in the physical property
      which were in themselves not tangible or capable of
      inventory; and finally,

  (_d_) The results of the whole work.

The members of this board were chosen on account of pre-eminent standing
in the Profession, and on account of experience and prominence in
railway engineering. The board was composed of four men, as follows:

Chairman, Octave Chanute, Past-President, Am. Soc. C. E., former
Consulting Engineer, Atchison, Topeka, and Santa Fe Railway, but at the
time not engaged in active railway work.

George W. Vaughn, M. Am. Soc. C. E., Engineer in charge of Track
Elevation in Chicago.

Charles E. Greene, M. Am. Soc. C. E., Dean of the School of Engineering,
University of Michigan.

Charles Hansel, M. Am. Soc. C. E., former Engineer, Wabash Railroad,
former Chief Engineer, Illinois Railway and Warehouse Commission, and at
that time General Manager of the National Switch and Signal Company.

These gentlemen were not engaged in any detailed work on the appraisal;
they came to the work for one week each month with minds entirely clear
of all confusion raised by issues of detail, and were thus enabled to
pass as a court upon all matters laid before them. Their association was
of inestimable value in giving confidence to the members of the staff.
The many years of railway service of Messrs. Chanute and Vaughn, and
their unquestioned ability in that special field of engineering, gave
the stamp of finality to points decided by them. The special knowledge
of Mr. Hansel in the field of signal engineering, and his known ability
as an expert in organization and administration, were of the greatest
value. The service of Professor Greene was that of the analyst and
logician; his clear and judicial mind enabled him to formulate the final
arguments in many cases under consideration.

The writer wishes to make it perfectly clear that he has not attempted
to minimize the work of Professor Cooley by stating the exact relation
of the many engineers on the staff to this work, but to bring out and
emphasize the fact that no one man, or no two or three men, were
responsible for any single part, but that the whole represents the best
efforts of sixty or seventy experienced men working to secure a fair,
honest, unprejudiced, engineering estimate along such lines as would
eliminate, as far as possible, all errors of individual judgment.

It has never been claimed for the work that it was perfect, or that it
was entirely free from errors. It has been and is claimed for it that it
probably represents as close and conservative an estimate of cost of
reproduction and depreciation as it would be possible for any set of men
to make under the conditions then existing.

Professor Cooley was in constant touch with the work, knew its every
detail, passed upon and approved every rule and order, presided at every
conference, and nothing more than his activity, optimism, and constant
watchful care and tireless energy kept the force at work day and night
and brought about the prompt completion of the details. His recognized
high standing, his remarkable ability as an executive and organizer, and
his powers of diplomacy, more than anything else, brought about the
final acquiescence of the railroad managers and kept up the confidence
of the State authorities; his personality pervades the entire work.
After giving all due credit to the staff, and they were entitled to much
credit, the real honor must go to Professor Cooley. It was his
conception, his plan, and the brunt of the battle was his.


                       Office and Field Methods.

The preliminaries of the organization having been completed, and the
forms prepared, a portion of the working force was brought on the
ground, and the work was actively commenced. It was subdivided into four
parts:

  (_1_) Office inspection, or inventory;

  (_2_) Field inspection;

  (_3_) Computation;

  (_4_) Compilation for the permanent record.

The men chosen as field inspectors were old and experienced railroad
engineers. As far as possible, they were assigned for a short period to
office inspection, then they were sent into the field, after which they
worked at the computation of values; so that each man was engaged on
many different phases of the work, and handled the notes of many of his
fellows, and no one man made up one complete appraisal, except as
specially noted.

_Making the Inventories._—Office inspection, or the preparation of
inventories, was assigned to parties usually of one or two experienced
men with from two to four younger engineers as assistants in the
computing-room. These men went to the general offices of the railroad
companies and made a complete examination of maps, profiles, bridge and
building records, records of motive power, rolling stock, etc. In short,
they prepared, as far as it was possible to do so, a complete inventory
of every building, structure, or piece of property owned by the road;
they took off complete abstracts of real estate and right-of-way
records; they noted principal yards and terminals, and secured maps of
such as were most complex, or furnished lists of such maps and records
as were most essential for the field men, and they made as complete a
report as possible of the corporate history of the road and the general
condition of its engineering records. No effort whatever was made to
examine or audit the financial books of any company, or to secure from
such books any data as to cost of property; the work was entirely
limited to the listing of physical property.

Most of the railroad companies co-operated, and gave access to their
records; one or two filled in the forms; a number had practically no
records, and only one or two companies withheld information. Requests
for blue prints of large yards and terminals, and of plans of standard
structures were generally granted cheerfully, and, although there was no
such spirit of co-operation as was shown later by the Wisconsin roads,
much labor was saved by the data furnished.

The result of the office inspection was the filing of inventories, which
were generally quite complete, the securing of maps and plans, the
gathering of data as to prevailing prices of labor and material, and the
securing of some very valuable cost data as to special structures and
classes of structures. All inventories were made up for roads, or for
divisions of roads, with each class of property listed separately, for
example, station buildings, interlocking plants, bridges, etc., so that,
if necessary, any special class of inspection might be assigned to one
man, while to others could be assigned the remainder of the work on that
particular road or division.

_Office Inspection as a Check on Field Work._—The office inspection
furnished many valuable data for checking the judgment of the field men.
For example, the number of cubic yards of excavation and embankment on
probably the greater part of the mileage had to be secured by the field
inspectors, either because the records had not been kept or the changes
of line and grade had been so extensive as to destroy their reliability.
Every field inspector, therefore, made his own estimate of the yardage
of pay earth. The office inspection reports, however, gave reliable data
(from profiles or original contract estimate files) of the actual
yardage on possibly 2000 or 3000 miles of line, so widely scattered that
it constituted a check on the work of a majority of the field men.

This work of office inspection disclosed the following points, which
will be practically common to all large valuation jobs:

  (_a_) There was no uniformity of method in the keeping of
      records of permanent way and structures;

  (_b_) There was a vast amount of carelessness in keeping records
      up to date, even on the larger roads;

  (_c_) The smaller roads, not only had little or nothing in the
      way of records, but had in many cases no department with
      employees qualified to make or keep such records;

  (_d_) The purchase of new equipment, the construction of new
      buildings and bridges, and the destruction, sale, or removal
      of old property, create a condition of continuous change
      which is seldom recorded by either operating or accounting
      officials, and makes book inventories derived from the roads
      of very doubtful value for use in an appraisal.

_Field Inspection._—The decision had been reached, after careful
discussion, not to permit the field inspectors to place a money value on
any structure, but to examine it, make a full description of it in all
particulars, and assign to it a percentage which should represent the
present value, or the depreciation from a similar new structure rated at
100 per cent.

The field inspectors were furnished with the records of the office
inspection covering the district assigned. They were given notebooks,
tape lines, and various blanks for reporting progress and recording
original estimates in the field. Provision was made for inspection by
the field men, either by the use of hand-cars, gasoline inspection cars,
or velocipede cars, although, with one or two of the roads, no
satisfactory arrangement could be made, and the men were compelled to go
on foot. A careful inspection of every structure was made. If any
correction to the office inspection record was necessary, it was made;
if the structure was new, it was carefully measured and described, and
everything noted which would be of service in estimating its value.
Side-tracks were measured, and the weight and type of rail noted. All
culverts and bridges were examined, described, and their condition
noted. Estimates were made of excavation and embankment, clearing and
grubbing, etc. (based on the standing timber at the time of the
examination), and careful estimates were made of classifications of
material. The records of the field inspector generally contained only
the description and the percentage, but, occasionally, when apparently
valuable information as to cost of any particular structure was
available it was noted, as was special information of local matters
affecting the value of any part of the work.

It was the plan (carried out with but few exceptions) to complete the
record with the field inspector so that from his notes a full and
accurate descriptive inventory might be made. There were a few
exceptions to the general method of field inspection work as outlined,
which were:

_Special Work on the Chicago and Northwestern Railway._—The Chicago and
Northwestern Railway had no records of any sort, all construction papers
having been destroyed by fire. This company organized and placed in the
field four complete engineering parties, each under one of its own
engineers, and with each party was sent one field inspector. The line
was carefully surveyed and cross-sectioned, and complete records of
every building and structure were made, side-tracks were measured, and
data taken for rail and ballast charts, etc. All work was done in the
presence of the field inspector, and he was given copies of all notes.
He placed his own percentage of depreciation on everything. The
estimates, made up independently by the Chicago and Northwestern
engineers and the appraisal staff, using in the latter case the same
unit prices as applied elsewhere in the Upper Peninsula, varied less
than 2 per cent.

_Special Valuations._—Certain special structures, such as ore docks and
ore and coal handling machinery, were of such a character as to require
expert appraisal. These were examined in the field, appraised, and
valued by G. H. Hutchinson, M. Am. Soc. C. E., whose special training
and experience in such work had qualified him perhaps better than any
other man. Interlocking and signaling plants were specially appraised by
the late Elliot F. Moore, who for 10 years had been Engineer of the
Michigan Railroad Commission, and whose intimate personal knowledge of
almost every plant in the State specially qualified him for this work.

Some of the bridges were of such a character as to require expert
knowledge, and this inspection was assigned to William Dunbar Jenkins,
M. Am. Soc. C. E., a man of ripe experience and sound judgment. The
larger and more elaborate station buildings were examined and appraised,
and values finally placed by Mr. F. G. Susemihl, Chief Architect of the
Michigan Central System, whose special work in railway buildings made
him thoroughly familiar with these values.

Work equipment and special equipment were appraised by Mr. G. L. Lewis,
who had been connected with the Marion Steam Shovel Company for many
years.

Except for these special assignments, all the field inspection was
handled in accordance with the appraiser's plan.

As stated previously, in only two or three cases was it necessary to
re-inspect, and, while several sections were intentionally gone over a
second time, without letting the field inspector know who had done the
work previously, or what his percentages had been, the result of all
these checks was to justify the figures in the earlier inspection and to
strengthen confidence in the work.

The field inspection of the Mechanical Department involved examining and
placing a percentage value on each locomotive, passenger car, and piece
of special equipment, and on all shop machinery. Inasmuch as several
points of special interest are involved in this inspection, it will be
discussed at more length in the section of the paper relating to the
methods of work of the Mechanical Department.

_Computation._—After the completion of the field inspection, all notes
were placed in the hands of the computing force. This organization
consisted of two classes of men, engineers brought in from field
inspection, and younger engineers. All computations were made
independently by two men, and all work was checked carefully.

Every man in the computing room was furnished a large bound blank-book,
in which he was required to make all his notes and computations, no
figures of any sort being made on loose paper. The name of each man was
placed on his notebook, and each set of field and office inspection
notes worked upon by him was signed with his initials. It was easy to
trace the work of every man, and in the subsequent trial of the Tax
Cases, every man in the service returned, and, not only testified as to
his office and field inspection, but was able to turn to and identify
all the computations made by him, and produce his original figures and
memoranda.

Very soon it became evident that such a volume of reports, notebooks,
memoranda, maps, plans, pamphlets, and other data was being accumulated
that, unless a special system was developed for filing and handling in
the office, the confusion would be serious and costly.

_Filing in Office._—The system of filing and record keeping had the
merit of being simple and inexpensive. There was borne in mind, in
devising this plan, the necessity of keeping all papers connected with
one division of any road together, the need for reducing to a minimum
the labor of filing and indexing, the constant use of papers, and their
frequent withdrawal from the files, making it necessary that they could
be at once located when they were not in the files.

The vault in the appraisers' office was arranged so that large manilla
envelopes, each of sufficient size to hold all the reports, notes, maps,
etc., of each road or division, could be filed vertically. Each road was
given a number; if there were several divisions, each division was given
a letter, as "15-_A_," "15-_B_," etc., and each division was filed
separately.

Every report, book, map, or other paper was stamped with its road or
division number and letter, and given a sheet number. In this manner
every paper was identified, and could be at once placed. A record was
kept in a book, describing every paper filed in each envelope.

In issuing papers for work, the entire file was taken and kept together
at all times.

One man had charge of the filing and recording, and no one else was
permitted to enter the vault. When a file was withdrawn, a receipt was
taken, and was put in the place of this file; and when the papers were
restored to the vault the receipt was destroyed.

The system proved adequate, and was much less cumbersome than a more
elaborate system of card indexing of separate papers could possibly have
been.

The net result of office and field inspection had been an inventory
based on the railroad records, checked by a man in the field, with a
percentage representing the field inspector's judgment as to
depreciation, together with a considerable number of special data as to
original cost, etc. It was now necessary to place figures of estimated
cost of reproduction and depreciation in terms of money.

The State of Michigan is made up of two peninsulas, widely separated,
with radically different conditions prevailing as to certain items of
the cost of construction.

_Computation Tables._—This appraisal involved seventy-eight incorporated
and forty-seven unincorporated railroads. It was necessary to adopt such
a system as would apply uniform methods and prices to all like property.
Accordingly, the field inspectors were assembled, and, after conference,
it was determined to prepare a set of tables, covering all classes of
railway construction, material, and structures, values being computed
for 100% value, and for each 10% depreciation. These tables covered
different weights, sizes, and types of structures and material, and were
all computed on the basis of the agreed estimated cost.

_Unit Prices._—The unit prices were the result of a most careful study
and discussion. For many items, such as clearing, grubbing, earthwork,
masonry, etc., the price was fixed by agreement during the discussion at
a figure which represented the fair average cost of this particular item
during the 5-year period preceding the appraisal.

For rails and rail structures, an average price was secured from market
quotations for a period of 10 years, a price was determined as the value
of scrap, and the percentage of depreciation was applied to the wearing
value of the rail. The unit price was $28; the agreed scrap value was
$12, leaving $16 as the wearing value of the rail. If an inspector
reported rail at 90%, or at 30%, this percentage was taken from the $16
wearing value and to this was added the scrap value. The tables were
arranged so that, for any weight of rail and any percentage, the cost of
reproduction and the present value could be taken from the tables in
dollars per mile. The same was true of bolts, spikes, angle-bars,
fish-plates, and frogs and switches.

In the case of material such as ties, where no scrap value could be
attached, the percentage was applied directly to the first cost.

In the case of bridges, the tables gave weights per foot and per span
for various lengths, types of structures, and loadings, and only the
cost of reproduction was estimated.

Estimated costs per cubic foot were deduced for buildings of various
standard railroad types and per square foot for depot platforms. These
figures were obtained by reducing to this basis the cost of a large
number of buildings of known cost, by comparison with data obtained from
railroad companies and from a number of engineers who had kept such
records, and by consultation with architects. These building tables did
not apply to the more elaborate and costly structures, all of which were
appraised specially.

Ballasting, track laying, and surfacing were divided into three and four
classes, in order to cover the different general types of railroads, and
prices per mile were fixed. On Upper Peninsula roads ballasting was
estimated at a higher price than on Lower Peninsula roads, while ties
and timber construction were estimated at a lower figure.

In addition to these prices, secured by averaging several years'
quotations, or by agreement of experienced construction engineers, many
valuable figures were obtained from manufacturers of locomotives, cars,
mechanical equipment, and bridges; and in several cases access was given
to the mechanical cost data of the larger roads. Specifications for
locomotives, cars, and shop tools were sent out to builders with a
request that they give average prices for a period of years.

From all this mass of data the unit prices for the valuation were
determined. For locomotives, values were plotted for engines of
different weights, in order to establish a curve, and curves
representing deterioration, scrap value, and major repairs were also
plotted, so as to ascertain diagrammatically the value of an engine of
given weight and stated condition.

The tables and diagrams proved of incalculable benefit in reducing the
work, and in securing that absolute uniformity of method necessary to
give the appraisal standing.

It may not be amiss to state here that in such a work no set of unit
prices could possibly be adopted which would not work some apparent
injustice. A number of Michigan lumber roads were of the cheapest
possible type of construction, and any unit price applied to ties or
timber, which would be at all reasonable for such roads as the Michigan
Central, Grand Rapids and Indiana, Pere Marquette, and others, would be
far in excess of the actual money paid out by these little roads. A few
individual instances of such apparent discrepancy were cause of
complaint and criticism, but, on analysis, very generally, these did not
appear to be anything but a disagreement with book values, in which ties
cut off the right of way were treated as having no cost; or in some
similar item certain local conditions may have made the first cost so
low as to amount to a donation of property. Conceding the propriety of
the objections, the reason for making the appraisal was to furnish
information on which the legislature might determine whether the State
should go from a specific to an ad valorem basis, and in view of this
purpose the objections became unimportant, as they applied to but a few
miles of road.

_Classification._—All work of computation was classified in strict
accordance with the Interstate Commerce Commission's classification of
construction accounts, to which were added one or two classifications
not recognized by that Commission, and final summaries were returned on
sheets similar to those illustrated by Figs. 1 to 10.

In computing, the staff made use of all data of every nature which was
before them, checked the judgment of the field inspector wherever any
reliable data were furnished, took into account age, special notes, or
costs, and, in case of any serious discrepancy in his percentage,
reported to the head of the department for either a re-inspection or for
a conference with the appraiser and inspector. In this department every
possible safeguard was thrown around the work to insure its absolute
mathematical correctness, and to guard against errors in the personal
equation.

_Compilation._—After the calculations were checked and completed they
passed to the compilers, who arranged and classified them, and prepared
the form of the final report. This consisted of a detailed list of every
piece of property and every structure, with a short description and
specification, and a statement of estimated cost of reproduction and
present value. The division is made by roads, by divisions of roads, and
by counties. This was done after the completion of all other work, and
the disbanding of the organization, a small force being retained by the
State to compile and put in permanent form all the papers of the
appraisal. This work was done under the direction of Messrs. James
Walker and O. C. Le Suer in consultation with Professor Cooley.

The final compilations were typewritten on large sheets and bound, and
constitute the final record of the physical valuation. After the
completion of the 1900 appraisal, all papers connected with the work of
the computing office were arranged in proper order and bound.


             Special Problems of the Mechanical Department.

The Civil Engineering section dealt wholly with fixed property located
entirely within the State; and the work offered no special difficulties
in the way of assignment of values. It is true that, when the question
of terminal values was under discussion, the Wisconsin and Michigan
Railroad offered a very pretty example, in that the revenue-producing
half of its mileage lay in Michigan, while its shops, yards, docks, and
car ferries, comprising the great bulk of its physical property, were in
Wisconsin. This instance merely emphasized the fact that no State
valuation of an interstate property can settle finally and definitely
all the questions that arise.

_Assignment of Value to States._—The Mechanical Department was compelled
to handle the valuation of moving property, and to assign values as
between the States on such a basis as would be fair to all parties. The
Courts have been inclined to view the distribution of values between
territorial units on the track-mileage basis as being a fair one. The
study of the problem in Michigan indicates that while this method,
perhaps, is just in most cases, it will not hold in all. Assignment was
made upon several bases, as follows:

  (_a_) Main-line mileage;

  (_b_) Total track-mileage;

  (_c_) Car- and locomotive-mileage of equipment operating in
      Michigan;

  (_d_) Car- and locomotive-mileage, entire equipment;

  (_e_) Freight-car mileage of the entire system.

The results secured by these different methods show, in many cases, very
little difference; all are close, and no injustice is worked by any
method, while, in other cases, the figures are widely divergent.

The Lake Shore and Michigan Southern Railway owns a high-class main line
between Chicago and Buffalo, and for part of the way there are two lines
several miles apart; the entire line is double-tracked, and there is
much third track. None of this line is located in Michigan, except some
80 miles of single-track main line of the Michigan Division between
Toledo and Elkhart. The company, however, has several hundred miles of
branch line in Michigan, which comprises most of the branch-line mileage
of its system. These lines, generally, are far inferior to its main
line.

Any apportionment of its equipment between States on the basis of either
line-mileage, total track-mileage, or locomotive- and equipment-mileage
of total equipment will result in the assignment to Michigan of a value
far in excess of a proper or fair amount. An apportionment of locomotive
and passenger-car equipment on the basis of equipment-mileage or
equipment operating in the State, and for freight cars on the basis of
car-mileage of total equipment, was found to be most fair.

In making the assignment of values, this study was made for all
interstate roads, and such basis used as was apparently most fair in
each case, the department making a special effort not to assign to
Michigan undue values or those which could not be sustained.

_Freight Car Inspection._—One of the most perplexing problems which was
faced by the Mechanical Department was the proper and satisfactory
inspection and valuation of freight equipment. The freight cars owned by
the companies were scattered over the United States and Canada, and the
inspection of any considerable percentage of those owned by any company
was, of course, an impossibility. The fact that these cars had been
purchased in series, so that there were considerable numbers in a group,
all of the same age, and built according to the same specifications,
made possible a valuation by groups. The acceptance, however, of any
arbitrary percentage of depreciation by years, or the acceptance of the
rules of depreciation of the Master Car Builders Association, without
making independent investigation with a view of establishing the
correctness of the rule, appeared to be unwise.

The several companies submitted carefully prepared statements of
equipment. These statements were compared with the equipment register
and the reports to the Commissioner of Railroads. The prices used were
those of the rules of interchange of the Master Car Builders Association
wherever applicable.

Prices were furnished by the leading manufacturers, and in many cases
were secured from the books of the railroad company.

In order to determine the condition of the equipment, the inspectors of
the department personally examined 32,000 freight cars in Michigan and
adjoining States. Their reports were separated, classified, and analyzed
by groups, with the result that the inspection fully confirmed and
justified the use of the rule for depreciation of the Master Car
Builders Association, which was therefore applied. In the 1902 appraisal
this rule was accepted without any inspection or further study of the
problem.

The criticism of this part of the work by the appraiser of the State of
Washington is wholly unjustified, as the work was necessary in order to
qualify in Court and defend the rule adopted, and the actual cost of the
work was small.

_Locomotives._—The inventory of locomotive equipment was secured from
the companies, and checked against reports and the equipment register.
Personal inspection was made of every locomotive in the State, then a
complete description was prepared, and the percentage of depreciation
assigned. Curves of depreciation had been computed and plotted, and the
figures of the inspectors were compared carefully with the curve in
order to eliminate possible errors.

_Vessels._—Professor Sadler's appraisal of vessels involved a personal
examination of every vessel. This survey included:

  (_a_) The hull of the vessel and general equipment;

  (_b_) The machinery and boilers.

An independent estimate of the cost of reproduction and depreciation was
made, and, wherever possible, this was checked by comparison with the
detailed original cost. In case of material difference, various
shipbuilders were consulted, and independent estimates of cost were
secured. In every case these latter estimates were confirmatory of the
estimated cost of reproduction, which figures were used throughout the
appraisal.


                           Overhead Charges.

There are certain expenses connected inseparably with the construction
of any public work, which, on the completion of that work, are not
capable of physical identification, but which, nevertheless, belong to
and must be a part of the cost of the physical property. These expenses
are legitimate; and, as long as the property is operated, a very large
part, if not all, of the entire expense remains in the present value of
the property as a "going concern."

Appraiser Cooley and his staff took up the discussion of these items and
disposed of those which were carried into the valuation by the placing
of a percentage. These items are:

  _Engineering._—This covered all the cost of preliminary and
      location surveys, design, and supervision of construction of
      the work, and all expenses connected therewith. This was
      covered by a charge of 4% of the cost of reproducing the
      permanent way and structure, but not the equipment.

  _Legal Expense._—This item is inseparable from the construction
      work, and was fixed at one-half of 1% of the cost of the
      same items as affected by the engineering charge.

  _Organization Expense._—This covered the cost of promotion,
      financing, and general supervision of construction, together
      with general office expense. These items were covered by an
      application of 1½% of the cost of the above items.

  _Interest._—This item is intended to cover interest on money
      during the period of construction. The length of time taken
      to build would, of course, be variable. It was assumed that
      3% on the entire cost of construction and equipment would be
      conservative, and this figure was used.

  _Discount on Bonds._—This was not included, for the reason that
      it was considered, not as a proper capital charge, but
      rather as an adjustment of the interest rate to the existing
      market condition, and as chargeable to interest account and
      not capital.

The discussion among members of the staff indicated such a wide range of
opinion as to the proper percentages to apply, that the final
determination of the rates was passed upon by the Board of Review. There
can be no question as to the propriety of these items as proper elements
in the first cost of construction of a new railroad. On the theory that
the cost of reproduction of the physical property should include every
item of expense which would enter into the cost of reproducing the
property as it existed on the date of the appraisal, they are proper
terms to include in the appraisal. As to whether the fixed rates were
high enough in every case, is an open question.

_The Charge of Ten Per Cent. for Contingencies._—Perhaps no single
feature of the Michigan appraisal of physical property has been so
generally criticised as the charge of 10% of the entire estimated cost,
including all the percentage charges, to cover "contingencies."

At the time the first appraisal was made, the writer was not at all
satisfied that such an item, in such amount, should be included. The
reasons advanced were so strong that it was done, and the writer's
subsequent work has fully convinced him that it was proper and
justifiable, because:

  (_a_) The conditions under which this particular inventory and
      appraisal were made, as to time and lack of co-operation of
      the companies, made it practically certain that some items
      of value were missed in the appraisal, such as station and
      miscellaneous equipment, frogs, switches, track structures,
      buildings owned by the companies and occupied by others,
      etc.

  (_b_) That there were many and large elements of physical cost
      not ascertainable by a physical inspection, such as deep
      foundations, many thousands of yards of earth in swamps and
      sink holes (a very general condition of roads in the
      Southern Peninsula), concealed classification due to growth
      of grass or washing of banks, and many other cases of work
      actually done, invisible after a lapse of years. The writer
      knows of many such instances on property which was in his
      charge many years ago; in several cases there were
      expenditures of from 0,000 to $50,000 which are now entirely
      invisible to an engineer passing over the line.

  (_c_) The failure on the part of railroad companies to keep
      anything like a complete history of construction operations,
      and the changes of operating officials from year to year,
      cause the loss of record of practically all the expense due
      to extra hazard and risk which the construction engineer
      provides for by his "contingencies."

  (_d_) The inclusion in operating expense, every year, of sums
      which are properly construction, and which, if added to unit
      prices of construction work, would cause the cry that such
      unit prices were too high. For instance, the appraisal
      estimate on earth was 17 cents per cu. yd., with no
      allowance for overhaul. Very much of the grade in the State
      had actual costs far in excess of this figure, and
      practically every road spends a large sum annually for the
      first four or five years, which is charged to operation but
      is in reality a part of the cost of completing the roadbed.

  (_e_) No account was taken of appreciation of any of the
      elements entering into a road. There is no doubt that
      roadbed, for example, does appreciate, due to ballasting and
      track work. These items go far toward accounting for the
      contingencies item on an old road such as the Michigan
      Central.

  (_f_) There is a considerable amount of cost, which cannot be
      taken out of capital, where facilities are abandoned or line
      or grade changed. These changes are common to all growing
      roads; they are due to the demands for greater traffic; they
      are necessary to the welfare of the community served; they
      are often made at points where no charge of defective design
      will apply. They might be termed expenses due to the
      development of the State, and, in the development of the
      railroad business, they were absolutely necessary for its
      present standard of efficiency. They are incapable of exact
      and definite determination, and must of necessity be
      included as contingent expenses.

In the case of a new road, where the exact cost is ascertainable, the
records have been fully kept, the original plans are on file, and the
history is fresh in the minds of the officials, it will be readily
admitted that a charge for contingencies in large amount would not be
justifiable; but, in the case of the Michigan Central Railroad, a line
more than 50 years old, which has changed, rebuilt, and added largely to
its property; in the case of the Pere Marquette Railroad, made up of the
union of a dozen lesser properties, without any complete history; in the
case of dozens of little lines, without maps, profiles, or records, some
such allowance is fully justified and proper.

The experience of the writer, in the years that have passed since these
appraisals, leads him to the opinion that the difficulty of estimating
values on an old property are such that in many cases an appraiser might
add, with perfect propriety, even more than 10% for the contingency
item.

In computing overhead charges, no allowance was made for working
capital, and no addition to the physical valuation was made to cover any
such element as "going concern" value.


                          Right-of-Way Values.

Land values were the subject of a great deal of discussion during the
appraisal of 1900, but subsequent investigations as to actual railroad
purchases resulted in quite radical changes in some of the figures in
the later valuations. In view of the fact that many criticisms of these
values have been made by railway attorneys, special emphasis is here
given to the subject. The conclusions reached in Michigan in 1902 agree
so closely with the conclusions of Taylor in Wisconsin and Morgan in
Minnesota that it is thought advisable to give a rather full account of
the methods used in both appraisals, and the line of reasoning which
brought about the changes made in 1902.

The 1900 appraisals methods were as follows: Work in Detroit, Grand
Rapids, Saginaw, Bay City, and some other large cities was assigned to
special appraisers, who visited the cities, examined critically all the
property, conferred with leading real estate men and experts in values,
and placed an estimate per acre or per square foot. This part of the
work was done with great care, and was substantially unchanged in the
later appraisals.

In all other land valuations, in cities and villages, and country right
of way, a personal examination was out of the question without making a
very large and expensive addition to the staff, as the field engineers
generally were not familiar with realty values, and could not take the
time to make the large number of inquiries. The appraiser did not see
his way clear to organize a special department, therefore the matter was
turned over to a sub-department of the Civil Engineering Section, the
work of which may be briefly outlined, as follows:

Lands were classified as:

  (_1_) Farm land,

  (_2_) Barren land,

  (_3_) Villages having a population of less than 500,

  (_4_) Villages from 500 to 3,000,

  (_5_) Cities having less than 10,000,

  (_6_) Cities having more than 10,000.

The percentage of waste land was fixed as a result of interviews with
roadmasters, superintendents, and other officials and employees of the
roads, by reports from field inspectors and others.

Letters of inquiry were sent to real estate men and bankers in every
county in the State (some 500 being communicated with), as to land
values in the town or county of each. The responses, which were numerous
and indicated considerable care in preparation, were classified, and on
these data, supplemented by as much personal inspection as it was
possible for a few men to give in a limited time, the values of the
various classes of land were determined by a system of averages. The
naked land values were then taken, and to them were added, as follows:

South of a line east and west through Saginaw, 125% plus a fixed charge
varying from $8.50 per acre downward was added to the so-called naked
land values for farm land. No waste land values were considered in this
district. North of this east and west line: Farm land, 100% and a fixed
charge of $3 per acre and upward; waste land, 200% plus a fixed charge
of $3 per acre; for all village lands, 125% plus $8.50, fixed charge;
for all city lands, 100% plus $8.50, fixed charge.

The fixed charges were intended to cover the expense of acquiring
abstracts, recording deeds, etc. Slightly different figures were made
for the Upper Peninsula.

The result of this work was a set of very low figures in many counties,
the average price per acre hardly reaching the going price of improved
farm lands. There was so little time to review these figures after they
were in shape that they were used in 1900, although the appraiser was
convinced that they were generally too low.

In the appraisal of 1902 a very careful study of real estate values was
made. The offices of Registers of Deeds in ten or twelve counties were
visited, a careful abstract of all railway transfers for a period of 10
years was taken off, the acreage determined, the average price per acre
for different classes of land computed, and then a very careful study of
transfers of adjacent improved and unimproved lands was made. As a
result, material increases were made in the farm land values, waste land
values were eliminated, the 1900 valuation, made by special appraisers
in large cities, was practically unchanged, while very radical changes
in the way of equalization of values of lands in villages and small
cities were made.

Inasmuch as the 1902 valuation was at issue in the Courts, the writer
believes he is justified in discussing at some length the deduction of
the staff on the conclusion of the 1902 preliminary studies, which led
to the final adoption of the new figures.

One would fall into error if country values for farm purposes were
conflicted with country values for railroad purposes. There is,
undoubtedly, a close relationship between the two classes of values;
this the writer has endeavored to discover, and it is indicated in
Tables 2 to 6. The use to which land is put can and does change its
value. Farm land in a certain township may be worth $50 per acre for
farming, but the discovery of oil would affect values, as far as oil
purposes are concerned. The presence of a vein of coal would give a
distinct value for mining purposes. Farm prices would not govern values
for any special use, such as oil drilling, mining, or railroad
operation.

In the case of city business property, farm prices cannot be applied, as
the use to which the land is put and the buildings placed on it give it
a greatly increased earning power, and hence increased value. Thus, with
a railroad right of way, the continuity of the strip of land, the
severance of lands crossed by it, the greater earning power it derives
from the construction placed on it, in short, the uses to which it is
put, give it a value far in excess of adjoining lands. An excellent
proof of this is found in the fact that many thousands of miles of right
of way have been bought by promoters and either sold to a company, which
built the lines, or used in financing the road. In no case has the
selling price been based on farm values.

It is not contended that railroad land values do not bear a direct
relation to land values for other purposes, as those things which tend
to increase general values usually make the construction of a railroad
profitable, and the better and more fully developed the country, the
greater is the need for transportation facilities and the higher the
prices of land for all purposes. This is shown in the figures submitted
herewith.

For purposes of appraisal, therefore, in 1902 the average value, as
derived from the 1900 appraisal, was taken, and, by comparison with
actual purchases, an attempt was made to ascertain the relation existing
between the appraisal figures of 1900 and the usual purchase price for
railroad properties, as determined by actual transfers. In making these
figures the appraiser was forced to the following conclusions:

  (_1_) That the naked land value is not a proper one to use in
      country lands, but that the going value of country lands
      with all improvements should be used as a basis for
      computing the added increment due to railway use;

  (_2_) That a classification of farm land and waste land should
      not be made, except as a basis for arriving at the relative
      differences in quality of land in different sections of a
      county;

  (_3_) That the added value for railroad purposes is due to the
      three elements:

          (_a_) Continuity,

          (_b_) Severance or damages,

          (_c_) Changed earning power,

      all of which the farmer or owner has cognizance of in making
      his price;

  (_4_) That in making up land values, account should be taken of:

          (_a_) The cost of acquiring the land, or expense,

          (_b_) The cost of the land itself.

The reasons are:

_I_.—In making a price on a 40-acre farm, the owner does not make two
prices, one on land and one on improvements. He arrives at a flat price
per acre for the entire farm, and usually asks more per acre for a part
than the whole. A man who valued his land at $100 per acre, with
improvements, would hardly sell 5 acres from a corner of his land, even
for residence purposes, at naked land prices.

The 1900 appraisal was based on naked land prices, as estimated by a
number of citizens of each county, and this flat rate was used in making
figures for the so-called "Market Value of Right-of-Way." It is fair to
assume that a railroad company can purchase large tracts of land for
gravel pits, or a narrow strip adjoining and widening its existing right
of way, at about market prices, as the elements of severance, abutting
damages, etc., are absent. Prices for this class of land ought to be,
and usually are, lower than those paid for a new right of way.

       TABLE 2.—COUNTRY LAND.—ADDITIONAL STRIP FOR WIDENING RIGHT
                       OF WAY, GRAVEL PITS, ETC.

 ═════════╤════════════════════════════════════════╤══════════╤═════════
  County. │     Description: Road and purpose.     │ Average  │ Average
          │                                        │per acre, │per acre,
          │                                        │   1900   │transfer.
          │                                        │appraisal.│
 ─────────┼────────────────────────────────────────┼──────────┼─────────
 Jackson  │Michigan Central. Widening right of way │    $84.47│  $156.08
 Kalamazoo│Michigan Central. Additional right of   │     89.41│   140.00
          │  way near Augusta                      │          │
 Kalamazoo│Grand Trunk Western. Additional strip   │     94.59│   120.50
          │  for double tracking                   │          │
 Cass     │Michigan Central. Gravel pit            │     84.97│    94.15
 Cass     │Grand Trunk Western. Additional strip   │     71.79│   203.53
          │  for double-tracking                   │          │
 Berrien  │Michigan Central. Additional right of   │    109.40│   113.66
          │  way                                   │          │
 Washtenaw│Michigan Central. Additional right of   │     49.35│   130.68
          │  way                                   │          │
 Washtenaw│Ann Arbor. Additional right of way      │     88.60│   116.12
 Ionia    │Pere Marquette. Gravel pit              │     77.50│   125.00
 ═════════╧════════════════════════════════════════╧══════════╧═════════

  Actual purchases are averaged from recent transfers, and represent
  consideration paid owners, but not cost of acquiring.

  The 1900 appraisal averages show country land after fixed charges
  and percentages are added.

  The tables given herewith are summarized from a very large mass of
  information introduced as evidence in a suit of Michigan Central
  Railroad _et al._ _vs._ Powers (The Michigan Tax Cases), and are
  selected as average examples of conditions throughout the Southern
  Peninsula.

It is evident from the figures in Table 2 that no such naked land values
as those used in 1900 were considered by the farmers in placing values
on their lands, as the sales covered in that table do not involve any
large element of damages. All transfers are of a strip a rod or more in
width adjoining an existing right of way.

_II._—It is true that in some sections of Michigan there are large
tracts of barren or low-priced land. In 1900 barren land prices were
used, and were much lower than farm land; in the poorer parts of the
State large percentages of barren land were used. This fact brought the
average per acre of country land, as applied in the appraisal, very low
in many of the counties, and justified the appraiser in using the
average country price of 1900 as the base price for a re-valuation.
Generally, the 1900 appraisal averages for country lands were fair
indices of the difference in actual value in different parts of the
State.

In the 1900 appraisal, the Michigan Central was credited with having, in
Jackson County, 309.1 acres of farm land (naked value, $38, average rate
$93.30), and 34.35 acres of barren land at $5 per acre. The field
inspectors reported that part of the district between Parma and Albion,
in the vicinity of Bath Mills, was waste or barren land. The Jackson and
Battle Creek Traction Company parallels and adjoins the Michigan Central
Railroad right of way from Parma to Bath Mills. An investigation of
records of deeds showed that they bought 25.02 acres of land in this
district at $65.79 per acre, and that the average price of all their
land in the county was $239.52 per acre.

While there was a marked difference in the rates of different grades of
country land, no one would be justified in putting any land south of a
line drawn from Saginaw to Muskegon at prices as low as $2 to $10 per
acre. An average based on the 1900 classification of lands would
probably eliminate all waste land classifications, without doing any
injustice.

     TABLE 3.—AVERAGE VALUES PER ACRE OF COUNTRY LANDS, OF THE 1900
     APPRAISAL, OF THE JACKSON, LANSING AND SAGINAW RAILROAD, AFTER
           ALL THE PERCENTAGES AND FIXED CHARGES WERE ADDED.

                          ════════════╤═══════
                            County.   │Price.
                          ────────────┼───────
                          Jackson     │ $75.71
                          Ingham      │  74.90
                          Clinton     │  42.38
                          Shiawassee  │  67.18
                          Saginaw     │  40.80
                          Bay         │  38.69
                          Arenac      │  32.47
                          Ogemaw      │   8.69
                          Roscommon   │  10.74
                          Crawford    │   8.41
                          Otsego      │  15.62
                          Montmorency │  12.38
                          Cheboygan   │  17.13
                          ════════════╧═══════

Table 3 illustrates quite clearly the extremely low figures applied in
many counties in the 1900 appraisal, and also represents quite well the
relative difference in value in the different counties.

That the 1900 rate varies about as the purchase price, is shown by the
fact that the Pere Marquette Railroad built a line in Montcalm County,
buying 155.3 acres at an average price of $135.19 per acre, while the
1900 appraisal showed an average of $29 on the 918 acres appraised. The
purchase price was 4.66 times the 1900 appraisal.

In Calhoun County, the Grand Trunk Railroad bought 63.2 acres at $491.13
per acre, while the 1900 appraisal was $61.44 on all the country land in
the county, or only one-eighth of the actual purchase price.

_III._—There can be no doubt that a railroad right of way costs much
more than an equal acreage of farm lands. The writer has always been
inclined to hold the view that an ordinary right of way through good
farming country would cost from two to three times farm prices, no
matter how much care is used in the acquisition of the land. In recent
years the price of right of way has been greatly increased. The Newton
and Northwestern Railroad right of way, in Iowa, cost $267 per acre, on
a line 80 miles long. This is nearly all country land, about 1 mile in
the outskirts of Boone (population 12,000), and about ½ mile in Newton
(population 6,500), being the only city land to increase the average.
The Rock Island System and the Chicago Great Western paid higher country
prices in the same territory. This line is in such country as Southern
Michigan, and land is held at from $65 to $100 per acre.

The Toledo Urban and Interurban right of way, in Lucas County, Ohio, was
bought by the writer in 1901 at an average net price of $329.21 per
acre. The average assessed valuation is $55 per acre. The going value of
farm lands will range from $100 to $225; probably a fair average is $135
per acre. The prices paid by Michigan railroads are fully sustained by
these personal experiences.

The figures in Table 4 show that the actual average price paid for new
right of way is greater than the average of the 1900 appraisal, after
the 125% and fixed charges are added, by from 230 to 726 per cent.

The argument that a change of line costs more than a new line is not
sustained by Table 4. In Jackson County, the Michigan Central Railroad
changed its line at an average cost of $165.67 per acre. The Jackson and
Battle Creek, a new line, parallel with and adjoining the Michigan
Central, paid $239.53; the Jackson and Suburban, a new electric line,
paid $293.34, and the "Ypsi-Ann" Electric paid $393.74. All the new
lines in Monroe County are higher than any changes of line in similar
country. The Ann Arbor change in Washtenaw County, located by the
writer, is at one point 3 miles from the old right of way, and only at
the two ends of the 7-mile line does it run on farms owned by parties
crossed by the old road; therefore, to all intents and purposes, it is a
new line.

The naked land values used in 1900, being clearly too low, were of no
use and were dropped. The so-called market price of right of way as
given in 1900 was misleading.

              TABLE 4.—COMPARISON OF COUNTRY LAND VALUES.

The actual purchases are averaged from recent transfers, and represent
consideration paid to land owners, but not the cost of acquiring.

The 1900 appraisal averages show all country land after fixed charges
and percentages were added, per rule of 1900.

 ═════════╤═══════════════════╤══════════╤═══════════════════╤═════════
  County. │     Railroad.     │   1900   │     Railroad.     │ Actual
          │                   │Appraisal,│                   │transfer,
          │                   │ average  │                   │ average
          │                   │per acre. │                   │per acre.
 ─────────┼───────────────────┼──────────┼───────────────────┼─────────
 Jackson  │Michigan Central.  │    $71.36│Michigan Central   │  $165.67
          │Air Line           │          │Air Line. New Line │
          │Michigan Central.  │     88.47│Jackson and Battle │   239.53
          │                   │          │Creek. Average     │
          │                   │          │entire county      │
          │Michigan Central.  │      5.00│Jackson and Battle │    65.79
          │Waste land         │          │Creek. Wasteland   │
          │Michigan Central.  │     93.30│Jackson and Battle │   298.51
          │First-class farm   │          │Creek. First-class │
          │                   │          │farm               │
          │Jackson, Lansing   │     75.72│Jackson and        │   293.34
          │and Saginaw.       │          │Suburban.          │
          │Average country    │          │                   │
          │values             │          │                   │
          │                   │          │Detroit, Ypsilanti │   393.74
          │                   │          │and Ann Arbor      │
 Monroe   │Flint and Pere     │     93.30│Flint and Pere     │   215.21
          │Marquette.         │          │Marquette. Monroe  │
          │                   │          │to Toledo          │
          │Michigan Central.  │     93.30│Toledo and Monroe. │   461.13
          │                   │          │Electric           │
          │Lake Shore and     │     93.30│Detroit and Toledo │   214.38
          │Michigan Southern. │          │Shore Line. (Duffy)│
          │                   │          │Detroit and Toledo │   262.49
          │                   │          │Shore Line. (Burt) │
 Kalamazoo│Michigan Central.  │     89.41│Michigan Central.  │   236.22
          │                   │          │Kalamazoo to       │
          │                   │          │Mattawan           │
 Van Buren│Michigan Central.  │     66.54│Michigan Central.  │   196.00
          │                   │          │Kalamazoo to       │
          │                   │          │Mattawan           │
 Cass     │Michigan Central.  │     84.97│Michigan Central.  │   260.61
          │                   │          │Cut-off near       │
          │                   │          │Pokagon            │
          │Michigan Central.  │     10.00│Michigan Central.  │    60.00
          │Wasteland          │          │Waste on cut-off   │
 Genesee  │Grand Trunk        │     98.10│Grand Trunk        │   337.56
          │Western.           │          │Western. Improved  │
          │                   │          │line               │
 Genesee  │Pere Marquette.    │     80.81│Flint and Pere     │   234.00
          │                   │          │Marquette. Change  │
          │                   │          │of line            │
 Montcalm │Pere Marquette.    │     29.00│Pere Marquette-    │   135.81
          │                   │          │Greenville-Stanton.│
 Calhoun  │Grand Trunk        │     61.44│Grand Trunk        │   491.13
          │Western.           │          │Western. Change of │
          │                   │          │line west of Battle│
          │                   │          │Creek              │
 Calhoun  │Michigan Central.  │     74.38│Jackson and Battle │   218.74
          │                   │          │Creek. Electric    │
 Tuscoia  │Michigan Central.  │     60.75│Michigan Central.  │    73.04
          │                   │          │Caro-Owendale      │
 St. Clair│Pere Marquette.    │     43.18│Rapid.             │   287.05
          │                   │          │Anchorville-Marine │
          │                   │          │City               │
 Washtenaw│Ann Arbor.         │     38.60│Ann Arbor. Change  │   285.50
          │                   │          │of line near Ann   │
          │                   │          │Arbor              │
 Ionia    │Pere Marquette.    │     77.50│Pere Marquette.    │   112.30
          │                   │          │Lowell-Belding     │
 Manistee │Ann Arbor.         │     25.40│Ann Arbor. Change  │    47.33
          │                   │          │line near Harlan   │
 Osceola  │Pere Marquette.    │     40.03│Pere Marquette.    │    57.93
          │                   │          │Change line near   │
          │                   │          │Evart              │
 ═════════╧═══════════════════╧══════════╧═══════════════════╧═════════

Having shown that there is an increase in cost of railroad over farm
land, the question arises: Is it legitimate? If it is a proper item of
cost, has it a place in the present value column?

In building a new railroad, engineers prepare their estimates of cost,
including grading, rail and fastenings, ties, bridges, and, among other
items, right of way. Their clients provide funds to build the line, and
furnish, among other items, cash for the right of way. The right-of-way
account in no wise differs from that of any other item of physical cost.
The right of way, with all its hold-ups, items for damages, court costs,
legal expenses, bills for personal services and expenses in securing it,
abstracts and recording of deeds, is just as much an element of physical
cost as the rails. The cost of acquiring the right of way is as proper
an element as charges for inspecting the rails, freight charges on them,
the loading and unloading, or any other charges that enter into the cost
of rails delivered to the track-laying contractor.

Should the cost of reproduction of right of way be carried to the
present value column? Clearly, yes. If a road is unfortunate enough to
buy its rails when they are at a price of $60 per ton, the full price is
charged to capital account; and when the line is sold to some large
corporation, no reduction is made, even though the price of rails be
much less at the time, but the selling price is based on the
construction account as a whole.

The same is true of the right of way. In no case which has come under
the writer's notice has a new company, or a set of promoters disposing
of a new line or a new right of way, ever consented to deal except on
the basis of construction account, plus promoters' profit. The cost of a
right of way is increased on account of continuity. A farmer is
justified in increasing his price per acre by reason of the fact that
the road must have a continuous line, regardless of how it affects the
individual. He must rearrange his fields, replant his orchard, change
his fences, ditches, and tile lines, and re-adjust his entire property
to accommodate the necessity of the road. He must also take into account
severance or damages. He is compelled to cross the line at an
inconvenient place, open and close two gates in every lane or at every
crossing, drive his cattle back and forth to water, haul his produce
over a short heavy grade across the track, and he must not interfere
with the railroad. He is in constant danger of loss of property from
fire or from accident, and he is in personal danger every time he passes
from his own land on one side of the railroad to his own land on the
other side. Every one who has bought right of way knows these arguments,
and is aware that the farmer knows them and charges extra on account of
them.

The law provides that, in condemnation, the jury shall take into account
two elements, the value of the land, and damages. The railroad pays
them, and very promptly charges the entire cost to the right-of-way
account. No one will question the propriety of the farmer taking them
into account in fixing his price. The value of continuity to the
railroad can hardly be measured in dollars and cents.

A fair illustration of continuity may be found in coal lands. A promoter
will secure option on a large acreage. As long as his holdings are
disconnected and widely separated they are of no more value than
adjoining lands, but let him close options on a large block of land all
in one body, and immediately he can add from 100 to 200% to the value of
his land for mining purposes. This added percentage is due to
continuity.

The conditions surrounding the purchase of railway lands in Michigan
have changed materially in the past few years. In a new country, without
means of transportation, land values are low, and, in order to open new
markets, land owners can afford to donate the right of way. Undoubtedly,
a very large percentage of the total right of way on the older lines was
either donated or bought at very low prices. As a community grows and
develops, acquires new industries, and receives new improvements,
property values increase; and, along with a general appreciation of
other values, those of railroad property must increase. It would
certainly be true that the present value of the site of the Majestic
Building, in Detroit, is not the same as it was in 1850; the argument
that its actual cost in 1850 was, say, $200, would not be any
justification for such a value to-day. Equally is it true that the value
of property owned by the Michigan Central Railroad is not to be measured
by the price paid for it 50 years ago. The greater business, and the
larger income derived from that business, make the Detroit of to-day a
much more valuable terminal for the road than the Detroit of 50 years
ago.

The same argument will apply to any city which has grown up after the
construction of railroads. The original right of way was farm land and
may have been a donation, but the change from farm to city certainly
increases the value of the railroad land just in proportion as the
surrounding land increases.

The same reasoning is properly applicable to lands which decrease in
value. Where a railroad buys right of way to gain access to valuable
timber lands, and, after the removal of the timber, the land is too poor
to support a population, the present value should depreciate in the same
ratio as the surrounding land, and immediately on its abandonment as a
right of way it would cease to have a railroad value.

In an appraisal, it appears to be fair to base the cost of reproduction
on the cost of building a new line on the location of the road under
appraisal, all other means of transportation remaining as they are
to-day, so as to secure as nearly as possible the conditions that would
be encountered by a new company building a new line on this location.

The argument was made in 1900, and reiterated frequently, that railroad
companies secure many donations. It may safely be said that, in a
developed country, such as in the south half of the Lower Peninsula, the
donations are of little account. Few donations were found in an
examination of records of deeds covering 10 years; and in some cases the
conditions were so burdensome that it may be said that the gift land was
the most expensive. A condition for a cattle-pass costing from $400 to
$600, a side-track costing from $1 to $1.50 per ft., and other like
specifications are found; and in many deeds where a liberal
consideration is named conditions which add greatly to the cost are not
infrequent.

The recent new lines in Southern Michigan secured but few donations,
although all considerations of $1 and other good and valuable
considerations were classed as donations unless the contrary was
susceptible of proof. In the case of the Ann Arbor Railroad, in
Washtenaw County, the $1 consideration represents a higher price than
the average, this being known by the writer, as he bought it. The same
is true of the Detroit and Toledo Shore Line, in Monroe County. In
making an appraisal, no deductions should be made for donations, if
there are any, as the fact that land is donated does not indicate
absence of value; nor should an addition be made to the appraisal value
on account of the fact that a road has been held up and compelled to pay
exorbitant prices in certain localities.

In some counties the base values of land in villages and small towns
were given at ridiculously low prices in 1900; some are as low as from
$50 to $100 per acre in towns of from 1,000 to 3,000 population. When
one stops to consider that a lot 4 by 8 rods contains ⅕ acre, and that
such lots in a town of considerable size range from $50 to $300 each, it
is readily seen that from $250 to $1,500 per acre are not excessive
figures. The figures for an adjoining county were often very high, and
village values were put up to substantially full value. The result of
adding percentages in 1900 was to magnify discrepancies, and little
villages of from 200 to 500 population in one county were appraised at a
higher rate than towns of from 2,000 to 5,000 in the next.

In 1902 the appraiser undertook to equalize all such discrepancies, and
found that no hard-and-fast rule would apply. A comparison of village
values, as determined by actual purchase, with the 1900 appraisal, is
given in Table 5.

The 1900 appraisal for city lands, outside of Detroit and Grand Rapids,
was generally very conservative or low. In some cases the figures were
extremely low.

           TABLE 5.—AVERAGE PRICE PER ACRE FOR VILLAGE LAND.

Actual purchases are averaged from recent transfers. The 1900 appraisal
averages are averages of prices as applied after all percentages and
fixed charges are added.

 ══════════╤════════════════════╤════════════╤════════════╤════════════
  County.  │   Name of road.    │  Name of   │ Appraisal, │   Actual
           │                    │  village.  │   1900.    │ transfer.
           │                    │            │Average per │Average per
           │                    │            │   acre.    │   acre.
 ──────────┼────────────────────┼────────────┼────────────┼────────────
 Jackson   │Michigan Central    │Parma       │     $177.25│   $1,166.65
 Van Buren │Michigan Central    │Mattawan    │      571.00│    2,439.04
 Tuscola   │Michigan Central    │Caro        │      571.00│      733.42
 Oakland   │Pere Marquette      │Clyde       │      346.00│      333.00
 Oakland   │Pere Marquette      │Milford     │      571.00│    1,136.37
 Genesee   │Pere Marquette      │Grand Blanc │      121.00│      327.87
 Kent      │Pere Marquette      │Lowell      │      571.00│    1,552.26
 Ionia     │Pere Marquette      │Belding     │    1,000.00│      967.77
 Washtenaw │Michigan Central    │Dexter      │      571.00│      718.75
 Washtenaw │Michigan Central    │Delphi      │      233.50│    2,383.34
 Cass      │Grand Trunk Western │Cassopolis  │      458.50│    1,600.00
 Cass      │Grand Trunk Western │Edwardsburg │      222.25│      466.67
 ══════════╧════════════════════╧════════════╧════════════╧════════════

The conclusion reached by the appraiser in 1902 was that, for railroad
purposes, right of way is worth what it costs to produce it. It would be
just as consistent to claim that a railroad has a misfortune in having a
river to cross, and that no value should be placed on the bridge which
spans it, as to claim that right of way, which costs three times
farm-land values, should not be valued at a higher figure than farm
land.

          TABLE 6.—COMPARISON OF VALUATION FIGURES WITH ACTUAL
     CONSIDERATIONS—COMPARISON OF IMMEDIATELY ADJOINING PROPERTIES,
                        GRAND RAPIDS, MICHIGAN.

              The prices are per square foot or per acre.

 ═══════════════════════════╤═════════╤═══════════╤═══════════╤═════════
          Location.         │ Size of │ Michigan  │   Pere    │ Actual
                            │  lots.  │  Central  │ Marquette │transfer.
                            │         │appraisal. │appraisal. │
 ───────────────────────────┼─────────┼───────────┼───────────┼─────────
                            │ ft. deep│per sq. ft.│per sq. ft.│
 Fulton to Island Street    │50 by 100│           │      $2.00│    $1.40
 Island to Oakes Street     │50 by 100│           │       2.00│     1.22
 Oakes to Cherry Street     │         │           │       2.00│     1.33
 Cherry Street Frontage     │130 deep │      $1.23│       1.23│
 Cherry to Williams Street  │50 by 130│           │           │     1.55
 Williams Street Frontage   │130 deep │       0.92│       0.54│
 Williams to Bartlett Street│         │           │           │     0.76
 Bartlett Street Frontage   │130 deep │       0.77│       0.46│
 Bartlett to Goodrich Street│         │           │           │    0.625
 Goodrich Street Frontage   │130 deep │       0.62│       0.38│
 Goodrich  Street  to       │         │           │           │    0.395
   Wealthy Avenue           │         │           │           │
 Prescott to First Street   │         │       0.25│           │     0.54
 First to Second Street     │         │       0.25│           │     0.16
                            │         │  per acre.│  per acre.│
 Land on Hall Street        │         │      1,500│      1,359│     3.75
 North side of Hall Street  │         │           │      1,000│per acre.
 Hall to Stevens Street     │         │      1,500│        800│ 1,351.11
 On Crofton Street          │         │        400│           │   400.00
 ═══════════════════════════╧═════════╧═══════════╧═══════════╧═════════

The problem of an appraiser is to determine, with the best evidence at
hand, what land is fairly worth for railroad purposes at the time of
appraisal. He must take into account the railway-purpose increment, if
he is consistent in his appraisal.


                          Non-Physical Values.

The foregoing narrative account of the general field and office handling
of the Michigan appraisal of physical property, while not touching on
matters of principle of valuation, except as to land values, is
submitted as describing briefly the machinery of the appraisal. A number
of very important issues were raised which have to do with the theory of
valuation. These are worthy of discussion at length, in the subsequent
consideration of the method of determination of a fair value, but are
not here referred to. Within any short limits it is impossible to give a
comprehensive description in detail of all the work of the Michigan
appraisal. Several articles descriptive of this work have been written,
giving quite full extracts from the various sets of rules which were
promulgated, and describing some phases of the work in much more detail
than is here attempted.

The physical valuation, as represented by two figures—the cost of
reproduction of the physical property, and its present value—was
submitted to the Board of State Tax Commissioners as the work of
Professor Cooley, and in most of the literature descriptive of it, it
has been termed the "Cooley Appraisal."

After the completion of Professor Cooley's work, his figures were
submitted to Professor Henry C. Adams, who had been making a study of
the income accounts of the various companies, and to whom had been
assigned the duty of determining the non-physical or franchise values of
the properties.

Professor Adams has described[5] very fully the plan adopted for this
work, and this plan has been commented on so fully that any lengthy
description is deemed unnecessary. It appears to be perfectly proper,
however, to correct certain misstatements regarding this work.

When it was first determined to make the appraisal, Professor Cooley—not
Professor Adams—was requested to take charge. The assignment to
Professor Adams of the non-physical valuation was made after the
physical valuation was well under way.

The use of a negative or subtractive non-physical value was considered,
and advised by Professor Adams. The work was not undertaken with a view
of "increasing the assessments," but to put the Tax Commission in
possession of a figure which would represent the business value of the
property as well as the physical value.

Professor Adams held that the non-physical element of value was not a
simple commercial element, but included:

                  {to be a corporation,
    The franchise {to use public property,

    The possession of traffic not exposed to competition,

    The possession of traffic through connections,

    The benefit of economies due to density of traffic,

    The value due to organization and vitality of industries served.

He also held that, as nothing visible or tangible gave support to this
value, it must be determined on the basis of information secured from
the income accounts of the company.

Without going into any complete description of Professor Adams' method,
it may be said that he made an analysis of the income accounts, and,
after providing for operating expenses and taxes, he deducted, as an
annuity properly chargeable to capital, a certain percentage of the
appraised value of the physical properties. Any remainder was
capitalized to give the true value of the immaterial element, or the
business value.

In the rates of capitalization and annuity used in 1902, there were
certain changes, making them differ from those used in 1900, and
certain changes in the detail of analysis of income accounts and
methods of determining the rates of interest which are entirely
immaterial to the present narrative. The work was of great importance
as being the first exposition of this method of obtaining non-physical
values. It was a fair, logical, and business-like attempt to determine
those elements which give a well-designed, economically-built, or
advantageously-located property a greater value as a money-earning
concern than the actual capital invested, or than the actual value
remaining in its physical property.

It will be seen that, in the case of a property in which the surplus
earnings depend on excessive rates for service, it will fail as a method
of determining a value for use as a basis of rate-making; and it fails,
in the form in which it was used in 1900 and 1902, to bring out those
negative or subtractive elements which may be determined from the income
accounts, in the case of properties which do not earn a fair return on
the investment. This, however, was due to the fact that the taxation
laws of Michigan made no provision for any reduction of value because
property was idle or non-productive, and any such deduction in the case
of corporation property would place it on a different basis from other
property. Professor Adams and his associates, therefore, applied only
positive values, where any such were found, although advocating the use
of negative values.

The writer has seen no criticism of Professor Adams' work which is not
apparently incited by, either the direct interest of corporations in
lowering valuations for taxation, or by an effort to confuse the subject
of valuation so as to discredit the work in the eyes of taxing
authorities. Any person competent to discuss the matter, who has given
Professor Adams' method careful thought, will be forced to the
conclusion that this was a long step in the direction of the final
solution of these important and perplexing elements of value.


             History and Results of the Michigan Appraisal.

Based on the valuation of 1900, the Board of State Tax Commissioners was
enabled to comply with the statute in reporting to the Legislature. New
laws were passed, sundry suits were brought, and, finally, the case of
the Michigan Central Railroad _vs._ Perry F. Powers, Auditor-General,
and a number of other cases in behalf of other roads, were brought to
trial before the United States Court for the Western District of
Michigan.

This Michigan Central case was a suit to restrain the collection of
taxes based on the new assessment, the railroads claiming that their
property was assessed at full value, while general properties of the
State were assessed at a considerably lower percentage than full value.
This suit was essentially a valuation of the railroad properties as of
April, 1902. This work was done along the same line as the former
valuation, by a portion of the same staff. The old work was brought down
to date, and certain special studies were made, which resulted in a
change of right-of-way valuation, as has been related.

In the trial of the case of Michigan Central Railroad _vs._ Powers, the
two valuations were fully testified to by all the men engaged, and the
record relative to the appraisal fills several volumes.

Subsequently, in 1906, Professor Cooley was engaged by the
Attorney-General, and, re-assembling the staff, brought the work down to
date as of April, 1906.

There has been no permanent force engaged on the work in Michigan, and
the re-appraisals have only been made as actual necessity demanded.

_Market Value of Stocks and Bonds._—During the progress of the appraisal
of 1900 an independent force of men was engaged in studying the market
values of stocks and bonds of Michigan roads with a view to securing
information on every possible line that would aid the appraiser in
reaching proper conclusions, or enable him to check his figures. These
figures were used only as a check, and no report of the details of this
work was submitted.

_Error in Published Reports as to Michigan Work._—In several articles
descriptive of the Michigan work, one quite serious misstatement of fact
has inadvertently been made. The writer is not quite sure how or where
the wrong impression originated, but it has been noted in several
articles and editorials.

Substantially, all accounts are similar to that of Professor Taylor,[6]
which is:

"In looking over the notes and results of the work done in Michigan, it
was noticed that Mr. Cooley's engineers, car-men and other experts went
over the property of each railway company and enumerated and valued the
same, and then the railway company generally had its own men perform the
same work in order to check up the appraisal made by the State
authorities. Thus, this expensive work was unnecessarily duplicated."

Undoubtedly this statement was made in good faith, and has gained
currency by not having been corrected, but it is not the fact.

The Chicago and Northwestern Railway took immediate steps to make
surveys and secure data, as has been described, and made a complete
appraisal, using the Michigan forms. The result of this appraisal was:

           Chicago and Northwestern, present value $8,551,530
           State appraisal, present value           8,281,090

In this case the railroad had no records, and the work was of value to
them, not only as a check on the work of the State, but also as giving
them complete records of permanent way. It was not done independently
of, and after, the State work, but was organized so that the field work
of both railroad company and State was done at the same time.

No other complete work of valuation was done by the railroad companies.
During the trial of the cases, no contrary or different valuations were
set up. No special attack was made on the work, except to select here
and there some specific example of a building which was appraised at a
higher figure than cost, perhaps half a dozen in all, and to introduce
expert evidence, particularly on land and right-of-way values. Aside
from the money expended on the litigation, there were no expenditures by
the roads in checking up the work. On the contrary, a number of
managers, at their own expense, had typewritten copies of the final
report as to their own lines made, in order to file in their records.

It is a fact that only one of the seventy-eight roads made a complete
appraisal, covering 387.8 miles of main line, and none of the other
roads or mileage went to any considerable expense.

_The Cost of the Work._—No complete statement of the total cost of the
work of valuation in Michigan has ever been issued as a public document.
The cost of the work, including salaries of appraiser, engineers,
assistants, clerks, all expenses of the Board of Review, all expenses
connected with Professor Adams' non-physical appraisal, also all office
rent, stationery, supplies, telegraph, telephone, and railroad expenses,
printing and binding—in short every dollar chargeable to the Michigan
railroad appraisal of 1900—footed up to $70,604.21.

The exact mileage of roads in the State was:

            Main track                       7,082.35 miles.
            Second track                       164.83   "
            Branches                           730.92   "
            Spurs and sidings                2,904.70   "
                                            _________ ______
            Total                           10,882.80 miles.
            Average cost per main-line mile            $9.97
               "     "    "  total-track "              6.50

The exact figures of cost of the subsequent work of appraisal, or the
costs of the litigation, are not available to the writer. In a general
way, it may be said that the cost to the State of the railroad tax cases
was not far from $75,000, and that the expenses of the second and third
appraisals were less than $50,000, so that, to date, the entire cost to
the State of Michigan is less than $200,000 for the three appraisals and
the litigation growing out of them.

Some information as to details of costs may not be out of place. All
employees were paid a salary and required to provide their own
subsistence. Salaries ranged from $250 to $500 per month for experienced
men, from $125 to $250 for men with only a few years of experience, and
from $75 to $125 for assistants and clerks.

All traveling expenses (except hotel and subsistence) were paid, the
State issuing mileage books to all employees, and receiving a complete
check on the movements of every man through the mileage bureau. The
telegraph and long-distance telephone were used almost exclusively in
communication between the office and the men in the field, all bills
being paid by the State. All expenses of inspection by hand-car,
velocipede-car, etc., were paid by the State, except as the roadmasters
made trips with the inspectors.

The unvarying policy of the appraiser was to reimburse the companies for
all extra expenses incurred on account of the work, and to accept no
transportation or favors from any company.

       TABLE 7.—GRAND SUMMARY OF RAILROAD APPRAISAL OF 1900 AS TO
                 SEVENTY-EIGHT INCORPORATED RAILROADS.

                          PHYSICAL APPRAISAL.

 ════╤══════════════════════════════════════╤═════════════╤═════════════
 Item│               Subject.               │   Cost of   │   Present
 No. │                                      │reproduction.│   value.
 ────┼──────────────────────────────────────┼─────────────┼─────────────
    1│Engineering, 4% on items 2 to 25,     │   $5,386,772│   $5,386,772
     │  inclusive, and on item 33           │             │
    2│Right of way and station grounds      │   27,745,313│   27,745,313
    3│Real estate                           │      863,337│      863,337
    4│Grading                               │   21,699,995│   21,693,024
    5│Tunnels                               │    1,148,070│    1,093,445
    6│Bridges, trestles, and culverts       │    8,027,119│    6,337,819
    7│Ties (cross- and switch-ties)         │   11,139,924│    6,148,748
    8│Rails                                 │   28,703,012│   21,865,994
    9│Track fastenings                      │    3,845,030│    2,987,982
   10│Frogs, switches, and crossings        │    1,469,781│    1,040,120
   11│Ballast                               │    3,723,558│    3,723,558
   12│Track laying and surfacing            │    6,555,638│    6,400,972
   13│Fencing                               │    2,763,595│    1,627,790
   14│Crossings, cattle guards, and signs   │      607,542│      428,474
   15│Interlocking and signal apparatus     │      501,883│      448,686
   16│Telegraph (30) telephones             │      258,985│      134,797
   17│Station buildings and fixtures        │    4,108,736│    3,111,103
   18│Shops, round-houses, and turn-tables  │    2,157,228│    1,467,569
   19│Shop machinery and tools              │    1,107,910│      882,634
   20│Water stations                        │      725,670│      522,135
   21│Fuel stations                         │      303,289│      201,461
   22│Grain elevators                       │    1,336,794│    1,609,043
   23│Warehouses                            │      258,646│      183,910
   24│Docks and wharfs                      │    5,531,919│    3,831,934
   25│Miscellaneous structures              │    1,234,345│      856,253
   26│Locomotives                           │    9,021,517│    5,092,053
   27│Passenger equipment                   │    3,197,473│    2,277,271
   28│Freight equipment                     │   19,734,240│   13,690,587
   29│Miscellaneous equipment               │      702,940│      423,689
   31│Ferries and steamships                │    1,725,000│    1,095,500
   32│Electric plants                       │       93,061│       89,898
   33│Terminals. Included in Items 1 to 32  │             │
   34│Legal expenses, 0.5% on items 2 to 25,│      673,349│      673,349
     │  inclusive, and on item 33           │             │
   35│Interest, 3% on items 1 to 34,        │    5,290,549│    5,290,549
     │  inclusive                           │             │
   36│Miscellaneous│Organization, 1.5% on   │    2,645,277│    2,645,277
     │  expenses   │  items 1 to 34,        │             │
     │             │  inclusive             │             │
     │             │Contingencies, 10% on   │   18,428,759│   15,127,110
     │             │  items 1 to 34,        │             │
     │             │  inclusive             │             │
 ────┼─────────────┴────────────────────────┼─────────────┼─────────────
     │TOTAL COST OF CONSTRUCTION AND        │ $202,716,262│ $166,398,156
     │  EQUIPMENT.                          │             │
     │                                      │             │
   37│Stores and supplies                   │    1,474,829│    1,474,829
     │Average per main-line mile            │       28,263│       23,495
     │   "     "  total-track mile          │       18,627│       15,290
     │                                      │             │
     │TOTAL VALUE OF NON-PHYSICAL ELEMENT   │             │   35,814,043
     │  (H. C. ADAMS)                       │             │
 ════╧══════════════════════════════════════╧═════════════╧═════════════

_The Result of the Michigan Work._—Any undertaking must be judged by its
results. The Attorney-General's report for 1906, on pages 21 and 23,
states:

"These cases are among the most important in the history of the State.
They constitute the last step in subjecting railroad property in
Michigan to taxation on the same basis and at the same rate as other
property is taxed, and secure practical uniformity and equality of
taxation between railroad and other property.

"As a result of these cases the various railroad corporations paid in
taxes $4,787,478.15, and as penalty thereon $1,158,321.18, a total
amount of $5,945,799.43 for the years 1902, 1903 and 1904. The 1905 tax
being paid soon after the decision of the Supreme Court, nothing was
paid under the former law (specific tax on earnings) and, of course,
there was no penalty on the 1905 taxes as they were paid before May 1,
1906."

In short, the roads are paying to the State of Michigan an average of
$1,595,826.05 more per year than they paid under the old law, and to
date the State has received about $10,750,000 more from taxes than it
would have received under the old specific tax law.

Railroad development in Michigan has received no appreciable check, and
notwithstanding a 2-cent fare and the bearing of an equal burden of
taxation, the properties are maintained, and improvements,
double-tracking and betterment of general standards fully keep pace with
similar work in other States.

Of course, it must be recognized that other forces besides the appraisal
helped to bring this about. The appraisal of 1900 furnished the
information. Public opinion compelled the passage of the needed laws,
and the magnificent legal work of Attorneys-General Blair and Bird,
Congressman Townsend, and Judge Knappen, and their associates, loyally
supported by Professors Cooley and Adams and the appraisal staff, were
all factors in securing the decision of the Supreme Court of the United
States.

-----

Footnote 5:

  Bulletin 21, U. S. Bureau of the Census, p. 78.

Footnote 6:

  Bulletin 21, U. S. Bureau of the Census.




               RAILROAD APPRAISAL OF THE STATE OF TEXAS.


_Authority for the Work._—In 1893 the Legislature of Texas enacted what
is known as the Stock and Bond Law, which was designed to control and
limit the total amount of stocks and bonds that may be issued on any
railroad property to the "reasonable value of said railroad property."
This law further provides that:

"It shall be the duty of the Railroad Commission to ascertain, and in
writing report to the Secretary of State, the value of each railroad in
this State including all its franchises, appurtenances and property."

The work of valuation in Texas antedates that in Michigan, and offers
some interesting opportunities for comparison of methods under somewhat
similar conditions, as far as the existing roads were concerned. The
work being in the hands of a permanent commission with very broad
powers, it has been possible to secure from recently built roads very
full and specific data as to construction, but with these later
valuations and with the current work of the department, this paper will
not deal.

The Commission of Texas interpreted the law to mean the estimated cost
of reproducing or duplicating the properties at the date of valuation,
allowing current market prices for all material and fair valuations on
all real property.

_Method of Physical Appraisal._—The Commission duly appointed engineers
to make these valuations. The railroads of the State were unfavorably
disposed toward the work, and were inclined to withhold information.

The Texas staff encountered the difficulty due to destruction or loss of
construction records, maps, and profiles. They had for their guidance
only the profiles, filed under a prior law, and were thus compelled to
depend wholly on original field work to secure their data. From a paper
by R. A. Thompson, M. Am. Soc. C. E.,[7] the following description is
taken:

"They [the engineers] with the profiles ... in hand, made a detailed
inspection of the railroads on the ground. The quantities of excavation
and embankment, where the actual quantities could not be obtained, were
estimated approximately from the profiles, using the center heights of
the cross-sections. The classification of the materials in excavation
was determined by inspection. Where original plans and estimates of cost
of the bridges, buildings and structures of all kinds could not be
obtained from the records of the railroads, their value was estimated
from measurements taken on the ground. The extent and acreage of the
right of way, the depot and terminal grounds, were determined by actual
measurement, or from maps furnished by railroads, or from city and
county tax records.

"After an examination of a railroad had been made by the engineers of
the Commission, its valuation was prepared on estimate sheets. Upon
sheets marked Estimate Sheet A ... were recorded the values of the right
of way and depot grounds, roadbed, track, bridges, structures and way
building for each mile, the value of ten miles being recorded on each
sheet.... On these sheets space was provided for the units and prices,
and columns for carrying out the values for each mile and the totals.

"The value of all rolling stock and equipment, and the value of such
properties as were properly applicable and chargeable to the entire
railroad, were recorded on a separate estimate sheet, only one sheet
being used for a railroad."

It thus appears that the general methods of securing the data and making
the field examination were quite similar to those adopted on the
Michigan work. The classification of items on the sheets is rather more
full than on the Michigan summary sheets, but apparently not so
completely in detail as the final compilation of work. In general,
however, the physical items included are complete in both cases. The
form in which the results are finally put up is radically different.

The following points of variations from the practices of the Michigan
appraisal are noted:

  (_a_) The unit prices were current market prices.

  (_b_) The value applied to right of way and real estate used for
      railway purposes was in accordance with the current market
      value of other property immediately adjoining, disregarding
      donations or property acquired at less than value.

  (_c_) No deduction was made on account of depreciation, as it
      was considered that all structures must be maintained in
      first-class, serviceable value, and renewed when necessary,
      and no allowance was made for appreciation of roadbed.

  (_d_) No allowance was made for franchise values of any kind,
      except track rights in streets.

  (_e_) No allowance was made for contingencies, except as made in
      prices or quantities.

Their practice was in accord with the Michigan appraisal, in allowing
from 5 to 6% to cover legal and engineering expenses and
superintendence, and from 5 to 6% to cover interest during construction.

_The Result of the Texas Work._—The object sought in Texas was to secure
a capitalization in harmony with the actual investment in the physical
property; in short, to "squeeze out water."

Of course, all stock and bond issues outstanding in 1894 are still in
existence, except as a few roads have been sold out or re-organized. No
new issues of stock or bonds may be made on roads in excess of the
valuation. Consequently, new roads are limited to issues of bonds not
far from $15,000 per mile. The effect is shown by Table 8, from the
Railroad Commission's Report.

     TABLE 8.—MILES OF RAILWAY IN OPERATION IN TEXAS, 1894 TO 1908,
                   WITH OUTSTANDING STOCKS AND BONDS.

 ═══════╤═══════════════╤═══════════════╤═══════════════╤═══════════════
 On June│   Miles of    │    Stocks     │     Bonds     │Total stock and
  30th. │  railway in   │ outstanding,  │ outstanding,  │     bonds
        │  operation.   │   per mile.   │   per mile.   │ outstanding,
        │               │               │               │   per mile.
 ───────┼───────────────┼───────────────┼───────────────┼───────────────
    1894│          9,154│        $15,076│        $25,726│        $40,802
    1895│          9,291│         14,874│         25,420│         40,294
    1896│          9,437│         14,647│         25,302│         39,949
    1897│          9,484│         14,320│         24,793│         39,113
    1898│          9,540│         14,205│         24,036│         38,241
    1899│          9,702│         13,997│         23,562│         37,559
    1900│          9,867│         13,724│         23,202│         36,926
    1901│         10,154│         12,922│         22,649│         35,571
    1902│         10,617│         12,388│         21,779│         34,167
    1903│         11,029│         11,971│         21,464│         33,435
    1904│         11,495│               │               │         32,400
    1905│         11,662│               │               │         33,418
    1906│         12,056│               │               │         32,886
    1907│         12,577│               │               │         32,142
    1908│         12,830│               │               │         32,305
 ═══════╧═══════════════╧═══════════════╧═══════════════╧═══════════════

         Total reduction, up to 1903, of stock per mile $3,105
           "       "      "  "    "   "  bonds  "   "    4,262
         ─────────────────────────────────────────────────────
                     Total stock and bonds              $7,367

E. L. Corthell, M. Am. Soc. C. E., speaking of results secured by the
Texas law, says[8]:

"The law, and generally its just operation, has cured many unmitigated
and notorious evils. Not only has the public in Texas been benefited,
but also the investor in railroad securities from the outside of the
State. The people of Texas now have just and uniform rates of
transportation, and the investor knows what he is purchasing, and may be
reasonably sure of a return on his investment."

Mr. Thompson says[9]:

"Another significant fact is that only a short time before the Stock and
Bond Law became effective about 39% of the railroads in Texas were in
the hands of receivers. To-day there is not a mile, of the 11,300 miles
in Texas, in the hands of receivers, and, with a few unimportant
exceptions, no railroad has been in the hands of receivers since the law
went into effect. The fact is that there has been no piece of
legislation, in this or any other State of the Union during the past
decade, which has been so fruitful of results and beneficent in its
action, alike to the railroads and the people."

-----

Footnote 7:

  _Transactions._ Am. Soc. C. E., Vol. LII. p. 328.

Footnote 8:

  _Transactions._ Am. Soc. C. E., Vol. LII. p. 346.

Footnote 9:

  _Ibid._, p. 364.




             RAILROAD APPRAISAL OF THE STATE OF WISCONSIN.


The State of Wisconsin made a valuation of railroad properties of the
State as of June 30th, 1903, the work being under the direction of W. D.
Taylor, M. Am. Soc. C. E. The plan adopted, the methods of work, and the
general result of independent studies conducted by Professor Taylor have
been described so fully in various technical papers and reports
elsewhere listed, that a very brief statement of points of difference
between the Michigan and Wisconsin works appears to be all that is
necessary here.

Professor Taylor associated with him for consultation Professor Cooley,
of Michigan, made a careful study of methods used in earlier appraisals,
used the Michigan blank forms as a basis for the preparation of his own,
and thoroughly outlined his general plan and the scope of the
information desired before actually organizing his staff or commencing
work.

In connection with the earlier stages of the work, conferences were held
with the officials of the principal railways of the State, and developed
a thorough understanding and plans for co-operation between the
appraiser and the roads. As a result of these conferences, each large
railway company of the State, acting through its heads of departments,
made an inventory and appraisal of its own property in the State, using
therefor the forms and blanks prepared by the appraiser. At the same
time, the appraiser organized a considerably smaller force than was used
in Michigan, made his own office and field inspection, and secured data
to complete the appraisal on the small roads, in which their own
engineering or operating departments were not organized so as to do the
work according to plan.

The work turned out by the large roads was then checked by this force,
the various points in which they were out of harmony were checked and
unified, a number of hearings were held, certain portions of the work
were checked over by the appraisers' men, sundry changes in quantity and
price were made, and finally, when the work was compiled and put in
shape for presentation, the appraiser had reason to believe that he had
secured a result which was reasonably free from error, and one in which
the railroads had co-operated to such an extent that no charge of
prejudice or unfairness would lie.

It is noted that the average cost of reproduction and the present value
per mile in Wisconsin are higher than in Michigan, which is probably as
it should be, as Michigan has a less mileage of high-class main trunk
line road than Wisconsin.

In general, the two appraisals were very similar. The determination of
unit prices, the placing of depreciation, the apportionment of
locomotives, freight, and passenger equipment, and other rolling stock,
the use of the Interstate Commerce Commission's construction
classification, the application of percentage values for engineering,
interest during construction, administration, legal expenses, and
contingencies (this latter fixed at 5.5%), all were along lines similar
to those developed in Michigan.

The work of the Wisconsin appraisal was carried on at the same time as
the second Michigan appraisal. The investigations made by Mr. Van Ranst
Pond and the writer, as to the actual sale prices of right of way, fully
discussed heretofore, were conducted at the same time as Professor
Taylor's work in Wisconsin was being done, and neither party had any
knowledge of the work of the other. The prior discussion relative to
this phase of the Michigan valuation is practically a revision of a
memorandum submitted by the writer to the Attorney-General in January,
1904. The tables are abstracted from much more extensive ones which,
supported by the evidence of Registers of Deeds of some ten counties of
Michigan, are part of the record of evidence in Michigan Central
Railroad _vs._ Powers. It is, therefore, not only of great interest, but
great value, as supporting Professor Cooley's right-of-way valuations,
to note the following extract[10] from Professor Taylor's discussion of
the paper by Mr. R. A. Thompson on the Texas railroad valuations:

"In the Wisconsin appraisal, the method followed for valuing the right
of way and terminal lands was about as given below. Parts of the right
of way of some of the larger systems are estimated at higher ratios than
this, but in such cases the roads themselves fixed the right-of-way
value.

"The market value for other purposes of the right of way and terminal
lands was judged to be the same as that of contiguous property.

"In farming lands, small towns, and suburban and residence property, the
right-of-way value was taken to be 250% of the market value for other
purposes.

"In city property, the right-of-way value was taken to be 133% of the
market value for other purposes, where the land was owned in strips of
100 ft. width or less, and 110% of the market value for other purposes,
where the land was owned in blocks, or in widths greater than 100 ft."

No effort whatever was made in the Wisconsin valuation to determine any
non-physical or intangible values, the report covering only cost of
reproduction and present value of the physical properties.

The Wisconsin work is noteworthy as the first appraisal in which the
hearty co-operation of the railroads was secured from the outset. In
Michigan the roads at the inception viewed the work with distrust, but
by the completion were in hearty sympathy with the efforts of the
appraiser to use just and honorable methods, and the managements
extended every courtesy in the way of access to records for verification
purposes.

-----

Footnote 10:

  _Transactions_, Am Soc. C. E., Vol. LII. p. 359.




                 THE MINNESOTA STATE RAILWAY APPRAISAL.


The valuation of railway properties in the State of Minnesota was
undertaken with a view to establishing a basis for rate-making. The work
was in charge of Mr. Dwight C. Morgan, Engineer of the Railroad and
Warehouse Commission of the State, whose full and complete report is a
very valuable addition to the literature of valuation practice. This
work was undertaken after the completion of that in Michigan and
Wisconsin, and advantage was taken of the experiences of the appraisers
in these two States. The Wisconsin plan of co-operation with the
railroads was adopted, and each company scheduled and appraised its own
lines.

The "cost of reproduction," and "present value of physical properties"
were the two sets of figures shown in the final results.

Unit prices were fixed on the basis of current prices in 1905, in
preference to an average of 5 or 10 years.

Apportionment of locomotives and rolling stock was made on an engine-
and car-mileage basis. The organization of an office force was
undertaken, and special study was made of the subjects of unit prices
and the various local conditions surrounding the different properties,
checking of quantities of earthwork, rails, etc., and preparing to
harmonize and unify the estimates as they should be received from the
railroads.

The greatest difference between this work and that in the other States
was the fact that the field inspection, instead of being made by many
men, was made by Appraiser Morgan, accompanied by two assistants,
inspection being made in a special train, which was paid for by the
State.

The detailed reports of the railroad companies were completed and in the
hands of the appraiser, maps and profiles of the road were prepared and
available, the train was run at slow speed, and many stops were made for
examination of bridges, culverts, and structures. About 100 miles per
day were covered, but this did not include the larger terminals of St.
Paul, Minneapolis, and Duluth, which were given many days.

In the preparation of final summaries, percentage values were placed as
follows:

 Engineering, superintendence, and legal                    4½ per cent.

 Contingencies                                              5   "    "

 Interest, time of construction varying according to        4   "    "
   mileage from 1 to 8 years

In addition to these three items, the item of "adaptation and
solidification of roadbed" was given a large place, being, for all the
roads of the State, $11,743,007.15. This feature was novel to this class
of valuation, and it is to be regretted that, in his report, the
appraiser did not narrate more fully the detailed methods by which he
arrived at his resultant figure.

_Land Valuation._—The vexed question of a proper value to give to lands
owned by a railway company, was treated by Appraiser Morgan in a
different way than it had been in Wisconsin or Michigan. A number of
special agents were appointed, who made an exhaustive study of the
transfers and assessed values throughout the State. The discussion of
this subject in Mr. Morgan's report is exhaustive, and of great
interest. The conclusions are quoted. It is regretted that the
discussion of methods of valuation can only be given in brief form.

"Careful and full consideration of all information made available for
establishing the value of the right of way owned and used by the railway
companies for railway purposes, led to the conclusion that in the state
at large exclusive of the three terminals of St. Paul, Minneapolis and
Duluth, a multiple of three (3) applied to the true value or normal
value of lands, as obtained from the transfers, would in general satisfy
the conditions.

"During the period referred to, the railway companies paid for the
property acquired by them, over and above its normal value, an amount
sufficient to justify the use of the following multiples: St. Paul, one
and three-fourths (1¾); Minneapolis, one and three-fifths (1⅗), and
Duluth, one and one-fourth (1¼), which when applied to the normal value
of the lands as established from contiguous and surrounding property,
formed the basis for measuring the cost of reproducing the existing
terminals of the railway companies."

In the final compilation of results, two sets of schedules were
rendered:

  (_a_) Those which gave the land values with added increment,

  (_b_) Those which omitted the increment.

The cost of the engineering work was about $70,000; this covered 7,596.4
miles of main track, 427.4 miles of second track, and 2,414 miles of
side-track, or a total of 10,437.8 miles of all tracks. As yet there has
been no decision by the Courts on the Minnesota rate cases.

_Forms Used in the Compilation of Information._—The forms used in the
Michigan appraisal have been described and fully illustrated. They were
all printed on 8½ by 11-in. sheets.

The Wisconsin appraisal used the Michigan forms as a basis, twenty of
them being practically identical with the corresponding Michigan forms.
The forms shown by Figs. 11 to 21 are materially different from those
used in Michigan.

The forms used in Minnesota in 1906 were based on those of Michigan and
Wisconsin, and were printed on 14 by 18½-in. sheets. They were remodeled
and elaborated to such an extent, however, that the writer believes
himself justified in submitting reproductions of the entire set, as
representing the most complete form for inventory yet used on any of the
State appraisals.

The appraiser in Nebraska in 1909, and Mr. Hansel in New Jersey in 1910,
have both returned to the 8½ by 11-in. sheets, and, while both clearly
followed earlier precedent in general, both have modified the details to
suit the requirements in their respective States.




                    THE WASHINGTON STATE APPRAISAL.


The State of Washington, through its Railroad Commissioners, made an
appraisal of railroad properties within its borders, the work being
under the direction of Halbert P. Gillette, M. Am. Soc. C. E.

[Illustration: FIG. 11.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │WISCONSIN RAILROAD          W.B.A. Form 1          __________________│
 │APPRAISAL OF 190__                                 _Office Inspector_│
 │Name of Road ____          ROADBED REPORT           _________________│
 │                                                    _Field Inspector_│
 │Between __ and __              PART I               Date ______ 190__│

 ╒════════╤════════╤═════════════════╤═════════════════════
 │LOCATION│ ACRES  │TOTAL EXCAVATION │        TIES
 │        │        │ AND EMBANKMENT  │
 ├────────┼────────┼─────┬─────┬─────┼──────┬────┬─────────
 │        │Clearing│Earth│Loose│Solid│Number│Kind│Condition
 │        │  and   │ cu. │Rock │Rock │      │    │
 │        │Grubbing│yds. │ cu. │ cu. │      │    │
 │        │        │     │yds. │yds. │      │    │
 │        │        │     │     │     │      │    │
 ├────────┼────────┼─────┼─────┼─────┼──────┼────┼─────────
 │        │        │     │     │     │      │    │
 ├────────┼────────┼─────┼─────┼─────┼──────┼────┼─────────
 │        │        │     │     │     │      │    │

 ╤════════════════╤═══════════════════════╕
 │    BALLAST     │         RAILS         │
 │                │                       │
 ┼──────┬─────────┼──────┬──────┬─────────┤
 │ Kind │Condition│Length│Weight│Condition│
 │ and  │         │  of  │      │         │
 │Amount│         │Single│      │         │
 │      │         │Track │      │         │
 │      │         │in ft.│      │         │
 ┼──────┼─────────┼──────┼──────┼─────────┤
 │      │         │      │      │         │
 ┼──────┼─────────┼──────┼──────┼─────────┤
 │      │         │      │      │         │

 ┌─────────────────────────────────────────────────────────────────────┐
 │WISCONSIN RAILROAD          W.B.A. Form 2          __________________│
 │APPRAISAL OF 190__                                 _Office Inspector_│
 │Name of Road ____          ROADBED REPORT           _________________│
 │                                                    _Field Inspector_│
 │Between __ and __              PART II              Date ______ 190__│

 ╒════════╤═════════════════════╤═══════════════════════
 │LOCATION│TIE PLATES AND BRACES│      FASTENINGS
 ├────────┼──────┬────┬─────────┼──────┬──────┬─────────
 │        │Number│Kind│Condition│Number│Weight│Condition
 │        │      │    │         │      │ per  │
 │        │      │    │         │      │ foot │
 ├────────┼──────┼────┼─────────┼──────┼──────┼─────────
 │        │      │    │         │      │      │
 ├────────┼──────┼────┼─────────┼──────┼──────┼─────────
 │        │      │    │         │      │      │

 ╤═════════════════════╤═══════════════════════╕
 │ FROGS AND SWITCHES  │    R.R. CROSSINGS     │
 ┼──────┬────┬─────────┼──────┬──────┬─────────┤
 │Number│Kind│Condition│Number│ Rail │Condition│
 │      │    │         │      │Weight│         │
 │      │    │         │      │      │         │
 ┼──────┼────┼─────────┼──────┼──────┼─────────┤
 │      │    │         │      │      │         │
 ┼──────┼────┼─────────┼──────┼──────┼─────────┤
 │      │    │         │      │      │         │

 ┌─────────────────────────────────────────────────────────────────────┐
 │WISCONSIN RAILROAD          W.B.A. Form 6          __________________│
 │APPRAISAL OF 190__                                 _Office Inspector_│
 │Name of Road ____         SIGNAL APPARATUS          _________________│
 │                                                    _Field Inspector_│
 │Between __ and __                                   Date ______ 190__│

 ╒════╤═══════════╤══════════════╤═══════════╤═══════╤════════════╤════╕
 │    │ LOCATION  │   NAME AND   │ No. Miles │ Cost  │ Condition  │    │
 │    │           │ DESCRIPTION  │Single Line│  New  │  Per Cent  │    │
 ├────┼───────────┼──────────────┼───────────┼───────┼────────────┼────┤
 │    │           │              │           │       │            │    │
 ├────┼───────────┼──────────────┼───────────┼───────┼────────────┼────┤
 │    │           │              │           │       │            │    │

 ┌─────────────────────────────────────────────────────────────────────┐
 │WISCONSIN RAILROAD          W.B.A. Form 8          __________________│
 │APPRAISAL OF 190__                                 _Office Inspector_│
 │Name of Road ____           MISCELLANEOUS           _________________│
 │                                                    _Field Inspector_│
 │Between __ and __           ROADWAY ITEMS           Date ______ 190__│

 ╒═══╤════════╤═══════════════════╤═════════╤═════════════════════╤════╕
 │   │LOCATION│Sets Section Tools,│Condition│ CROSSING PROTECTION │    │
 │   │        │  Hand Cars, etc.  │Per Cent │                     │    │
 ├───┼────────┼───────────────────┼─────────┼────┬──────┬─────────┼────┤
 │   │        │                   │         │Kind│Amount│Condition│    │
 │   │        │                   │         │    │      │Per Cent │    │
 ├───┼────────┼───────────────────┼─────────┼────┼──────┼─────────┼────┤
 │   │        │                   │         │    │      │         │    │
 ├───┼────────┼───────────────────┼─────────┼────┼──────┼─────────┼────┤
 │   │        │                   │         │    │      │         │    │

[Illustration: FIG. 12.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │WISCONSIN RAILROAD          W.B.A. Form 9          __________________│
 │APPRAISAL OF 190__                                 _Office Inspector_│
 │Name of Road ____    TELEGRAPH, INSTRUMENTS AND     _________________│
 │                          STATION EQUIPMENT         _Field Inspector_│
 │Between __ and __                                   Date ______ 190__│

 ╒═╤═════╤═══════╤════╤═════════╤════════════════╤═════════╤════╤═
 │ │OWNER│ LINE  │KEYS│SOUNDINGS│     RELAYS     │Repeaters│Cut │
 │ │     │BETWEEN│    │         │                │         │Outs│
 │ │     │       │    │         │                │         │    │
 │ │     │       │    │         │                │         │    │
 │ │     │       │    │         │                │         │    │
 ├─┼─────┼───────┼────┼─────────┼───────┬───┬────┼─────────┼────┼─
 │ │     │       │    │         │Western│Box│Key │         │    │
 │ │     │       │    │         │ Union │   │ on │         │    │
 │ │     │       │    │         │       │   │base│         │    │
 ├─┼─────┼───────┼────┼─────────┼───────┼───┼────┼─────────┼────┼─
 │ │     │       │    │         │       │   │    │         │    │
 ├─┼─────┼───────┼────┼─────────┼───────┼───┼────┼─────────┼────┼─
 │ │     │       │    │         │       │   │    │         │    │


 ╤═══════════════╤═══════╤═══════╤═════════╤═════════╤═╕
 │ SWITCH BOARDS │Number │Make of│ Length  │Condition│ │
 │               │  of   │Battery│Telegraph│Per Cent │ │
 │               │Battery│       │   or    │         │ │
 │               │ Cells │       │Telephone│         │ │
 │               │       │       │  Lines  │         │ │
 ┼──────┬──────┬─┼───────┼───────┼─────────┼─────────┼─┤
 │Number│Number│ │       │       │         │         │ │
 │  of  │  of  │ │       │       │         │         │ │
 │Straps│Boards│ │       │       │         │         │ │
 ┼──────┼──────┼─┼───────┼───────┼─────────┼─────────┼─┤
 │      │      │ │       │       │         │         │ │
 ┼──────┼──────┼─┼───────┼───────┼─────────┼─────────┼─┤
 │      │      │ │       │       │         │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │WISCONSIN RAILROAD         W.B.A. Form 38          __________________│
 │APPRAISAL OF 190__                                 _Office Inspector_│
 │Name of Road ____     FENCES, CATTLE GUARDS AND     _________________│
 │                          HIGHWAY CROSSINGS         _Field Inspector_│
 │Between __ and __                                   Date ______ 190__│

 ╒═╤════════╤══════╤═══════╤═════╤═════╤═════╤═════╤═════════╤══════
 │ │LOCATION│ Wire │Length │ No. │Size │ No. │Size │Condition│ Kind
 │ │        │  or  │  of   │Posts│ of  │Plank│ of  │Per Cent │  of
 │ │        │Wooden│ Fence │ Per │Posts│ or  │Plank│         │Cattle
 │ │        │Fence │(Single│Mile │     │Wire │ or  │         │Guard
 │ │        │      │ Line) │     │     │ Per │Wire │         │
 │ │        │      │       │     │     │Mile │     │         │
 ├─┼────────┼──────┼───────┼─────┼─────┼─────┼─────┼─────────┼──────
 │ │        │      │       │     │     │     │     │         │
 ├─┼────────┼──────┼───────┼─────┼─────┼─────┼─────┼─────────┼──────
 │ │        │      │       │     │     │     │     │         │

 ╤═════════╤════════╤═════════╕
 │Condition│Ft. B.M.│Condition│
 │Per Cent │Crossing│Per Cent │
 │         │ Plank  │         │
 │         │        │         │
 │         │        │         │
 │         │        │         │
 ┼─────────┼────────┼─────────┤
 │         │        │         │
 ┼─────────┼────────┼─────────┤
 │         │        │         │

 ┌─────────────────────────────────────────────────────────────────────┐
 │WISCONSIN RAILROAD         W.B.A. Form 42          __________________│
 │APPRAISAL OF 190__                                 _Office Inspector_│
 │Name of Road ____   TIMBER TRESTLES AND OPENINGS    _________________│
 │                                                    _Field Inspector_│
 │Between __ and __                                   Date ______ 190__│

 ╒═╤════════╤════════════════════╤═══════╤═════╤═══════════╤═════════╤═╕
 │ │LOCATION│    DESCRIPTION     │Average│ No. │  Average  │Condition│ │
 │ │        │ Total Length; Pile │Height │Piles│Penetration│Per Cent │ │
 │ │        │  or Frame; Number  │  Top  │ Per │ of Piles  │         │ │
 │ │        │  Stringers; B.M.   │Ground │Bent │           │         │ │
 │ │        │ Framing; Per Lin.  │To Base│     │           │         │ │
 │ │        │     Ft., Etc.      │ Rail  │     │           │         │ │
 ├─┼────────┼────────────────────┼───────┼─────┼───────────┼─────────┼─┤
 │ │        │                    │       │     │           │         │ │
 ├─┼────────┼────────────────────┼───────┼─────┼───────────┼─────────┼─┤
 │ │        │                    │       │     │           │         │ │

[Illustration: FIG. 13.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 21           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                             DOCKS AND WHARVES                       │
 │           With or Without Coal or Ore Handling Equipment            │

 ╒═╤═════════════════════════════════════════════════════════════════
 │ │                                   DOCKS AND WHARVES
 │ │
 │ │
 ├─┼────────┬────┬──────────┬──────┬───────┬────────┬───────┬────────
 │ │LOCATION│Item│Dimensions│Piles │Framing│Platform│Masonry│Concrete
 │ │        │    │          │Lineal│ B.M.  │  B.M.  │ Cubic │ Cubic
 │ │        │    │          │ Feet │ Feet  │  Feet  │ Yards │ Yards
 │ │        │    │          │      │       │        │       │
 │ │        │    │          │      │       │        │       │
 ├─┼────────┼────┼──────────┼──────┼───────┼────────┼───────┼────────
 │ │        │    │          │      │       │        │       │
 ├─┼────────┼────┼──────────┼──────┼───────┼────────┼───────┼────────
 │ │        │    │          │      │       │        │       │

 ══════════════════════╤══════════════════════════════════════════════
                       │     SUPERSTRUCTURE FOR HANDLING COAL OR ORE
                       │
                       │
 ┬───────┬───┬─────────┼────┬──────────┬──────┬───────┬────────┬──────
 │Filling│Age│Condition│Type│Dimensions│Timber│Number │Capacity│Number
 │ Cubic │   │Per Cent │    │          │ B.M. │  of   │   of   │  of
 │ Yards │   │         │    │          │ Feet │Pockets│Pockets │Hoists
 │ Earth │   │         │    │          │      │       │        │
 │ Stone │   │         │    │          │      │       │        │
 ┼───────┼───┼─────────┼────┼──────────┼──────┼───────┼────────┼──────
 │       │   │         │    │          │      │       │        │
 ┼───────┼───┼─────────┼────┼──────────┼──────┼───────┼────────┼──────
 │       │   │         │    │          │      │       │        │

 ════╤════════════╤═════════╤═╕
     │  COMPLETE  │ Average │ │
     │   PLANT    │Condition│ │
     │            │Per Cent │ │
 ┬───┼────────────┼─────────┼─┤
 │Age│  Cost of   │         │ │
 │   │Reproduction│         │ │
 │   │            │         │ │
 │   │            │         │ │
 │   │            │         │ │
 ┼───┼────────────┼─────────┼─┤
 │   │            │         │ │
 ┼───┼────────────┼─────────┼─┤
 │   │            │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 22           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                            INTERLOCKING PLANTS                      │

 ╒═╤════════╤═══════╤═════╤═════════════════════╤═══════
 │ │LOCATION│Name of│When │     TOWER HOUSE     │Kind of
 │ │        │Railway│Built│                     │Machine
 │ │        │Crossed│     │                     │
 │ │        │       │     │                     │
 │ │        │       │     │                     │
 │ │        │       │     │                     │
 ├─┼────────┼───────┼─────┼────┬──────────┬─────┼───────
 │ │        │       │     │Kind│Dimensions│Cond.│
 │ │        │       │     │    │          │ Per │
 │ │        │       │     │    │          │ Ct. │
 ├─┼────────┼───────┼─────┼────┼──────────┼─────┼───────
 │ │        │       │     │    │          │     │
 ├─┼────────┼───────┼─────┼────┼──────────┼─────┼───────
 │ │        │       │     │    │          │     │

 ╤════════════════╤════════════════════════╤════════════╤══════════
 │NUMBER OF LEVERS│KIND OF CONNECTION PIPE │Foundations,│  SIGNAL
 │                │       OR WIRE TO       │  Wood or   │  POSTS
 │                │                        │  Concrete  │
 │                │                        │            │
 │                │                        │            │
 │                │                        │            │
 ┼────┬─────┬─────┼───────┬────────┬───────┼────────────┼────┬─────
 │Work│Spare│Total│Derails│Switches│Signals│            │High│Dwarf
 │    │     │     │       │        │       │            │    │
 │    │     │     │       │        │       │            │    │
 ┼────┼─────┼─────┼───────┼────────┼───────┼────────────┼────┼─────
 │    │     │     │       │        │       │            │    │
 ┼────┼─────┼─────┼───────┼────────┼───────┼────────────┼────┼─────
 │    │     │     │       │        │       │            │    │

 ╤════════════════════════╤════════╤═════════╤════════════╤═══════════
 │  NUMBER OF FUNCTIONS   │ELECTRIC│ Average │Per Cent of │Per Cent of
 │        OPERATED        │CIRCUIT │Condition│Construction│Maintenance
 │                        │  FOR   │Per Cent │Cost Paid By│ Cost Paid
 │                        │        │         │This Company│  By This
 │                        │        │         │            │  Company
 │                        │        │         │            │
 ┼───────┬────────┬───────┼──┬──┬──┼─────────┼────────────┼───────────
 │Derails│Switches│Signals│  │  │  │         │            │
 │       │        │       │  │  │  │         │            │
 │       │        │       │  │  │  │         │            │
 ┼───────┼────────┼───────┼──┼──┼──┼─────────┼────────────┼───────────
 │       │        │       │  │  │  │         │            │
 ┼───────┼────────┼───────┼──┼──┼──┼─────────┼────────────┼───────────
 │       │        │       │  │  │  │         │            │

 ╤═════════╤════════════╤═╕
 │Per Cent │  Cost of   │ │
 │   of    │Reproduction│ │
 │Operating│            │ │
 │Cost Paid│            │ │
 │ By This │            │ │
 │ Company │            │ │
 ┼─────────┼────────────┼─┤
 │         │            │ │
 │         │            │ │
 │         │            │ │
 ┼─────────┼────────────┼─┤
 │         │            │ │
 ┼─────────┼────────────┼─┤
 │         │            │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 23           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                              SIGNAL APPARATUS                       │

 ╒════════╤════════════════════════════════════════════════════════
 │LOCATION│    TRAIN ORDER AND MANUAL BLOCK SIGNALS OPERATED IN
 │        │             CONJUNCTION WITH THE TELEGRAPH
 ├────────┼──────┬────────────┬─────────┬─────────┬─────────┬──────
 │        │ Type │Manufactured│ Number  │Condition│Miles of │ Type
 │        │  of  │     by     │Installed│Per Cent │ Single  │  of
 │        │Signal│            │         │         │  Line   │Signal
 │        │      │            │         │         │Protected│
 ├────────┼──────┼────────────┼─────────┼─────────┼─────────┼──────
 │        │      │            │         │         │         │
 ├────────┼──────┼────────────┼─────────┼─────────┼─────────┼──────
 │        │      │            │         │         │         │

 ╤═════════════════════════════════════════════════════════════════════
 │                       AUTOMATIC BLOCK SIGNALS
 │
 ┼────────────┬─────────┬──────────┬────────┬─────────┬─────────┬──────
 │Manufactured│ Number  │  Number  │Circuit │Miles of │Condition│ Type
 │     by     │Installed│  Switch  │Track or│ Single  │Per Cent │  of
 │            │         │Indicators│  Wire  │  Line   │         │Signal
 │            │         │          │        │Protected│         │
 ┼────────────┼─────────┼──────────┼────────┼─────────┼─────────┼──────
 │            │         │          │        │         │         │
 ┼────────────┼─────────┼──────────┼────────┼─────────┼─────────┼──────
 │            │         │          │        │         │         │

 ╤════════════════════════════
 │   DISTANT SWITCH SIGNALS
 │
 ┼─────────┬─────────┬────────
 │ Number  │Condition│Location
 │Installed│Per Cent │
 │         │         │
 │         │         │
 ┼─────────┼─────────┼────────
  │         │         │
  ┼─────────┼─────────┼────────
  │         │         │


 ╤════════════════════════════════════════╤═╕
 │  ELECTRIC BELLS FOR HIGHWAY CROSSING   │ │
 │               PROTECTION               │ │
 ┼────────────┬─────────┬───────┬─────────┼─┤
 │Manufactured│ Number  │Circuit│Condition│ │
 │     by     │Installed│ Track │Per Cent │ │
 │            │         │or Wire│         │ │
 │            │         │       │         │ │
 ┼────────────┼─────────┼───────┼─────────┼─┤
 │            │         │       │         │ │
 ┼────────────┼─────────┼───────┼─────────┼─┤
 │            │         │       │         │ │
 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 24           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                         TELEGRAPH, TELEPHONE LINES                  │
 │                              & APPURTENANCES                        │
 │ _In Case Lines are not Owned, Only Show Such Equipment as Actually  │
 │          Belongs to the Railroad Company Office Compiler_           │

 ╒═╤════════╤═════╤═══════════════════════════════════════════════
 │ │LOCATION│OWNER│
 ├─┼────────┼─────┼──────┬──────┬──────┬─────┬──────┬──────┬──────
 │ │        │     │Number│Number│Number│Kind │Number│Number│Number
 │ │        │     │      │      │  of  │ of  │  of  │  of  │  of
 │ │        │     │      │      │Miles │Poles│Wires │ Wire │ Keys
 │ │        │     │      │      │      │ per │Strung│      │
 │ │        │     │      │      │      │Mile │      │      │
 │ │        │     │      │      │      │     │      │      │
 ├─┼────────┼─────┼──────┼──────┼──────┼─────┼──────┼──────┼──────
 │ │        │     │      │      │      │     │      │      │
 ├─┼────────┼─────┼──────┼──────┼──────┼─────┼──────┼──────┼──────
 │ │        │     │      │      │      │     │      │      │

 ══════════════════════════════════════════════════════════════════
      GENERAL DESCRIPTION
 ┬────────┬──────┬────────┬────────────┬───────┬──────┬────────────
 │ Number │Number│ Number │ Number of  │Kind of│Number│  Cost of
 │   of   │  of  │  and   │ Telephone  │Battery│  of  │Reproduction
 │Sounders│Relays│Capacity│Transmitters│       │Cells │
 │        │      │   of   │    and     │       │      │
 │        │      │ Switch │ Receivers  │       │      │
 │        │      │ Boards │            │       │      │
 ┼────────┼──────┼────────┼────────────┼───────┼──────┼────────────
 │        │      │        │            │       │      │
 ┼────────┼──────┼────────┼────────────┼───────┼──────┼────────────
 │        │      │        │            │       │      │

 ══════════╤═══════╕
           │REMARKS│
 ┬─────────┼───────┤
 │Condition│       │
 │Per Cent │       │
 │         │       │
 │         │       │
 │         │       │
 │         │       │
 ┼─────────┼───────┤
 │         │       │
 ┼─────────┼───────┤
 │         │       │

[Illustration: FIG. 14.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 25           _________________│
 │Company __________                                  _Field Inspector_│
 │Locomotives in Service      MINNESOTA RAILROAD &    _________________│
 │in Minnesota                WAREHOUSE COMMISSION    _Office Compiler_│
 │______ Total Number      RAILROAD APPRAISAL OF 1906                  │
 │                             LOCOMOTIVES                             │

 ╒═╤═══════╤════════════════════════════════════════════════════════
 │ │Name of│
 │ │Builder│
 │ │       │
 │ │       │
 │ │       │
 │ │       │
 ├─┼───────┼──────┬─────┬────────┬───────┬──────────┬──────┬────────
 │ │       │Engine│Class│ Simple │Service│Dimensions│Diam. │Working
 │ │       │Number│     │   or   │       │    of    │  of  │Pressure
 │ │       │      │     │Compound│       │Cylinders │Boiler│
 │ │       │      │     │        │       │          │      │
 ├─┼───────┼──────┼─────┼────────┼───────┼──────────┼──────┼────────
 │ │       │      │     │        │       │          │      │
 ├─┼───────┼──────┼─────┼────────┼───────┼──────────┼──────┼────────
 │ │       │      │     │        │       │          │      │
 ├─┼───────┼──────┼─────┼────────┼───────┼──────────┼──────┼────────
 │ │       │      │     │        │       │          │      │

 ═══════════════════════════════════════════════════════════════════
   ENGINES





 ┬─────────┬───────┬────────┬──────┬────────┬─────────┬─────┬───────
 │ Driving │Weight │ Weight │Weight│Hauling │  Brake  │When │ When
 │ Wheels  │  on   │   on   │  on  │Capacity│Equipment│Built│ Given
 │         │Driving│Trailing│Truck │        │         │     │General
 │         │Wheels │ Wheels │      │        │         │     │Repairs
 ┼───┬─────┼───────┼────────┼──────┼────────┼─────────┼─────┼───────
 │No.│Diam.│       │        │      │        │         │     │
 ┼───┼─────┼───────┼────────┼──────┼────────┼─────────┼─────┼───────
 │   │     │       │        │      │        │         │     │
 ┼───┼─────┼───────┼────────┼──────┼────────┼─────────┼─────┼───────
 │   │     │       │        │      │        │         │     │

 ╤═════════════════╤══════╤════════════╤═════════╤═╕
 │     TENDER      │Total │  Cost of   │Condition│ │
 │                 │Weight│Reproduction│Per Cent │ │
 │                 │Engine│            │         │ │
 │                 │  &   │            │         │ │
 │                 │Tender│            │         │ │
 │                 │Loaded│            │         │ │
 ┼────────┬────────┼──────┼────────────┼─────────┼─┤
 │ Water  │  Coal  │      │            │         │ │
 │Capacity│Capacity│      │            │         │ │
 │        │        │      │            │         │ │
 │        │        │      │            │         │ │
 ┼────────┼────────┼──────┼────────────┼─────────┼─┤
 │        │        │      │            │         │ │
 ┼────────┼────────┼──────┼────────────┼─────────┼─┤
 │        │        │      │            │         │ │
 ┼────────┼────────┼──────┼────────────┼─────────┼─┤
 │        │        │      │            │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 26           _________________│
 │Company __________                                  _Field Inspector_│
 │Passenger Equipment on      MINNESOTA RAILROAD &    _________________│
 │System ______ Cars          WAREHOUSE COMMISSION    _Office Compiler_│
 │Passenger Equipment      RAILROAD APPRAISAL OF 1906                  │
 │Assigned to Minnesota                                                │
 │______ Cars                                                          │
 │Passenger Car Mileage,      PASSENGER EQUIPMENT                      │
 │System ______ Miles                                                  │
 │Passenger Car Mileage,                                               │
 │Minnesota ______ Miles                                               │

 ╒═╤══════╤═════════╤═════╤══════════╤═════════╤═══════╤══════╤════
 │ │Serial│ Kind of │Class│Dimensions│Design of│Kind of│Number│Kind
 │ │Number│Equipment│     │          │Vestibule│Coupler│  of  │ of
 │ │      │         │     │          │         │       │Seats │Heat
 │ │      │         │     │          │         │       │      │
 │ │      │         │     │          │         │       │      │
 │ │      │         │     │          │         │       │      │
 │ │      │         │     │          │         │       │      │
 ├─┼──────┼─────────┼─────┼──────────┼─────────┼───────┼──────┼────
 │ │      │         │     │          │         │       │      │
 ├─┼──────┼─────────┼─────┼──────────┼─────────┼───────┼──────┼────
 │ │      │         │     │          │         │       │      │

 ╤═════╤══════╤═════════╤═══════╤═════╤═══════╤════════════╤═════════
 │Kind │Trucks│  Brake  │Name of│When │ Total │  Cost of   │Condition
 │ of  │Number│Equipment│Builder│Built│Number │Reproduction│Per Cent
 │Light│  of  │         │       │     │of Cars│            │
 │     │Wheels│         │       │     │Now in │            │
 │     │      │         │       │     │Service│            │
 │     │      │         │       │     │       │            │
 │     │      │         │       │     │       │            │
 ┼─────┼──────┼─────────┼───────┼─────┼───────┼────────────┼─────────
 │     │      │         │       │     │       │            │
 ┼─────┼──────┼─────────┼───────┼─────┼───────┼────────────┼─────────
 │     │      │         │       │     │       │            │

 ╤═════════╕
 │  Give   │
 │Number of│
 │Cars Each│
 │ Series  │
 │Assigned │
 │   to    │
 │Minnesota│
 ┼─────────┤
 │         │
 ┼─────────┤
 │         │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 27           _________________│
 │Company __________                                  _Field Inspector_│
 │Freight Car Mileage,        MINNESOTA RAILROAD &    _________________│
 │System ______ Miles         WAREHOUSE COMMISSION    _Office Compiler_│
 │Freight Car Mileage,     RAILROAD APPRAISAL OF 1906                  │
 │Minnesota ______ Miles                                               │
 │                           FREIGHT CAR EQUIPMENT                     │
 │                 Include Cabooses in this Statement.                 │

 ╒═╤═══════╤═════════╤═════╤══════════╤════════╤════════╤════════
 │ │Serial │Class of │Sills│Dimensions│Capacity│Kind of │Size of
 │ │Numbers│Equipment│ and │          │        │Couplers│Journals
 │ │       │         │Body │          │        │        │
 │ │       │         │Steel│          │        │        │
 │ │       │         │ or  │          │        │        │
 │ │       │         │Wood │          │        │        │
 ├─┼───────┼─────────┼─────┼──────────┼────────┼────────┼────────
 │ │       │         │     │          │        │        │
 ├─┼───────┼─────────┼─────┼──────────┼────────┼────────┼────────
 │ │       │         │     │          │        │        │

 ╤═════════╤═══════╤═════╤═══════╤════════════╤═════════╤═══════╕
 │  Brake  │Name of│When │Number │  Cost of   │Condition│REMARKS│
 │Equipment│Builder│Built│of Cars│Reproduction│Per Cent │       │
 │         │       │     │Now in │            │         │       │
 │         │       │     │Service│            │         │       │
 │         │       │     │       │            │         │       │
 │         │       │     │       │            │         │       │
 ┼─────────┼───────┼─────┼───────┼────────────┼─────────┼───────┤
 │         │       │     │       │            │         │       │
 ┼─────────┼───────┼─────┼───────┼────────────┼─────────┼───────┤
 │         │       │     │       │            │         │       │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 28           _________________│
 │Company __________                                  _Field Inspector_│
 │                            MINNESOTA RAILROAD &    _________________│
 │                            WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                          MISCELLANEOUS EQUIPMENT                    │
 │ Include Snow Plows, Flangers, Steam Shovels, Pile Drivers, Derrick  │
 │    Cars, Dredges, and all Special Equipment, Located or used in     │
 │                             Minnesota.                              │

 ╒═══╤═════════╤════════════╤════════╤════╤═════════════╤══════════╤═══╕
 │   │LOCATION │DESCRIPTION │Name of │Age │   Cost of   │Condition │   │
 │   │         │            │Builder │    │Reproduction │ Per Cent │   │
 │   │         │            │        │    │             │          │   │

[Illustration: FIG. 15.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 14           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                           STATION BUILDINGS AND                     │
 │                                  FIXTURES                           │
 │              Including Station Equipment and Platforms              │

 ╒═╤════════╤═════════════════════════════════════════════
 │ │LOCATION│                  BUILDING
 ├─┼────────┼────────┬──────────┬───┬───────────┬─────────
 │ │        │Material│Dimensions│Age│  General  │Condition
 │ │        │        │          │   │Description│Per Cent
 │ │        │        │          │   │           │
 │ │        │        │          │   │           │
 │ │        │        │          │   │           │
 ├─┼────────┼────────┼──────────┼───┼───────────┼─────────
 │ │        │        │          │   │           │
 ├─┼────────┼────────┼──────────┼───┼───────────┼─────────
 │ │        │        │          │   │           │

 ╤═════════════════╤═══════════════════════════════════════════════╤═╕
 │    EQUIPMENT    │                   PLATFORMS                   │ │
 ┼───────┬─────────┼──────┬───────┬────────┬──────┬──────┬─────────┼─┤
 │Office │Condition│ Wood │Cinders│Concrete│Brick │Square│Condition│ │
 │  and  │Per Cent │Square│Square │ Square │Square│ Ft.  │Per Cent │ │
 │Waiting│         │ Ft.  │  Ft.  │  Ft.   │ Ft.  │      │         │ │
 │ Room  │         │      │       │        │      │      │         │ │
 │ Items │         │      │       │        │      │      │         │ │
 ┼───────┼─────────┼──────┼───────┼────────┼──────┼──────┼─────────┼─┤
 │       │         │      │       │        │      │      │         │ │
 ┼───────┼─────────┼──────┼───────┼────────┼──────┼──────┼─────────┼─┤
 │       │         │      │       │        │      │      │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 15           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                          MISCELLANEOUS BUILDINGS                    │
 │ Including General Office Buildings, Warehouses, Elevators, and all  │
 │     Other Buildings Not Specifically Called for in Blank Forms      │

 ╒════╤════════╤═══════════════════════════════════════════════╤═══════╕
 │    │LOCATION│              GENERAL DESCRIPTION              │REMARKS│
 ├────┼────────┼────────┬──────────┬────┬────────────┬─────────┼───────┤
 │    │        │Material│Dimensions│Age │  Cost of   │Condition│       │
 │    │        │        │          │    │Reproduction│Per Cent │       │
 ├────┼────────┼────────┼──────────┼────┼────────────┼─────────┼───────┤
 │    │        │        │          │    │            │         │       │
 ├────┼────────┼────────┼──────────┼────┼────────────┼─────────┼───────┤
 │    │        │        │          │    │            │         │       │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 16           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                             ENGINE HOUSES AND                       │
 │                                 TURNTABLES                          │

 ╒═╤════════╤════════════════════════════════════════════════════
 │ │LOCATION│                                           ENGINE HOUSES
 ├─┼────────┼─────────────────────────┬─────┬──────┬──────┬──────
 │ │        │       MATERIAL OF       │ No. │Depth │Number│
 │ │        │                         │ of  │  of  │  of  │
 │ │        │                         │Fire │Stalls│Stalls│
 │ │        │                         │Walls│      │      │
 ├─┼────────┼───────────┬─────┬───────┼─────┼──────┼──────┼──────
 │ │        │Foundations│Walls│Framing│     │      │      │Number
 │ │        │           │     │       │     │      │      │
 │ │        │           │     │       │     │      │      │
 │ │        │           │     │       │     │      │      │
 ├─┼────────┼───────────┼─────┼───────┼─────┼──────┼──────┼──────
 │ │        │           │     │       │     │      │      │
 ├─┼────────┼───────────┼─────┼───────┼─────┼──────┼──────┼──────
 │ │        │           │     │       │     │      │      │

 ════════════════════════════════════════════════

 ────────────────────┬─────────┬────────┬────────
      PITS           │ HEATING │ SMOKE  │ Age of
                     │         │ JACKS  │Building
                     │         │        │
                     │         │        │
 ┬────────┬──────────┼─────┬───┼────┬───┼────────
 │Material│Dimensions│Steam│Hot│Kind│No.│
 │        │          │     │Air│    │   │
 │        │          │     │   │    │   │
 │        │          │     │   │    │   │
 ┼────────┼──────────┼─────┼───┼────┼───┼────────
 │        │          │     │   │    │   │
 ┼────────┼──────────┼─────┼───┼────┼───┼────────
 │        │          │     │   │    │   │

 ╤══════════════════════════════════════════════════════════
 │                        TURNTABLES
 ┼─────────┬─────┬──────┬─────┬─────────────┬─────────┬─────
 │Condition│Type │Length│Built│   Loading   │ Turning │ Age
 │Per Cent │ of  │ Feet │ By  │Specification│Apparatus│ of
 │         │Table│      │     │    Tons     │         │Table
 │         │     │      │     │             │         │
 ┼─────────┼─────┼──────┼─────┼─────────────┼─────────┼─────
 │         │     │      │     │             │         │
 │         │     │      │     │             │         │
 │         │     │      │     │             │         │
 │         │     │      │     │             │         │
 ┼─────────┼─────┼──────┼─────┼─────────────┼─────────┼─────
 │         │     │      │     │             │         │
 ┼─────────┼─────┼──────┼─────┼─────────────┼─────────┼─────
 │         │     │      │     │             │         │

 ╤════════════════════════════════════════════════╕
 │                 TURNTABLE PITS                 │
 ┼─────────┬──────────┬──────────┬──────┬─────────┤
 │Condition│  Center  │ CURBING  │ End  │Condition│
 │Per Cent │Foundation│          │Pacing│Per Cent │
 │         │          │          │      │         │
 │         │          │          │      │         │
 ┼─────────┼──────────┼────┬─────┼──────┼─────────┤
 │         │          │Kind│Cubic│      │         │
 │         │          │    │ Yds │      │         │
 │         │          │    │B.M. │      │         │
 │         │          │    │Feet │      │         │
 ┼─────────┼──────────┼────┼─────┼──────┼─────────┤
 │         │          │    │     │      │         │
 ┼─────────┼──────────┼────┼─────┼──────┼─────────┤
 │         │          │    │     │      │         │

[Illustration: FIG. 16.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 17           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                           CINDER PITS AND TRACK                     │
 │                                   SCALES                            │

 ╒═╤════════╤═════════════════════════════════════════════╤════════
 │ │LOCATION│           CINDER PITS AND HOISTS            │
 ├─┼────────┼────────┬──────────┬───┬───────────┬─────────┼────────
 │ │        │Material│Dimensions│Age│ Pneumatic │Condition│LOCATION
 │ │        │ of Pit │          │   │ or Power  │Per Cent │
 │ │        │        │          │   │  Hoists.  │         │
 │ │        │        │          │   │  General  │         │
 │ │        │        │          │   │Description│         │
 ├─┼────────┼────────┼──────────┼───┼───────────┼─────────┼────────
 │ │        │        │          │   │           │         │
 ├─┼────────┼────────┼──────────┼───┼───────────┼─────────┼────────
 │ │        │        │          │   │           │         │

 ══════════════════════════════════════════════════════╤═══════╕
                  TRACK SCALES                         │REMARKS│
 ┬────────────┬──────────┬──────────┬────────┬─────────┼───────┤
 │  Name of   │Materials │Dimensions│Capacity│Condition│       │
 │Manufacturer│    of    │          │  Tons  │Per Cent │       │
 │            │Production│          │        │         │       │
 │            │          │          │        │         │       │
 │            │          │          │        │         │       │
 ┼────────────┼──────────┼──────────┼────────┼─────────┼───────┤
 │            │          │          │        │         │       │
 ┼────────────┼──────────┼──────────┼────────┼─────────┼───────┤
 │            │          │          │        │         │       │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 10           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │Length of Main Line       FENCES CATTLE GUARDS AND                   │
 │Roadway ______ Miles               SIGNS                             │
 │______                                                               │

 ╒═╤════════╤════════════════════════════════════════════════════════
 │ │LOCATION│                  RIGHT OF WAY FENCES
 ├─┼────────┼────────────────────────────┬───────────────────────────
 │ │        │         WOOD FENCE         │        WIRE FENCE
 ├─┼────────┼──────┬─────┬─────┬─────────┼─────┬─────┬─────┬─────────
 │ │        │ No.  │ No. │ No. │Condition│ No. │ No. │ No. │Condition
 │ │        │Boards│Posts│Miles│Per Cent │Wires│Posts│Miles│Per Cent
 │ │        │ Per  │ Per │ Per │         │ Per │ Per │ Per │
 │ │        │Panel │Mile │Line │         │Panel│Mile │Line │
 │ │        │      │     │     │         │     │     │     │
 │ │        │      │     │     │         │     │     │     │
 ├─┼────────┼──────┼─────┼─────┼─────────┼─────┼─────┼─────┼─────────
 │ │        │      │     │     │         │     │     │     │
 │ │        │      │     │     │         │     │     │     │
 ├─┼────────┼──────┼─────┼─────┼─────────┼─────┼─────┼─────┼─────────
 │ │        │      │     │     │         │     │     │     │
 │ │        │      │     │     │         │     │     │     │
 ├─┼────────┼──────┼─────┼─────┼─────────┼─────┼─────┼─────┼─────────
 │ │        │      │     │     │         │     │     │     │

 ╤═════════════════════════════╤═════════════════════════════════
 │         SNOW FENCES         │               CATTLE GUARDS
 ┼─────────────────────────────┼─────────────────────┬───────────
 │    TEMPORARY & PERMANENT    │        WOOD         │        IRON
 ┼──────┬─────┬──────┬─────────┼────┬──────┬─────────┼────┬──────
 │Length│B.M. │Total │Condition│Kind│Number│Condition│Kind│Number
 │ Per  │ Ft. │Length│Per Cent │    │      │Per Cent │    │
 │Panel │ Per │  in  │         │    │      │         │    │
 │      │Panel│Linear│         │    │      │         │    │
 │      │     │ Feet │         │    │      │         │    │
 │      │     │      │         │    │      │         │    │
 ┼──────┼─────┼──────┼─────────┼────┼──────┼─────────┼────┼──────
 │      │     │      │         │    │      │         │    │
 │      │     │      │         │    │      │         │    │
 ┼──────┼─────┼──────┼─────────┼────┼──────┼─────────┼────┼──────
 │      │     │      │         │    │      │         │    │
 │      │     │      │         │    │      │         │    │
 ┼──────┼─────┼──────┼─────────┼────┼──────┼─────────┼────┼──────
 │      │     │      │         │    │      │         │    │

 ══════════╤════════════════════════╤══════════════════════════╤═╕
           │   HIGHWAY CROSSINGS    │      MISCELLANEOUS       │ │
 ──────────┼────────────────────────┼──────────────────────────┼─┤
           │     PLANKING USED      │      ROADWAY SIGHTS      │ │
 ┬─────────┼────────┬─────┬─────────┼─────────┬──────┬─────────┼─┤
 │Condition│ Number │Total│Condition│  Kind   │Number│Condition│ │
 │Per Cent │   of   │B.M. │Per Cent │         │      │Per Cent │ │
 │         │Crossing│ Ft. │         │         │      │         │ │
 │         │        │Used │         │         │      │         │ │
 │         │        │     │         │         │      │         │ │
 │         │        │     │         │         │      │         │ │
 ┼─────────┼────────┼─────┼─────────┼─────────┼──────┼─────────┼─┤
 │         │        │     │         │Mile     │      │         │ │
 │         │        │     │         │Posts    │      │         │ │
 ┼─────────┼────────┼─────┼─────────┼─────────┼──────┼─────────┼─┤
 │         │        │     │         │Whistling│      │         │ │
 │         │        │     │         │Posts    │      │         │ │
 ┼─────────┼────────┼─────┼─────────┼─────────┼──────┼─────────┼─┤
 │         │        │     │         │         │      │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                  Form 1           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │Length of Main Line       LANDS FOR RIGHT OF WAY,                    │
 │Roadway ______ Miles        YARDS AND TERMINALS                      │
 │______                                                               │
 │Separate by Counties, and for Incorporated Cities, Villages and Towns│
 │Show Joint Right of Way Separately and Indicate Division of Ownership│

 ╒═╤════════╤══════╤════════════╤═════════════════════════════╤═════
 │ │LOCATION│ Name │  Name of   │    WIDTH OF RIGHT OF WAY    │Total
 │ │        │  of  │Incorporated│                             │Acres
 │ │        │County│   City,    │                             │Right
 │ │        │      │ Village or │                             │ of
 │ │        │      │    Town    │                             │ Way
 │ │        │      │            │                             │
 ├─┼────────┼──────┼────────────┼─────┬─────┬─────┬─────┬─────┼─────
 │ │        │      │            │FEET │FEET │FEET │FEET │FEET │
 │ │        │      │            │     │     │     │     │     │
 ├─┼────────┼──────┼────────────┼─────┼─────┼─────┼─────┼─────┼─────
 │ │        │      │            │Miles│Miles│Miles│Miles│Miles│
 ├─┼────────┼──────┼────────────┼─────┼─────┼─────┼─────┼─────┼─────
 │ │        │      │            │     │     │     │     │     │
 ├─┼────────┼──────┼────────────┼─────┼─────┼─────┼─────┼─────┼─────
 │ │        │      │            │     │     │     │     │     │

 ╤═══════╤═══════╤══════════════╤═══════╤════════╤═══════╕
 │Average│Average│LANDS FOR YARD│Average│Average │REMARKS│
 │Market │ Right │AND TERMINALS │Market │ Value  │       │
 │ Value │of Way │              │ Value │  for   │       │
 │  Per  │ Value │              │ Value │Railway │       │
 │ Acre  │  Per  │              │  Per  │Purposes│       │
 │       │ Acre  │              │ Acre  │Per Acre│       │
 ┼───────┼───────┼────────┬─────┼───────┼────────┼───────┤
 │       │       │LOCATION│Total│       │        │       │
 │       │       │        │Acres│       │        │       │
 ┼───────┼───────┼────────┼─────┼───────┼────────┼───────┤
 │       │       │        │     │       │        │       │
 ┼───────┼───────┼────────┼─────┼───────┼────────┼───────┤
 │       │       │        │     │       │        │       │
 ┼───────┼───────┼────────┼─────┼───────┼────────┼───────┤
 │       │       │        │     │       │        │       │

[Illustration: FIG. 17.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 18           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                           STEAM & ELECTRIC POWER                    │
 │                             PLANTS-GAS PLANTS                       │
 │ Include all Shafting, Belting, Motors, Etc., Operated from Central  │
 │                                Plant                                │

 ╒═╤════════╤═════╤════════════════════════════════════════════
 │ │LOCATION│Kind │                            GENERAL DESCRIPTION
 │ │        │ of  │
 │ │        │Plant│
 ├─┼────────┼─────┼────────────────────────────────────────────
 │ │        │     │               POWER BUILDING
 │ │        │     │
 ├─┼────────┼─────┼────────┬──────────┬───┬──────────┬─────────
 │ │        │     │Material│Dimensions│Age│ Cost of  │Condition
 │ │        │     │        │          │   │Production│Per Cent
 ├─┼────────┼─────┼────────┼──────────┼───┼──────────┼─────────
 │ │        │     │        │          │   │          │
 ├─┼────────┼─────┼────────┼──────────┼───┼──────────┼─────────
 │ │        │     │        │          │   │          │

 ═══════════════════════════════╤═╕
                                │ │
                                │ │
                                │ │
 ┬─────────┬──────────┬─────────┼─┤
 │  POWER  │ Cost of  │Condition│ │
 │EQUIPMENT│Production│Per Cent │ │
 ┼─────────┼──────────┼─────────┼─┤
 │         │          │         │ │
 │         │          │         │ │
 ┼─────────┼──────────┼─────────┼─┤
 │         │          │         │ │
 ┼─────────┼──────────┼─────────┼─┤
 │         │          │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 19           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                            GENERAL REPAIR SHOPS                     │

 ╒═╤════════╤════════════════════════════════════════════════════
 │ │LOCATION│                       MOTIVE POWER AND REPAIR SHOP
 ├─┼────────┼──────────┬───────────────────────┬─────┬───────────
 │ │        │Dimensions│   MATERIAL USED FOR   │ Age │  General
 │ │        │          │                       │Years│Description
 │ │        │          │                       │     │    and
 │ │        │          │                       │     │ Purposes
 │ │        │          │                       │     │ for Which
 │ │        │          │                       │     │   Each
 │ │        │          │                       │     │Building is
 │ │        │          │                       │     │   Used
 ├─┼────────┼──────────┼───────────┬─────┬─────┼─────┼───────────
 │ │        │          │Foundations│Walls│Frame│     │
 ├─┼────────┼──────────┼───────────┼─────┼─────┼─────┼───────────
 │ │        │          │           │     │     │     │
 ├─┼────────┼──────────┼───────────┼─────┼─────┼─────┼───────────
 │ │        │          │           │     │     │     │

 ═══════════════════════╤═╕
                        │ │
 ┬────────────┬─────────┼─┤
 │  Cost of   │Condition│ │
 │Reproduction│Per Cent │ │
 │            │         │ │
 │            │         │ │
 │            │         │ │
 │            │         │ │
 │            │         │ │
 │            │         │ │
 ┼────────────┼─────────┼─┤
 │            │         │ │
 ┼────────────┼─────────┼─┤
 │            │         │ │
 ┼────────────┼─────────┼─┤
 │            │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 20           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                          SHOP MACHINERY AND TOOLS                   │
 │           Separate by Buildings in Which They are Located           │
 │Shafting, Belting, Motors, Etc., to be Included on Form No. 18 Power │
 │                               Plants                                │

 ╒═══╤═══════════════════════════════════════════════════════╤═════════╕
 │   │           MACHINES WITH ACCOMPANYING TOOLS            │ REMARKS │
 ├───┼──────────┬────────┬──────┬───────────────┬────────────┼─────────┤
 │   │ Name of  │Name of │ Age  │    Cost of    │ Condition  │         │
 │   │ Machine  │ Maker  │      │ Reproduction  │  Per Cent  │         │
 ├───┼──────────┼────────┼──────┼───────────────┼────────────┼─────────┤
 │   │          │        │      │               │            │         │
 ├───┼──────────┼────────┼──────┼───────────────┼────────────┼─────────┤
 │   │          │        │      │               │            │         │

[Illustration: FIG. 18.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                  Form 7           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                          PILE BRIDGES AND TIMBER                    │
 │                                  TRESTLES                           │
 │Include Timber Overhead Highway Bridges Erected at Expense of Railway│
 │                               Company                               │

 ╒═╤════════╤════════════════════════════╤═════════════════════
 │ │LOCATION│    GENERAL DESCRIPTION     │        PILES
 │ │        │                            │
 │ │        │                            │
 │ │        │                            │
 ├─┼────────┼──────┬──────┬───────┬──────┼──────┬──────┬───────
 │ │        │Bridge│Total │Average│Number│ Kind │Number│ Total
 │ │        │Number│Length│Height │  of  │  of  │  of  │Lineal
 │ │        │      │      │       │Bents │Timber│Piles │ Feet
 │ │        │      │      │       │      │      │ Per  │Pilling
 │ │        │      │      │       │      │      │ Bent │
 ├─┼────────┼──────┼──────┼───────┼──────┼──────┼──────┼───────
 │ │        │      │      │       │      │      │      │
 │ │        │      │      │       │      │      │      │
 │ │        │      │      │       │      │      │      │
 ├─┼────────┼──────┼──────┼───────┼──────┼──────┼──────┼───────
 │ │        │      │      │       │      │      │      │
 ├─┼────────┼──────┼──────┼───────┼──────┼──────┼──────┼───────
 │ │        │      │      │       │      │      │      │

 ╤════════════════════════╤═══════════════════════════
 │          CAPS          │       FRAMED BENTS
 │                        │
 │                        │
 │                        │
 ┼──────┬──────────┬──────┼──────┬──────────┬─────────
 │ Kind │Dimensions│Number│ Kind │Dimensions│B.M. Feet
 │  of  │          │  of  │  of  │          │Including
 │Timber│          │ Caps │Timber│          │Sills and
 │      │          │      │      │          │  Caps
 │      │          │      │      │          │
 ┼──────┼──────────┼──────┼──────┼──────────┼─────────
 │      │          │      │      │          │
 │      │          │      │      │          │
 │      │          │      │      │          │
 ┼──────┼──────────┼──────┼──────┼──────────┼─────────
 │      │          │      │      │          │
 ┼──────┼──────────┼──────┼──────┼──────────┼─────────
 │      │          │      │      │          │

 ╤═══════════════════════════════════════════════
 │                SUPERSTRUCTURE FOR PILE OR FRAMED
 │
 │
 │
 ┼──────────────────────┬────────────────────────
 │      STRINGERS       │          TIES
 │                      │
 │                      │
 │                      │
 │                      │
 ┼──────┬──────────┬────┼──────┬──────────┬──────
 │ Kind │Dimensions│No. │ Kind │Dimensions│Number
 │  of  │          │Per │  of  │          │  of
 │Timber│          │Span│Timber│          │ Ties
 ┼──────┼──────────┼────┼──────┼──────────┼──────
 │      │          │    │      │          │
 ┼──────┼──────────┼────┼──────┼──────────┼──────
 │      │          │    │      │          │

 ═════════════════════════╤═════════╤═╕
    BENTS                 │Structure│ │
                          │ Average │ │
                          │Condition│ │
                          │Per Cent │ │
 ┬────────────────────────┼─────────┼─┤
 │      GUARD RAILS       │         │ │
 │                        │         │ │
 │                        │         │ │
 │                        │         │ │
 │                        │         │ │
 ┼──────┬──────────┬──────┼─────────┼─┤
 │ Kind │Dimensions│Lineal│         │ │
 │  of  │          │ Feet │         │ │
 │Timber│          │      │         │ │
 ┼──────┼──────────┼──────┼─────────┼─┤
 │      │          │      │         │ │
 ┼──────┼──────────┼──────┼─────────┼─┤
 │      │          │      │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                  Form 8           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                                  CULVERTS                           │
 │     Include all Arch, Box, Cast Iron or Vitrified Pipe Culverts     │

 ╒═╤════════╤═══════╤══════╤════════╤══════════╤═══════════╤════════
 │ │LOCATION│Culvert│Design│Material│Dimensions│  MASONRY  │Concrete
 │ │        │Number │      │        │          │           │ Cubic
 │ │        │       │      │        │          │           │ Yards
 ├─┼────────┼───────┼──────┼────────┼──────────┼─────┬─────┼────────
 │ │        │       │      │        │          │Class│Cubic│
 │ │        │       │      │        │          │     │Yards│
 ├─┼────────┼───────┼──────┼────────┼──────────┼─────┼─────┼────────
 │ │        │       │      │        │          │     │     │
 ├─┼────────┼───────┼──────┼────────┼──────────┼─────┼─────┼────────
 │ │        │       │      │        │          │     │     │

 ╤══════════════╤══════╤═══╤═════════╤═══════╕
 │    PAVING    │Timber│Age│Condition│REMARKS│
 │              │ B.M. │   │Per Cent │       │
 │              │ Feet │   │         │       │
 ┼────────┬─────┼──────┼───┼─────────┼───────┤
 │Material│Cubic│      │   │         │       │
 │        │Yards│      │   │         │       │
 ┼────────┼─────┼──────┼───┼─────────┼───────┤
 │        │     │      │   │         │       │
 ┼────────┼─────┼──────┼───┼─────────┼───────┤
 │        │     │      │   │         │       │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                  Form 9           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                           TRACK AND BRIDGE TOOLS                    │

 ╒═╤════════╤═════════════════════════════════════════
 │ │LOCATION│    TRACK TOOLS ASSIGNED TO SECTIONS
 │ │        │
 │ │        │
 │ │        │
 │ │        │
 │ │        │
 │ │        │
 ├─┼────────┼───────┬────────────────┬────────────────
 │ │        │Number │   HAND CARS    │     TOOLS
 │ │        │  of   │                │
 │ │        │Section│                │
 ├─┼────────┼───────┼──────┬─────────┼──────┬─────────
 │ │        │       │Number│Condition│Number│Condition
 │ │        │       │      │Per Cent │  of  │Per Cent
 │ │        │       │      │         │ Sets │
 ├─┼────────┼───────┼──────┼─────────┼──────┼─────────
 │ │        │       │      │         │      │
 ├─┼────────┼───────┼──────┼─────────┼──────┼─────────
 │ │        │       │      │         │      │

 ╤══════════════════════════════════════════╤══════════════════════════╕
 │   BRIDGE TOOLS ASSIGNED REGULAR CREWS    │NOTE:-                    │
 │                                          │In Space Below, List Kind │
 │                                          │and Number of Tools in use│
 │                                          │by Average Section and    │
 │                                          │Bridge Crew, Covering     │
 │                                          │General Track and Bridge  │
 │                                          │Work                      │
 ┼────────┬────────────────┬────────────────┼──────────────────────────┤
 │LOCATION│   HAND CARS    │     TOOLS      │                          │
 │        │                │                │                          │
 │        │                │                │                          │
 ┼────────┼──────┬─────────┼──────┬─────────┼──────────────────────────┤
 │        │Number│Condition│Number│Condition│                          │
 │        │      │Per Cent │  of  │Per Cent │                          │
 │        │      │         │ Sets │         │                          │
 ┼────────┼──────┼─────────┼──────┼─────────┼──────────────────────────┤
 │        │      │         │      │         │                          │
 ┼────────┼──────┼─────────┼──────┼─────────┼──────────────────────────┤
 │        │      │         │      │         │                          │

[Illustration: FIG. 19.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 11           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                              STOCK YARDS AND                        │
 │                               APPURTENANCES                         │

 ╒═╤════════╤═════════════════════════════════════════════════
 │ │LOCATION│                            YARDS
 ├─┼────────┼──────┬──────────┬──────┬──────────┬───┬─────────
 │ │        │Number│Dimensions│Number│Sheds and │Age│Condition
 │ │        │  of  │          │  of  │Dimensions│   │Per Cent
 │ │        │ Pens │          │Gates │          │   │
 │ │        │      │          │      │          │   │
 ├─┼────────┼──────┼──────────┼──────┼──────────┼───┼─────────
 │ │        │      │          │      │          │   │
 │ │        │      │          │      │          │   │
 │ │        │      │          │      │          │   │
 │ │        │      │          │      │          │   │
 ├─┼────────┼──────┼──────────┼──────┼──────────┼───┼─────────
 │ │        │      │          │      │          │   │
 ├─┼────────┼──────┼──────────┼──────┼──────────┼───┼─────────
 │ │        │      │          │      │          │   │

 ════════════╤═════════════════════════════════════════════
             │                    WATER SUPPLY AND POWER
 ┬───────────┼──────────────┬───────────┬─────┬────────────
 │  PAVING   │    WELLS     │Other Means│Pumps│ WIND MILLS
 │           │              │ of Supply │     │
 │           │              │    and    │     │
 │           │              │Description│     │
 ┼────┬──────┼────────┬─────┼───────────┼─────┼─────┬──────
 │Kind│Square│Diameter│Depth│           │     │Size │Tower,
 │    │ Feet │        │     │           │     │Wheel│ Kind
 │    │      │        │     │           │     │     │ and
 │    │      │        │     │           │     │     │Height
 ┼────┼──────┼────────┼─────┼───────────┼─────┼─────┼──────
 │    │      │        │     │           │     │     │
 ┼────┼──────┼────────┼─────┼───────────┼─────┼─────┼──────
 │    │      │        │     │           │     │     │

 ══════════════════╤══════════════════════════════╤═╕
                   │         STOCK SCALES         │ │
 ┬───────────┬─────┼────┬────────┬──────────┬─────┼─┤
 │Other Power│Cond.│Kind│Capacity│Dimensions│Cond.│ │
 │ Used, and │ Per │    │  Tons  │    of    │ Per │ │
 │Description│Cent │    │        │ Platform │Cent │ │
 │           │     │    │        │          │     │ │
 ┼───────────┼─────┼────┼────────┼──────────┼─────┼─┤
 │           │     │    │        │          │     │ │
 │           │     │    │        │          │     │ │
 │           │     │    │        │          │     │ │
 │           │     │    │        │          │     │ │
 ┼───────────┼─────┼────┼────────┼──────────┼─────┼─┤
 │           │     │    │        │          │     │ │
 ┼───────────┼─────┼────┼────────┼──────────┼─────┼─┤
 │           │     │    │        │          │     │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 12           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                               WATER STATIONS                        │

 ╒═╤════════╤════════╤═══════════════════════════════════
 │ │LOCATION│ Source │            PUMP HOUSE
 │ │        │ Supply │
 │ │        │If Well,│
 │ │        │  Give  │
 │ │        │Diameter│
 │ │        │  and   │
 │ │        │ Depth  │
 ├─┼────────┼────────┼────────┬──────────┬─────┬─────────
 │ │        │        │Material│Dimensions│ Age │Condition
 │ │        │        │        │          │Years│Per Cent
 │ │        │        │        │          │     │
 │ │        │        │        │          │     │
 ├─┼────────┼────────┼────────┼──────────┼─────┼─────────
 │ │        │        │        │          │     │
 │ │        │        │        │          │     │
 │ │        │        │        │          │     │
 │ │        │        │        │          │     │
 ├─┼────────┼────────┼────────┼──────────┼─────┼─────────
 │ │        │        │        │          │     │
 ├─┼────────┼────────┼────────┼──────────┼─────┼─────────
 │ │        │        │        │          │     │

 ╤═══════════════════════════════════════════════════════════════════
 │                               POWER
 │
 │
 │
 │
 │
 │
 ┼───────────────────────────┬───────────────┬───────────────────────
 │          BOILERS          │  GAS ENGINES  │      WIND MILLS
 │                           │               │
 │                           │               │
 │                           │               │
 ┼──────────┬──────────┬─────┼────┬────┬─────┼────┬──────┬─────┬─────
 │Horizontal│Dimensions│Cond.│Kind│H.P.│Cond.│Kind│Tower,│Diam.│Cond.
 │ Vertical │          │ Per │    │    │ Per │    │ Kind │Wheel│ Per
 │          │          │ Ct. │    │    │ Ct. │    │ and  │     │ Ct.
 │          │          │     │    │    │     │    │Height│     │
 ┼──────────┼──────────┼─────┼────┼────┼─────┼────┼──────┼─────┼─────
 │          │          │     │    │    │     │    │      │     │
 ┼──────────┼──────────┼─────┼────┼────┼─────┼────┼──────┼─────┼─────
 │          │          │     │    │    │     │    │      │     │

 ╤═══════════════════════════════════════════════════════
 │                         PUMPS
 │
 │
 │
 │
 │
 │
 ┼────┬────────┬─────────┬────────────┬──────────────────
 │Kind│Diameter│Condition│SUCTION PIPE│  DISCHARGE PIPE
 │    │   of   │Per Cent │            │
 │    │Cylinder│         │            │
 │    │        │         │            │
 ┼────┼────────┼─────────┼─────┬──────┼─────┬──────┬─────
 │    │        │         │Diam.│Length│Diam.│Length│Cond.
 │    │        │         │     │      │     │      │ Per
 │    │        │         │     │      │     │      │ Ct.
 │    │        │         │     │      │     │      │
 ┼────┼────────┼─────────┼─────┼──────┼─────┼──────┼─────
 │    │        │         │     │      │     │      │
 ┼────┼────────┼─────────┼─────┼──────┼─────┼──────┼─────
 │    │        │         │     │      │     │      │

 ╤══════════════════════════════════
 │           WATER TANKS
 │
 │
 │
 │
 │
 │
 ┼────────┬────────┬──────┬─────────
 │Diameter│Capacity│Tower,│Condition
 │        │  Gal.  │ Kind │Per Cent
 │        │        │ and  │
 │        │        │Height│
 ┼────────┼────────┼──────┼─────────
 │        │        │      │
 │        │        │      │
 │        │        │      │
 │        │        │      │
 ┼────────┼────────┼──────┼─────────
 │        │        │      │
 ┼────────┼────────┼──────┼─────────
 │        │        │      │

 ╤════════════════════════════════════════╤═╕
 │              WATER CRANES              │ │
 │                                        │ │
 │                                        │ │
 │                                        │ │
 │                                        │ │
 │                                        │ │
 │                                        │ │
 ┼────┬──────┬─────────┬──────────────────┼─┤
 │Kind│Diam. │Condition│   SUPPLY PIPE    │ │
 │    │Column│Per Cent │                  │ │
 │    │      │         │                  │ │
 │    │      │         │                  │ │
 ┼────┼──────┼─────────┼─────┬──────┬─────┼─┤
 │    │      │         │Diam.│Length│Cond.│ │
 │    │      │         │     │      │ Per │ │
 │    │      │         │     │      │ Ct. │ │
 │    │      │         │     │      │     │ │
 ┼────┼──────┼─────────┼─────┼──────┼─────┼─┤
 │    │      │         │     │      │     │ │
 ┼────┼──────┼─────────┼─────┼──────┼─────┼─┤
 │    │      │         │     │      │     │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 13           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                               COAL STATIONS                         │

 ╒═╤════════╤═════╤═══════════════════════════════════════════════
 │ │LOCATION│Type │             GENERAL DESCRIPTION OF BUILDING
 │ │        │Chute│
 │ │        │ or  │
 │ │        │Crane│
 ├─┼────────┼─────┼──────────┬──────────┬───────┬────────┬────────
 │ │        │     │ Kind of  │Dimensions│Number │ Total  │ Age of
 │ │        │     │Foundation│    of    │  of   │Capacity│Building
 │ │        │     │          │ Building │Pockets│  Tons  │
 ├─┼────────┼─────┼──────────┼──────────┼───────┼────────┼────────
 │ │        │     │          │          │       │        │
 ├─┼────────┼─────┼──────────┼──────────┼───────┼────────┼────────
 │ │        │     │          │          │       │        │

 ══════════╤═══════════════════════╤═════════════════════╤═╕
           │       APPROACH        │ SPECIAL APPLIANCES  │ │
           │                       │  FOR HOISTING AND   │ │
           │                       │      CONVEYING      │ │
           │                       │                     │ │
 ┬─────────┼──────┬──────┬─────────┼───────────┬─────────┼─┤
 │Condition│Design│Length│Condition│  General  │Condition│ │
 │Per Cent │      │      │Per Cent │Description│Per Cent │ │
 │         │      │      │         │           │         │ │
 ┼─────────┼──────┼──────┼─────────┼───────────┼─────────┼─┤
 │         │      │      │         │           │         │ │
 ┼─────────┼──────┼──────┼─────────┼───────────┼─────────┼─┤
 │         │      │      │         │           │         │ │

[Illustration: FIG. 20.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                 Form 1A           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                         RAILWAY TERMINAL PROPERTY                   │

 ╒═╤════════╤═══════╤═══════════╤═════╤════════════╤═════════════╤═════╕
 │ │TERMINAL│SECTION│DESCRIPTION│TOTAL│  Average   │Average Right│TOTAL│
 │ │  MAP   │  NO.  │OF PROPERTY│ACRES│Market Value│of Way Value │VALUE│
 │ │        │       │   OWNED   │OWNED│  Per Acre  │  Per Acre   │     │
 ├─┼────────┼───────┼───────────┼─────┼────────────┼─────────────┼─────┤
 │ │        │       │           │     │            │             │     │
 ├─┼────────┼───────┼───────────┼─────┼────────────┼─────────────┼─────┤
 │ │        │       │           │     │            │             │     │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                  Form 2           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                               ROADWAY REPORT                        │
 │  In Recording Information, Show Main Tracks Separate from Passing,  │
 │                     Side, and Industry Tracks:                      │
 │  Show Joint Tracks Separately, and Indicate Division of Ownership.  │
 │ The above does not apply to Grading or Protection except for Joint  │
 │                               Tracks.                               │

 ╒═╤════════╤════════╤═════════════════════════════╤════════════════
 │ │LOCATION│ Acres  │  GRADING—CUBIC YARDS—PAY  │       PROTECTION
 │ │        │Clearing│         QUANTITIES          │
 │ │        │  and   │                             │
 │ │        │Grubbing│                             │
 ├─┼────────┼────────┼─────────────────┬───────────┼────┬───────────
 │ │        │        │   EXCAVATION    │EMBANKMENT │Rip │  RETAINING
 │ │        │        │                 │           │Rap │
 │ │        │        │                 │           │Cu. │
 │ │        │        │                 │           │Yds.│
 ├─┼────────┼────────┼─────┬─────┬─────┼─────┬─────┼────┼────┬──────
 │ │        │        │Earth│Loose│Solid│Earth│Loose│    │Dry │Mortar
 │ │        │        │     │Rock │Rock │     │Rock │    │Wall│ Wall
 │ │        │        │     │     │     │     │     │    │Cu. │ Cu.
 │ │        │        │     │     │     │     │     │    │Yds.│ Yds.
 ├─┼────────┼────────┼─────┼─────┼─────┼─────┼─────┼────┼────┼──────
 │ │        │        │     │     │     │     │     │    │    │
 ├─┼────────┼────────┼─────┼─────┼─────┼─────┼─────┼────┼────┼──────
 │ │        │        │     │     │     │     │     │    │    │

 ═════════╤═════════════════════════════════════════════
          │                 CROSS TIES
          │
          │
          │
 ─────────┼──────────┬──────┬──────┬───────┬──────┬─────
  WALLS   │Dimensions│ Oak  │Cedar │Hemlock│Other │Cond.
          │          │      │      │       │Kinds │ Per
          │          │      │      │       │      │Cent
          │          │      │      │       │      │
 ┬────────┼──────────┼──────┼──────┼───────┼──────┼─────
 │Concrete│          │Number│Number│Number │Number│
 │Wall Cu.│          │      │      │       │      │
 │  Yds.  │          │      │      │       │      │
 │        │          │      │      │       │      │
 ┼────────┼──────────┼──────┼──────┼───────┼──────┼─────
 │        │          │      │      │       │      │
 ┼────────┼──────────┼──────┼──────┼───────┼──────┼─────
 │        │          │      │      │       │      │

 ╤═════════════════════════════════╤═╕
 │   SWITCH TIES (Including Head   │ │
 │             Blocks)             │ │
 │                                 │ │
 │                                 │ │
 ┼────┬──────────────────────┬─────┼─┤
 │B.M.│    Number of Sets    │Cond.│ │
 │Feet│                      │ Per │ │
 │Per │                      │Cent │ │
 │Set │                      │     │ │
 ┼────┼───┬────┬───────┬─────┼─────┼─┤
 │    │Oak│Pine│Hemlock│Other│     │ │
 │    │   │    │       │Kinds│     │ │
 │    │   │    │       │     │     │ │
 │    │   │    │       │     │     │ │
 ┼────┼───┼────┼───────┼─────┼─────┼─┤
 │    │   │    │       │     │     │ │
 ┼────┼───┼────┼───────┼─────┼─────┼─┤
 │    │   │    │       │     │     │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                  Form 3           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                               ROADWAY REPORT                        │
 │  In Recording Information, Show Main Tracks Separate from Passing,  │
 │                     Side, and Industry Tracks.                      │
 │  Show Joint Tracks Separately, and Indicate Division of Ownership   │

 ╒═╤═══════════════════════════════════════════════
 │ │                    BALLAST
 ├─┼────────┬─────┬────────┬─────┬───────┬─────────
 │ │LOCATION│Miles│Kind of │Width│Average│Condition
 │ │        │     │Material│ at  │ Depth │per Cent
 │ │        │     │        │Crown│  Per  │
 │ │        │     │        │     │ Under │
 │ │        │     │        │     │  Tie  │
 ├─┼────────┼─────┼────────┼─────┼───────┼─────────
 │ │        │     │        │     │       │
 ├─┼────────┼─────┼────────┼─────┼───────┼─────────
 │ │        │     │        │     │       │

 ╤═══════════════════════════════════════════════════════╤═════╕
 │        RAILS (Insert Weight of Rail per Yard)         │     │
 ┼────────┬───────┬─────┬────────┬─────┬─────┬─────┬─────┼─────┤
 │LOCATION│Time to│ New │Relaying│ Wt. │Cond.│ Wt. │Cond.│     │
 │        │Replace│When │ Rails  │Track│ Per │Track│ Per │     │
 │        │ Years │Laid │ Miles  │Miles│Cent │Miles│Cent │     │
 │        │       │Miles│        │     │     │     │     │     │
 │        │       │     │        │     │     │     │     │     │
 ┼────────┼───────┼─────┼────────┼─────┼─────┼─────┼─────┼─────┤
 │        │       │     │        │     │     │     │     │     │
 ┼────────┼───────┼─────┼────────┼─────┼─────┼─────┼─────┼─────┤
 │        │       │     │        │     │     │     │     │     │

[Illustration: FIG. 21.]

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                  Form 4           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │Length of Main Line            ROADWAY REPORT                        │
 │Roadway ______ Miles                                                 │
 │Length of Passing Side,                                              │
 │and Industry Tracks                                                  │
 │______ Miles                                                         │
 │  In Recording Information, Show Main Tracks Separate from Passing,  │
 │                     Side, and Industry Tracks;                      │
 │  Show Joint Tracks Separately, and Indicate Division of Ownership.  │

 ╒═╤════════╤══════╤══════════════════════════════════════════════════
 │ │LOCATION│Weight│
 │ │        │  Of  │
 │ │        │ Rail │
 ├─┼────────┼──────┼────────────────────────┬──────┬──────────────────
 │ │        │      │       ANGLE BARS       │Weight│      FISH PLATES
 │ │        │      │                        │  Of  │
 │ │        │      │                        │ Rail │
 ├─┼────────┼──────┼─────┬──────┬─────┬─────┼──────┼─────┬──────┬─────
 │ │        │      │ No. │Weight│ No  │Cond.│      │ No. │Weight│ No
 │ │        │      │ Of  │ Per  │Bolts│ Per │      │ Of  │ Per  │Bolts
 │ │        │      │Pairs│ Pair │ Per │Cent │      │Pairs│ Pair │ Per
 │ │        │      │     │      │Joint│     │      │     │      │Joint
 │ │        │      │     │      │     │     │      │     │      │
 ├─┼────────┼──────┼─────┼──────┼─────┼─────┼──────┼─────┼──────┼─────
 │ │        │      │     │      │     │     │      │     │      │
 ├─┼────────┼──────┼─────┼──────┼─────┼─────┼──────┼─────┼──────┼─────
 │ │        │      │     │      │     │     │      │     │      │

 ═════════════════════════════════════════════════════════════════
                      TRACK FASTENINGS


 ──────┬───────────────┬──────────────────────────┬───────────────
       │     BOLTS     │        NUT LOCKS         │    SPIKES
       │               │                          │
       │               │                          │
 ┬─────┼────┬────┬─────┼────┬────┬───┬──────┬─────┼────┬────┬─────
 │Cond.│Size│No. │Cond.│Kind│Size│No.│Weight│Cond.│Size│No. │Cond.
 │ Per │    │Kegs│ Per │    │    │   │ Per  │ Per │    │Kegs│ Per
 │Cent │    │200 │Cent │    │    │   │ 1000 │Cent │    │200 │Cent
 │     │    │Lbs.│     │    │    │   │      │     │    │Lbs.│
 │     │    │Used│     │    │    │   │      │     │    │Used│
 ┼─────┼────┼────┼─────┼────┼────┼───┼──────┼─────┼────┼────┼─────
 │     │    │    │     │    │    │   │      │     │    │    │
 ┼─────┼────┼────┼─────┼────┼────┼───┼──────┼─────┼────┼────┼─────
 │     │    │    │     │    │    │   │      │     │    │    │

 ════════════════════════════════════════════╤═╕
                                             │ │
                                             │ │
                                             │ │
 ┬─────────────────────┬─────────────────────┼─┤
 │     TIE PLATES      │     RAIL BRACES     │ │
 │                     │                     │ │
 │                     │                     │ │
 ┼────┬───┬──────┬─────┼────┬───┬──────┬─────┼─┤
 │Kind│No.│Weight│Cond.│Kind│No.│Weight│Cond.│ │
 │    │   │ Each │ Per │    │   │ Each │ Per │ │
 │    │   │      │Cent │    │   │      │Cent │ │
 │    │   │      │     │    │   │      │     │ │
 │    │   │      │     │    │   │      │     │ │
 ┼────┼───┼──────┼─────┼────┼───┼──────┼─────┼─┤
 │    │   │      │     │    │   │      │     │ │
 ┼────┼───┼──────┼─────┼────┼───┼──────┼─────┼─┤
 │    │   │      │     │    │   │      │     │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                  Form 5           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │Length of Main Line            ROADWAY REPORT                        │
 │Roadway ______ Miles                                                 │
 │Length of Passing Side,                                              │
 │and Industry Tracks                                                  │
 │______ Miles                                                         │
 │  In Recording Information, Show Main Tracks Separate from Passing,  │
 │                     Side, and Industry Tracks;                      │
 │  Show Joint Tracks Separately, and Indicate Division of Ownership.  │

 ╒═╤════════╤══════════════╤══════════════╤══════════════╤════════
 │ │LOCATION│SPLIT SWITCHES│STUB SWITCHES │SWITCH STANDS │ SWITCH
 ├─┼────────┼──────────────┼──────────────┼────┬───┬─────┼────┬───
 │ │        │   Complete   │   Complete   │Kind│No.│Cond.│Kind│No.
 │ │        │  Including   │  Including   │    │   │ Per │    │
 │ │        │Connecting Rod│Connecting Rod│    │   │Cent │    │
 │ │        │              │              │    │   │     │    │
 │ │        │              │              │    │   │     │    │
 │ │        │              │              │    │   │     │    │
 │ │        │              │              │    │   │     │    │
 ├─┼────────┼────┬───┬─────┼────┬───┬─────┼────┼───┼─────┼────┼───
 │ │        │Wt. │No.│Cond.│Wt. │No.│Cond.│    │   │     │    │
 │ │        │Rail│   │ Per │Rail│   │ Per │    │   │     │    │
 │ │        │    │   │Cent │    │   │Cent │    │   │     │    │
 ├─┼────────┼────┼───┼─────┼────┼───┼─────┼────┼───┼─────┼────┼───
 │ │        │    │   │     │    │   │     │    │   │     │    │
 ├─┼────────┼────┼───┼─────┼────┼───┼─────┼────┼───┼─────┼────┼───
 │ │        │    │   │     │    │   │     │    │   │     │    │

 ══════╤════════════════════════════╤════════════════════════════
 LAMPS │        RIGID FROGS         │     SPRING RAIL FROGS
 ┬─────┼────┬───────┬─────┬─────────┼────┬───────┬─────┬─────────
 │Cond.│Wt. │Length │Total│Condition│Wt. │Length │Total│Condition
 │ Per │Rail│in Feet│ No. │Per Cent │Rail│in Feet│ No. │Per Cent
 │Cent │    │       │ of  │         │    │       │ of  │
 │     │    │       │Each │         │    │       │Each │
 │     │    │       │Kind │         │    │       │Kind │
 │     │    │       │     │         │    │       │     │
 │     │    │       │     │         │    │       │     │
 ┼─────┼────┼─┬─┬─┬─┼─────┼─────────┼────┼─┬─┬─┬─┼─────┼─────────
 │     │    │ │ │ │ │     │         │    │ │ │ │ │     │
 │     │    │ │ │ │ │     │         │    │ │ │ │ │     │
 │     │    │ │ │ │ │     │         │    │ │ │ │ │     │
 ┼─────┼────┼─┼─┼─┼─┼─────┼─────────┼────┼─┼─┼─┼─┼─────┼─────────
 │     │    │ │ │ │ │     │         │    │ │ │ │ │     │
 ┼─────┼────┼─┼─┼─┼─┼─────┼─────────┼────┼─┼─┼─┼─┼─────┼─────────
 │     │    │ │ │ │ │     │         │    │ │ │ │ │     │

 ╤═══════════════════════════╤══════════════════════════════════╤═╕
 │        GUARD RAILS        │        RAILROAD CROSSINGS        │ │
 ┼────┬──────┬─────┬─────────┼────┬───────┬────┬──────┬─────────┼─┤
 │Wt. │Length│Total│Condition│Wt. │Name of│Per │ Per  │Condition│ │
 │Rail│  in  │ No. │Per Cent │Rail│Railway│Cent│ Cent │Per Cent │ │
 │    │ Feet │ of  │         │    │Crossed│Cost│Maint.│         │ │
 │    │      │Pairs│         │    │       │Paid│ Paid │         │ │
 │    │      │     │         │    │       │ by │  by  │         │ │
 │    │      │     │         │    │       │This│ This │         │ │
 │    │      │     │         │    │       │Co. │ Co.  │         │ │
 ┼────┼───┬──┼─────┼─────────┼────┼───────┼────┼──────┼─────────┼─┤
 │    │   │  │     │         │    │       │    │      │         │ │
 │    │   │  │     │         │    │       │    │      │         │ │
 │    │   │  │     │         │    │       │    │      │         │ │
 ┼────┼───┼──┼─────┼─────────┼────┼───────┼────┼──────┼─────────┼─┤
 │    │   │  │     │         │    │       │    │      │         │ │
 ┼────┼───┼──┼─────┼─────────┼────┼───────┼────┼──────┼─────────┼─┤
 │    │   │  │     │         │    │       │    │      │         │ │

 ┌─────────────────────────────────────────────────────────────────────┐
 │Name of Operating                  Form 5           _________________│
 │Company __________                                  _Field Inspector_│
 │Section Number ______       MINNESOTA RAILROAD &    _________________│
 │From ______ To ______       WAREHOUSE COMMISSION    _Office Compiler_│
 │                         RAILROAD APPRAISAL OF 1906                  │
 │                                  BRIDGES                            │
 │             Truss, Plate Girder, I Beam and Draw Span.              │
 │            Indicate Power Used For Operating Draw Spans.            │

 ╒═╤════════╤══════╤═════════════════════════════════════════════════
 │ │LOCATION│Bridge│                             SUB-STRUCTURE
 │ │        │Number│
 ├─┼────────┼──────┼─────────────┬───────────┬───────────┬───────────
 │ │        │      │    PILES    │  FRAMED   │  MASONRY  │ CONCRETE
 │ │        │      │             │  TIMBER   │           │
 │ │        │      │             │           │           │
 │ │        │      │             │           │           │
 │ │        │      │             │           │           │
 │ │        │      │             │           │           │
 ├─┼────────┼──────┼──────┬──────┼──────┬────┼─────┬─────┼─────┬─────
 │ │        │      │ Kind │Total │ Kind │B.M.│Cubic│Cubic│Cubic│Cubic
 │ │        │      │  of  │Lineal│  of  │Feet│Yards│Yards│Yards│Yards
 │ │        │      │Timber│ Feet │Timber│    │     │     │     │
 ├─┼────────┼──────┼──────┼──────┼──────┼────┼─────┼─────┼─────┼─────
 │ │        │      │      │      │      │    │     │     │     │
 ├─┼────────┼──────┼──────┼──────┼──────┼────┼─────┼─────┼─────┼─────
 │ │        │      │      │      │      │    │     │     │     │

 ══════════════════════╤═══════════════════════════════════════════════
                       │
                       │
 ┬─────────┬───┬───────┼─────┬───────┬──────┬───────────────┬──────┬───
 │ Average │Age│Average│ No. │ Total │Design│Specifications │Total │Age
 │Height of│   │ Cond. │ of  │Length │  of  │ For Live Load │Weight│
 │Piers and│   │  Per  │Spans│  of   │Bridge│               │  of  │
 │Abutments│   │ Cent  │     │Bridge │      │               │Steel │
 │         │   │       │     │       │      │               │  in  │
 │         │   │       │     │       │      │               │Bridge│
 ┼─────────┼───┼───────┼─────┼───────┼──────┼───────────────┼──────┼───
 │         │   │       │     │       │      │               │      │
 │         │   │       │     │       │      │               │      │
 │         │   │       │     │       │      │               │      │
 ┼─────────┼───┼───────┼─────┼───────┼──────┼───────────────┼──────┼───
 │         │   │       │     │       │      │               │      │
 ┼─────────┼───┼───────┼─────┼───────┼──────┼───────────────┼──────┼───
 │         │   │       │     │       │      │               │      │

 ══════════════════════════════════════════════════════════════╤═╕
 SUPERSTRUCTURE                                                │ │
                                                               │ │
 ┬─────┬──────────────────────┬────────────────────────┬───────┼─┤
 │Cond.│     BRIDGE TIES      │      GUARD RAILS       │Average│ │
 │ Per │                      │                        │ Cond. │ │
 │Cent │                      │                        │  Per  │ │
 │     │                      │                        │ Cent  │ │
 │     │                      │                        │       │ │
 │     │                      │                        │       │ │
 ┼─────┼──────┬────┬──────────┼──────┬──────────┬──────┼───────┼─┤
 │     │ Kind │No. │Dimensions│ Kind │Dimensions│Lineal│       │ │
 │     │  of  │ of │          │  of  │          │ Feet │       │ │
 │     │Timber│Ties│          │Timber│          │      │       │ │
 ┼─────┼──────┼────┼──────────┼──────┼──────────┼──────┼───────┼─┤
 │     │      │    │          │      │          │      │       │ │
 ┼─────┼──────┼────┼──────────┼──────┼──────────┼──────┼───────┼─┤
 │     │      │    │          │      │          │      │       │ │

From Mr. Gillette's report,[11] supplemented by information furnished by
Henry L. Gray, Assoc. M. Am. Soc. C. E., Engineer of the Railroad
Commission of Washington, the following general statement as to methods
is gleaned:

The plan involved, not only a determination of cost of reproduction and
present value, but also original cost.

The appraiser was unable to adopt the methods followed in Wisconsin and
Minnesota, in so far as they accepted the inventory of the railroads,
but made his own examinations of records. The railroads of the State
denied that they had any information whatever that would be of value to
the Commission.

The records of the Engineering Department were examined. The records of
the Accounting Department were analyzed, various annual reports were
examined and a corporate history of the road prepared.

Special forms for securing information were not prepared, and no rules,
or definite order of procedure to be used for all roads alike, were
adopted.

It is somewhat difficult to determine from the appraiser's report just
what part of it covers actual work done, and what part is theory
developed from the work, but presumably maps were prepared and profiles
secured which represented the original conditions of construction.

The field inspection was made on hand-cars or on foot, each field
inspector being furnished with the plans, profiles, etc.

The same conditions existed in Washington as elsewhere, that is, certain
records were not kept up, and were found to be inaccurate and
unreliable, and, as a result, the appraiser reported the condition to be
such as "to cause much unnecessary work subsequently in checking."

A percentage of depreciation was not placed in the field, but was
determined by "mortality tables," or by ascertaining the probable years
of structure life, then determining from the age of the particular
structure under consideration its percentage of depreciation, a method
by no means new. It is not stated that any attempt was made to compare
these tables with the rules of the Master Car Builders Association for
valuing equipment, and no field inspection of equipment was made. The
prevailing prices of materials formed the basis for estimating the cost
of reproduction.

The value of motive power and rolling stock was apportioned among the
States on the basis of engine- and car-mileage.

The land values were fixed by the Railroad Commission sitting as a
court; real estate men from the large cities, real estate experts
brought by the railway companies, and others testified; and, based on
this testimony, the value was determined by the Commission in the same
manner as in a condemnation case. Three right-of-way experts, all of
whom had had experience in purchasing right of way for roads, were in
the regular employ of the Commission, and details as to present values
were referred to them.

The chief point of difference between this work and that of the other
States apparently was the effort to ascertain first cost of the
properties plus additions. This was done by an examination of the
accounts of the railway companies.

The result of the Washington work, as far as rate-making is concerned,
is indeterminate, as the United States Courts have held that the
Commission may not fix freight rates. The Supreme Court of the State has
held that they could. The Supreme Court has also held that the Tax
Commission should accept the findings of the Railroad Commission for the
purpose of taxation, with the result, as stated by Mr. Gray, that more
than $1,250,000 more was received last year than during any prior year
from railroad taxes.

The report of the Washington appraiser differs widely from that for
other States in that it is diffuse and does not present the methods
clearly and systematically; it is difficult, indeed, to trace what was
actually done. The writer is loath to criticize, but this report is such
as to suggest comment on a number of points.

_1._—Throughout the report very great stress is laid on the cost of
making the appraisal. Such an undertaking as an appraisal of corporation
property should be done thoroughly or left alone. It matters not whether
the work of Professor Cooley or Professor Taylor cost $5 a mile or $50 a
mile, if a dependable result was secured. It does not appear to be good
taste either to criticize costs of work in other States, or compare the
costs in Wisconsin and Michigan with the costs in Washington.

_2._—A number of criticisms, amounting almost to reflections, are made
on the methods elsewhere. The appraiser says:

"Speaking for myself, I found the precedents established by Texas,
Michigan, and Wisconsin of little value either in deciding the methods
to be pursued in making the appraisals or in estimating the probable
cost of appraisal....

"In estimating present or depreciated values of structures, rolling
stock, etc., both Michigan and Wisconsin had sent experts into the field
to estimate the percentage of present value to each unit. In this manner
40,000 freight cars were inspected in Michigan and their 'present value'
estimated. To me this seemed to be not only a useless procedure but very
erroneous....

"The appraisals heretofore made in other states have been based almost
entirely upon field surveys and inspection, no attempt having been made
to secure the necessary data from the engineering and accounting records
of the railways. Why? The answer is found in the purpose of the
appraisal."

Such sentences, and others which, by inference if not by name, reflect
on work executed by men of high professional standing, are hardly in
good taste, even if true, in a report to a railroad commission of
another State. Whether or not he found little of value, the appraiser's
general line of procedure was not radically different from that followed
in Michigan and Wisconsin in getting all available data first from the
companies, then in making a field inspection before fixing values. If
misled by erroneous profiles, he went into an error needlessly, as it
was fully known in Michigan that records were in the condition described
before any field work was begun.

The inspection of freight cars in Michigan was not to "estimate present
value" but to determine at first hand whether the Master Car Builders
rules for valuation were safe to use, and to back up their use in Court.

The third paragraph quoted is a misstatement, due clearly to a
misapprehension of what really was done.

_3._—The spirit of suspicion of railroad men's motives is an unfortunate
one to carry into a railroad appraisal, much less into a report.

_4._—The writer fully realizes the magnitude of the task before the
appraiser who is asked to determine first cost plus improvements or
betterments.

Hardly a trunk line road exists to-day that has not grown up from a
small beginning, changed its line, reduced its grades, added safety
devices, changed the type of its bridges and buildings, increased the
weight of its rails, put in service much heavier equipment, in fact,
completely changed everything, except, perhaps, the original right of
way.

The task of securing from old accounting department records an accurate
statement of cost is—and the writer says it with the confidence born of
experience—an impossibility. It is a job of such magnitude as to be
practically prohibitive. The different systems of accounting, the
different policies of the management, as to charging betterments to
capital or operating expense, to say nothing of the countless errors
that creep into the distribution of accounts, place such an undertaking
among the labors of a modern Hercules, and, to one who has been engaged
even in the task of trying to ascertain what one year's accounting on a
large road may do in concealing betterments under the guise of operating
expense, it would appear that a result that could be sworn to as correct
was impossible of attainment along the lines suggested in this report.

The general question of the propriety of the use of mortality tables is
discussed elsewhere in this paper.

This document, as an addition to the literature of the subject of
valuation of properties, is disappointing, for if there were original
and valuable methods they are not explicitly described.

The cost of making the appraisal was about $13 per mile of line.

-----

Footnote 11:

  _Engineering-Contracting._




            THE VALUATION OF TRACTION PROPERTIES IN CHICAGO.


During 1906 a complete valuation of the property and franchises of the
surface roads of Chicago was made under the direction of a Commission
consisting of Bion J. Arnold, M. Am. Soc. C. E., and Messrs. Mortimer E.
Cooley, and A. B. du Pont. The report of this valuation was published in
the form of a pamphlet which is now practically out of print, as all
extra copies were long ago exhausted.

The instructions of this Commission from the Chicago City Council were:

"To consider the detailed inventories and estimates of value to be
submitted by the Street Railway Companies, to investigate the same and
to ascertain whether the values thus listed were reasonable, fair and
just."

Detailed inventories and estimates of value were submitted by the roads,
and, from time to time during the progress of the work, additions or
corrections to these schedules were made.

Reports showing income, operating expense, and traffic statistics were
made, and such detailed statements as were called for from time to time
were furnished.

The Commission organized its force for valuation work by using the
office and field organization of the Arnold Company under the direct
charge of George Weston, M. Am. Soc. C. E., for the major part of the
work, and retained Messrs. Theodore H. Hinchman, Jr., C. V. Conover, and
the writer to give special study to certain features of the appraisal.
In the determination of franchise values, Professor Henry C. Adams was
retained in consultation by the Commission.

In arriving at the value of the physical properties, a complete field
examination was made, depreciation determined, cost of reproduction
estimated, and in general, the work was carried on along lines quite
similar to those of the railway appraisals heretofore described in
detail.

Several very interesting and unique problems were presented, some of
which were as follows:

"Upon what basis shall the cable properties of the companies be
estimated—(_a_) as operating cable systems, or (_b_) as obsolete systems
having no value except so far as the physical property can be utilized
in the conversion of the cable lines into electric?"

In the final conclusions of the Commission, part of the cable lines were
treated in one way, and part in the other.

"What allowance, if any, shall be made for the pavements laid by the
companies on their right of way?"

The discussion of this topic, together with the opinions of counsel as
to the legal status, is of interest. The Commission did not consider the
value of paving as constituting any part of the physical property, the
value of which must be supported out of earnings. The present value of
the pavement was estimated and reported without specific recommendation
as to whether an allowance should be made.

The valuation of real estate was left in the hands of real estate
experts familiar with values in Chicago, each piece of property being
personally examined and valued, and the representatives of the roads
given such hearings as they desired.

In computing the value of physical properties, an allowance of 10% was
made to cover the following items:

"_1.—Legal Expenses_—including those incurred in securing right of way
and frontage consents.

"_2.—Interest or carrying charge_ for the money expended during the
construction period and up to the time the property goes into operation.

"_3.—Brokerage_—or the expense of securing the necessary moneys.

"_4.—Contingencies_—to cover incomplete inventories, unforeseen
difficulties of construction, and any and all other items of expense
which cannot be foreseen."

The only novel feature in this list is Item 3, which was not included
specifically in any of the railroad valuations made by States and
heretofore described.

The franchise and intangible property valuation, amounting to some
$9,000,000, or about one-fifth of the total, was a very important phase
of the work, and the Commission gave up a large part of the report to
its discussion.

The difficulties in this part of the work are described as threefold:

"_First._—The difficulty of determining what are the exact legal rights
of the companies in any given street or part of street, in absence of a
direct and final judicial decision as to these rights;

"_Second._—The difficulty in estimating the value of a line of street
railways, consisting of several parts, where each of these parts is
operated under a different tenure due to the character of the ordinances
or franchises, respectively; and

"_Third._—The difficulties arising from the absence of exact information
as to the receipts and expenditures on the several parts of a single
line covered by franchises of different length and character."

The Commission, having arrived at such an adjustment of the difficulties
as appeared just, determined the value of franchises in the following
manner:

It was assumed that the gross earnings on the different parts or routes
of each system were in proportion to the car-mileage.

The system was divided into routes, and the car-mileage was determined
for each route; then this information was compiled so as to show the
car-mileage, and consequently the gross earnings, apportionable to each
franchise.

The next step was to determine, in the same manner, the proportion of
operating expenses assignable to each franchise, the operating expense
being assumed to be uniform with gross earnings. A study of the
conditions in Chicago resulted in a determination upon 70% as a fair
proportion for operating expenses, taxes, and maintenance.

Next, the amount of capital investment to be supported out of earnings
was computed by estimating the cost of reproduction of track and
overhead lines under each franchise and apportioning the cost of land,
power-houses, barns, cars, tools, and stores in proportion to
car-mileage.

In determining earnings for the unexpired years of franchise life, it
was assumed that the earnings would increase in accordance with the law
laid down by Mr. Arnold in 1902.

The last step was to find the value of the net earnings of future years,
after deducting the sum required to support the invested capital. The
rate chosen was 5% compound interest. The sum of the different present
values thus found was the value of the franchise sought.

Two other points arising in connection with franchise values were:

"Where, on a street, franchises covering part of the street have
expired, and others remain in force, the contention of the city is that
the expired franchise is valueless because traffic under it can be
stopped; that of the company is that it still has value, as traffic can
be routed over other streets where franchises have not expired."

This was set aside on the ground that the value of any particular
portion of a street, or of a franchise, remains the same as long as the
system is considered as an entirety.

The second point was as to the value of traffic agreements; but this
complicated problem was also dismissed on the theory that when two
systems are considered as co-operating, the value of individual parts of
either system remains the same regardless of their ownership.

The values of their properties, fixed by the companies, included paving.
The total figures reached in this valuation were:

          Companies' valuation, including paving, $73,555,675
          Commission's   "          "        "     50,994,782
          Commission's   "      excluding    "     46,652,747

This work affords many interesting problems, and is perhaps the largest
valuation for determining a price for the purchase of property that had
been made to date.




     THE COMMERCIAL VALUATION OF RAILWAY OPERATING PROPERTY OF THE
                   DEPARTMENT OF COMMERCE AND LABOR.


In 1902 the permanent Census Office was established, and the Director
was authorized to collect statistics relative to public indebtedness,
valuation, taxation, and expenditures. The Bureau of the Census
co-operated with the Department of Commerce and Labor in the preparation
of the appraisal of the commercial valuation of railway properties of
the country.

The report of this work, issued as Bulletin 21 of the Bureau of the
Census, is the most interesting and valuable exposition of the subject
of railway valuations yet published, as it includes not only the report
of this particular work, together with the results, tabulated by States,
but appendices describing and discussing the work in States and foreign
countries, and the work of valuation by railway men.

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.

This method, of course, cannot be used for purposes of rate-making, or
of bond or stock restrictive legislation, but the general uniformity of
its results with those of State appraisals, and the radical differences
noted in the case of values for taxation in other States, lead very
properly to the inference that a value determined by this method is very
close to the truth.




                   THE EXTENT OF APPRAISAL PRACTICE.


There have been many appraisals of property besides those reviewed in
the foregoing pages. Several excellent contributions to valuation
literature, as a result of the numerous water-works appraisals, are
mentioned in the Appendix.

New Jersey and Nebraska have had railway appraisals in progress during
1909-10. At the time of writing, neither appraisal has gone far enough
to add any points of interest to the subject, except as the appraisers
in these two States discuss the subject and bring out new points.

Valuations of street railway property have been made in several cities,
Cleveland, Ohio, Detroit, and Milwaukee being the most recent.

The Cleveland and Milwaukee hearings have produced large records, and
have tended to determine finally certain principles of valuation.
Several valuations have also been made for corporations, among which may
be mentioned that of The Toledo Railways and Light Company, by Messrs.
Ford, Bacon, and Davis, and that for the New York, New Haven, and
Hartford Railway, under the direction of John F. Stevens, M. Am. Soc. C.
E.

This latter valuation offers some very interesting points, and, in view
of Mr. Stevens' standing as a railroad engineer, the adoption by him of
methods of inventory and field inspection would go far toward fixing a
precedent which would be acceptable to the railroads. It is to be
regretted that the interests of the road are such that it is not deemed
wise by its President to discuss even the principles of this work at
present.

In connection with the recent appraisal made by the City of Detroit, The
Detroit United Railway made an independent examination and appraisal of
its own property, with the double purpose of furnishing an inventory to
the city and of checking the work of the staff employed by the city.
This work for the railroad was done by officials and employees of the
company, under the personal direction of Mr. R. B. Rifenberick. It is
noteworthy for the completeness of its inventory, which goes into the
most minute detail, and for the excellence of the maps and drawings
which accompany it and show, not only every standard type of track,
rail, and all buildings and machinery, but every piece of track and
overhead special work on the entire system. This appraisal includes a
most complete and exhaustive study of average unit costs. Inasmuch as
this work is likely to be fully reviewed in the Courts in the near
future, any further description would hardly be proper. It is not too
much to say, however, that it probably stands as the most complete in
every detail, as to inventory and records, of all American appraisals up
to this date.

During the summer of 1910 the Railway Commission of Michigan ordered an
appraisal of certain large electric-power properties of the State. This
work was done by Professor Mortimer E. Cooley, assisted by Mr. Henry C.
Anderson and the writer. This appraisal, involving certain comparatively
new corporations, made it possible to obtain a fairly definite solution
of some of the problems relative to overhead charges.

It is evident that the demand for valuation work of a high character
will increase, and that it will come, not only from States and cities,
but from corporations. Much of the work done in the past has not been
described in the publications of scientific societies; much very
valuable work has secured only partial notice through reports of
litigation; and it is undoubtedly true that the most complete and full
discussions of the principles of valuation have been in the form of
expert evidence before the Courts, and are buried in the mass of
unprinted records of testimony.




    REVIEW OF SOME METHODS OF VALUATION, AND SOME OF THE CRITICISMS
                       ON THE MICHIGAN APPRAISAL.


Much of the available literature on the subject of valuations is in the
form of papers descriptive of water-works appraisals and arbitrations,
many of which have been made, and a few of which have been the subject
of valuable papers and discussions before learned societies.

Before the American Water-Works Association, D. W. Mead and J. W.
Alvord, Members, Am. Soc. C. E., have presented papers[12] which have
been quite fully discussed. The chief point of interest in these papers
is the treatment of the intangible element termed "going value." Mr.
Alvord advances the argument that, after the determination of physical
present value, there should be added, to determine the fair value, two
non-physical elements: the "going" or "business" value, and the
franchise value. The first element is defined as that special value
which is:

"Built up ... by the energy, perseverance and solicitation of the
officers in charge, as distinct from the inert plant itself, ...

                  *       *       *       *       *

"The element of 'going value' has been before described as the element
of growth in the plant irrespective of its physical condition. It is
comparable somewhat to that indefinable quality known in other lines of
business as 'Good Will'. Nevertheless it is something more than good
will in water works business, as it represents what might be more aptly
described as 'connected good will', that is to say, the acquisition of
customers who have invested considerable sums in actually connecting
their premises with the plant of the company, and provided appliances
for the use of the water which it can deliver."

The method advocated by Mr. Alvord as the most rational one for
computing this value is described as follows:

"It is assumed that a new plant will be constructed, the inception of
which is coincident with the data of arbitration. Such new plant is to
be of an equal capacity with the older plant under consideration, and a
due allowance of time in which to construct this new plant, and the
necessary capital to be invested in it from time to time is estimated.
At the completion of this new imaginary plant, it is assumed that it
commences to obtain business in that community from those who are not
previously accustomed to the free use of public water, except in a
general way; that it is to require the business ability and consequent
increase in number of customers which the earlier and older plant went
through within the early years of its existence. An assumption of the
amount of business thus created for each year for a period of years in
advance is carefully computed and estimated by the board of arbitration.
The losses of interest upon capital invested are duly fixed, as well as
the first absence and later addition of revenue from hydrant rentals,
and a table is prepared showing each year, the total business developed
and the total losses, if any. After this is completed a forecast is made
of the business of the older works for the same period of time in the
future that it takes the business of the new works to equal the business
of the old works. If the business of the old works is found to be a
growing one it will be a longer period that the new works will require
to overtake it than will be the case if the business of the older works
is stationary or decreasing. In general, the differences which might be
called the debits and credits of this new imaginary plant and the debits
and credits of the older working plant are reduced to their present
worth at the time of appraisement, and an estimate is made up which will
adequately represent the financial advantage which the old works
(already fully equipped and in running order and having a large number
of profitable customers) will have over the new works, where everything
must be built and customers secured.

"It is necessary in making this supposititious estimate of the new plant
to consider it in no way a competitor of the older works; there is not
supposed to be competition between the new and the old, but it is left
to the experience of the board of arbitration to consider how long it
would take the new company to build new works, and build up business for
the new works, until they have overtaken the business of the old company
should it continue to occupy the same territory."

Mr. Alvord's description of his method has been quoted fully, as it is
an interesting one and has been often used. It is open to the very
decided objection that it is purely theoretical, a rational method of
computation, perhaps, but based on assumption throughout. It may be said
to be a method which is within the field of pure speculation. Mr.
Alvord, himself, says that where experience in financial matters and the
financial management of water-works is not brought into the valuation,
there is usually to be found guesses of the wildest character. Professor
Mead, in discussing Mr. Alvord's method and agreeing that it is
consistent and logical, says:

"The method is by no means an exact one, and must necessarily lead to a
very great divergence in opinions as to the 'going value,' in accordance
with the assumptions on which it is based.... Its very logic is an
element of danger, for if clearly presented from a biased standpoint to
one previously unacquainted with its application, and if accepted
without careful analyses it may lead to very unjust conclusions. If
used, however, carefully and conscientiously with the desire to do
justice to all concerned, it is a valuable method of estimating going
value, and the only logical one with which the speaker is familiar."

In addition to the element of going or business value, Mr. Alvord
considers the franchise value, and presents two methods for its
determination:

_First._—The physical value, depreciation, and going value are entirely
neglected, and the entire valuation is fixed on the basis of its earning
power throughout the remaining life of the franchise and its probable
sale value.

The probable net revenue for each year of franchise life must be
estimated and capitalized at a sum, which, if put at interest, would pay
such yearly revenue and extinguish itself at the end of the franchise
period. To this must be added the physical value of the plant at the end
of the franchise period.

_Second._—The cost of reproduction, depreciation, and present physical
value are ascertained, and the going value computed. Then it is
determined whether or not the net revenue is paying interest on a
capitalized value greater than that indicated by the sum of the physical
and business values. If such capitalized figure is less than this
combined value, there is, of course, no franchise value; if it is more,
there is a franchise value which should be determined by estimating, for
the remaining years of the franchise, the excess income over and above
that necessary to cancel all obligations (including interest on the
physical and business values), and the reduction of these several sums
to a basis of present worth.

A number of other articles and papers are listed in the Appendix. Many
of these are of great value and are well worth careful perusal, but they
offer no definite plan of valuation. Inasmuch as the general principles
involved in the valuation of a water-works plant and a railroad plant
are similar, it is advisable, in any exhaustive study of the subject, to
review the articles descriptive of water-works valuation, and it is a
matter of regret that greater consideration cannot be here given to some
of the points raised by such engineers as George H. Benzenberg,
Past-President, Am. Soc. C. E., Kenneth Allen, Arthur L. Adams, Emil
Kuichling, Members, Am. Soc. C. E., and others in their various papers
and discussions of this subject.

The _Railway Age_, the _Railroad Gazette_, the _Railroad Age Gazette_,
and the _Railway Age Gazette_ contain many editorials and articles on
the valuation of railroad properties. These are written mainly from the
standpoint of the railway official, and present many matters of interest
which are worthy of study prior to undertaking a large appraisal. One
series of articles in the _Railway Age Gazette_[13] is a most masterly
argument, and it is to be regretted that the author has not disclosed
his identity.

The Michigan valuation has been discussed in two papers by Mr. Charles
Hansel, whose connection with the work, as a member of the Board of
Review, gave him probably a more intimate knowledge of it than any one
else, not connected with the actual working organization, who has
undertaken to review the work. His first paper, published in 1901,[14]
entitled, "What is the Value of a Railroad for Purposes of Taxation?" is
a discussion of the work of Professors Cooley and Adams, written while
the subject was fresh in his mind. His second paper, an able argument
for a Government valuation, appeared in the _North American Review_ in
1907. The one point to which special attention is drawn is Mr. Hansel's
astonishing misconception of Professor Adams' plan of work. This
misleading statement appears in the first paper and is reiterated in the
second. It is of such a character that to pass it unchallenged would be
doing great injustice to Professor Adams. He states Professor Adams'
plan as follows: Capitalize net earnings and add to the present value of
the physical appraisal as found by Professor Cooley.

"The result would be that in case the present value per mile as
determined by Professor Cooley is found to be $15,000, and the net
earnings by Professor Adams are found to be $1,000, this capitalized at
5 per cent. would equal $20,000, and added to the present value would
make $35,000, which would be the sum upon which taxes were to be levied.
In other words, if the company actually earns $1,000 it increases its
value for purposes of taxation 20 times that amount. If, however,
instead of having a net earning of $1,000 it spends that sum in
improving the property, it has only increased its taxable property by
$1,000."

This statement is not only inaccurate, but involves the other error of
assuming that the appraisal figure was to be used for taxation. It was
not. It was merely information to aid the legislature in framing new
taxation laws. The chief error, however, is in assuming that Professor
Adams added the value of the property, as determined by a capitalization
of net earnings (which _per se_ is a well-recognized method of
valuation), to the value of the physical property. This error probably
is due to the flood of criticism which at the time was aimed at any form
of non-physical valuation.

Professor Adams finds the net earning in Mr. Hansel's example to be
$1,000 per mile. From this, in the method actually used, he deducts an
annuity for the support of invested capital, which he assumes to be the
present value found by Professor Cooley. In the example given by Mr.
Hansel he would deduct 4% on $15,000, or $600 per mile, leaving $400 per
mile as surplus, or the earnings due to non-physical elements of value.
This, capitalized at 5%, would give $8,000 per mile, which, added to
Professor Cooley's figure of Present Value, would make $23,000 per mile,
instead of $35,000, as stated by Mr. Hansel.

The most recent criticism of the Michigan valuation work was in an
address[15] before the New York Traffic Club in January, 1909, by Mr. W.
H. Williams, Third Vice-President of the Delaware and Hudson Company.
This address is devoted to an attack, not only on the work of the
Michigan appraisal, but on Professor Adams' work and on the propriety of
valuation work being undertaken for any reason. The arguments advanced
in this address are such that a discussion of them becomes almost
necessary in any complete review of the Michigan work, and it contains
so many statements which are erroneous that it would hardly be
permissible to pass them without comment. The manifest impatience with
all forms of governmental interference with corporations, which so often
characterizes the utterances of prominent railway officials, appears in
this paper to a marked degree. After stating that the present agitation
for a physical valuation appears to be the result of a misconception, on
the part of the Interstate Commerce Commission, of Section 20 of the Act
to Regulate Commerce, and quoting Professor Adams' suggestion of an
inquiry, he says:

"Subsequently, the desire of Governor Pingree to find a means of
increasing railway taxation in Michigan gave Professor Adams an
opportunity to experiment with his project within the limits of that
State."

This is a direct imputation of an improper motive, not only to Governor
Pingree, but to Professor Adams. As stated elsewhere, the investigation
was to determine whether the railroads were paying taxes on the same
basis of valuation as other property in the State—an absolutely proper
proceeding. Professor Adams was associated with the Michigan appraisal,
but had no connection whatever with the "physical valuation," to which
such objection is taken, and his appointment was made after the work of
physical valuation had been fully outlined and was well under way.

The opening statement is followed by a brief _résumé_ of the
recommendations of the Interstate Commerce Commission and President
Roosevelt, and of bills introduced in Congress, also by quotations from
Bulletin 21, describing the methods of valuation used in Michigan and a
showing that practically a similar basis was used in other States. Mr.
Williams then summarizes his objections to the Michigan work:

"(1) No allowance is made for discount on securities sold.

"Discount is a partial capitalization of the commercial risk had in
making the investment, and it increases or decreases in proportion to
the probability of the earning power of money under existing conditions.
Not only is this practice justified by long-established commercial
usage, but also by judicial determination."

The correctness of this position cannot be conceded on any grounds of
economics or accountancy. It is answered conclusively in an article,[16]
elsewhere referred to, as follows:

"There is considerable diversity of opinion as regards the proper
treatment of discount on securities sold. There is a distinction between
bonds, representing corporate indebtedness and having a definite
limitation as to the time of their redemption, and share capital,
representing ownership and which as a rule is irredeemable. In relation
to the former there can be but one tenable view. If a company can market
its 50-year 4 per cent. bonds at 90 per cent. of par, it means that the
company's credit is on a 4½ per cent. basis; that it could market a like
security paying 4½ per cent. at par. If it elects to issue at the lower
rate it is merely sacrificing principal for the sake of a reduction in
the annual interest charge; in other words, it is pre-paying interest
which would accrue during the life of the issue. If $10,000,000 par
value were issued at 90 per cent., the discount would amount to
$1,000,000, and the saving in interest to $50,000 per year, or
$2,500,000 in 50 years. Obviously the company cannot claim the privilege
of capitalizing the discount, while thereby availing itself of the
reduction in interest. If such a course were legitimate in the case of a
5 or 10 per cent. discount, it would be equally so if the discount were
50 or 75 per cent., when the absurdity of the proposition would be
perfectly apparent. The somewhat general practice of prorating the
discount, as a charge against revenues, over the term of the
obligation's existence is sound; but this should be done, not in equal
installments, but on the basis of the appreciated value of the bond as
it approaches par at maturity. There is no apparent objection to
charging discount of this nature in a lump sum against an accumulated
surplus. The capitalization of discount on stocks, involving as it does
the introduction of fictitious values in capital assets, is wholly
indefensible."

The writer has failed to note any particular "judicial determination"
which approves of the charge of any such item to capital account.

"(2) The interest during construction (3 per cent.) is less than a fair
and reasonable return on the investment."

The amount actually paid out for interest on money used during the
period of construction will vary, of course, depending on the time of
construction and the way in which payments on construction materials are
made. On the basis of a rate of 6% per annum and construction lasting
one year, only a very small portion of the construction cost will pay
6%, while the great items of rails, buildings, motive power, and
equipment will be put into the work from 90 days to 10 months after the
commencement of work, and will actually bear but little interest. In the
Michigan appraisal the assumption was made that all work must be
replaced in one year, and that on long roads partial operation would
commence as various sections of the line were completed; and 3% was
agreed on as a fair average, perhaps having in mind Governor Pingree's
"desire to increase railway taxation." Some assumption must be made.
This one, that long roads, covering several years of construction work,
are in Michigan put in partial operation as soon as built, is not
unreasonable. Such an assumption clearly would not be proper in the case
of long lines crossing mountains, or involving such a class of
construction as to make it impossible to complete the property short of
two or three years; and, in any such cases, the interest charge should
be made sufficient to cover.

"(3) No allowance is made for working capital with which to carry on the
business."

All the appraisals of physical property have been made on the basis of
securing a figure representing the cost of reconstructing the property
in the condition in which it existed on the date of the appraisal,
including only items properly chargeable to capital, cost of road, and
equipment. This is not such an item. The writer is of the opinion,
however, that it is a proper one to determine and include in any report.

"(4) No allowance is made for wear and tear of material during the
period of construction. Assuming eight years to be the life of a tie,
and three years the period of construction, a substantial percentage of
the period of usefulness is over before the road is in operation. The
use of the rails before the track is put in proper line and surface
hastens the time when they must be removed."

This deterioration is a necessary incident to any construction work. It
has not been customary or usual to take account of it. To add to the
amount capitalized on account of this item would be manifestly improper.
The only way in which this could be cared for would be in an adjustment
of the depreciation reserve when raised to cover that which takes place
during the construction period. This reserve, later in the address, is
objected to by Mr. Williams as improper accounting:

"(5) No allowance has been made for impact and adaptation. After the
line is placed in operation, each fill will sink 1 ft. for every 10 ft.
of height. The slope of cuts must be increased to prevent landslides and
washouts. The ballast will pound into the roadbed, necessitating
additional ballast to secure a standard cross-section."

Part of this objection is covered by the item, "Appreciation of
Roadbed," discussed elsewhere. This, perhaps, is a proper item, but a
comparatively small one. One of the examples cited is clearly
maintenance. This objection is largely covered in the Michigan work by
the contingency item.

"(6) A uniform price for earthwork was used, thus ignoring the varying
character of soil and length of haul."

This is erroneous. On the Michigan appraisal prices were used for earth,
loose rock, and solid rock. There is practically no classification in
the Southern Peninsula of Michigan, or, in fact, on 90% of the mileage
of the State. The price used was not much out of the way when considered
as a fair average for the territory. The same was apparently true of
other appraisals. It would not be a proper figure to use in an estimate
based on 1909 prices, which are materially greater than those obtaining
in 1890-1900.

"(7) A uniform price list for all materials was used, thus ignoring the
source of supply and cost of delivery to point of use."

This, again, is not true. Differences were made between the Upper and
Lower Peninsulas; and an exhaustive study was made of rates to different
sections. It is believed that the prices adopted took all these points
fully into consideration. It is true that no effort was made to use
different unit prices as between counties, but, in a number of cases,
differences in prices were made for different sections of the State,
where either local conditions as to production of materials, or traffic
rates, seemed to warrant.

"(8) No allowance was made for interference with work on account of
labor troubles, condition of the weather, etc., which would vary
materially in the different counties of the same state."

True. Nor is such allowance ever made in actual construction, beyond the
contingency item. Such items are a frequent source of annoyance, delay,
and sometimes of expense, but an expense difficult to separate and set
up, and clearly belonging to contingencies.

"(9) No allowance is made for carrying charges until such time as the
road was placed on a revenue basis."

True; and such item is not a part of a physical appraisal.

The foregoing nine points are classed as "among other things" open to
criticism. The next two quoted paragraphs are introduced to indicate the
"other things" as they appear. These are mainly non-physical or
intangible elements of value, which, under the method of Professor
Adams, are treated _en bloc_, and which, from their nature, it would be
impossible to set out and value separately; therefore, no effort is made
to answer them point by point, further than to say in general that, if
there is any value attaching to these items, it was presumed to have
been disclosed by the method of Professor Adams, and to suggest further
that had Professors Cooley and Adams had such an advocate of intangible
values ten years ago, their labors would have been lightened, as all
arguments by railway officials at that time were against the use of any
such elements of value in an appraisal.

"No consideration has been given to the leasehold interests....
Therefore it will be seen there remains to be determined many questions
vitally affecting the value of the property without regard to its value
as a 'going concern.'

"There should be no difference in the basis of arriving at the value, as
a 'going concern,' of the property of a railway and any industrial
establishment, nor should there be any difference in the basis of
valuation for taxation [exactly what Governor Pingree maintained] or
other purposes. There is common to both the value due to location, good
will, etc."

While the remainder of the address in question contains no specific
criticisms of methods of valuation, it does go into a discussion of
sundry legal decisions; and conclusions are drawn quite at variance with
those set forth elsewhere in this paper. The thing most noticeable in
the entire address is the lack of a proper spirit of fairness, an
apparent inability to state fully and fairly the position of the men
whose views are being opposed, and an undue emphasis in quoting some
public official whose views coincide for the time being with the
theories which are being advocated. The fact that Mr. Williams quotes
from an address of Hon. Robert H. Shields, President of the Michigan Tax
Commission, a statement criticising the work of Professors Cooley and
Adams, illustrates the latter point.

The statement is made again and again that the Michigan work was a
physical valuation; that no attempt was made to secure a "fair value"
(the language of the Courts), and that the value as a going concern was
not attempted to be given. In no case is the statement made that
Professor Cooley had charge of the physical valuation in Michigan, and
that Professor Adams took this physical valuation, and, under his
method, treated it as one element, and with it and other data derived
from a study of the reports and earnings of the company, undertook to
determine a "non-physical," "intangible," "franchise," or "going
concern" value, which included all tangible elements, and which, added
to the physical value, was assumed by Professor Adams to give the true
value. Had such a statement been fairly made, no possible objection
could be raised to the making of any number of points against the
correctness of the methods used by Professor Adams.

"Certainly it cannot be denied that a road between New York and Chicago,
950 miles in length, passing through a manufacturing district, is of
greater value than a road 1,200 miles in length, between the same
cities, but passing through a hilly and undeveloped territory a portion
of the distance, and through a farming section for a greater portion of
the remaining distance; yet the advocates of a physical valuation would
have us believe that there is no difference in the value of the two if
they can be reproduced to-day at the same cost."

This statement is entirely unfair to every man who has been in
responsible charge of valuation work in recent years in the United
States. No theory has ever been favored by any honest-thinking advocate
of a valuation. In the first place, no interstate valuations have ever
been made, and no parallel case to the one assumed is to be found,
except for very short sections of roads, a very marked instance having
been referred to elsewhere in this paper. Such a condition as assumed
would be reflected in the earnings of the companies to such an extent as
to cause the non-physical element of Professor Adams as used in Michigan
to correct largely or wholly the inequality and inaccuracy of the
physical valuation; such at least was the theory, and, if carried to its
logical end by the use of negative non-physical values, such would be
the result.

The final arguments of Mr. Williams' address are devoted to an attack on
the plan outlined by the Interstate Commerce Commission for valuation,
and on some of the accounting methods of the Commission—points not
proper to be discussed in this paper—but it is difficult indeed to read
them without noting the apparently studied misrepresentation of the real
attitude of Professor Adams and the Commission, and the evident object
of the entire address to create a wrong impression regarding what has
been done, and a prejudice against the men who have been engaged on
State appraisal work and those who advocate the appraisal of properties
as a proper step in the way of securing such information as will enable
an intelligent consideration of the great corporation problems that must
be solved.

-----

Footnote 12:

  _Proceedings_, Am. Water-Works Assoc., 1902.

Footnote 13:

  Commencing with the issue of January 22d, 1909.

Footnote 14:

  The _Railroad Gazette_, April 19th, 1901, Vol. XXXIII. No. 16. p. 271.

Footnote 15:

  _Railroad Age Gazette_, April 2d, 1909, p. 761.

Footnote 16:

  _Railroad Age Gazette_, January 29th, 1909, p. 219.




         THE DETERMINATION OF ELEMENTS OF VALUE AND METHODS OF
                        VALUATION BY THE COURTS.


The preceding narrative of methods of appraisal work logically leads up
to the question: Will these methods that have been adopted in various
appraisal undertakings stand the test of the Courts? After all, the
final seal of approval must be stamped on a method by the highest Courts
before it can be said to be a definitely fixed and determined principle
for general use in valuation.

In a careful perusal of many papers on this subject, quotations from
judicial decisions will be noted which are literally correct as far as
they go, but which are incomplete and often very misleading; and often
such incomplete quotations are presented as to convey an entirely wrong
impression of the full decision. In order that no such charge may lie
against this paper, the quotations given are full enough to indicate
clearly the intent of the Court, even at the expense of undue length.

An examination of all Federal and Supreme Court cases which bear on the
subject of property valuation has been made, and quotations at length
from some of the older cases, establishing precedent, together with
citations to more recent decisions, are submitted. It is believed that
the points of principle and method, in so far as they have been
determined by the highest Courts, are quite fully set forth.

A study of the complete methods of the railroad valuation in Michigan,
in connection with these decisions, discloses the fact that they comply
with the requirements of the earlier cases, that all matters affecting
value be taken into consideration, and that in the more recent decisions
the detailed methods adopted in the Cooley physical appraisal have been
sustained as to very many points. In no case have any of such methods
been unfavorably criticized, and, while at this date the Supreme Court
has not squarely passed on the propriety of any method for securing
non-physical or intangible values, it has fully sustained the general
position of Professor Adams in several important points. In addition to
the complete examination of Federal cases, certain very interesting and
valuable State cases have been examined, and some of them are quoted.

These cases involve both matters of taxation and rate-making. They cover
railroads, water-works, gas-works, and other classes of public service
corporations, and clearly demonstrate the fact that any analysis of the
subject of property valuations must include all classes of corporations.
Rate-making and taxation in themselves are entirely separate and
distinct from valuation, which is a necessary preliminary step in either
undertaking. For this reason all references which are not of special
interest in the valuation part of the problem are omitted.

The case of Smyth _vs._ Ames (169 U. S., 466) was an action to question
the constitutionality of a statute of Nebraska establishing rates. It is
of great interest, and, based on the ruling of the Court in this case,
the appraiser in Washington and the appraisers in Nebraska have
undertaken to secure first cost as an element of value. The decision
holds that:

  (1) A railroad corporation is a person within the meaning of the
      fourteenth amendment.

  (2) A State enactment establishing rates that will not admit the
      carrier to earn such compensation as would be just to it and
      to the public, would deprive such carrier of its property
      and would be repugnant to the fourteenth amendment.

  (3) Rates established by a State cannot be so conclusively
      determined by the legislature that they cannot become the
      subject of judicial inquiry.

The reasonableness of rates prescribed by a State for intra-state
business must be determined without reference to the interstate business
done by the carrier or the profits derived from that business.

This paper is not concerned with the question of rates, which is
discussed at length in this decision. It is, however, of special
interest to note what the Court says in regard to the relation of the
corporations to the people, and to elements of value.

  "A railroad is a public highway, and none the less so because
  constructed and maintained through the agency of a corporation
  deriving its existence and powers from the State. Such a corporation
  was created for public purposes. It performs a function of the
  State. Its authority to exercise the right of eminent domain and to
  charge tolls was given primarily for the benefit of the public. It
  is under governmental control, though such control must be exercised
  with due regard to the constitutional guaranties for the protection
  of its property.... It cannot therefore be admitted that a railroad
  corporation maintaining a highway under the authority of the State
  may fix its rates with a view solely to its own interests and ignore
  the rights of the public. But the rights of the public would be
  ignored if rates for the transportation of persons or property on a
  railroad are exacted without reference to the fair value of the
  property used for the public, or the fair value of the services
  rendered, but in order simply that the corporation may meet
  operating expenses, pay the interest on its obligations, and declare
  a dividend to stockholders.

  "If a railroad corporation has bonded its property for an amount
  that exceeds its fair value, or if its capitalization is largely
  fictitious, it may not impose upon the public the burden of such
  increased rates as may be required for the purpose of realizing
  profits upon such excessive valuation or fictitious capitalization,
  and the apparent value of the property and franchises used by a
  corporation, as represented by its stocks, bonds, and obligations,
  is not alone to be considered when determining the rates that may
  reasonably be charged."

(The Court here quotes 164 U. S., 578, Covington and Lexington Turnpike
_vs._ Sanford.)

  "A corporation maintaining a public highway, although it owns the
  property it employs for accomplishing public objects, must be held
  to have accepted its rights, privileges, and franchises subject to
  the condition that the government creating it, or the government
  within whose limits it conducts its business, may by legislation
  protect the people against unreasonable charges for the services
  rendered by it. It cannot be assumed that any railroad corporation,
  accepting franchises, rights, and privileges at the hands of the
  public, ever supposed that it acquired, or that it was intended to
  grant to it, the power to construct and maintain a public highway
  simply for its benefit, without regard to the rights of the public.
  But it is equally true that the corporation performing such public
  services, and the people interested in its financial affairs have
  rights that may not be invaded by legislative enactment in disregard
  of the fundamental guaranty for the protection of property. The
  corporation may not be required to use its property for the benefit
  of the public without receiving just compensation for the services
  rendered by it. How such compensation may be ascertained, and what
  are the necessary elements in such inquiry, will always be an
  embarrassing question.

  "We hold, however, that the basis of all calculations as to the
  reasonableness of rates to be charged by a corporation maintaining a
  highway under legislative sanction must be the fair value of the
  property being used by it for the convenience of the public. And in
  order to ascertain that value the original cost of construction, the
  amount expended in permanent improvements, the amount and market
  value of its bonds and stocks, the present as compared with the
  original cost of construction, the probable earning capacity of the
  property under particular rates established by the statute, the sum
  required to meet operating expenses, are all matters for
  consideration, and are to be given such weight as may be just and
  right in each case. We do not say that there may not be other
  matters to be regarded in estimating the value of the property. What
  the company is entitled to ask is a fair return upon the value of
  that which it employs for the public convenience. On the other hand,
  what the public is entitled to demand is that no more be exacted
  from it for the use of a public highway than the services rendered
  by it are reasonably worth."

The body of this decision is quoted at length to show:

  First. That the Court reiterates the relation of the people to
      the corporation, as defined by Covington and Lexington
      Turnpike Road _vs._ Sanford (164 U. S., 578) and by Stone
      _vs._ Farmers' Loan and Trust Company (116 U. S., 307).

  Second. That the basis for computing a fair rate is the fair
      value of the property, which must be arrived at by a
      computation or series of computations taking into account
      many different factors.

  Third. That while the Court mentions certain things that may
      serve as indices of value, which are to be taken into
      account and given due weight, the Court does not outline or
      define any method of arriving at a value, but does recognize
      it as an embarrassing question.

  Fourth. That no such stress has been laid by the Court on
      original cost as has been construed by some appraisers.

The principles enunciated in Smyth _vs._ Ames are reiterated by the
Court in San Diego Land Company _vs._ National City (174 U. S., 739),
with the further ruling:

  "The contention of the appellant in the present case is that, in
  ascertaining what are just rates, the Court should take into
  consideration the cost of its plant; the cost per annum of operating
  the plant, including interest paid on money borrowed and reasonably
  necessary to be used in constructing the same; the annual
  depreciation of the plant from natural causes resulting from its
  use; and a fair profit to the Company over and above such charges
  for its services in supplying the water to consumers, either by way
  of interest on the money it has expended for the public use, or upon
  some other fair and equitable basis. Undoubtedly, all these matters
  ought to be taken into consideration and such weight given them,
  when rates are being fixed, as under all the circumstances will be
  just to the company and to the public. The basis of calculation
  suggested by the appellant is, however, defective in not requiring
  the real value of the property and the fair value in themselves of
  the services rendered to be taken into consideration. What the
  company is entitled to demand, in order that it may have just
  compensation, is a fair return upon the reasonable value of the
  property at the time it is being used for the public. The property
  may have cost more than it ought to have cost, and its outstanding
  bonds for money borrowed, and which went into the plant, may be in
  excess of the real value of the property. So that it cannot be said
  that the amount of such bonds should in every case control the
  question of rates, although it may be an element in the inquiry as
  to what is, all the circumstances considered, just to both the
  company and the public."

In the case of Columbus Southern Railway _vs._ Wright (151 U. S., 479),
the Court quotes approvingly from Franklin Company _vs._ Railroad (12
Lea (Tenn.), 521-537-538-539), and shows that the doctrine quoted had
already been enunciated by the Supreme Court in the State Railroad Tax
Cases (92 U. S., 575-607). The Court quotes as follows:

  "The property of a railroad company for purposes of taxation
  consists of its realty, its local personalty, its rolling stock, its
  choses in action, and its franchises. The franchise is a privilege
  conferred by the charter of incorporation, namely the right to
  exercise all the powers granted in the mode prescribed for the
  purpose of profit. It is a unit not confined to any one county in
  which it may be exercised.

                  *       *       *       *       *

  "Obviously, after ascertaining the value of the entire franchise in
  the State as a unit, no more approximate or just division of this
  value can be made for purposes of taxation than to allot it among
  the counties through which the track runs in proportion of the
  entire length of track in the county to the entire length of track
  in the State....

  "The roadway itself of a railroad depends for its value upon the
  traffic of the company and not merely upon the narrow strip of land
  appropriated for the use of the road, and the bars and cross-ties
  thereon. The value of a roadway at any given time is not the
  original cost, nor, _a fortiori_, its ultimate cost after years of
  expenditure in repairs and improvements. On the other hand, its
  value cannot be determined by ascertaining the value of the land
  included in the roadway assessed at the market price of adjacent
  lands, and adding the value of the cross-ties, rails, and spikes.
  The value of land depends largely upon the use to which it is put
  and the character of the improvements upon it."

The mileage basis of apportionment is sustained in the following and
other cases:

 State Railroad Tax Cases                                  92 U. S., 608

 Delaware Railroad Tax Case                                18 Wall., 206

 Erie Railway _vs._ Pennsylvania                           21 Wall., 492

 Western Union Telegraph Company _vs._ Mass               125 U. S., 530

 Pullman Palace Car Company _vs._ Pennsylvania            141 U. S.,  18

 Maine _vs._ Grand Trunk Railway                          142 U. S., 217

 Pittsburg, Cincinnati, Chicago, and St. Louis Railway    154 U. S., 430
   _vs._ Backus

Therefore this basis of division of values between territorial units
appears to be well established by precedent. This is in a measure
unfortunate, as certain classes of property cannot be apportioned
equitably in this way, unless the value of a railroad be determined, and
then that value allocated between different territorial units in
proportion to mileage, without any regard to the location of any
structure or series of structures in any State or county, the
track-mileage basis must be looked upon as a method of apportionment
which is subject to modification or which will lead to error.

In an Indiana tax case, Cleveland, Cincinnati, Chicago, and St. Louis
Railway _vs._ Backus (154 U. S., 444), the late Justice Brewer, of the
Supreme Court, in handing down the judgment, said:

  "The true value of a line of railroad is something more than an
  aggregation of the values of the separate parts of it, operated
  separately. It is the aggregate of those values plus that arising
  from a connected operation of the whole, and each part of the road
  contributes not merely the value arising from its independent
  operation, but its mileage proportion of that flowing from a
  continuous and connected operation of the whole.... The value of
  property results from the use to which it is put, and varies with
  the profitableness of that use, past, present and prospective,
  actual and anticipated. There is no pecuniary value outside that
  which results from such use....

  "In the nature of things it is practically impossible, at least in
  respect to railroad property, to divide its value and determine how
  much is caused by one use to which it is put and how much by
  another. Take the case before us, it is impossible to disintegrate
  the value of that portion of the road within the State of Indiana
  and determine how much of that value springs from its use in doing
  interstate business and how much from its use in doing business
  wholly within the State. An attempt to do so would be entering upon
  a mere field of uncertainty and speculation."

In the Michigan cases, the principal one being Michigan Central Railroad
_vs._ Powers (201 U. S., 245), the question of method of valuation was
not passed on by the Courts for the reason that, after the evidence was
in, and during the argument, counsel for the railroad admitted that the
Cooley valuation was as correct a figure as it was possible to secure
under then existing conditions, methods and rates of taxation being the
issue.

It is thus seen that the Supreme Court of the United States was not, in
any of the earlier cases, required to pass squarely on the propriety of
any method of arriving at a "fair value," and consequently had not,
prior to 1909, defined any hard-and-fast rules of procedure in
determining such value. The Circuit Courts have passed on kindred
questions in a few cases, among which San Diego Land and Town Company
_vs._ National City (74 Fed., 83), and San Diego Land and Town Company
_vs._ Jasper (110 Fed., 714) hold as above, and cite most of the cases
referred to. In the latter case the Court says:

  "The actual value of such property obviously depends upon a variety
  of considerations—among them the actual and prospective number of
  consumers—and is no more unchangeable than the value of any other
  kind of property."

As an illustration, there is cited the effect of a year's drouth on an
irrigation plant as temporarily affecting the value of property.

In the case of Cotting _vs._ Kansas City Stock Yards (82 Fed., 839) the
Circuit Court touches on one very interesting argument, in the light of
some of the methods of valuation advocated by railway managers and some
of the criticisms of recent valuation work.

  "Different methods of estimating the value of property may properly
  be employed when it is valued for different purposes. When a
  valuation is placed on property which has become affected by a
  public use, for the purpose of ascertaining whether the maximum rate
  of compensation fixed by law for its use is reasonable or otherwise,
  it is obvious that the income derived therefrom by the owner before
  it was subjected to legislative control cannot always be accepted as
  a proper test of value because the compensation which the owner
  charged for its use may have been excessive and unreasonable. Again,
  when property has been capitalized by issuing stock, neither the
  market value nor the par value of the stock can be accepted in all
  cases as a proper criterion of value, because the stock may not
  represent the money actually invested, and furthermore because the
  property may have been capitalized mainly with reference to its
  income producing capacity, on the assumption that it is ordinary
  private property which the owner may use as he thinks proper without
  being subject to legislative control. On the other hand, however,
  when property is valued for the purpose last stated, it is clear
  that the owner thereof is entitled to the benefit of any
  appreciation in value above the original cost and the cost of
  improvements, which is due to what may be termed natural causes. If
  improvements made in the vicinity of the property, the growth of
  city or town where it is located, the building of railroads, the
  development of the surrounding country and other like causes, give
  property an increased value, the owner cannot be deprived of such
  income by legislative action which prevents him from realizing an
  income commensurate with the enhanced value of his property."

The language of the late Judge Brewer, sitting as one of the circuit
judges in the case of National Water-Works Company _vs._ Kansas City (62
Fed., 853), is definite as to the necessity of taking into account some
elements of intangible value, and is here quoted as giving the views of
this eminent jurist:

  "The difficult question, however, still remains; and that is, what
  is the 'fair and equitable value,' which by the statute and
  ordinance the city is to pay for the water-works? * * * We are not
  satisfied that either method, by itself, will show that which under
  all the circumstances can be adjudged the 'fair and equitable
  value.'

  "Capitalization of earnings will not, because that implies
  continuance of earnings, and a continuance of earnings rests upon a
  franchise to operate the water-works. The original cost of
  construction cannot control, for original cost and present value are
  not equivalent terms. Nor would the mere cost of reproducing the
  water-works plant be a fair test, because that does not take into
  account the value which flows from the established connections
  between the pipes and buildings of the city. * * * A complete system
  of water-works, such as the company has, without a single connection
  between the pipes in the streets and the buildings of the city would
  be a property of much less value than the system connected as it is
  with so many buildings and earning, in consequence thereof, the
  money which it does earn. The fact that it is a system in operation,
  not only with a capacity to supply the city but actually supplying
  many buildings, in the city—not only with a capacity to earn but
  actually earning—make it true that the 'fair and equitable value' is
  something in excess of the cost of reproduction."

The foregoing authorities cover practically all the older cases in the
Federal Courts. These cases have been examined, and such of the subject
matter has been quoted as would show the conclusions of the Courts as to
what constitute the various elements of true value. The latest Federal
decision bearing on the subject, and in many ways the most replete with
argument, is the case of Consolidated Gas Company _vs._ City of New York
(157 Fed., p. 849), which was decided in December, 1907.

In this case the valuation was determined by the master:

  1.—A valuation of tangible assets, consisting of real estate,
      plant, mains, services, meters and miscellaneous equipment,
      and the property of subsidiary companies, the whole
      aggregating $63,357,000. Of this an allowance of $3,616,000
      was made by the master for working capital, and this entire
      amount was treated as tangible property.

  2.—Finally, an intangible value of 0,000,000 was assigned by him
      to the franchise and good will.

Objections were raised, as follows:

  (_A_) Land values represent no original investment by the
      Company, do not indicate land especially appropriate for the
      manufacture of gas, and increase the apparent assets without
      increasing the earning power.

  (_B_) The values of physical property are not original cost, but
      are cost of reproduction less depreciation.

  (_C_) Some of the property cost more than new articles of the
      same kind at the time of inquiry. Some are of designs not
      now favored by the scientific and manufacturing world.

The disputed questions involved, as far as tangible property is
concerned, were:

  1.—Whether the values ascribed to the several enumerated items
      are based on competent and persuasive evidence.

  2.—Whether the method of valuation pursued by the master is in
      accordance with law.

  3.—Whether the items of property are "employed" (in the legal
      signification of the word) in the production of gas.

The first, a question of fact, is found affirmatively, and the evidence
was found to be competent.

The second question is one of law, and, quoting from the cases cited in
this paper, the Court holds as follows:

  "This method of valuation correct * * * upon reason it seems clear
  that in solving this equation the plus and minus quantities should
  be equally considered and appreciation and depreciation treated
  alike.... The value of the investment of any manufacturer, in plant,
  factory, or goods, or all three, is what his possessions would sell
  for upon a fair transfer from a willing vendor to a willing buyer,
  and it can make no difference that such a value is affected by the
  efforts of himself or others, by whim or fashion, or (what is really
  the same thing) by the advance of land values in the opinion of the
  buying public. It is equally immaterial that such value is affected
  by difficulties of reproduction. If it be true that a pipe line
  under the New York of 1907 is worth more than was a pipe line under
  the city of 1827, then the owner thereof owns that value, and that
  such advance arose wholly or partly from difficulties of duplication
  created by the city itself is a matter of no moment. Indeed, the
  causes of either appreciation or depreciation are alike unimportant
  if the fact of value be conceded or proved; but that ultimate
  inquiry is oftentimes so difficult that original cost, and reasons
  for changes in value, become legitimate subjects of investigation as
  checks upon expert estimates, or bookkeeping, inaccurate and perhaps
  intentionally misleading. * * *

  "The so-called money value of real or personal property is but a
  conveniently short method of expressing present potential
  usefulness, and 'investment' becomes meaningless if construed to
  mean what the thing invested in cost generations ago. Property,
  whether real or personal, is only valuable when useful. Its
  usefulness commonly depends on the business purposes to which it is
  or may be applied. Such business is a living thing, and may flourish
  or wither, appreciate or depreciate; but, whatever happens, its
  present usefulness, expressed in financial terms, must be its value.
  * * * It is not to be inferred that any American government intended
  when granting a franchise, not only to regulate the business
  transacted thereunder, and reasonably to limit the profits thereof,
  but to prevent the valuation of purely private property in the
  ordinary economic manner, and the property now under consideration
  is as much private property as are the belongings of any private
  citizen. Nor can it be inferred that such government intended to
  deny the application of economic laws to valuation of increments
  earned or unearned, while insisting on the usual results thereof in
  the case of equally unearned and possibly unmerited depreciation.

  "I think the method of valuation applied by the report to land,
  plant, mains, services, and meters lawful. To 'working capital, Coke
  and Coal Company, and Astoria' the above considerations are not
  applicable, and these items will be treated separately."

The Court's review of the third question raises no points of special
interest as to valuation.

The question as to amount of "working capital" is taken up, and that
term is defined as:

  "The amount of cash necessary for the safe and convenient
  transaction of a business, having regard to the owner's ordinary
  outstandings both payable and receivable, the ordinary condition of
  his stock, or supplies in hand, the natural risk of his business,
  and the condition of his credit; and unless these matters, and
  perhaps others, be looked into, no comparison can be drawn between
  one business and another, or even between those of the same general
  nature."

In this instance it is of interest to note that the Court reduced the
"working capital" from $3,616,000 to $1,616,000.

Perhaps the most novel and interesting part of this decision is that
dealing with the intangible elements of value. The master was unable to
separate the two elements, good will and franchise value, but gave their
combined value.

  "From the testimony I think it apparent that what is here meant by
  good will is the organization of complainant, long established, and
  doubtless well manned and equipped. Such organization is clearly of
  value, because without it neither tangible nor intangible property
  can be profitably managed. Yet the organization itself is but a
  method of utilizing that which is invested, it is really dependent
  for its existence and continuance upon the franchise, without which
  there can be no useful organization. Tangible property has a certain
  value entirely apart from franchise or right to continue business,
  but good will in the sense of the organization for the business of
  furnishing gas, can have no existence whatever apart or detached
  from the franchise conferring the necessary privilege. Would any one
  think of capitalizing good will of this kind and distributing its
  assumed value in the shape of new shares among stockholders new or
  old? I think the most ingenious financier could not imagine such a
  proceeding, and, if this good will be not property capable of such
  capitalization and distribution, I do not think it property capable
  of capitalization as against the State.

  "Finally, this claim of good will seems to forget that for many
  years the price and distribution of complainant's gas has been
  regulated by law. A citizen is entitled to have a clean street
  before his house because he pays taxes, _inter alia_, for that
  purpose. He is much more plainly entitled to have complainant's gas
  in his house because the company must give it to him if he pays for
  it. I think it apparent that the conceivable good will of a gas
  company in this city is about equal to that of the street-cleaning
  department of the municipal government."

Is a public service corporation entitled to add the value of its
franchise to the assets from which a fair return may lawfully be
demanded? This question is taken up and discussed exhaustively by the
Court (157 Fed., 872 to 879), and while it is clear in reading his
judgment that he does not believe it sound doctrine to invest a
franchise with value, yet, after citing a large number of cases, he
reaches the conclusion that he is "compelled" to consider franchises,
not only as property, but as productive and inherently valuable
property, and to add their value, if ascertainable, to complainant's
capital account before declaring the rate of return.

This case went to the Supreme Court of the United States, where, under
the title Willcox _vs._ Consolidated Gas Company (212 U. S., 19),
citation is made to many cases in connection with the matter of
franchise value. The decision of the Court is:

  "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.

It appears to be doubtful whether the Court can be construed as
approving such an element of value in rate cases.

It thus appears that the United States Courts have laid down a few
rules, which may be regarded as fixed and definite and must be followed,
but that many important questions have not yet been decided. The value
to be determined must be a "fair value" of the property being used for
the convenience of the public. The par value of stocks and bonds may not
alone be considered (although it may be considered), the market value of
stocks and bonds, original cost plus cost of additions, the probable
earning capacity, the cost of reproduction, depreciation, appreciation,
all these, and any others that will throw light on the "fair value" must
be taken into account and given the weight to which they are entitled.
Any fictitious book values due to over-issues of stock and bonds are to
be given no weight, but the appraisal must give the fair value, in the
light of all the facts, of the property in actual use at the time of the
appraisal.

There are several decisions of the State Supreme Courts which discuss
these subjects, but an examination of a number of these gives
practically nothing more, in the way of definite conclusions as to
method, than has been cited. Perhaps the most complete and painstaking
consideration of appraisal problems by any Court was that given by Judge
Savage of the Supreme Court of Maine (97 Maine, 185, and 99 Maine, 371).
These were neither rate cases nor taxation cases, but proceedings under
statute to require from the Court instructions to a board of appraisers
appointed to value the plants. In the later or Brunswick case, Judge
Savage elucidates a number of points left not altogether clear in the
Waterville case. The Brunswick decision contains some interesting views
on "going value," and the Court's remarks on the general difficulties in
making rules for an appraisement are exactly to the point:

  "There are many difficulties, if not dangers, in attempting to
  formulate rules which are to be applied to facts not yet
  ascertained. While it may be easy enough to state rules in the
  abstract, it is much more satisfactory in an opinion of the court,
  to express them in terms which are applicable to the facts in the
  precise case in hand.... It must be always understood that our
  answers to these questions are intended to be given only in the most
  general and comprehensive terms, which may, or may not, be found to
  be fitted to the facts which may subsequently be developed. No other
  course would be wise or safe.... A public service property may or
  may not have a value independent of the amount of rates, which for
  the time being may be changed. A public service company may, under
  some circumstances, be required to perform its services at rates
  prohibitive of a fair return to its stockholders, considering their
  property as an investment merely....

  "Now, what is the property which the district has taken by power of
  eminent domain? In the first place it is a structure, pure and
  simple, consisting of pipes, pumps, engines, land rights, and water
  rights. As a structure, it has value independent of any use, or
  right to use, where it is, a value probably much less than it cost,
  unless it can be used where it is, that is, unless there is a right
  to use it. Nevertheless, it has value as a structure. But, more than
  this, it is a structure in actual use, a use remunerative to some
  extent. It has customers, it is actually engaged in business, it is
  a going concern. The value of the structure is enhanced by the fact
  that it is used in, and in fact is essential to, a going concern
  business. We speak sometimes of a going concern value as if it is,
  or could be, separate and distinct from structure value—so much for
  structure and so much for going concern. But this is not an accurate
  statement. The going concern part of it has no existence except as a
  characteristic of the structure. If no structure, no going concern.
  If a structure in use, it is a structure whose value is affected by
  the fact that it is in use. There is only one value. It is the value
  of the structure as being used. That is all there is of it."

The Court then argues that, as the structure is being used under
authority and by virtue of franchises, it is more valuable. The
franchise, however, is limited; other and competing franchises may be
granted; a franchise may exist entirely independent of a structure. He
holds that the structure is more valuable with the franchise.

  "It is a structure in actual use, and with a right on the part of
  the owner to use it and to charge reasonable rates to customers for
  services rendered. It is threefold in discussion but it is single in
  substance."

This case is largely taken up with a discussion of the reasonableness of
rates which furnish a basis for the estimate of value. There is no
specific attempt to describe methods of procedure. That is left to the
appraisers. These two Maine Cases, together with a valuable paper[17]
thereon by Leonard Metcalf, M. Am. Soc. C. E., constitute an extremely
valuable addition to the literature of appraisements.

It is clear, from a study of all the cases referred to in this paper,
that the Courts have laid down a line of precedent which is equitable
and just, that the interests of both public and corporations will be
safeguarded, and that the likelihood of any unfair or improper
valuations passing the scrutiny of the Supreme Court is but remote.

-----

Footnote 17:

  _Transactions_, Am. Soc. C. E., Vol. LXIV, p. 1.




          PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION.


All the foregoing narrative of methods adopted in recent valuations,
review of judicial opinions, and comment on the expressed opinions of
various engineers and railway officials, is presented as being proper
and necessary to support the contention that the Michigan valuation,
while not the first appraisal work, was the first valuation work of
large magnitude undertaken by any State; that it was a work which
established many precedents; and that the complete discussion of methods
and principles in connection with and following this appraisal has given
it probably a greater general value than any similar undertaking. The
Wisconsin work, which immediately followed that of Michigan, was along
lines similar to those of the Michigan physical valuation, and carried
the work forward, adding to and strengthening certain of its features.
Without any impropriety, it may be claimed that these two appraisals
have laid down the general lines on which this class of engineering
effort will be largely directed in the future.

It is desirable, in closing this paper, to indicate such general methods
of procedure in valuation practice as may be said to have been
thoroughly established by precedent, and to present such argument as
will support the contention that such methods are proper.

The fact has been emphasized, again and again, by every writer on the
subject, that problems of this class are not capable of exact
mathematical solution; that, no matter how much care may be exercised in
the execution of the work, the result is tempered by the personal
judgment of the men engaged on it, and that only when it is executed by
men of experience, sound judgment, and high moral worth can it have a
definite, final, and just result.

This feature of appraisal work cannot be too strongly emphasized. The
value of the work depends on the character of the men doing it, their
experience in design, construction, and operation of properties, and
their absolute fairness and freedom from prejudice.

That there will be many large valuations undertaken in the near future,
there appears to be no doubt. These valuations will be made as a
necessary preliminary to three classes of corporate control:
rate-making, taxation, and the regulation of capitalization.

The Courts hold that the value must be "the fair value of the property
used for the public," and that the corporation:

  "may not impose upon the public the burden of such increased rates
  as may be required for the purpose of realizing profits upon [such]
  excessive valuation or fictitious capitalization." (Smyth _vs._
  Ames.)

This language is repeated, again and again, so that it is clear that any
valuation, to be sustained by the Courts, should:

_1._—Be based on a careful study and analysis of all the information
applicable to the case in hand; and

_2._—That it must separate the various elements so that every step of
the work may be reviewed and supported.

Public interest demands that, in any valuation, certain figures shall
appear which shall show the amount of _bona fide_ capital actually
existing in the property at the date of appraisal.

The fact that a given amount of money was invested in building a
railroad in 1880, and that certain other sums were spent for additions
in subsequent years, does not necessarily indicate that these amounts of
capital will still be found in the property in 1910.

The removal of timber from surrounding lands, the destruction of
industries and the removal of tracks leading thereto, the destruction of
equipment and facilities, the depreciation in value of adjacent
property, along with wear and tear, and obsolescence, have gone to
effect the destruction or loss of capital on many Michigan railroads.
The case in 212 U. S., 1, clearly directs that the valuation must not
take into account this destroyed capital, but must return a "fair value
of the property as it is."

On the other hand, the amount of money actually spent in producing a
given property in the past may be far below the present value. The
appreciation of value of lands by reason of development of cities and
growth of industries, the increase in cost of the materials entering its
construction, and many other causes, may lead to an appreciation of the
value of the property, and this appreciation should appear in the
valuation and the company be entitled to the benefit of it. It is in the
nature of an increase of the investment, and should appear as capital.

It is clear that there are two classes of elements of value in the final
value of a public service property: those which are physical, and those
which are intangible. There are various of the physical elements of
value which are not material or susceptible of inventory, but which,
nevertheless, attach themselves to the physical property, are capable of
determination, within reasonable limits of certainty, and should be
taken into account and computed as physical property.

In the subsequent discussion of physical and intangible values, it is
attempted to differentiate between such elements as should attach to the
physical value, or capital remaining in the plant, and the purely
intangible or franchise values.

It is contended by the writer:

That the Physical Value, or present value of the physical property,
should fairly represent the actual capital invested in the property at
the date of appraisal; that it should be made up of the sum of the
various elements which constitute the cost of reproducing the property
together with any appreciation which may have been added to any of them,
less all depreciation.

That the Non-Physical Value is the difference between the "fair value"
as defined by the Courts, or the reasonable value of the property as a
business or producing property, and the physical value, or actual
present worth; and that the only proper method for determining such
values involves a study of income accounts.

This Non-Physical Value may be: positive, or a value in excess of the
physical property, or negative, or less than the physical value. In the
case of a property having a negative intangible value, a deduction
should be made from the physical value.

It is further contended that, in making the physical appraisal, the
purpose of the appraisal should not be permitted to modify the figures.
The resultant figure should be the same, whether it is to be used as a
basis for assessment, rate-making, or limitation of capitalization. It
should be an engineering estimate of the amount of _bona fide_ capital
still remaining in the property, or of the complete cost of reproduction
under existing conditions, less depreciation. This figure is definite,
within reasonable limits, and it cannot be conceded that it is
permissible to vary it, submitting one result as a physical value for
taxation, and another and different result as a present physical
valuation for rate-making.

There may be some question as to the propriety of using non-physical
values for certain ultimate ends; in fact, the Supreme Court, in the
Omaha and Knoxville water cases, clearly indicates that they must not be
used for certain purposes; but, in any case, to furnish information,
this element of value should be determined, and, as in the case of
physical values, it should be an unchangeable figure[18] and should
represent the difference between the worth of the actual physical
property and the final business value of the property considered as an
earning proposition.

It is not necessary to go minutely into detail as to the various steps
to be taken in making the appraisal of physical property. Each appraisal
will offer some problems peculiar to itself, and no general set of rules
can be laid down which will be applicable to all cases. It is deemed
sufficient to call attention to general matters of major importance and
to refer to some points which have not been mentioned in the preceding
narrative, omitting argument in the case of such as have there been
fully discussed.

The distinction should be kept in mind that any element of value which
belongs to the property by reason of its physical existence is classed
as an element of physical value. The property is considered as an
operating property in the sense that it is reproduced complete, ready to
operate; and any expense, or any element of value needed to complete it,
is an element of the physical value, but any value arising as a result
of surplus earning power, any good-will value, going-concern value, or
value due to established business, strategic location, favorable traffic
arrangements, etc., should be considered as intangible values.

The valuation of physical property is naturally divided into four parts:

   I. —The preliminary study,

  II. —The field inspection,

 III. —The computation,

  IV. —The preparation of the final figure.


                       I.—The Preliminary Study.

The preliminary steps should include a general examination of the
property, a study of its corporate history, an examination of its
records, maps and profiles, and the preparation of an inventory of its
property.

The work in Wisconsin and Minnesota was done in co-operation with the
railroad companies, who prepared (generally, but not in every case)
their own inventories on forms adopted by the appraiser. In Michigan,
all this information was secured by the appraiser. There can certainly
be no valid objection to the use of information compiled by the
companies, whose familiarity with their own records and property would
enable them to supply lists which under all ordinary conditions would be
more complete and up-to-date than if made up by men having no special
knowledge of the property.

The chief difficulty encountered in making an inventory from recorded
data lies in the fact that very few sets of records are corrected to
date, and many additions and erasures will of necessity have to be made
in the field.

In making a field inspection, it is of great assistance to be able to
refer to maps of large yards, to profiles, to standard plans, and to
drawings of the principal structures, so that the investigation of
office records should include a careful examination of the maps of
principal terminals, with a view to securing such as will simplify the
field inspection. The investigation should be extended to cover a study,
not only of the engineering office data, but also statistical data to be
derived from the records of the auditor, superintendent, and
superintendent of motive power, and should cover earnings, operating
expenses, car and locomotive mileage, and such other data as will
facilitate the distribution of such elements of value as are not
localized, together with such other statistics as will furnish a
thorough knowledge of the property and its operations.

It has been claimed by the appraiser in Washington—and the view is also
held by the Commissioner of Railroads in Nebraska—that original cost is
essential, in view of the Supreme Court's decision, particularly in
Smyth _vs._ Ames. The writer cannot accept the correctness of this
position. It would appear that the language of the Court should be
construed to mean that original cost, where ascertainable, is a proper
matter to take into account, along with many other things; but it can
hardly be considered mandatory.

In the case of a property only recently built, in which the records are
complete and the engineering and construction files are available, it
may not be specially difficult to determine cost, but in the case of any
of the large railway systems of the United States, which are made up of
the consolidation of many different roads, some of them built many years
ago, some of them having gone through many changes of management,
reorganization, and earlier consolidation, it is practically impossible
to secure either the old financial books or the old construction
records, and without these complete records it would appear to be an
utter impossibility to secure the primary cost. Primary cost is but the
first step. The work of building up, by securing the amount of additions
and betterments that have been made from year to year, is one of
appalling magnitude and of utter uncertainty and conjecture. Keeping in
mind that, prior to July 1st, 1907, the railroad companies of the
country did not have a system of uniform accounting, and that additions
to property were charged to operating expenses to the extent of hundreds
of millions of dollars; that policies were different on different roads,
and under different managements of the same road, and that the
accounting methods were determined by the policy of the road or
management; and the further fact that the distribution of ordinary
railroad accounts may be extremely reliable on one road and abounding
with errors on another; it will be seen that any attempt to depend on
the auditor's office for anything approximating a complete statement of
cost would lead into a maze of figures which would be confusing,
unreliable, and incapable of proof.

Therefore, it is the writer's conclusion that, beyond such figures on
recent construction, or records of cost of such special structures as
are matters of particular record, it is not advisable to attempt to
secure complete data as to the cost to date of a railroad. In the
Michigan appraisal, original cost was secured in the case of many
structures, notably the Port Huron Tunnel, and it is by no means argued
that original cost should not be considered, or investigated, but it is
held that such an undertaking as to secure, from the financial books of
the company, an accurate or reliable statement of construction cost,
plus additions and betterments, less property destroyed, of the Michigan
Central Railroad, for example, would be absolutely an impossibility,
particularly if the work was to be undertaken, as in the Washington
appraisal, by men who were utter strangers to the property. The
admission of the appraiser of Washington, that, except for a few gaps,
the information was complete, is fatal, as the gaps must needs be filled
by estimates, and it would appear to be better to depend on estimated
figures throughout than to use what purported to be actual costs on part
and estimates on the remainder.

If original cost is essential, it is hard to get away from accepting the
book values of the companies, as these, objectionable as they may be,
from the viewpoint of the public, are just as apt to be as near the
actual truth as any statement made up by strangers from an examination
of old records covering many years of operation.


                       II.—The Field Inspection.

The field inspection, to be of the greatest value, should be made by
civil or mechanical engineers of long experience, preferably by men who
have had charge of their respective departments on railroads of
considerable extent, or of properties similar to that under
investigation. The writer is of the opinion that in this particular
phase of the work, the practice adopted in the Michigan appraisal was
considerably in advance of more recent valuations. Each particular
structure or piece of equipment should be examined and its condition
noted; special features should be fully described and careful record
made of everything that would tend to affect the value. The argument has
been often made that the fixing of a percentage of depreciation by a man
in the field is purely arbitrary and amounts to nothing but a guess. In
the computing office it is often necessary to check the field figure of
depreciation by the use of tables of fixed annual depreciation, but it
must be borne in mind that mortality tables of any form are based on a
system of averages. The actual depreciation on rail, for instance,
varies greatly; the conditions of traffic, curvature, gradient, rolling
stock, and various local conditions tend to shorten or lengthen the
life, so that the personal opinion of an experienced man on the ground
is likely to be much more nearly correct than the arbitrary application
of a rule of averages.

The writer has inspected station buildings more than 50 years old, and
their condition and adaptability for the service required of them would
give them a very high percentage; he is also familiar with buildings
less than 10 years old, which, by reason of changed traffic conditions
and consequent shifting of business, have become obsolete and have been
permitted to depreciate so rapidly that any table average would give too
high a result.

In the case of a water-works inspection, so much of the value is
included in the system of distribution mains, a form of property which
is inaccessible, that much more dependence must be placed on a figure
based on age; but there, also, as full investigation as possible should
be made, in order to determine to what extent tuberculation or
electrolysis has affected the pipes.

A general inspection (made in Minnesota by the appraiser with two
assistants) would appear to be an excellent thing as a review of the
whole work, but whether such an inspection would be sufficiently
thorough to base thereon a set of final values, would appear to be
doubtful.

The inspection in the field, in addition to the placing of a percentage
for depreciation, should involve a complete check of the inventory, a
correction of all errors, due to the construction of new property or the
destruction or removal of old, and a compilation of all information
required for a complete, correct, and intelligent appraisal of the
physical property by the computing office. Every appraisal is different,
and every property offers new problems and diverse conditions. These
must be met, and therefore the field inspector must call particular
attention to all matters specially affecting the values of the property
he is inspecting.

It is impossible to anticipate all these conditions in advance, although
the use of carefully prepared blanks and the standardizing of the form
in which the data are gathered greatly simplify the work, not only in
the office, but in the field.


                         III. The Computation.

On the completion of the field work, with all the preliminary data in
the office, the computation must proceed, and with this part of the work
there are many questions which must be taken up, considered, and
definitely answered.

The classification and arrangement of the information as to the property
to be valued, the costs and prices of the various materials entering
into construction, the making and checking of such tables as may be
required for estimating, the computing, checking, filing, indexing, and
the various other routine details of work need not be referred to
specially, as they must be worked out for each appraisal. The matters of
principle that will be met are more important, and, while it would be
impossible to mention all that may come up, it may not be amiss to refer
to a few.

(_a_) In making an appraisal of several properties, to what extent shall
these properties be grouped or classified?

(_b_) What unit prices shall be assigned in the estimates of cost of
reproduction, and how shall they be determined?

(_c_) How shall right-of-way and real estate values be ascertained?
Shall such elements as appreciation, or any increments due to the
purpose for which the land is used, be treated as physical or
non-physical values?

(_d_) What method shall be finally adopted in determining depreciation?
What elements shall depreciation be made to cover?

(_e_) What elements of cost or appreciation shall be treated as parts of
the physical property although not capable of inventory, and what shall
be treated as non-physical?

(_f_) Is an allowance for contingencies a proper item to include in an
appraisal?

(_g_) What weight shall be given the matters of adaptability, proper or
improper design, and the economics of location?

(_h_) How shall the values of such property as locomotives, cars, etc.,
be geographically assigned?

(_i_) What is the effect upon values of large terminals?

(_j_) Should an allowance be made by reason of rapid development of the
art?

These are not by any means all the perplexing questions that arise; each
valuation offers some that are special, but these cover the more
important points.

(_a_) _Classification of Properties._—In making an appraisal involving
the properties of a large number of companies, such for instance as any
of the State railroad appraisals, it becomes evident that there are
certain properties which are small, badly run down, and either built to
serve a very limited trade or located in a territory which has not
developed, and that such properties cannot be compared equitably with
the large trunk-line roads, or even with smaller roads in a good
territory and doing a good business. Several such properties exist in
Michigan in a district which was originally a lumber-producing country,
and at the time they were built local conditions were such that prices
of timber and labor were far below any cost that it would be reasonable
to assume to-day. Whether taxation or rate-making be the ultimate end of
the work, it is certain that these carriers are entitled to some
classification which will separate them from the more prosperous roads.
Many of these roads would not be built to-day under any circumstances,
yet their maintenance and continued operation is absolutely essential to
the people of the district served by them.

Whether this classification should be undertaken at the time of making
the appraisal of physical property, and an attempt be made to classify
unit prices, or whether this should be taken up in connection with the
intangible values, and solved, as far as the valuation is concerned, by
the adoption of such a method as will affect these physical values by a
subtractive or negative non-physical value, or whether the entire matter
should be left for the subsequent work of rate-making or assessment, is
one which must be determined at the outset of the physical valuation. It
may not be left without determination, as the question will be raised in
all probability in the form of an attack on the valuation, if it is not
considered and a conclusion reached.

It is the writer's opinion that the application of an intangible
subtractive value is the proper solution, except in the case of roads
which would not to-day be rebuilt. In fixing a uniform price for
identically the same labor or material, whether on a small
poverty-stricken road or a main trunk line, no serious injustice is
done, provided the price fixed is one which, from a strictly engineering
standpoint, is a reasonable figure for cost of reproduction. The
differences in class are due, not to special differences in cost of
physical property, but rather to differences in earning ability on
account of good or poor territory served, efficient or inefficient
management, or other reasons not connected with the physical structure;
hence such differences are reflected in the earnings, and are clearly
elements to be adjusted in the non-physical valuation.

(_b_) _Unit Values._—The general reliability of the appraisal rests very
largely on the reasonableness and fairness of the various prices which
are applied to the different parts of the property in making the
estimate of cost of reproduction. These unit prices should be determined
before any actual figures are made. They should be made up from the most
complete data available, and, before being tabulated, should be
carefully reviewed by all the experienced men engaged on the appraisal,
in order that no figure which is either too high or too low may be used.

As a basis, the average of either 5 or 10 years should be used in
preference to current prices on all such material and equipment as is
fairly stable. Rail, and all forms of rail structures, machinery,
locomotives, cars, etc., can be reduced to such a unit that averages can
be secured which will eliminate the error due to a period of extreme
high or low prices.

In the case of such materials as lumber and ties, the price of which has
been steadily rising, due to the growing scarcity of the material, a
price based upon a long average is unfair to the corporation, and it
would appear to be proper to use current prices. There can be no
hard-and-fast rule which will be applicable to all appraisals. The unit
prices must be such reasonable figures as can be sustained in Court.
Their adoption should not be final until every possible test of their
accuracy and reasonableness has been made. When they have been adopted,
and such modification made as may be fair for certain territory, on
account of local conditions, transportation facilities, or other
consideration which may affect them, the adopted figures should be
applied to all property alike. The use of different unit figures for
different roads in the same territory is highly undesirable, and should
be avoided.

(_c_) _Right of Way and Real Estate._—The valuation work which has been
accomplished during the past decade, and the study of values for
taxation and rate-making, have brought into prominence the perplexing
features of land values as applied to corporation property. It is
comparatively simple to fix within very close limits the reproduction
cost of tracks, bridges, locomotives, or any of the other elements of
physical structure. Not so with the land. A few years' development may
change farm land right of way into city right of way, surrounded by
factories, or it may change desirable residential property adjacent to a
road into slums.

In view of the clear language of the Court in 82 Fed., 839, and 157
Fed., 849, it is evident that any valuation which does not take into
account the appreciation or depreciation of land values cannot be
sustained. There can be no serious objection to the doctrine that the
property of a corporation generally increases or decreases in value in
the same proportion as adjacent property, and it must therefore be
admitted that a value based on the sale value of adjacent lands is a
reasonable one and must stand. This reasoning, of course, will be
subject to exceptions, in the case of terminal properties, docks and
water-front properties, and right of way in large cities, but it is
believed to be sound when applied to right of way in the country and in
small towns and cities.

The next question to be determined is whether the increment of value due
to the use of the land is a proper one. It would appear that in the use
of land for water-works, gas-works, street-car barns, or other isolated
tracts of land used for corporation purposes, this increment would be
much less than in the case of a steam or interurban railroad, the
holdings of which form a continuous and unbroken strip; and, in the case
of street railroads, water-works, and like properties, it would be
indeed difficult to compute and afterward sustain any considerable
increment.

In the case of railway properties, however, it is quite evident that the
following facts can be sustained: The actual cost of property purchased
for railway purposes will range from two and one-half to five times the
selling price of similar and adjacent property used for other purposes.
While the actual percentage will vary somewhat, as between land in
cities and in the country, and as between fully settled districts well
served by roads and sparsely populated regions, yet the difference is
very marked, and is capable of determination by an examination of the
public records.

This difference can be determined either by a comparison of railway
purchases and other transfers, as was done in the later studies in
Michigan and in Wisconsin, or by extending the investigation to include
assessed valuations, and using the averages, as was done in the work of
Mr. Morgan in Minnesota.

In establishing figures for use in a valuation, it would appear to be
better to base them on an analysis of actual transfers than to undertake
to fix values by any methods of examination and personal appraisal.
Enough instances of the wide divergence of expert opinion have been
cited to show conclusively that such a method, applied to the thousands
of acres of a large corporation, may lead to serious error.

A single attorney or real estate man who has had experience in
abstracting and conveyancing, and who has bought some right of way, can
examine the records of an average county the largest city in which has a
population of 20,000 or less, abstract all railway transfers for 5
years, locate them on the maps, secure data as to actual selling prices
of near-by lands, and, in a comparatively short time, be in position to
furnish figures which will establish the relation between sales for
railway and other purposes in that county. The work that half a dozen
such men could do in 90 days would go very far toward establishing with
a fair degree of definiteness the value of the railway purpose increment
for the majority of counties in any average State. Of course, such an
investigation in the large cities is a matter of much greater labor, and
would require sufficient time to make complete examinations, probably
necessitating a special force for such city work.

On every appraisal, the question has been asked, should this railway
purpose increment be added to the value of the property? Clearly, yes.

The Supreme Court quotes approvingly from the Tennessee Court, as
follows (151 U. S., 479):

  "The value of the land depends largely upon the use to which it is
  put and the character of the improvements upon it."

This is stated again and again. It must be remembered that, for railroad
uses, the strip must be continuous; that it must be located so as to
permit curves and grades which conform to the requirements of the road;
that, no matter what damages may accrue to adjacent property, the road
must take its strip; that its use is entirely changed and is a structure
placed on it which is capable of vastly greater earnings than the
property produced before—all these elements add to the cost of the
property when it is acquired for railway purposes, and in the same
measure to its value under its new use.

In a new country, where transportation facilities are limited and land
cheap, this added increment may be little or nothing, but in a thickly
settled State, with many railroads, this element will increase with a
good degree of uniformity; while, in terminals, the price rises to
almost inconceivable figures. It is capable of being determined, and is
clearly an element in the cost of reproduction. The writer holds to the
view that it is properly to be placed with the physical values, and that
it should not be considered as an intangible element of value.

(_d_) _Depreciation._—Thus far, this discussion has not dealt at length
with the subject of depreciation, and it is not considered essential to
the purposes of this paper that it be done. The State appraisals have
raised a question as to the propriety of using mortality or life tables
as compared with personal inspection and the placing of a percentage
based on individual judgment. Either method is subject to error. It is
certainly desirable to secure the opinion of the man who inspects a
bridge, or building, or locomotive, as to its physical condition. It may
be desirable to use the check secured by the fact that the age of the
building is known and also the average life of structures of its class.

The result of the Michigan inspection of rolling stock was to sustain
fully the rules for valuation issued by the Master Car Builders
Association; and clearly, it is not only proper, but extremely
desirable, to apply tables to such equipment as freight cars, which are
scattered all over the United States, for it would be absolutely
impossible to inspect completely those of any road or system. On the
other hand, the life of steel rails cannot be determined by any simple
table, because the number of car movements, the weight of motive power,
the speed of trains, the location (on curves or on heavy grades), and
many other conditions affect their life. This also pertains to
buildings, locomotives, and other equipment. The character of service
rendered, the nature and extent of repairs, and the way in which they
have been maintained, add to or take away from any life assigned by
tables, so as to render them valueless in many individual instances.

In placing depreciation, allowance should be made, not only for wear and
tear due to use, and decay due to the elements, but also to cover that
which is due to obsolescence, or the fact that the facility is of an
antiquated or inefficient type, and has been superseded in general use
by more efficient and economical devices; this may be called commercial
depreciation, as distinguished from physical depreciation. The method to
be used in placing depreciation is clearly one of the important things
that must be determined by each set of appraisers, and, while the writer
believes that the use of expectancy tables would greatly facilitate the
work in many cases, the data on which to found a complete set of tables
and to support them and justify their use are often lacking; therefore,
any use of tables should be safeguarded in every possible manner, and
personal inspection of fixed property should always be made.

(_e_) _Immaterial Elements of Physical Property._—There are certain
expenses, inseparable from the construction of any public works, which
are a necessary and proper part of the cost, and are arranged for in the
original financing, but are not capable of identification after the
completion of construction work. These expenses are:

 (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.

The corporate history of the Ann Arbor Railroad, in Michigan, shows that
it was built in sections of from 25 to 30 miles, and that each section
was put into operation as soon as built, so that, while the actual
period of construction of the complete property extended over 15 years,
no section was under construction much more than one year. This is
typical of much of the railroad building of the past, and on such a
property the interest charge would be comparatively small.

A proper charge in such a case would clearly not be sufficient in the
case of a road several hundred miles in length, through mountains, with
tunnels, heavy bridges, and other structures which would extend the
actual construction over periods of from 3 to 5 or 6 years, and this is
particularly true where the road is a main line or artery, and where
local traffic is of minor importance.

The computation of the interest charge is complicated by the fact that
interest begins to run as the bonds are taken up, and but a small part
of the construction money draws interest during the whole period.

The practice in the State appraisals has been to fix a uniform
percentage for all properties. This has had in its favor the argument
that it was conservative valuation where taxation is the ultimate end,
as the amount was less than one year's interest in every case. It would
appear to be more correct to use the corporate history of each company,
determine the actual construction periods, and use a rate based on the
actual time in each case. This can be fixed with a fair degree of
accuracy, and a reasonable percentage determined, to equalize the
varying periods of time on which the interest runs on different parts of
construction.

Discount.—Discount on bonds is claimed by certain railroad men as a
proper item for consideration. As has been argued elsewhere, this is not
a proper charge against capital. It is an adjustment of the interest
rate to the market, or an advance payment of interest; and, in the
writer's opinion, should under no consideration be allowed.

Working Capital.—Working capital is another item claimed and conceded in
some valuations. It is not a part of the "cost of construction." The
money provided for working capital at the outset is not a permanent
investment, but is rather a temporary loan paid back out of earnings.
The writer fails to perceive any possible argument in favor of adding
such an item to the permanent value of the property. In making an
appraisal, after the physical value is determined, it is usual to set up
a statement of stores, supplies, fuel, and cash on hand, and working
capital is certainly shown by the current balance sheet, in the form of
cash or accounts receivable. It would appear to have no place in a
physical appraisal. Although the items of cash, stores, and supplies
were shown in the Michigan appraisal, they did not appear as part of the
physical value, nor were they taken into account in computing intangible
value, but, being taxable property, they were reported separately.

(_f_) _Contingencies._—The use of a percentage for contingencies in the
appraisal in Michigan was bitterly contested by the railroads as
improper and excessive. In Michigan 10% was used, in Wisconsin 5½%, and
in Minnesota 5 per cent.

Subsequent work in Michigan has demonstrated that the use of as high a
figure as 10% was fully justified; and the probability is that the
latest Michigan appraisal did not eliminate omissions, inaccuracies of
description, and excess cost of construction due to difficulties, to
such an extent as to justify much reduction in the percentage.

In making an appraisal, the percentage to be applied to cover
contingencies is a proper matter for consideration, and in some cases
conditions might well be such that even a smaller allowance than that
fixed in Minnesota would be proper, but such cases would doubtless be
the exception. The writer believes it to be proper practice to add
liberally for the contingency item. The strongest argument against it is
that it is incapable of being described and located definitely, and is
difficult of exact proof. Therefore it has been claimed that it partakes
of the nature of a non-physical element, and that if there be any value
over and above the physical property value, it will appear with other
non-physical elements reflected in the earnings, and may be properly
included in the intangible value if such exists. This argument does not
appeal to the writer as being final, and he would advocate the use of
such a percentage of physical values as appears proper in each appraisal
to cover the error due to the extreme difficulty of securing an exact
inventory and construction history of the properties.

(_g_) _Design._—Among the matters which were considered in the Michigan
work was that of adaptability, or the economical questions of location,
design, and construction. It is possible that in some properties, such
as water, gas or electric companies, the efficiency of the plant may be
very greatly affected by faulty design, uneconomical arrangement,
improper construction, and to such an extent that any cost of
reproduction, less any ordinary depreciation, would be greatly in error
without further allowance. This may also be true of railroads. Excessive
curvature and gradients greatly decrease the tonnage hauled by a given
power, without decreasing the cost per train-mile.

It is extremely difficult to treat this as a physical element. It is
impossible to reduce it to terms of dollars and cents by any usual or
customary methods. It is impossible to separate it from any one of half
a dozen other items that may be brought up. It opens the door to endless
speculation as to what might or might not take place under somewhat
different conditions. For these reasons, it was treated in the Michigan
appraisal as a non-physical element of value and dismissed from all
consideration in the physical appraisal. This was clearly proper, and
the subject is only referred to here for the purpose of making clear
that it was fully studied and a definite conclusion reached.

Adaptation.—In the sense that this term is used by Mr. Williams and Mr.
Morgan, the appreciation or solidification of roadbed was considered in
the Michigan work, but given no place in the appraisal. This is a very
proper item to consider, but it would appear to be better to include it
directly with the roadbed item in the physical appraisal as appreciation
or solidification. There can be no reasonable objection to adding to the
contract prices for grading, ballasting, etc., a reasonable amount to
cover, not so much the seasoning and settling of the new roadbed, as the
actual money disbursed in work on this new roadbed during the first 3 or
4 years of operation in order to bring it up to the proper operating
condition. A very considerable part of the money spent on "maintenance
of track" for the first few years after a new line is built is in
reality deferred construction cost.

(_h_) _Apportionment of Values._—The apportionment of values of
locomotives, cars, miscellaneous equipment, shops, and those other parts
of the cost which are not susceptible of separation from the operation
of the property as a whole, is an interesting and at times a perplexing
problem. While the Courts have viewed as equitable the distribution of
values between territorial units when made on a track-mileage basis, it
is hardly likely that a Court would look with favor on an appraiser
appointed by Michigan giving any consideration to values of bridges,
track, or buildings in Ohio. Thus far, every State appraiser has
concerned himself only with the fixed physical property in his own
State, together with his proportionate share of the floating property.
The methods that may be considered are track-mileage, car-mileage,
locomotive-mileage, and train-mileage.

The method finally used must be such as will give the fairest result for
the property under consideration. In some cases one or more of these
methods will give a fair value, while in other cases the same system
would be most unjust.

(_i_) _Terminals._—There is no one feature of the entire problem so big
with possibilities, and so far from solution, as that of terminal
property values and their proper assignment. The property must be
considered as an operating unit. Its value must be made up of the values
of the parts or elements plus an added value that comes from the
operation of the whole. The problem would be simplified if what were
sought were the value of a certain railroad, but, as it has been
presented up to this time, the problem is: what is the value of that
part of this railroad in Michigan? or Wisconsin? or Minnesota? A fairly
satisfactory solution of many of the value questions has been obtained,
but nothing in the way of a solution of the terminal question. A road
owns 300 miles of line in Michigan and 7 miles in Ohio. That 7 miles
includes its largest terminal; its principal connections are there; it
has a fine property, and is in the capacity of landlord to several other
roads. What part of that terminal value, if any, is assignable to the
State of Michigan? Decidedly, it would not be proper to appraise the
entire property as a unit and assign to Ohio only the proportion that 7
miles bears to the whole length; it is equally unfair to appraise it as
a Michigan property down to the State line, and add nothing to the value
by reason of the terminal.

The influence on the value of the property, of the ownership of
terminals in such cities as Chicago, New York, Jersey City, Hoboken,
Pittsburg, Detroit, St. Louis, Kansas City, and other large centers of
population is tremendous, yet a very large part of the railroad mileage
entering those cities belongs to roads which have their largest mileage
outside the State in which the terminal is located.

There can be no doubt that the influence of a large terminal affects in
a measure the value of every mile of line owned by the company; that
this influence is greatest on the principal and direct lines, and less
as more remote parts of the system are reached. As yet, no plan has been
suggested for determining what this value is or for apportioning it.

The final solution in Michigan was to treat terminal properties within
the State exactly as other property was treated, and to assume that, if
there was any value assignable to Michigan by reason of outside
terminals, it would appear as a non-physical value through the earnings.

When all the phases of this question are considered—the enormous land
values, the value due to possession of deep-water terminals, the effect
on the business of the entire property by reason of the ownership of
such properties as those, for instance, in New York City, Jersey City,
and Hoboken—it is evident that no appraisal which has yet been made has
established any rule of valuation which may be considered proper for
terminals.

It is to be hoped that the work now in progress in New Jersey may be so
well supported by the State that it will be possible for the appraisal
board to make an exhaustive study of this subject and reach definite
conclusions as to the real extent, manner of computation, and proper
method of distribution of these values.

(_j_) _Development of the Art._—Is any value assignable to property on
account of expenditures by reason of the rapid development of the art?
This question seems not to have been squarely asked or answered in
connection with any of the past appraisals.

Every piece of material and every facility purchased by a company is
bought with a definite expectation that it will have a certain life,
that during that term of life it will add sufficiently to the earnings
to provide a fund for its replacement and earn a profit. No matter
whether or not such a reserve is created on the books, this is the
theory, and, under it, accident may wipe out certain new property, other
property will outlive its expectation and maintain the average life of
the entire group of facilities.

There are countless cases where this will not hold. The rapid
development of large cities has compelled electric lines to extend
largely. The demands of the people for more frequent and more rapid
service, and more modern and larger equipment, have greatly shortened
the term of life of power-plant equipment and cars. The rapid
development in the art of electricity, the congestion of traffic in
streets of cities, the enormous increase of train movements, and the use
elsewhere of newer types of cars, have compelled the abandonment of
millions of dollars' worth of property and the investment of other
millions in new and improved facilities to provide for the increased
movements of traffic and increased safety to the public. These changes
are not due to the fact that the original installation was defective,
but to the demands of the public for frequent, safe, and speedy service,
demands which are perfectly reasonable. The query is: should a
corporation which complies with public demands be compelled to lose
capital invested in facilities which have not yet paid for themselves;
and which, under a continuance of conditions which existed when they
were installed, or any that might then have been anticipated, would
normally have a useful life of several more years, and which were
abandoned, not by reason of being worn out or unfit for service, but
purely because facilities of a more modern type were called for?

To answer this affirmatively increases the hazard of investment greatly
in the large centers of population. To answer it affirmatively in some
cases might amount to confiscation of property. The writer inclines to
the view that, as far as appraisal is concerned, the value due to the
remaining life of the abandoned facility, where such abandonment was in
response to legal requirement, and where no element of corporate
necessity due to increased efficiency or economy of the new facility
enters into the computation, should be added to the value of the
facility replacing it. Any consideration that is given such claims by an
appraiser must be most careful, as the inference to be drawn from the
decision of the Court in the Knoxville Water Case (212 U. S., 1) is that
such elements of value will receive scant consideration unless most
fully supported.

If the policy of the management of any public service company is to keep
up with the demands of modern civilization, it would appear that such
policy should not be discouraged, and, in computing the value of the
property, some provision ought to be devised for covering such values as
remain in serviceable property at the time of its abandonment in
response to public demand; or else the rates for service should be
increased sufficiently to compensate the corporation for losses of this
nature on the ground that it constitutes an element of extra hazard.

These and like subjects in connection with the appraisal must be taken
up during the period of computation and settled. The computing office
organization and methods call for no special comment, except to
emphasize the need of experienced men, the use of every possible check
on the accuracy of the work, and the prime necessity of keeping all
notes in such manner that they can be identified and used to
re-establish every step taken in the course of the appraisal.


                IV.—The Preparation of the Final Figure.

The final form of the work is, of course, so much a matter of personal
judgment that even a suggestion may appear to be useless. The use of
such a classification as will conform approximately, if not exactly,
with that adopted by the Interstate Commerce Commission is more
desirable now than it was 10 years ago, as all the roads in the country
are using this classification in their accounts, and the more nearly
uniform the work of various State appraisals, the better the results
will be.

-----

Footnote 18:

  Unchangeable only for the period under consideration and as regards
  the purpose of the appraisal. This value varies from year to year,
  depending on business conditions and on earnings of the company.




        NON-PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION.


In the published articles treating on the subject of valuation, much
stress is laid on the intangible or non-physical elements of value. They
have been termed "going concern values," "business values," "good will
values," "franchise values," as well as "non-physical" and "intangible"
values.

So much of the argument of many writers has been taken up with this
phase of the question that it is impracticable to recapitulate the
various arguments in support of giving these elements a place in the
appraisal.

The writer cannot agree with those who would place any of these elements
of value in the physical appraisal.

Value is given to a property, either by reason of the fact that it is an
instrument for earning profit, or that it does earn profit or gives
promise of profit. The actual investment of capital in a new plant is
made with the expectation of earnings. It is not reasonable to attach as
physical value, to such a plant, any value in excess of the actual
investment. Nor does it appear to be any more reasonable, in the case of
an old plant, to assign arbitrary and fictitious values over and above
the actual investment remaining in the plant, unless such values are
justified and supported by actual earnings in excess of such a rate of
interest on the money invested, as it would earn if invested in some
non-hazardous security, and—carrying out the clearly-expressed idea of
the Courts—such intangible value can only accrue when the rates charged
for the service are fair and proper.

The capitalist seeking investment bases his ideas of value on:

  (_a_) The market price of stocks and bonds, an estimate of worth
      based primarily on actual earnings of the property, but
      affected to some extent by outside conditions; or

  (_b_) On the capitalized net income, or actual earnings, of the
      property; or,

  (_c_) In the case of a new property, on an estimate of what the
      probable earning capacity of the property will be, where the
      business is more fully developed.

Methods (_a_) and (_b_) ignore cost of construction, or present
investment in physical property, and base a value on past performances.
Method (_c_) is based purely on hypothetical earnings, but the only real
measure of value in this instance is the actual amount of capital that
has been invested.

No appraiser would be justified in placing a "going concern" value, in
excess of original cost, on a new property, nor would he be justified in
placing such a value on a property 3 years old, or 10 years old, unless
the net earnings were such as to indicate that the property had a
business or commercial value in excess of the physical property value.

It would seem reasonable to say that this difference between the
physical value and the value based on earnings represents the "good
will," "established business," or "going value," and all the other
non-physical elements of value.

To take a specific example: it would be impossible to separate the
different elements of intangible value of the Michigan Central Railroad,
and say that a certain sum of money represented "good will," another sum
"established business," still another sum the "franchise value," and
still another sum the "going concern."

The "going concern value" of the Michigan Central Railroad is exactly
analogous to the going concern value of the hypothetical water-works
cited by Mr. Alvord. Instead of having water pipes connected with
buildings along the mains, and considerable sums invested in appliances
for using the water, there are manufacturing plants located along the
railroad, connected with it by side-tracks built by the industry, and
depending on the transportation facilities of the road for their
connections with their customers, the very life of the manufacturing
plant dependent on its connection with the road. This is "connected good
will" of the same kind as described by Mr. Alvord. Yet, to fix a value
on it by the method described by him involves going into the realm of
conjecture and speculation to a degree that could never be sustained.

Difficulties as great would be encountered in an effort to separate and
set up any other elements which go to make up the intangible value, and
any figure thus determined would be absolutely incapable of proof.

The Courts say that the value must be the "fair value of the property
being used," all the conditions being taken into account (169 U. S.,
466).

It can be readily seen that the physical present value is not
always—indeed, is not often—the "fair value." The "fair value" may be
more, or less, than the present value of the physical property. It would
seem to be reasonable to interpret the Court's meaning of the term "fair
value" to be the value as a business or commercial property, taking into
account the actual investment existing in the property, together with
any favorable conditions which would enable it to earn, on rates which
were fair and reasonable to the consumer, an income in excess of a usual
rate of interest on the actual investment, or any unfavorable ones which
under the same rates would reduce its earnings to less than usual
interest. If such an interpretation be allowable, it would appear to be
correct practice to use a "fair value" made up of two elements: a
physical value, representing the investment, and a non-physical value,
representing all the elements which affect that investment to give it
favorable or unfavorable financial returns. Is it not, then, proper to
conclude that the non-physical or intangible value, composed of all
these various elements of value, can only be determined absolutely by a
study of the earnings and operating expenses? Is not this clearly what
the Court had in mind in the Nebraska Rate Case?

Much of the argument on the subject of "going" values and other kindred
elements of value consists of statements of theory and generalities, and
may be said to be merely argument to support the theory that there is an
intangible element of value. If work of valuation is to be of any real
benefit, must it not give a definite result? Must not this result be
based on absolute facts?

In securing the present value of any physical property the fixed and
certain facts are:

  The inventory of property owned.—This is absolute.

  The cost of reproduction of the different elements.—This is
      capable of determination within very close limits.

  The depreciation.—This is in a measure a matter of judgment,
      based on the experience, not only of the engineers making
      the appraisal, but of the entire scientific world; and, if
      properly made and properly checked, there should be no very
      wide divergencies in results.

  The items of general expense.—These, based on available
      statistics, must be estimated. The exact determination of
      these items will be made comparatively easy as statistics
      based on the uniform classification of accounts become
      available.

It is believed that the physical values, when secured along the lines
suggested, are definite enough to be accepted as a fair estimate of the
amount of capital actually invested in the property, and that, if a
sufficiently large force of men experienced in the construction,
operation, and financial management of the kind of property under
investigation is engaged on the work, the element of uncertainty due to
errors of personal judgment can be largely eliminated.

The next question to be determined is whether there is, at the time of
the appraisal, any non-physical value, and, if so, to select a method
for computing it that will give a result that can be definitely
supported as to the particular property under investigation. A study of
the income accounts of the property being valued should be made. If the
property is not earning a sufficient sum to pay its operating expenses,
and taxes, and to set aside a fund to cover depreciation and
obsolescence, there is clearly no intangible value of any sort to be
added to the physical value. If, however, after all these charges are
taken care of, there is a net earning which is large enough to pay 4 or
5% on the physical property and still leave a surplus, is it not
perfectly reasonable and proper to hold that this surplus represents
earnings on all intangible elements of value?

The contention that all the different elements of non-physical value
merge into one intangible value, not capable of separation, will
doubtless be objected to by many engineers and corporation managers.

Among the elements adding value to property have been described:

_1.—"Going Concern" Value._—Professor Mead defines this as the value due
to the fact that a plant has consumers actually utilizing its product,
and that it is in actual and successful operation and has its business
developed. This value is the worth of the plant in excess of a similar
plant without connections, and constitutes an asset in the consideration
of its physical value. Mr. Alvord has used the term "connected good
will" as applicable to this element of value.

The writer does not concede that "going concern" is a proper element to
consider in the physical value, as it does not represent any part of the
cost chargeable to capital, and the physical valuation should be
confined to the determination of capital invested.

It has already been argued that to the physical property as inventoried
should be added proper figures to cover organization, legal expense,
administration, engineering, and contingencies. All these items are in
the nature of additions on account of the fact that the property is a
"going concern." It is maintained that these costs should carry to the
present value column as values, for the reason that all these services
rendered in connection with the creation of the property remain,
unimpaired in value, as long as the property is operated. When, however,
a property ceases to be operated, and is abandoned and dismantled, not
only do all these elements absolutely disappear, but also all increments
of value by reason of the special use of the property are wiped out, and
there exist only a lot of partly worn out and partly obsolete machinery
and equipment, salable at scrap values, buildings constructed for a
purpose which renders them unfit for other use, and land partly salable
at going prices and much that will not sell at all.

As long as a gas-works, a water-works, or a railroad is in operation and
earning, it is a "going concern," and all increments which attach to its
physical property as a whole continue to exist, even if the physical
value of the property is greater than a fair value. That fair value can
be determined and reached by means of a negative non-physical value.

In view of these things, it would seem to be highly improper to add to
physical value anything more for "going concern." In the final report of
U. S. Judge R. W. Tayler, Arbitrator in the Cleveland Street Railway
matter, in December, 1909, the following language supports the above
contention:

  "I allow nothing for going value, except in so far as that is the
  result of the necessary expenditure of money in building the road,
  acquiring its land, power-houses, and equipment, and putting them
  into successful operation. The expenditures for these purposes are,
  and necessarily must be, included in the valuation of the physical
  property."

_2.—Developed Business._—It is perfectly clear that the "fair value" of
a property must take into account the established business of the
concern. This really is covered by the "going concern values," as
defined by Messrs. Mead and Alvord. The only manner in which this can be
determined intelligently is by an analysis of income accounts.

_3.—Cost of Handling Business._—A railroad with heavy grades, bad
curves, poor equipment, or unskilful management is not nearly as
valuable a property as one having good line and grades, and far-sighted,
economical, and skilful management, and which handles its business at a
lower cost per unit.

In such cases the differences in location and management are bound to
show in the earnings, adding to the physical value of one property and
possibly taking from the value as shown by the physical appraisal in the
case of another.

_4.—Good Will and Established Organization._—These are valuable assets.
It is difficult, indeed, to attach exact weight to these elements of
value, except as they are shown in the intangible value indicated by the
earnings. In most cases of public service companies, as is argued
elsewhere, it is doubtful if such elements are entitled to any place in
a public valuation.

_5.—Franchise Values._—These cover various specific items arising out of
the ownership of special franchises, or, out of the general rights
granted by law to corporations.

All these elements of value have been presented, and have been supported
by able arguments. No one has offered a method of separating them. While
there is universal recognition of their existence, in the case of many
properties, they are supported by nothing visible or tangible. They are
practically inseparable, one from another. They are not always present,
and the application of any such arbitrary rule as that suggested by Mr.
Alvord would make it possible to place values which were purely
fictitious. Therefore, it follows that, if they are to be considered at
all, they must be treated as parts of one intangible value, and that
value must be derived from a study of the income account of the
property.

There are other points to be noted as reasons why no such elements of
value may attach to the physical property.

Any value of an old and well-established property in excess of a fair
return on its physical property (in other words, any intangible value)
must be limited and restricted, when used for rate-making purposes, by
the value to the consumer of the services rendered. The Courts hold so
squarely that the rates charged for services must not be more than the
particular service is worth, and that the Company may exact a fair
return on property actually being used, that it is not conceivable that
any valuation which attempts to attach fictitious elements of value to
physical property can be sustained.

This argument is not intended as an attempt to show that intangible
values are improper and that where they exist rates should be lowered.
It is contended that the determination of rates that will be just and
fair to all competing companies involves other consideration than the
valuation of either physical or intangible properties, and that when all
these rate-making problems are properly solved, there will remain large
intangible values on the well-designed plants. It is further contended
that the work of valuation should separate the tangible and intangible
elements, so that the further work of rate-making or assessment may not
be complicated by improper elements which are included among the items
of the physical properties.

In consideration of franchise value, the history of the corporation
should be investigated with a view to determine what part the public
played in the creation of the property.

The granting of aid bonds, of public lands, and of aid money to
railroads, the giving of encouragement to water-works companies by the
payment of excessive hydrant rentals, are illustrations of the fostering
and development of public service utilities by the public to such an
extent as to justify in a large measure the claim that in many cases the
allowance of an intangible value is improper as against the public.

A further consideration in the matter of intangible values is the fact
that they all partake more or less of the nature of "good will," and the
question very properly arises, in the case of a purchase by the public,
or of a rate-making valuation: "Should the public be compelled to pay
for its own good will?" In the case of such a corporation as a
street-railway company in a large city, any value arising from a surplus
of earnings is due to the franchise, established business, or going
value, or good will of the citizens of that city. This element of value
frequently sustains an excessive bond indebtedness. At the expiration of
the franchise period the citizens of that city consider a purchase, and
are asked to pay, among other things, for their own good will. In view
of the attitude of the Federal Courts in the Consolidated Gas Case, and
the language of the lower Court in disallowing the item of "good will,"
which judgment was sustained by the Supreme Court, it is very evident
that any attempt to fix arbitrarily a value on such an item in an
appraisal is not likely to be supported successfully. The grounds named
by the Court are:

  Tangible property has a value apart from any franchise or good
      will value.

  The franchise, conferring the privilege to be a corporation, to
      use public property, to be free from competition, and to
      enjoy many other privileges, has some value apart from
      tangible property.

  Good will can have no existence as apart from or detached from
      the franchise conferring the necessary privilege. Such good
      will (by itself) is not capable of being capitalized and
      distributed among stockholders.

  Citizens are entitled to have gas (or water) because they
      pay for it, exactly as they are entitled to have clean
      streets (and, in the same way, police protection or fire
      protection), because they pay taxes among other things
      for that.

The Court, therefore, finds that there is no good will value in
connection with the gas business in the City of New York, although it is
said, elsewhere in the finding, that it is the best, most favorably
located, and most prosperous business of its kind in the country.

Judge Tayler, in the Cleveland Railway arbitration, says:

  "I allow nothing for good will. A street railway company which has a
  monopoly, and especially if it has a franchise value remaining, can
  have no good will value."

Judge Lurton, in the Omaha Water-Works Case, says:

  "That kind of good will, as suggested in Willcox _vs._ Consolidated
  Gas Co., is of little or no commercial value when the business is,
  as here, a natural monopoly with which he must deal, whether he will
  or no."

In connection with a consideration of franchise values, the following
points are raised by the Federal Court in the Consolidated Gas Cases
(157 Fed., 872-879):

  "Should a corporation have a right to demand an income return,
  separable from any return upon its tangible property, from its right
  to place gas mains in the public streets and maintain them for its
  private profit, a right which it did not buy from city or state or
  pay therefor any legal valuable consideration? The Court thinks not,
  because 'Return can be expected only from investment, and he that
  invests must part with something in the act of investing.' Does any
  company invest its franchise in its business? It does not part with
  its franchise in the same way it parted with money or money's worth
  in acquiring or creating mains or plants. The investment of property
  was made, not in the franchise, but under the franchise, and on the
  faith thereof. The franchise is but a part of the power or
  sovereignty, allotted to a private person for the benefit of all,
  and only incidentally given for private emoluments.

  "What is the value of a franchise to perform a certain service,
  under which no money is invested and no service yet performed? What
  is it worth apart from performance under it?

  "Unless it can be seen to possess inherent value entirely apart from
  the earning capacity of the subsequent investment or from the actual
  earnings resulting from such investment, the value asserted or
  claimed is but a duplication of that derived from the use of the
  tangible property when so invested.

  "The concepts of the nature and value of franchises are seen dimly
  and confusedly because of the failure to distinguish between
  productive and non-productive property. Land, money, chattels may by
  industry and intelligence be made productive without a franchise;
  but no excellence in these desirable qualities can ultimately render
  a franchise productive without the use of money, chattels, and land
  in connection therewith, and when the juncture is made the earning
  capacity of the real and personal property, plus the franchise and
  plus intelligence and industry, is really no greater than it would
  be without the franchise, for the franchise has added no producing
  power to the realty or personalty; it has but authorized their
  employment in a particular way and protected the owners while so
  employing them."

The Court emphasized the fact that the particular way in which they are
used is in performing a function of the State—in doing a service for the
public which the public might do equally well for itself, in the
following language:

  "I can imagine no more than three ways in which the value of a
  franchise can be stated. It is valuable: (1) because it authorizes
  the gainful use of private property in a particular manner; (2)
  because once obtained it is often difficult or impossible to get
  another like it; (3) because it may be used to injure or hinder
  another enterprise, although itself conferring or securing nothing
  of value.

  "The third method of statement has been accurately, though
  colloquially, described as a 'nuisance value,' and is so obviously
  illegitimate as to require no discussion. The second method of
  statement, when carefully considered, asserts that because the
  sovereign has deemed it advisable to entrust a public work to one
  citizen or a body of citizens such quasi monopolistic grant confers
  the right to charge for the service more than would be just or
  lawful were the occupation open to all. Nor does it change the truth
  of the last statement that the difficulty of procuring franchises
  produces, and long has produced, a traffic in them. On every private
  sale of franchise property, the price paid is so much money lost to
  the public by official incompetence or worse, and such sale can
  confer on the vendee no right to compel the consumer to repay him a
  price that should have been paid to the State. For these reasons, I
  believe that on principle a franchise should be held to have no
  value except that arising from its use as a shield to protect those
  investing their property on the faith thereof, and that, it renders
  fruitful, it possesses no more economic value for the investor than
  does an actual shield possess fighting value, apart from the soldier
  who bears it."

It will not do to leave this decision without calling attention to the
fact that the foregoing quotations are but argument advanced by the
Court, and that he found a franchise value, following the reasoning of
the Supreme Court in cases cited heretofore, and other cases, and upon
the doctrine that:

  "Private citizens may acquire vested property rights through a
  series of even erroneous decisions; rights so firmly vested that it
  becomes unconstitutional for the court which persisted in error
  suddenly to rectify its mistakes to the detriment of those who had
  securely rested upon the decisions sought to be invalidated."

After citing numerous cases, and considering methods of valuing
franchises, the Court says:

  "I think it obvious, as I have endeavored heretofore to point out,
  that either for the purpose of condemnation or regulation the value
  of a franchise depends wholly upon what is earned under it and I
  believe the best way of finding out how much a franchise, separately
  considered, is worth, is to ascertain what those persons desirous of
  continuing operation under it consider it to be worth. In a
  corporation whose stock is freely bought and sold, such value is
  measured by the success attending the sale of stock based entirely
  upon capitalization of the franchise; yet the value of stock issued
  only in consideration of the franchise is obviously dependent on
  earnings after the stock based on tangible property has received a
  satisfactory dividend * * * yet it will always be true that, unless
  the whole net return, compared with the value of tangibles, is above
  a satisfactory return on tangible investment alone, the addition of
  stock issued for franchise will be regarded as 'water,' and detract
  from the value of the entire issue, and I think this conclusive
  proof that value on a franchise depends wholly on what actual
  investment can earn."

In this particular instance stock to the amount of $7,781,000 had been
issued in 1884 and divided among stockholders without any consideration,
which stock represented the company's own valuation of its franchise at
that date. The Court, in fixing a value, held that it would be proper to
increase it proportionately to the increase in tangible property; this
he did, fixing the franchise value at more than $12,000,000. The Supreme
Court of the United States, in disposing of this, says (212 U. S., 47):

  "But although the state ought for these reasons [applicable to this
  case—not general], to be bound to recognize the value agreed upon in
  1884 as part of the property upon which a reasonable return can be
  demanded, we do not think an increase in that valuation ought to be
  allowed upon the theory suggested by the Court below. Because the
  amount of gas supplied has increased to the extent stated, and the
  other and tangible property of the corporations has increased so
  largely in value, is not, as it seems to us, any reason for
  attributing a like proportional increase in the value of the
  franchises. Real estate may have increased in value very largely, as
  also the personal property, without any necessary increase in the
  value of the franchises. Its past value was founded upon the
  opportunity of obtaining these enormous and excessive returns upon
  the property of the company, without legislative interference with
  the price for the supply of gas, but that immunity for the future
  was, of course, uncertain, and the moment it ceased and the
  legislature reduced the earnings to a reasonable sum, the great
  value of the franchises would be at once and unfavorably affected,
  but how much so it is not possible for us to see. The value would
  most certainly not increase."

The Court did not concur in the increase of the franchise value, and, in
dismissing this subject, says:

  "What has been said herein regarding the value of the franchises in
  this case has been necessarily founded upon its own peculiar facts,
  and the decision can form no precedent in regard to the valuation of
  franchises generally where the facts are not similar to those in the
  case before us."

It appears, then, from this, the latest case, that:

_1._—The view of the lower Court that a franchise or intangible value is
not separable, and that if there be a value it must be determined from
the earnings, is concurred in by the Supreme Court.

_2._—That the arbitrary increase of franchise value, by the lower Court,
proportional to the normal increase of the physical property, is not
concurred in.

_3._—Inferentially, it appears that the acquiescence of the State in the
franchise value of 1884 is the main reason for permitting that value to
stand, and it would seem to follow, from the reasoning of the Court,
that it is very questionable whether any franchise or intangible value
based on excessive rates should be allowed to stand.

Another view of franchise values, as stated by George H. Benzenberg,
Past-President, Am. Soc. C. E., in discussing water-works franchises, is
as follows:

  "Some contend that a franchise is simply and purely a privilege
  given by the municipality to a water company to utilize the streets
  for the purpose of laying a system of pipes through which it may
  distribute and deliver water. It is not a license to do business,
  but a privilege to use public streets, alleys, and grounds. * * * If
  that interpretation is the proper one, the value of the franchise,
  if the property is to be purchased by a municipality, is
  comparatively nothing. If the property is to be purchased by another
  company, it represents all of the great value that such franchise
  possesses to the original holder, together with all the privilege it
  confers; but in the event it is purchased by the city, it is
  dispossessed of that certain element of value, and I think for that
  reason it is stipulated in many of the ordinances that no value
  shall be placed on the franchise by appraisers."

In the paragraph just quoted, it is evident that the term "franchise" is
used in a restricted sense, and refers to the ordinance or contract from
a municipal corporation granting the right to operate on specific terms,
rather than the broad use of the word as indicating all rights derived
from general laws or special contracts or grants. The point, however, is
applicable to the case of any corporation occupying public ground.

It is believed that enough argument has been adduced to show that any
attempt to give separate value to the different elements that enter into
the intangible value of a property is a very risky proceeding on the
part of appraisers, and to support further the contention that, as a
business proposition, the value of any property depends on its earnings;
that the franchise simply protects the owners of the property in their
enjoyment of those earnings; that the value of the franchise merges in
the "fair value" of the property, and that the franchise can have no
special value of itself unless the earnings of the property are in
excess of a usual and fair rate on the actual investment. In case there
are surplus earnings, they measure and determine not only the value of
the franchise, but also the value of all other non-physical elements. If
this be true, any readjustment of rates, any restriction of operations,
or other form of legislative control which would unfavorably and
violently affect earnings, is bound to hold down franchise or
non-physical values; as it would not seem possible to read into the
various decisions any intention on the part of the Court to base the
right to demand fair return on anything but the "fair value of the
property being used."

The writer, therefore, reaches the following conclusions regarding
non-physical values:

_1._—That all the different non-physical elements of value are
inseparable.

_2._—That in the case of very many properties, no non-physical value can
attach, and in many cases this value will be a negative or subtractive
quantity.

_3._—That in the case of properties located so as to secure either a
monopoly of business in a congested territory, or in which the
construction, location, strategic position, or economic excellence of
design, is such that, on a schedule of rates which is fair and
reasonable for competitors less advantageously situated, an earning is
secured which is in excess of usual returns, a non-physical value of
considerable magnitude may very properly be assigned.

_4._—That, for the computation of non-physical values, the income
account of the property under consideration affords the only legitimate
basis, but even then consideration must be given to duration of
franchise, reasonableness of rates, and other modifying conditions, and
also, possibly, the purpose for which the appraisal is made may
determine whether or not a non-physical value may be used. The language
of the Court in the Knoxville and Omaha cases apparently leaves this a
very open question.

This brings us substantially to the conclusion reached by Professor
Adams in 1900, and a careful study of the method laid down by him shows
nothing that cannot be accepted as fair and reasonable. His plan should
be extended so as to cover subtractive values or the case of properties
showing a deficit.

This method has the merit of being based on the actual earnings and
expenses of the company under investigation and on the value of the
physical property as already computed. It does not introduce a mass of
purely supposititious figures, nor depend on hypothesis. The proposition
is simply this: If a property earns only its operating expenses,
including therein proper depreciation reserves, taxes, and such a
percentage on its actual invested capital as could be earned by that
capital if invested in good non-taxable bonds or other like security, it
is worth no more than its physical property is worth. If it earns more
than that, it is due to the franchise, going concern, or other
intangible elements of value, and, to determine that value, capitalize
the surplus.

It takes several years for a property to reach its normal earning
capacity after construction is completed, and, in the investigation of a
property of comparatively recent construction, where the gross and net
earnings show a steady annual increase, the application of a negative or
subtractive value should be made with great caution; but where the
earnings have been fairly uniform and stationary for a period of years,
and the property does not earn a sufficient sum to care for depreciation
and annuity, it is clear that the value as an earning investment is less
than the determined physical value, and that the physical valuation
should be reduced by some amount to arrive at the "fair value."

The Courts hold that public service corporations are entitled to earn:

(_a_) Operating expenses,

(_b_) Expenses of maintenance and running repair,

(_c_) Taxes,

(_d_) A sinking fund from earnings to cover depreciation and
obsolescence, and

(_e_) A reasonable profit on the fair value of the property.

An investigation of non-physical values should then include an analysis
of operating expenses, to determine that additions and betterments to
property are not included therein.

The general practice of corporations in the past has been to ignore any
reserve to cover depreciation and obsolescence. If, at the beginning of
operations of any property, such a sum should be annually set aside out
of earnings as should, when invested as a sinking fund, maintain the
integrity of the investment, then this amortization fund at any period,
plus the depreciated value of the physical property, should equal the
amount of the total capital actually invested in the property. In most
cases this has not been done, and the Supreme Court in the Knoxville
Water Case holds that, by reason of the failure to create such a fund,
whether due to carelessness, excessive dividends, or other cause, the
company must lose the amount of capital represented by the depreciation
that has taken place. In making a computation of intangible values, it
is certainly proper to consider the income account as averaged over a
period of years, to avoid violent fluctuations of gross or net earnings,
and a depreciation reserve should be determined for such years, as it
cannot be claimed that, unless such an amortization fund is earned, in
addition to other operating expenses and taxes, there is any
non-physical value.

Professor Adams covered the depreciation in the Michigan work in the 4%
annuity which was deducted before non-physical values were computed. The
writer is inclined to go a step farther than Professor Adams, and hold
that, before any intangible values can be attached to the property, it
should earn not only all operating expenses, taxes, and reserve for
depreciation, but also interest on the actual investment equivalent to
the return that would be had were the money invested in a non-taxable
bond, say 4%, and that any earnings in excess of such a sum might be
termed properly "earnings on franchise," or intangible values.

On this basis, then, a rule would be formulated, being that of Professor
Adams, with some modifications:

_1._—Deduct from gross earnings from operation the aggregate of
operating expenses, including in operating expenses an annual sinking
fund to amortize the depreciation and obsolescence, and the remainder
may be termed "income from operation."

_2._—To this income from operation add income from investment, giving
"total income," which represents the amount at the disposal of the
corporation for the support of its capital and for the determination of
its annual surplus.

_3._—From "total income," deduct taxes, rents paid for lease of operated
property (provided such property is not included in the appraisal), and
improvements chargeable to income. The remainder represents the income
after all charges against operation of property, and maintenance of the
integrity of the capital investment have been cared for.

_4._—From this remainder (_3_) deduct such a percentage of the value of
the physical property (representing invested capital) as would equal the
income of that capital if invested in government or other non-taxable
bonds. The remainder would represent surplus, which, capitalized at a
proper rate, would equal the value of intangible or non-physical
properties, which is to be added to the appraised value of the "physical
property."

_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:

  "No particular rate of compensation must in all cases be regarded as
  sufficient for capital invested in business enterprises. Such
  compensation must depend greatly on circumstances and locality.
  Among other things the amount of risk in the business is an
  important factor, as well as the locality where the business is
  conducted and the rate expected and usually realized there upon
  investments of a somewhat similar nature with regard to the risk
  attending them. There may be other matters which in some cases might
  also be properly taken into account in determining the rate which an
  investor might properly expect or hope to receive and which he would
  be entitled to without legislative interference. The less risk, the
  less right to any unusual return upon the investments."

In view of these dicta, it is needless to argue whether a rate of 6% or
10%, or 15%, or more, be reasonable.

The writer has herein endeavored to narrate the story of the Michigan
appraisal in some detail, to review briefly subsequent similar work, to
present the main points in the legal decisions bearing on appraisal
practice, and to present his own views as to proper and legitimate
methods of valuation in the light of judicial opinions. He has attempted
to do this in the spirit of absolute fairness, without permitting either
early years of training in corporation service, or more recent
investigations for State and city, to bias the presentation of truths.

The subject is one which has not attracted the average citizen
sufficiently to compel him to give it deep study. Those who are familiar
with it all too frequently have views biased by interest, and it is
hardly conceivable that any final conclusion will be reached until each
and all of the main issues are determined by the Courts. When thus
determined, it will be done with wisdom and with justice. It is
impossible to study the cases referred to without being impressed with
the absolute fairness of this great tribunal. Quotations from decisions
have been included at considerable length in order to obviate the
criticism that the references do not convey the exact meaning of the
Courts.

The writer acknowledges the valuable suggestions, criticisms, and
information furnished him by Professors Henry C. Adams, Mortimer E.
Cooley and W. D. Pence; Mr. Henry L. Gray, Engineer of the Railroad
Commission, Washington; Mr. D. F. Jurgensen, Engineer, Railroad and
Warehouse Commission, Minnesota; Mr. Bion J. Arnold, and others who have
made possible the presentation of data regarding State and other
appraisals.

_Bibliography._—Accompanying this paper will be found a bibliography of
the principal articles on the subject of property valuation.




                                APPENDIX




                             BIBLIOGRAPHY.


 _Railroad Valuation._—

                          "The Appraisal of
                            Plants for Public Services." Nicholas S.
                            Hill, Jr. _The Engineering Record_, June
                            8th, 1901. A review of the principles on
                            which a property is valued when purchased by
                            private parties or by municipalities.

                          "The Value of
                            Railways and Their Capitalization." H. T.
                            Newcomb. _Railroad Gazette_, August 29th,
                            1902. Abstract from _Yale Review_, August,
                            1902.

                          "The Census Office
                            Railroad Valuation." (Editorial.) _Railroad
                            Gazette_, September 1st, 1905. A discussion
                            of the work of Professor Henry C. Adams,
                            Statistician of the Interstate Commerce
                            Commission, and his assistants.

                          "Railroad Taxes and
                            Plans for Ascertaining the Fair Valuation of
                            Railroad Property." _The Railway Age_,
                            September 8th, 1905. Report presented at the
                            meeting of the National Association of
                            Railroad Commissioners, at Deadwood, S. Dak.

                          "Railroad Valuations
                            in State Reports." Professor Harold M.
                            Bowman. _Railroad Gazette_, September 8th,
                            1905. Abstract of a report, which explains
                            briefly the systems of valuation provided
                            for by the laws of the several States, with
                            a critical review of the systems and
                            administrative reports.

                          "The Determination of
                            Physical Values." Clinton S. Burns, M. Am.
                            Soc. C. E. _The Engineering Record_,
                            September 16th, 1905. Presents a
                            mathematical formula for fixing depreciation
                            on articles, based on age, with quite a
                            complete demonstration of the theory
                            presented.

                          "Valuation of
                            Railroad Property," Henry Fink. (Serial.)
                            _Railway Age Gazette_, July 24th, 1908, _et
                            seq._ A brief review of several methods.

                          "The Valuation of
                            Railways." (Serial.) _Railway Age Gazette_,
                            January 22d, 1909, _et seq._ A thorough
                            discussion of the subject, and one of the
                            best presentations of it from a rational
                            corporation standpoint.

                          "Some Neglected
                            Factors of Fair Valuation." (Editorial.)
                            _Railway Age Gazette_, March 5th, 1909.

                          "Railway Capital and
                            Values." W. H. Williams. (Serial.) _Railway
                            Age Gazette_, April 2d, 1909, _et seq._ An
                            address setting forth at length the views of
                            the railway managers who oppose valuation of
                            property for any purpose.

                          "Valuation of Street
                            Railway Properties." _Electric Railway
                            Journal_, June 19th, 1909. A general
                            discussion of the subject.

                          "Commercial Valuation
                            of Railway Operating Property in the United
                            States: 1904." Bulletin 21, United States
                            Bureau of the Census. Contains an exhaustive
                            discussion of sundry methods of valuation.
                            The most complete series of papers on
                            valuation yet published.

 _The Chicago Appraisal._—

                          Report to the Common
                            Council on Railroad Valuation. B. J. Arnold,
                            M. Am. Soc. C. E., M. E. Cooley, and A. B.
                            Du Pont.

 _The Michigan Appraisal._—

                          "Expert Valuation of
                            Railway and Other Corporate Property in
                            Michigan." E. E. R. Tratman, Assoc. M. Am.
                            Soc. C. E. _Engineering News_, December
                            20th, 1900. A descriptive paper.

                          "What is the Value of
                            a Railroad for the Purpose of Taxation?"
                            Charles Hansel, M. Am. Soc. C. E. _Railroad
                            Gazette_, April 19th, 1901. Discussion of
                            the work done by Professor M. E. Cooley, and
                            on valuation in general.

                          "Michigan Railroad
                            Appraisal—Valuation of Physical Properties."
                            Professor Mortimer E. Cooley. Bulletin 21,
                            U. S. Bureau of the Census, p. 76.

                          "Michigan Railroad
                            Appraisal—Valuation of Non-Physical Elements
                            of Railway Property." Professor Henry C.
                            Adams. Bulletin 21, U. S. Bureau of the
                            Census, p. 78.

 _The Minnesota Appraisal._—

                          "Valuation of Railway
                            Property." A. S. Cutler. _Year Book_,
                            University of Minnesota, 1908. An account of
                            the methods used for obtaining and checking
                            the information.

                          Report on the
                            Valuation of Railways in Minnesota, January,
                            1909. Minnesota State Railroad Commission.

                          "Valuation of
                            Railways in Minnesota." _Railway Age
                            Gazette_, February 5th, 1909. A descriptive
                            article.

 _The Texas Appraisal._—

                          "Railroad Franchise
                            Values in Texas." W. H. Coverdale, Assoc. M.
                            Am. Soc. C. E. _Railroad Gazette_, February
                            12th, 1904. Discussion of methods used in
                            Texas.

                          "Methods Used by the
                            Railroad Commission of Texas Under the Stock
                            and Bond Law, in Valuing Railroad
                            Properties." R. A. Thompson, Assoc. M. Am.
                            Soc. C. E., with discussion by Messrs. E. L.
                            Corthell, F. Lavis, W. H. Coverdale, and W.
                            D. Taylor. _Transactions_, Am. Soc. C. E.,
                            Vol. LII, p. 328, _et seq._

 _The Washington Appraisal._—

                          "Report to the
                            Washington Railroad Commission on the
                            Valuation of Railways in Washington."
                            Halbert P. Gillette, M. Am. Soc. C. E.
                            _Engineering-Contracting_, April 7th, 1909.

 _The Wisconsin Appraisal._—

                          "Wisconsin Railroad
                            Valuation." W. D. Taylor, M. Am. Soc. C. E.
                            Bulletin 21, U. S. Bureau of the Census, p.
                            82.

                          "The Appraisement of
                            the Physical Value of Wisconsin Railways for
                            the Purpose of Taxation." W. D. Taylor, M.
                            Am. Soc. C. E. _Engineering News_, March
                            31st, 1904.

                          Discussion on
                            "Valuation of Railroad Properties." W. D.
                            Taylor, M. Am. Soc. C. E. _Transactions_,
                            Am. Soc. C. E., Vol. LII, p. 353.

                          "Report to the Tax
                            Commission." W. D. Taylor, M. Am. Soc. C. E.
                            Report of the Wisconsin Tax Commission,
                            1907, p. 269.

                          "The Work of the
                            Joint Engineering Staff of the Wisconsin Tax
                            and Railroad Commissions." W. D. Pence, M.
                            Am. Soc. C. E. _Journal_, Western Society of
                            Engineers, Vol. XIV, p. 73. (Abstract.)
                            _Engineering News_, March 4th, 1909.

 _Water-Works Valuation._—

                          "Water-Works
                            Valuation and Fair Rates, in the Light of
                            the Maine Supreme Court Decisions, in the
                            Waterville and Brunswick Cases." Leonard
                            Metcalf, M. Am. Soc. C. E. _Transactions_,
                            Am. Soc. C. E., Vol. LXIV, p. 1. (A complete
                            bibliography of the subject of water-works
                            valuation may be found on p. 69 of Mr.
                            Metcalf's paper.)




                           TABLE OF CONTENTS.


                                                                    PAGE

 INTRODUCTORY                                                          1

   _Reasons for Valuation_                                             2

     _As a Matter of Public Interest_                                  2

     _As a Matter of Corporation Necessity or Expediency_              3

   _Difficulties of Accurate Valuation Encountered_                    4

 THE RELATION OF PUBLIC SERVICE, OR QUASI-PUBLIC CORPORATIONS, TO      6
   THE PEOPLE

   _Supreme Courts_                                                    8

   _Regulation and Legislation_                                       10

 EXPLANATION OF TERMS                                                 16

   _Appraisal or Valuation_                                           16

   _Cost of Reproduction_                                             16

   _Cost, or Original Cost_                                           16

   _Present Value, or Present Physical Value_                         16

   _Non-Physical, or Intangible, Value_                               17

   _Elements of Final Value_                                          18

     _The "Physical Property" Element of Value_                       18

     _The "Non-Physical" or "Intangible" Elements of Value_           18

   _True Method of Valuation_                                         19

 THE MICHIGAN STATE APPRAISALS                                        20

   Organization                                                       20

     _Administration_                                                 20

     _Civil Engineering_                                              20

     _Mechanical Engineering_                                         20

     _Telegraphs_                                                     20

     _Telephones_                                                     21

     _Vessel Properties_                                              21

     _Methods of Procedure_                                           21

     _Difficulties_                                                   22

       _Lack of Complete Understanding on the Part of the State       22
   Officials_

       _The Attitude of the Railroad Corporation Managers_            22

       _The Confused Condition of the Records_                        22

     _Forms Used_                                                     23

     _Board of Review_                                                36

   Office and Field Methods                                           37

     _Making the Inventories_                                         38

     _Office Inspection as a Check on Field Work_                     39

     _Field Inspection_                                               40

     _Special Work on the Chicago and Northwestern Railway_           40

     _Special Valuations_                                             41

     _Computation_                                                    42

     _Filing in Office_                                               42

     _Computation Tables_                                             43

     _Unit Prices_                                                    43

     _Classification_                                                 45

     _Compilation_                                                    46

   Special Problems of the Mechanical Department                      46

     _Assignment of Value to States_                                  46

     _Freight Car Inspection_                                         47

     _Locomotives_                                                    48

     _Vessels_                                                        48

   Overhead Charges                                                   49

     _Engineering_                                                    49

     _Legal Expense_                                                  49

     _Organization Expense_                                           49

     _Interest_                                                       49

     _Discount on Bonds_                                              49

   _The Charge of Ten Per Cent. for Contingencies_                    50

   Right-of-Way Values                                                52

     _Comparison of Country Land Values_                              59

     _Average Price per Acre for Village Land_                        63

     _Comparison of Valuation Figures with Actual Considerations_     64

   Non-Physical Values                                                64

   History and Results of the Michigan Appraisal                      67

     _Market Value of Stocks and Bonds_                               67

     _Error in Published Reports as to Michigan Work_                 67

     _The Cost of the Work_                                           69

     _Grand Summary of Railroad Appraisal of 1900 as to               70
   Seventy-eight Incorporated Railroads_

   _The Result of the Michigan Appraisal_                             70

 RAILROAD APPRAISAL OF THE STATE OF TEXAS                             71

   _Authority for the Work_                                           71

   _Method of Physical Appraisal_                                     72

   _The Result of the Texas Work_                                     73

 RAILROAD APPRAISAL OF THE STATE OF WISCONSIN                         75

 THE MINNESOTA STATE RAILWAY APPRAISAL                                77

   _Land Valuation_                                                   78

   _Forms Used in the Compilation of Information_                     79

 THE WASHINGTON STATE APPRAISAL                                       79

 THE VALUATION OF TRACTION PROPERTIES IN CHICAGO                      94

 THE COMMERCIAL VALUATION OF RAILWAY OPERATING PROPERTY OF THE        97
   DEPARTMENT OF COMMERCE AND LABOR

 THE EXTENT OF APPRAISAL PRACTICE                                     99

 REVIEW OF SOME METHODS OF VALUATION, AND SOME OF THE CRITICISMS ON  101
   THE MICHIGAN APPRAISAL

 THE DETERMINATION OF ELEMENTS OF VALUE AND METHODS OF VALUATION BY  112
   THE COURTS

 PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION                 128

   _The Preliminary Study_                                           132

   _The Field Inspection_                                            135

   _The Computation_                                                 136

     _Classification of Properties_                                  137

     _Unit Values_                                                   138

     _Right of Way and Real Estate_                                  139

     _Depreciation_                                                  141

     _Immaterial Elements of Physical Property_                      142

       _Organization_                                                143

       _Legal Expense_                                               143

       _Engineering_                                                 143

       _Administration_                                              143

       _General Expense_                                             143

         _Discount_                                                  145

         _Working Capital_                                           145

     _Contingencies_                                                 145

     _Design_                                                        146

       _Adaptation_                                                  146

     _Apportionment of Values_                                       147

     _Terminals_                                                     147

     _Development of the Art_                                        148

   The Preparation of the Final Figure                               150

 NON-PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION             150

   _"Going Concern" Value_                                           154

   _Developed Business_                                              155

   _Cost of Handling Business_                                       155

   _Good Will and Established Organization_                          155

   _Franchise Values_                                                156

   _Conclusions Regarding Non-Physical Rules for Determination_      165

 CONCLUSION                                                          165

 BIBLIOGRAPHY                                                        168

   _Railroad Valuation_                                              168

   _The Chicago Appraisal_                                           169

   _The Michigan Appraisal_                                          169

   _The Minnesota Appraisal_                                         169

   _The Texas Appraisal_                                             169

   _The Washington Appraisal_                                        170

   _The Wisconsin Appraisal_                                         170

   _Water-Works Valuation_                                           170




                               DISCUSSION


FRED LAVIS, M. AM. SOC. C. E.—The author states that his paper is
confined to "a discussion of the methods which should be used in
arriving at a correct figure of cost of reproduction and depreciation,"
and that "it does not take up questions involving the propriety of those
figures when reached." In so far as this is concerned, it is probably
the most complete compilation of the available information on this phase
of the subject which has yet appeared in print. The author refuses to
recognize that the consideration of the so-called intangible values has
any place in a physical valuation. As, however, there exists such a
widespread feeling, especially among those interested in railroads, that
physical valuations, for any purpose whatever, are absolutely useless,
because these intangible values are not or cannot be included, it does
not seem out of place to refer to this phase of the subject at this
time, and more especially in view of the fact that many persons, the
prominence of whose position entitles them to consideration, have taken
this point of view very recently, and their remarks have received
considerable publicity. Not more than two weeks ago, Judge Lovett, the
head of the Harriman System, expressed the opinion that the theory of
valuing railroad property by trying to determine the cost of
reproduction was utterly impractical. It seems important, therefore,
that we, as engineers, interested in having the question properly
understood, should be careful, in referring to valuation, to make it
plain that other features besides the value of the physical property are
to receive due consideration. The speaker, therefore, proposes to
examine some of the arguments advanced by the opponents of valuation to
see if the objections most generally brought forward are insuperable.

Some critics of valuation go so far as to say that engineers cannot make
a close valuation of even the purely physical property. For instance,
Mr. W. H. Williams, Vice-President of the Delaware and Hudson Company,
in a paper on this subject,[19] states that:

  "No engineer in estimating on the several important items of
  construction work for the year will come within 10 per cent. of the
  total aggregate cost. Many of the more important items are
  frequently underestimated 25 to 50 per cent."

He cites, as an especially good illustration, the Panama Canal, the
original estimate of the cost of which was $140,000,000, though the
present estimate is $300,000,000. Almost every one who has kept in touch
with that subject knows why the Panama Canal has cost more than the
original estimates, and that the greater cost is no reflection on the
judgment of the engineers who made such estimates. One cannot always
foresee what changes in plans may be made before construction is
completed, and would hardly expect the estimates of the cost of a
railroad to be adequate if they were made for a single-track road and a
double-track was built. In any event, there is a vast difference in
estimating the cost of an engineering work already completed and one
which has yet to be started, the difference being largely in favor of a
closer estimate of the completed work.

Limitations are often placed on engineers, in connection with work they
do, which are afterward forgotten. The speaker was asked not long ago to
prepare a report in connection with the valuation of a large railroad
property. The time within which the results were required was very
limited, and the methods used in the valuation necessarily had to be a
combination of the inventory method and reliance, in a great many
matters, on the judgment of those making the appraisal. Undoubtedly the
result obtained was entirely adequate for the purpose for which it was
required, but would hardly stand if an attempt were made to use it as a
basis for an argument before a Court of law or a public service
commission, though it would not be beyond the range of the experience of
many engineers to have a matter of this kind brought forward some time
in the future as an absolute statement of fact, with no reference to the
way in which the work was done.

It is inevitable, of course, that engineers will differ in their
opinions as to some details of methods of making an inventory of the
property of a railroad or other public service corporation, and also as
to exactly what unit prices should be applied, but in general it is safe
to say that any engineer of proper experience and training can make a
satisfactory appraisal of the value of the physical property of a
railroad, and that if two or more such competent fair-minded engineers,
unhampered by any consideration of the purpose for which it is to be
made, should make such an appraisal, the variation in the result would
be so small as to be negligible. The speaker, however, does not entirely
agree with the author, that the purpose for which the appraisal is to be
used should be entirely ignored by those who are making it. There can be
little doubt as to the propriety of using a properly made physical
valuation as a basis for taxation, or as information for the owners,
although there may be some as to the methods whereby the so-called
intangible values are to be determined in these cases, or even whether
they should be considered at all. The greatest difference of opinion
arises when an attempt is made to regulate the issue of stocks and
bonds, or to fix the rates which should be charged for transportation,
on the basis of a physical valuation.

Arguments for and against rate regulation revolve in a circle, and,
apparently, there is no starting point which will satisfy every one. The
Courts have ruled that the railroads are entitled to such rates as will
enable them to earn a fair return on the value of their property; the
railroads claim that the only way to determine this value is on the
basis of the earning capacity; that is, one side claims that the rates
must be based on the value and the other that the value should be based
on the rates. It is evident, however, by this time, that the railroads
must submit to regulation, therefore a way must be found to break into
the circle, and it would seem to be incumbent on them to direct their
energies along lines which will tend to make such regulation fair and
just rather than to oppose it entirely. There is little claim that
unduly large dividends are paid, but there is a feeling in the mind of
the public that the railroads are over-capitalized. Is it not possible,
therefore, to break into the circle at this point, and decide, by means
of a proper valuation, as to the fairness or otherwise of the
capitalization? The objection to this, on the part of the railroads, is
that the value of the purely physical elements is by no means the whole
value of their property, but that something should be added for the
so-called intangible values.

To emphasize the difficulties of appraising the intangible values in any
way which will permit the application of such value to the determination
of rates for transportation, the opponents of physical valuation cite
what is now the familiar instance of two mythical roads between the same
termini, the first with good alignment and easy grades following a
valley, and the second forced into the mountains, having not only
heavier grades and more curvature, with consequently a higher cost of
operation, but also more expensive construction. The value of the purely
physical features of the former, of course, would be much less than
those of the latter, but its actual value as a property would be
greater. How then should the rates on the two roads be fixed? The
fallacy of using this example as an argument against physical valuation
as a basis for rate-making is in assuming that there would be two
railroads built under such circumstances, with no other features than
the two termini and the line between.

One has only to call to mind such examples of competing lines as those
of the Denver and Rio Grande between Denver and Salt Lake, the Union
Pacific between Cheyenne and Ogden, the Lackawanna and New York Central
between New York and Buffalo, or many others, to realize that there are,
on all roads of this nature, many other factors than the actual cost of
operating through trains between the termini, which determine the
through rates.

One would hardly suppose that at this late date any one believes that it
is proposed to use only the value of the purely physical property of
railroads as a basis for rate regulation, yet the _New York Sun_, a
paper of national prominence and usually most ably edited, devoted a
column of its editorial page[20] to a discussion intended to show that
rate regulation, based on physical valuation alone, was an
impossibility.

In addition to citing the example given above, the following is put
forward as the _reductio ad absurdum_ of the argument for rate
regulation based on physical valuation. It is said:

  "Suppose there are two bridges over the Ohio, the _cost of the
  construction of each being the same_, one between Cincinnati and
  Newport and the other twenty miles below where there is nothing but
  a village on either shore.... On what basis would the proponents of
  physical valuation, as the determining value in rate making, adjust
  a toll charge on these respective bridges?"

The example is far-fetched, and in no way applicable to the question of
the adjustment of rates on railroads, but inasmuch as it is seriously
put forward from a responsible source, it seems worth while to consider
it.

Assuming, as apparently the propounder does, that the proposition is
uncomplicated by any questions of franchises, public rights in the land
on which the bridge and its approaches are built, etc., then there is no
question but that the owners of either bridge have a perfect right to
charge what toll they please. On the other hand, suppose the permission
of the War Department, or some other governing body, had to be obtained
in order to build piers in the river, or even to build the bridge at
all; the argument used in asking for this permission is that the bridge
is needed as a public convenience; or it is desired to occupy certain
streets for the approaches, again is used the argument of public
convenience, and so on. These privileges are granted on the tacit
understanding, at least, that the public convenience is to be served,
and the Courts rule that, in such cases, in consideration of the equity
which the public has in the property by reason of the rights granted, a
fair return on the value of the property, but no more, should be the
basis for establishing the rates of toll. Would the _Sun_ claim that the
value of the rights and franchises given by the public in such a case,
be included in the value of these bridges, and that a higher total
income should be derived from one bridge than the other because the
value of the streets on which the approaches had been built is greater
in one case than the other; or that a greater income should be derived
in one case than another because the cities furnish more people than the
villages? Is there any particular reason, except for the slightly larger
depreciation and cost of maintenance, and, bearing in mind the fact that
both bridges cost the same, why, if there is ten times as much traffic
on one bridge as on the other, the toll should not be proportioned
accordingly, to provide the same income on each?

If the _Sun_ had imagined a bridge built by private individuals, with
their own money, between two villages, the inhabitants of which, at the
time the bridge was built, having been willing to grant almost any
franchises or privileges in order to get the bridge, the villages in
course of time growing to large cities, and the old bridge having been
replaced by a heavier modern structure, the example might have been more
nearly comparable to the railroad situation. In this case, the original
toll, of say 10 cents a head, may have, in the early days, only barely
returned a meager rate of interest on the investment, or even for some
years resulted in a deficit. Would the _Sun_ uphold the owners of the
bridge if, since the villages have grown to cities, they still insisted
on collecting the original toll, if it could be shown that a new bridge
could be built and would be a paying investment with a toll of, say, 2
cents, except for the fact that the original bridge was built in the
only location where it was practical to build a bridge at all? Or is it
reasonable to say that the foresight and energy of the owners of the
bridge, even though it may have been one of the principal factors in
enabling the villages to grow into cities, entitle them to capitalize
their enterprise on the basis of a 10-cent toll? It cannot be denied
that the energy and foresight of the original builders should be
recognized in fixing the rate of toll, but there is a limit to the value
of this, and it is because of the feeling on the part of the general
public that the capitalization of similar intangible values on the part
of the railroads and other public service corporations is too large,
which, whether true or not, has caused the present agitation against
them. If the capitalization is reasonable, there must be some way to
demonstrate the fact, and it seems as if a properly made physical
valuation, with due allowance for the intangible values, is at least a
step in the right direction.

The _Sun_ states in its editorial that:

  "The scheme of physical valuation, as a basis for rate making, is
  flatly rejected as unworkable by practically all the ablest railway
  authorities of the country, and that the only true measure of value
  is the earning capacity."

To quote only one, namely: Dr. Emory R. Johnson, who is generally
regarded as an authority and not by any means predisposed in favor of
the public as against the railroads, it is found that he states in his
"American Railway Transportation" that:

  "The earning capacity of the railroad cannot be equitably or
  logically made the sole criterion of value, because the rates, and
  hence the earnings, should depend to some extent, at least, upon the
  amount of capital justly entitled to profit."

It would seem to be self-evident that the earnings alone, either gross
or net, are not necessarily an indication of the value of the road.
Gross earnings are not, because, if a minimum proportion of them is used
for maintenance and betterment, the value of the property will steadily
decrease; whereas, if the opposite policy be followed, it will increase.
On the same principle, the net earnings offer no criterion as to the
manner in which the property has been kept up, and alone are, therefore,
no measure of its true value.

As an example of the arguments used by some of the opponents of physical
valuation, the following quotations are made from an article by Mr.
Henry Fink, Chairman of the Board of the Norfolk and Western
Railway.[21] Referring to the fluctuation in the costs of construction,
he says:

  "As the cost of materials and labor fluctuates ... it follows that
  what may be a fair valuation of a railroad one year may not be so
  one or two years later. Hence, it would be necessary to make new
  valuations from time to time."

Further, in the same article, referring to a valuation based on the
market value of bonds and stocks, he says:

  "Unlike the physical valuation, this method has a rational basis....
  It is true that prices of stock fluctuate—at times violently—but
  this difficulty can be overcome in a measure by using the average
  prices for long periods."

It is strange that it did not occur to so able a man as Mr. Fink that
the value of the physical property might also be based on average prices
for long periods; the cost of railroad construction and equipment as a
whole does not fluctuate nearly so violently as the stock market.

The report on "The Basis of Unit Prices,"[22] by W. D. Pence, M. Am.
Soc. C. E., the Engineer of the Wisconsin Railroad Commission, in
connection with the Appleton Water-works case, is an excellent example
of a fair and impartial study of this phase of the subject, and the
conclusion of the Commission in this matter can only be regarded as
reasonable by any one who is disposed to be at all fair-minded. It says:

  "If the standard by which the reasonableness of charges is to be
  determined should fluctuate with the market prices of material,
  labor and land, no schedule of rates could be established for any
  length of time, for, under the circumstances, a rate that would be
  reasonable to-day might be very unreasonable to-morrow. The
  principles of the law applicable to the subject certainly involve no
  such absurd consequences."

Another instance of an argument based on technicalities is found in the
_Railway Age Gazette_.[23] In an editorial on Valuation and Rate
Regulation, it is said:

  "It has been supposed in the past that rate-making is an exercise of
  judgment. It seems to be assumed by many that after a valuation has
  been made it will be merely an exercise in mathematics. Suppose the
  value of a railway for state purposes is $50,000,000. Then, on this
  theory, all that will have to be done will be to multiply this
  amount by 6 per cent.—or whatever may be regarded as a fair
  return—and so adjust the rates as to enable the road to earn, say,
  $3,000,000 a year," but, the writer goes on to ask, "how are the
  specific rates to be fixed? A great majority of those who advocate
  valuation say that they should be based on the cost of the service.
  The proper method, then, would be to ascertain the exact cost of
  hauling each commodity and then base rates on these ascertained
  costs, making them just high enough to allow the road a fair
  return."

Then the article goes on to point out the difficulties of doing this,
which of course we all know, and finally concludes that: "The theory of
basing rates absolutely on the cost of service is unjust and
impracticable." In the present state of the art this is probably true,
but why is it necessary to change the present theory of rate-making
because the rates are to be lowered or raised? If, for instance, it is
shown that it is necessary to reduce the rates sufficiently so that the
net earnings will be reduced, say, approximately 10%, is it beyond the
capacity of the traffic officials of a railroad to adjust their rates
accordingly?

In an editorial in another part of this same issue the _Gazette_
advocates the raising of rates to meet higher prices of supplies and
higher wages; it is surely as feasible to lower rates as it is to raise
them, and, even though it were necessary to base rates on the cost of
service, it does not seem as if that would be entirely impractical,
inasmuch as it is the whole argument advanced for raising the
commutation rates on the railroads entering New York City. Will the
_Gazette_ say that the arguments put forward by these railroads are all
wrong? Mr. Fink, in the article[24] already referred to, states:

  "It cannot be said that ... railroads make tariffs; they can only
  adjust them to varying conditions."

                  *       *       *       *       *

  "Adjusting freight rates is practical work of men who have special
  training for it and large experience. They may not all be able to
  explain underlying principles, such as the value of service, but
  they have used this principle for years, and apply it, intuitively
  in every case which comes before them."

Surely this body of men is equal to whatever adjustment may be
necessary. Rates will probably never be arranged to suit every
individual shipper; but if the people, as a whole, believe that the
railroads are fairly capitalized on a reasonable basis of value, and the
rates, in the aggregate, are adjusted so that unduly high profits are
not made, individual complaints of injustice may easily be taken care
of.

The most important considerations affecting the regulation of railroad
rates arise in attempting to fix the amount which shall be considered a
fair return on the investment. If a certain rate of interest is fixed as
the maximum which may be earned, all incentive toward improvement or
progress is removed. The effect of this would be, of course, to retard
all development. Once a railroad was earning its legal rate of interest,
there would be no necessity of cutting down grades, building larger
locomotives to handle larger trains, investigating the economics of
operation and location, in order to introduce the thousand and one
economies which are being developed day by day, or for our railroad
presidents to lie awake nights thinking how they are to save that
million dollars a day for the benefit of the always ungrateful shipper.
This objection against rate regulation, and incidentally against
physical valuation, can undoubtedly be overcome. One proposal which has
been made is somewhat along the lines on which it is proposed to finance
the New York Subways, the profits to be divided between the railroads
and the State, after a certain rate of interest had been earned. There
is nothing novel about this, as several railroad charters have been
granted with a provision that all earnings, over an amount necessary to
provide a certain rate of interest, should be paid to the State. Another
suggestion[25] is that the reasonable rate of return be fixed as a
percentage of the gross income, irrespective of the amount of capital
required to produce it. There are probably other ways in which this
might be worked out and adjusted, and this phase of the subject surely
does not present any insuperable objections.

That the railroads have little to fear, in regard to capitalization,
from a properly made valuation, is shown by the results in the State of
Washington, where the valuation was undertaken solely for the purpose of
fixing rates, the result being a determination of the market value of
the three principal railroads of the State—the Northern Pacific, Great
Northern, and Oregon Railroad and Navigation Company—at an amount
considerably in excess of their capitalization.[26] It is true that
rates were lowered in this case on some commodities, but it does not
necessarily follow that every change of rates on the basis of valuation
must be toward a lower scale. Railroad rates are low and have stayed low
while the cost of everything else has been raised, and yet, while this
fact is well known to the general public, they still believe that, in
some way or another, the railroads are getting or have been getting more
than their proper share of profits. Evidently there is something wrong
somewhere, and it is not going to be set right by calling the public
fools and ridiculing their presumption for meddling in any way with
railroad affairs. Mr. F. W. Whitridge, the Receiver of the Third Avenue
Railroad, of New York, while stating[27] that he had only just
discovered that there was such a thing as valuation, at the same time
held up the whole scheme to ridicule, though he admitted that:

  "The people of this country have, I think wisely, made up their
  minds, in consequence of great corporate abuses, that public service
  corporations should be subject to regulation, etc."

He nevertheless ridicules the efforts of the authorities, particularly
their endeavors in the matter of valuation, with its "irreverence for
facts." They seem, he says, "to be singing the song of the Banderlog who
dreamed of

                   "'Something noble, grand, and good
                   Won by simply wishing we could.'"

Valuation, however, has gone far beyond the point where it can be
considered a visionary scheme, or can be held up to ridicule; and it has
been worked out far enough to show, at least, that there is a rational
basis, on which a determination of values can be made, which will do
justice to both sides; furthermore, the Supreme Court of the United
States has not only ruled that valuation must necessarily be precedent
to rate regulation, but has gone so far as to specify at least some of
the elements which must be taken into account, and it may be worth while
noting that, in spite of the author's criticisms of the Washington State
Valuation, it is the only one, thus far, in which an attempt has been
made to comply with the rules laid down by this Court. The results in
Washington, however, indicate clearly the need of regulation of the
railroads, as a whole, and not varied regulation by individual States of
the parts of systems within the borders of each.

Arguments on either side can be prolonged indefinitely, and many good
reasons for and against physical valuation are advanced from time to
time, just as they may be on any proposition. Some of the principal
objections have been referred to here in an endeavor to show that they
are not insuperable; the point which concerns us now is that to-day we
are confronted with a fact and not a theory, and that fact is that the
railroads are going to be regulated, and that their proper development
is held back and general business is hampered by the feeling of
uncertainty as to the outcome. Physical valuation is not a panacea for
all evils, but a properly made valuation of the physical elements, with
a due allowance for the intangible values, based possibly on some such
method as that developed by the Washington State Commission or by
Professor Adams in Michigan, is surely as good a way of breaking into
the circle of argument as any that has been proposed thus far.

The equipment of freight trains with air brakes and safety couplers was
practically forced on the railroads by the pressure of public opinion
led by laymen, yet one will hardly find a railroad man now who will not
admit that this is good practice, not only from the standpoint of safe
operation, but from that of economy as well. The early attitude of the
railroads in this matter is already being quoted by the advocates of
valuation, and inasmuch as we have to admit, as we surely do, that a
start is going to be made somewhere along the line of obtaining some
more definite information in regard to the true relation of the value,
capital, and profits, of railroad properties, than the mere statement by
the railroads themselves that they are all that is good and fair, would
it not be wise on their part to do all they can to have the start made
properly rather than oppose it? Some of the most prominent and
progressive railroad men of the country have already arrived at the
point of believing and saying that regulation properly carried out may
not be an unmixed evil, in fact, would probably be beneficial, but they
still balk at valuation, without, however, suggesting any other means
whereby the general public is to obtain the information on which to base
an intelligent opinion as to how such regulation is to be carried out.

The speaker does not for a moment underestimate the difficulties
incident to the determination of the intangible values, or forget the
difference between the problem presented by the comparatively new lines
in the State of Washington and a valuation of, say, the Pennsylvania
Railroad or the New York Central. No one who gives any real thought to
the problem pretends that the value of a railroad is the value of its
purely physical property; but, because the matter of determining the
intangible values is difficult and complicated, is it necessary that we
should sit back and fold our hands and say "it can't be done"; that in
the whole country there is no man or body of men, or engineers, if you
please, with brains and ability enough to solve the problem? As for
cost, is it not worth $10,000,000, which is more than $40 per mile for
all the railroads in the country, or about three times as much as the
cost of the most careful appraisals yet made, to have the question put
once and for all on a stable basis, satisfactory to all, if the problem
be approached in a fair, broad-minded, common-sense way, by engineers
big enough to command the respect of both sides? Aside from the question
of rate regulation, is it not worth this much to the railroads of the
country to be able actually to prove that the amounts at which they are
capitalized are reasonable, as in the great majority of cases they
probably are?

There are one or two points which, it seems to the speaker, cannot be
too strongly emphasized:

First, that valuations properly made may be the means whereby confidence
may be restored, not only in the mind of the general public, but in that
of the investor; but, in order to obtain this result, the railroads
should urge, with all the power they possess, the necessity of having
such valuations made by a body of men, some of whom, at least, should be
engineers, big enough to entitle their opinions to the respect of both
sides, and thoroughly qualified by training and experience for the work.

Second, that, as far as possible, regulation should be general or
national, so as to avoid the complication of dividing all roads at the
State lines, and of having different regulations in different States.

Third, that there need not necessarily be any relation between rate
regulation and rate-making. Rate regulation can well be confined to
rates in the aggregate, rate-making applies to the adjustment of
individual rates, and must necessarily be the work of men well versed in
all the varied elements which control it and the particular conditions
affecting the business of each particular road. The speaker believes
that valuations made in this way and with these objects in view will do
no harm to the railroads, and will do much to restore confidence and
give us the much needed peace and quietness to carry out necessary
development.

                  *       *       *       *       *

CHARLES H. HIGGINS, ASSOC. M. AM. SOC. C. E.—Mr. Riggs' able and timely
paper is of great interest and worth to all concerned with the matter of
values, whether of public service corporation property, or other
property; and what engineer is not concerned with values?

One cannot but wish that an index accompanied the paper, as its
usefulness would be thereby greatly increased, particularly as, by its
arrangement, such subjects as depreciation, non-physical values, etc.,
are treated of in many different portions of the paper.

_The Wisdom of Having a Physical Valuation._—It is hard to understand
how any thoughtful person can now doubt this, for we are in a period of
regulation and taxation of public service corporations, and the only
question is whether they shall be regulated and taxed with a full
understanding of the investment involved, or by arbitrary methods, such
as the 2 cents per mile passenger rate, which has been so popular in
many States, under widely different conditions and irrespective of the
cost of the service.

The time would seem to have arrived when the thoughtful public service
corporation manager would welcome a fair valuation of the company's
property, as protection against legislation conceived in ignorance of
the capital invested.

_Relation Between Railroads and Other Properties._—The relation between
appraisals of railroad and of water, gas, and traction companies is very
close, and the same general principles apply. In the former, however, it
is complicated more often by the fact that the lines of a railroad
extend through many States, with terminals in one or two, and, further,
that the railroads have many subsidiary, controlled, or dependent
companies, such as coal, lighterage, terminal, car, warehouse,
contracting, elevator, stock yard, and supply companies, often owned,
wholly or in part, by men in the railroad management. Agreements with
these companies may greatly affect the non-physical values, as
determined by the methods advocated in this paper, which may otherwise
be sound.

_Valuation of All Properties._—The author says that the valuation of all
railroad properties in the country "would be of interest." It would be
more; it would be of value infinitely greater than the cost. The mere
presence of light prevents many vices, and this is as true in
corporation practices as in the streets. It is in accord with Dr.
Woodrow Wilson's "pitiless publicity"; and, which is, perhaps, more
important, it is the basis, or should be, of all legislation concerning
the regulation of these great highways.

_One and Only One Fair Value._—Nothing in Mr. Riggs' paper is of more
value than his insistence that there is one and only one fair value of
the physical property of a railroad, no matter for what purpose it is to
be used. How futile are the misdirected efforts of those who would have
it otherwise, for, no matter what the purpose of the appraisal may be,
who can foresee the use that may be made of it when it becomes public
property?

_Cost of Reproduction._—Cost of reproduction less depreciation seems to
be the established method—that recognized by the Courts—for arriving at
the value of the physical property. Cost, as the author contends, can
only be an element in determining the present value, for the owner of a
stone bridge has as much right to any appreciation in the value of
masonry as the owner of land has in the increased value of his property;
and, though the cost early in the life of the structure is usually near
its value, it may lose that position. What relation exists between the
value of the Pyramid of Cheops and its cost? Now, as then, our unit
measure of value is changing. Cost is certainly of historic interest,
but present value is the subject for present uses.

The points in favor of inspection to determine the physical condition of
the object to be valued are convincing, where the structure may be
readily inspected. Mortality tables mean little without a history of
maintenance. With perfect maintenance there would be no physical
depreciation.

_Maintenance versus Depreciation._—Depreciation and maintenance are
interdependent, so much so that some engineers have advocated dropping
the term, "depreciation," and substituting "deferred maintenance." A
little thought will make this clear. While this term would not apply in
the case of a single rail or car, it is not illogical when applied to a
system, built and renewed piecemeal and maintained at a certain standard
of usefulness, that is, on all well-managed undertakings of magnitude,
units are constantly being replaced, thus maintaining a standard of
efficiency. This standard, on the entire system, is usually found to be
between 70 and 90% of the cost of reproduction. Some items are even
improved, and the cost is charged to the maintenance account, such as
that referred to in the paper as "consolidation and adaptation" of
roadbed; and only a few, such as steel rails, steadily and progressively
become less useful, and even these have a bottom value, that of scrap
steel. Nor are examples numerous where all the rails are laid at one
time, and they are extremely rare where all are replaced at
approximately the same time. When the rails on a street or section are
renewed, the cost cannot properly be charged to capital account, except
in so far as the new rails are of a more valuable type than the old
ones; for, if this were done, there would be no limit to the
capitalization as time goes on. Furthermore, the moment it is admitted
that, by reason of a change in the art, we may have depreciation through
obsolescence, we admit that through a change in the art we may have
appreciation through the opposite of obsolescence. This being the case,
the use of "mortality tables" to determine present value is misleading,
unless it is done with the full itemized accounts of maintenance, which
are seldom, if ever, available. The author's position in regard to the
need of inspection of each item is well taken.

_Dead versus Live Properties._—These, perhaps, are not happy
expressions, but they serve to emphasize a vital distinction which must
be made in the valuation of properties. The difference may be as great
as between a corpse and a man; here, also, the distinction is hard to
define. We say the soul has departed, or the spark of life is
extinguished, but these expressions do not contain a satisfactory
scientific definition. So, as Mr. Riggs points out, the physical
property of a going business may not be valued as so much junk, even if
the non-physical values are to be determined separately.

_The Franchise a Contract._—The Courts hold a franchise to be a
contract, something often forgotten, both by the public and by
corporations. The speaker, however, understands this only to mean, even
where the franchise is in perpetuity, that the property of the
corporation cannot be taken for public use without just compensation. In
a sense, then, there can be no such thing as a perpetual franchise.
Using the word franchise with its restricted meaning, the
unreasonableness of the rates may be measured by the value of the
franchise.

_Physical versus Non-Physical Values._—The following division has been
made by the author between physical and non-physical property, for the
purpose of valuation:

  "That the Physical Value, or present value of the physical property,
  should fairly represent the actual capital invested in the property
  at the date of appraisal; that it should be made up of the sum of
  the various elements which constitute the cost of reproducing the
  property together with any appreciation which may have been added to
  any of them, less all depreciation.

  "That the Non-Physical Value is the difference between the 'fair
  value' as defined by the Courts, or the reasonable value of the
  property as a business or producing property, and the physical
  value, or actual present worth; and that the only proper method for
  determining such values involves a study of income accounts.

  "This Non-Physical Value may be: positive, or a value in excess of
  the physical property, or negative, or less than the physical value.
  In the case of a property having a negative intangible value, a
  deduction should be made from the physical value."

This division is convenient but arbitrary. It is the division of an
engineer rather than of an economist; for these so-called non-physical
values are like the breath of a man's life; without them, the physical
value is like the discarded body. Again, the use of negative
non-physical values, while convenient, may not be wholly logical. These
remarks are not directed at Mr. Riggs, for he is careful to say that he
is dealing only with active enterprises, and not with those which are
inert, and the speaker realizes that he is not attempting primarily to
build up a logical argument, but to formulate certain rules to overcome
practical difficulties met by all who have attempted valuation work. As
many who have not given this matter much thought are apt to be misled by
the distinction made between physical and non-physical values, they
should bear in mind that the line between them is like the equator, an
imaginary one.

_Water._—"The water is as much a part of the cost of putting that line
there as the rails," remarked a corporation official, of admirable
character and wide experience, pointing to a trolley line from the
window of a Pullman car; and, bearing in mind what he meant by "water,"
this is undoubtedly so. The cost of promoting the enterprise, the
discount on the hazard, the loss of interest during its infancy, the
labor of building up the undertaking—these are all real elements of
cost, and may remain in the property as value, but, like all other items
of cost, they have their reasonable limits, which, in each individual
case, can be determined within narrow bounds.

_Purpose of a Valuation._—As Mr. Riggs points out, there are four
reasons for a valuation: Taxation, rate-making, purchase, and control of
the issue of securities, one of which is usually the primary cause for
the valuation being made; and he argues that there can be but one "fair
value" of the physical property, whichever of these reasons may prompt
the appraisal. This is fundamental, for "fair value" is used in the
sense of true value, which, to the writer, seems to be a more apt
expression. It is rather surprising that it does not appear in the
paper. Its use, of course, is old; in the Constitution of New Jersey,
1875, we find: "Property shall be assessed for taxes under general laws,
and by uniform rules, according to the true value." Each of the three
matters, taxes, rates, and authorized capitalization, are interdependent
and, in the long run, cannot be considered separately. This can be
emphasized by a _reductio ad absurdum_: Modern civilization is so
dependent on transportation by rail that unquestionably all taxes could
be raised by assessment on the railroads, if these roads were allowed to
fix their rates and were protected in the collection of them; but how
would this method differ from that of the Romans, of farming out the
collection of taxes? Not materially, and no one advocates a return to
that method. This is absurd, but it serves to emphasize the relation
between taxes and rates. Taxes can only come from the rates.

_Overhead Charges versus Unit Values._—There is much in various parts of
this paper concerning overhead charges, but very little about the items
considered in determining the unit values or unit prices used; and does
not the latter greatly affect the former? For example, in discussing the
Michigan appraisal, the author says:

  "For many items, such as clearing, grubbing, earthwork, masonry,
  etc., the price was fixed by agreement during the discussion at a
  figure which represented the fair average cost of this particular
  item during the 5-year period preceding the appraisal."

The "fair average cost" under what conditions? This word "cost" is
understood by different men in as many different ways as the word value.
Mr. Riggs very clearly gives the items included in "fair value" as
finally arrived at by him, but it would seem to be as important to
define "fair cost" as used in arriving at the unit prices, for otherwise
the chain has a weak link.

What may be considered a fair cost per unit of measure for a particular
item differs greatly: First, with the point of view and breadth of
horizon of the man stating such cost; and second, with the methods of
letting contracts and accounting with which he may be familiar, as
applied to such items of work. Because of the first, a fair average unit
cost may mean one thing to a contractor, another to a division engineer,
still another to a chief engineer, and a fourth to a manager or
consulting engineer; and because of the second, the understanding of the
term may differ among men of the same class. All of this quite aside
from what may be termed the personal equation of the individual. Thus
the subject of overhead charges can only be discussed profitably in the
light of knowledge concerning what has already been included in fixing
the unit prices used. For example, the element of hazard common to all
construction, but differing in degree on different classes of work, may
be included in the unit cost used, or it may be added as a percentage to
resulting sums, but it cannot rightly be included twice. This is equally
true of other elements of cost of a similar character.

The foregoing is pertinent, for any valuation will probably be attacked
in the Courts, and the unit values will be one of the most tempting
points for assault, for the very reason that this wide difference of
understanding in regard to cost, and particularly in regard to unit
costs, exists. This same difference of understanding is usually the
reason for the wide difference in unit costs testified to by able
engineers and, consequently, for the distrust often felt for such
testimony. The methods followed in taking expert testimony usually work
to make "confusion worse confounded." The judge or layman, hearing two
engineers testify to widely different unit prices as a fair average cost
for certain work, forms a low opinion of their judgment, or worse,
whereas the real difficulty may, and usually does, lie in a different
understanding of the meaning of the term "cost," or "unit cost." To the
speaker, this seems to be the weakest point in an admirable paper.

_Paving._—Whether the value of the paving between and for a space
outside of the tracks is an element of value in a street-car line, or
whether the cost incidental to the construction and maintenance is in
the nature of a tax, is a much disputed point in all valuations of
street-railway properties, and an important one, for it may amount to
$15,000, or more, per mile. It is interesting to remember that the
custom of requiring street-railway companies to maintain the pavement
between the rails and for a space of about 2 ft. outside of them, which
has become almost universal, developed during the use of horses to draw
the cars, the animals causing great wear on that portion of the street.
This question of values is a difficult one. It would seem that the most
tenable position is that: If the fee to the pavement is not in the
company, and if the rule concerning cost of reproduction less
depreciation is to be followed, the cost of taking up and relaying the
pavement is an element of value in the physical worth of the track, for
it would be impossible to reproduce the track without incurring the cost
of such work.

S. D. NEWTON, ASSOC. M. AM. SOC. C. E. (by letter).—The general scope of
this paper is admirable. The author's views and definitions are
unusually sound, clear, and forcibly expressed. To one minor detail,
however, the writer is unable to subscribe. Referring to "the physical
property element of value," he states that:

  "This consisted of those things which are visible and tangible,
  capable of being inventoried, their cost of reproduction determined,
  their depreciation measured, and without which the property would be
  unable to produce the commodity on the sale of which income
  depends."

  Take the case of an industrial spur for some minor industry along a
  line of railroad. It is often a question in the minds of the
  management whether or not the car-load business done by such an
  enterprise is sufficient in quantity to warrant the expense of a
  spur track. There are probably other facilities in the neighborhood
  which could be used to take care of this business at the expense of
  some inconvenience; in a large proportion of cases, the railroad
  will handle the business anyway, and the spur can in no sense be
  called a necessity. Still, it is visible, tangible, and capable of
  being inventoried, and should be included in an inventory of the
  property the same as any track or section of track belonging to the
  Company. This may also be said of an extra settling basin or filter
  bed in the case of a water-works plant. If such basin or bed were
  not in existence, and a leak should occur in the original plant, the
  business of supplying water to its customers could, in all
  probability, be carried along in some manner until the break could
  be repaired; nevertheless, such a tank or bed is desirable, and its
  value should most certainly be included in an inventory.

Take the extreme case of a piece of machinery which is utterly broken
down or so far out of date as to be entirely worthless for the purposes
for which it was designed. Yet such machinery has, at least, a scrap
value, and as such it should be included in the inventory as part of the
tangible assets of the concern at the date in question.

Of course, in many instances, certain interests endeavor to have
inventoried items which should either be omitted altogether or included
at a much reduced valuation from that sought to be placed on them, and,
in such cases, the very best judgment of the appraising engineer must be
called into play in order that injustice may not be done to either
party; but to say, as Mr. Riggs' definition virtually does, that nothing
should be inventoried which can, either with or without inconvenience,
be dispensed with, is absurd, and the writer does not believe that such
is the meaning the author intended to convey. Probably, if the word
"economically" were inserted in the definition, it would more nearly
represent the proper idea.

WILLIAM V. POLLEYS, M. AM. SOC. C. E. (by letter),—In his very thorough
and painstaking paper Mr. Riggs states that it is confined to a
discussion of methods for arriving at a correct figure of cost, and
disclaims any intention of considering the propriety of using said
figure when reached.

Inasmuch, however, as he devotes the next eight or ten pages to a
dissertation on law, political economy, rate-making, finance, and advice
to railroad employees, with a word of encouragement to the good, and
firm reproof to the bad ones, it is fair to assume that he intends this
disclaimer in a Pickwickian sense, and that the real intent of the paper
is to show that the physical valuation of property is, with certain
determinative, corrective factors, a proper standard for gauging
taxation, bond issues, and kindred evils.

Is it not a fact, however, that taxation is based on a much more
intangible structure, and that the net earnings must necessarily have
more to do with it than the physical valuation of the property—whether
it be that of a wicked public service corporation, or that of an honest
haymaker—rather on what their property can produce, than on what it
would cost to produce the property? Is it not rather a battle of
business acumen between the taxer and taxee, a battle which, among other
things, is regulated more or less by the fact that an extreme in either
direction will bring disaster to one or both, followed by the inevitable
reaction and readjustment?

Take, for instance, an extreme case: A manufactory is erected on
comparatively worthless ground. A million dollars or more is invested in
a plant, with the result that surrounding real estate values go up with
a bound. Supposing that the manufacturer has not made any previous
arrangements for immunity, and the assessors are both acute and honest,
the property will be taxed for a large figure, which tax, if the factory
is making money, will be paid, with more or less grumbling, up to the
economical breaking point. Suppose that, owing to a sudden permanent
change in business conditions, it becomes impossible to operate this
plant, and it is abandoned. A corps of experts may be thrown into the
mill, before the last employee has left the building, and may carefully
scrutinize and caliper the machinery, count the bricks in the wall, tap
the stay-bolts in the boilers, and bore into the furniture to see
whether it is solid or veneer, and when they are through and their
figures are all in, they have not arrived at anything that is of the
slightest use as a basis for a bond issue or taxation, and very little
that would be of use for sale. In such an extreme (but by no means
unheard-of) case physical value bears no relation to real value.

This is not to say that a physical valuation is without worth, and even
great worth in some cases; it is merely offered as an opinion that the
physical value is in many (and probably most) instances a very
treacherous guide to the real value—a far poorer guide, as a general
rule, than the accounting department; a minor quantity, in fact.

It seems doubtful whether there is a scientific way of arriving at the
true value of a going property by the physical-valuation route. There is
too large a percentage of values which, being intangible, are matters of
judgment. At best, the determination of value must be that of opinion,
and the worth of that opinion hinges principally on the practical
qualifications and disinterestedness of the person who gives it.

Unfortunately, or fortunately, as the point of view may be, the
disinterested person is not apt to be qualified, nor the qualified
person to be disinterested, and it seems extremely probable to the
writer that, while weapons may be changed and excuses vary, the tax war
will be waged as of yore, and the fool and his money will continue along
diverging paths until something more ingenious than physical valuation
is invented, however well the valuation may be made.

C. P. HOWARD, M. AM. SOC. C. E. (by letter).—While there may be no
material differences of opinion as to the principles on which a physical
valuation should depend, such a detailed description of organization and
methods as that presented by the author should be of great service to
others undertaking similar investigations.

It may not be amiss, however, to mention certain features affecting the
non-tangible values which should be more fully considered in any general
discussion of the subject.

The author calls attention to one or more particulars in which the
methods of the Michigan appraisal may "fail as a method of determining a
value for use as a basis of rate-making." Later, after quoting various
court decisions, he dismisses this phase of the subject with the words:
"In view of these dicta, it is needless to argue whether a rate of 6% or
10%, or 15%, or more, be reasonable."

A value for purposes of rate-making might more properly be called a
"permissible value." The writer holds no brief for the corporations, and
would not like to fall under the imputation of being "apparently incited
by, either the direct interest of corporations, * * * or an effort to
confuse the subject of valuations," but will venture the following,
which, while it does not exactly represent any particular case, it is
hoped may be recognized as an illustration drawn from life.

A, B, C, and their associates, being familiar with a certain territory,
its resources, transportation facilities, and growing development,
believe that the time has come to build another railroad through their
State or States. They have made careful estimates of the amount of
tonnage that may be expected from the development of its mines, timber,
farms, etc., and conclude as follows:

_First._—The road, completed along the most approved lines, will cost,
with equipment, $50,000,000.

_Second._—It will take five years to construct and equip the road and
put it in fair running order.

_Third._—The traffic, when fully developed according to their hopes and
expectations, will eventually afford at usual tariffs a handsome profit,
say, from 8 to 12% per annum on the capital invested. This condition,
they believe, in all human probability, will be attained in from 5 to 10
years after completion.

_Fourth._—That half the traffic anticipated will pay 5% on the
investment.

_Fifth._—They are obliged to admit (though the chances of this are so
remote as to be in their opinion negligible) that, due to unforeseen
causes, obstruction, competition, etc., there is a possibility that, as
has so often happened in the past, the enterprise may prove a financial
failure, or that the period of prosperity may be postponed so far into
the future as to amount to practically the same thing.

Here is a bold undertaking; but were it $5,000,000 instead of
$50,000,000, the conditions would be essentially the same. Nevertheless,
they have the courage of their convictions and go ahead.

Now, with all the risks and uncertainties attending an enterprise of
this sort, if the ultimate profits were limited in advance to 5 or 6% on
the capital invested, less depreciation, who but the Government itself
could afford to build a railroad?

Evidently, when an existing railroad makes small additions from time to
time to extend or take care of its business, the risk is not so great.
Such extensions will continue more or less under any limitations.

For rate-making, it is evident that an appraisal based on earnings will
utterly fail of its purpose if made during the lean years immediately
following construction. If made some years later, when the property has
begun to pay, the risk and necessary financial loss of the lean years
should be remembered, as any one building a road in the future will
necessarily have the same problems to meet, together with the expenses
of interest, depreciation, loss from operation, etc., both during the
construction and the lean years following, all of which must properly be
considered a part of the real cost of constructing and developing a
property.

J. E. WILLOUGHBY, M. AM. SOC. C. E. (by letter).—The determination of
the cost of reproducing the property of any steam railway involves,
together with other items, an estimate of the present cost of:

  _First._—The acquirement of the right of way, to the extent, in the
  form, and on the location of that held in connection with the
  railway to be reproduced;

  _Second._—The construction thereon of the roadway, to the form and
  dimensions, and of the materials which the roadway to be reproduced
  exhibits; and

  _Third._—The seasoning and adaptation of the roadway to the state of
  perfection which the roadway to be reproduced exhibits at the time
  the estimate of cost of reproduction is made.

The first conception, for fixing the cost of the several items, is to
consider the railway to be reproduced as being non-existent at the time
the estimate is made, but having the environment which then exists along
the operated railway, although that environment may be largely of the
railway's own creating. The cost of the right of way is to be fixed as
ungraded and unimproved property attached and forming a part of the
adjoining improved property, which adjoining property will be entitled
to receive, in addition to the market value of the land taken, all
consequential damages due to the taking off of the right of way in the
form and location that the land has actually been taken, and for the
purpose of railway construction and operation. This adjoining property
is to give credit on the consequential damages for the incidental
benefits which it derives, if any, from the construction and operation
of the railway.

In fixing these values, the drift of public sentiment—the bias of juries
of view and of trial juries—at the time the estimate of cost of
reproduction is made must be considered, since that sentiment may affect
enormously the cost of the right of way. The amount to be paid for a
right of way is in the end that which a condemnation court will award.
The question as to whether or not the right of way was originally
donated can no more enter into the determination of the cost of
reproduction, for the purpose of lessening the estimate of cost of
acquiring the right of way, than the fact that donations of lands or
bonds (or of convict labor and slave labor, as in the South prior to
1860) made by governmental authority or private enterprise, at the time
of the original construction, can be used to reduce the reproduction
cost of the excavation made in the formation of the roadway.

No rule as to the sale of property for commercial purposes in the
vicinity of an operated railway can be rightfully adapted as covering
the line as a whole. While the cost of right of way through farm or
timber lands bears a general relation to the value of those for
agricultural purposes, where improvements thereon bear but a small
proportion to their total value, this relation is wholly wanting in the
cost of a right of way through a village or city or at any point where
the improvements on the property bear a large proportion to its total
value. The relation is also wanting where a right of way is obtained
through agricultural lands devoted to special purposes, like that of
country homes for the rich. It is also wanting where the right of way is
taken out of the narrow river lands in the Appalachian Mountains, where
the total value of the whole farm is dependent on the small acreage of
flat land along the river bank. The general rule of prefixing a constant
to the current selling price of lands, in order to determine the
estimated cost of right of way, should be limited to agricultural and
timber lands, and to those which, owing to their extent, the carving out
of the right of way does not wholly destroy for the continuation of
agricultural and timber operations.

For villages and cities, and for lands devoted or adapted to special
purposes, an accurate estimate of the cost of reproduction of the right
of way can be determined only by a specific investigation of the
conditions in each community. While it is difficult to conceive all the
activities and sentiments which have growth in, from, and of railway
operation, as being in existence without the railway, it is only through
such an assumption that one can estimate correctly the make-up of the
items of cost of reproducing a railway as such railway may now exist. To
assume that the railway, not existent for the purpose of estimating the
cost of reproduction, will now receive the donations of land and moneys
that were made half a century ago, is merely going back to a
determination of what the road has actually cost; and that is contrary
to the intent of the theory of the cost of reproduction. The conception
of a parallel line is not correct, for it imposes thereby a further
burden on properties which have already contributed to the public good,
probably to an extreme extent, and gives an abnormal cost for right of
way, as shown when a railway seeks to enlarge its terminals in a crowded
community, or to find a new entrance into a populous city.

So, too, in estimating on the formation of the roadway, one must
consider the roadway to be reproduced as being obliterated—all cuts and
borrow-pits refilled, and all embankments and spoil banks removed from
the right of way—but all other lines of transportation, except the
railway to be reproduced, must be considered as being in existence as
they actually are at the date when the estimate of cost of reproduction
is made, and that such other lines of transportation are available for
bringing in machinery, tools, teams, materials, and supplies for the
construction of the railway to be reproduced. It is only by such an
assumption that the benefit of the improved means and methods of
construction now prevalent can be obtained; but it is not permissible to
estimate for the construction of a railway with different grades,
alignment, roadbed, widths, or with different materials than that of the
railway to be reproduced merely because such construction at this day
might be actually cheaper or better than to construct it in exact
duplication. For example, if the rock cuts on the roadway to be
reproduced be only 18 ft. wide, with ¼:1 slopes, one must not figure on
the greater economy of steam-shovel excavation, because the steam shovel
cannot be worked in cuts of that width; nor can the spoil from such cuts
be carried long distances to eliminate a possible solid-rock borrow
originally made elsewhere, because long hauls are practicable in
steam-shovel work, but wanting in excavations where the mule is the
transportation force. So, too, it is not permissible to estimate on
reinforced concrete bridges to take the place of more costly cut-stone
arches, if cut-stone arches are the structures that have been actually
built. The idea of cost of reproduction is not synonymous with the idea
of the cost of building a railway capable of serving the same
transportation purpose. If all our railways were to be built anew, in
the light of our present knowledge, and with our present traffic
offerings and financial resources, vast changes would be made in the
character of construction. The physical fact of existing construction
prevents a theoretical substitution of what is the best construction for
any community, together with its costs for the construction which was
actually made years ago.

In the event that an estimate of reproduction costs be made for a State
as a whole, or for a great railway system as a whole, the conception of
reproduction is modified so that the construction may take the form of
progressive construction, the principal lines being built first and the
less important lines afterward. This method will require the estimate
for interest during the construction period to be greater.

The money cost of the seasoning and the adaptation of the roadway to
such a condition as will permit heavy trains to be run at high speeds,
is great, but the amount is not readily ascertained. An estimate of cost
of reproduction, to be true, must consider this item; and probably the
more usual method of ascertaining it is to assume it to be an amount in
some proportion to the cost of the excavation. This proportion will vary
with the character of the material through which and of which the cuts
and fills are made, and with the methods of construction necessarily
adopted. There are many railways on which this cost will exceed 25% of
the total cost of excavation.

After the estimate has been made, including the item for seasoning and
adaptation, there should be added a contingent fund to cover the omitted
work, consisting of small borrow-pits and ditches, undetermined
foundations, unexpected conditions encountered, unavoidable "force
account" work, minor changes of streams and highways, damages to
adjoining lands due to the methods of construction and to diversion of
water, etc. This item will not exceed 5% of the cost of the roadway if
the estimate be accurately made.

The more convenient form into which an estimate of cost of reproduction
of a steam railway is to be put is to follow the sub-accounts, as
prescribed by the Interstate Commerce Commission for Expenditure for
Road. Each item given in that accounting has a place in the estimate.
These comments are confined to the items covering the roadway, namely,
Right of Way and Station Grounds, Grading, Tunneling, Bridges, Trestles,
and Culverts.

HENRY C. ADAMS, ESQ.[28] (by letter).—To the writer this paper seems to
be the most complete and comprehensive discussion of the general
question of valuation of property invested in public service industries
that has come under his notice. It is especially important in that it is
a summary of the discussion on this most difficult subject during the
past ten years, and the writer thoroughly agrees with the general
conclusions reached by Mr. Riggs.

There is one point, however, which might possibly have been developed
more completely, and that is the treatment of discounts, which presents
itself from time to time in the general discussion. Mr. Riggs quotes
with approval the following:

"If a company can market its 50-year, 4 per cent, bonds at 90 per cent.
of par, it means that the company's credit is on a 4½ per cent. basis;
that it could market a like security paying 4½ per cent. at par."

This is, of course, correct as far as the mathematics of the proposition
is concerned, but it seems to overlook that peculiar psychology of the
market which enables a corporation to secure a larger amount of actual
cash for a given interest annuity when bonds are sold at a discount than
when they are sold at par.

Aside, however, from the accuracy of the above quotation and of Mr.
Riggs' apparent acceptance of it as the final word on discounts, one may
ask if it recognizes all the elements necessarily involved in a
discussion of the problems raised by discount financiering. From the
literature of the subject one may read the following claims: Discount is
a measure of the risk involved in a new enterprise; discount is a market
adjustment that reflects the current value of money; discount is a
sacrifice of principal for a slightly reduced interest annuity; discount
is a dividend declared before the dividend is earned; and many cases are
cited in which a discount is merely a promoter's fee for services
rendered.

The writer does not care to discuss at this time these various points of
view from which discounts may be regarded. They are mentioned merely to
suggest that the subject is not as simple as some writers seem to think.
Any valuation of public service industries, from whatever point of view
it may be regarded, must, from the nature of the case, touch the problem
of fundamental equities; and one of the elements of this problem which
has not as yet been fully analyzed is this element of discounts. From
the point of view of taxation, such an analysis is not perhaps
essential; but if the valuation is to be used as a basis of determining
reasonable rates, or as a measure of reasonable capitalization, it seems
to be essential.

The writer is sure this discussion will not be construed as in any sense
a criticism on Mr. Riggs' paper; it is rather a suggestion of an
unwritten chapter in the literature of valuation. The American Society
of Civil Engineers is to be congratulated in securing from one of its
members so complete and satisfactory a discussion of the principles and
methods for the valuation of public service corporation property.

CARL C. WITT, M. AM. SOC. C. E. (by letter).—The appraisal of the
railway property in Michigan was a wonderful performance in a great many
ways, not the least of which was the thoroughness of the work,
considering the short time available, and the writer desires to express
his appreciation of this paper, as it is a valuable addition to the
meager literature on this subject.

More recent appraisals, made by States traversed by the same railway
systems as those involved in the Michigan appraisal, have been made with
a freedom from opposition by railway companies due to the educational
effect of this pioneer work. Particularly is this true of the recently
completed appraisal, by the Board of Railroad Commissioners of South
Dakota, of the physical property of the railways in that State, of which
work the writer was the Engineer in charge. No opposition was met; in
fact, some of the railway companies had established regular departments
for furnishing inventories and appraisals, had completed the necessary
field work in South Dakota before the inventory had been requested by
the State, and were able to furnish a very complete appraisal in a short
time after the request for it was made.

This appraisal was made in compliance with an act of the Legislature of
1907, which required the Board of Railroad Commissioners to ascertain
the true cash value of all the property of every railroad company in
South Dakota used in the operation and maintenance of their respective
roads. No attention was paid to the purpose of the appraisal, but one of
the first uses made of the information thus secured was in the
litigation following the passage of an act by the Legislature of 1909,
prescribing a maximum passenger fare of 2 cents per mile on all
railroads operating within the State. In connection with a rate case of
this kind, some questions have been raised regarding proper bases for
land values, the use of an item for adaptation and solidification as an
element of physical value, the value of the intangible assets, etc.

The lands of all railway companies were appraised at a cost to reproduce
or re-purchase at the time of appraisal, regardless of the original cost
of the property. The sales method was used for determining the market
value of adjoining property. There has been a very large land movement
in South Dakota in the last five years, and as most of the country is
prairie, with similar soil over large areas, it was not difficult to
determine the average market value of the land for farm purposes, at the
date of the appraisal, and the gradual trend of values for five years
previous to that date. An average multiple of 250% was used to arrive at
the cost of reproducing or purchasing the right of way. This multiple
was based on investigations made of recent right-of-way purchases, and
inasmuch as there are no large terminals in South Dakota, the same
average multiple was used throughout the State for both town and farm
property, investigation showing that town property could be secured for
slightly less and farm property for slightly more than the average
multiple used.

In each supplemental appraisal the land values will be corrected to
correspond to the changes in surrounding values, as the railway company
is entitled to any increase, due to natural causes, based on the cost to
reproduce at the time of appraisal. This is a well-established theory,
as shown by Mr. Riggs.

No allowance was made for the item commonly known as "adaptation and
solidification," except in the item of contingencies and in the
consideration of the present value of the ballast. In some recent
appraisals, large sums, based on a percentage of the cost of grading,
have been allowed for this item. While there is no question that large
sums of money are expended in maintaining a safe track on a new bank,
and that this expense gradually diminishes as the roadbed becomes solid,
due to the pounding of the trains and the action of the elements, this
expense is, and properly so, charged to maintenance, and is paid for out
of the operating revenues. Now, in the trial of a rate case, exhibits
showing the operating expenses, including maintenance charges, are
introduced, and to include this same item in the appraisal of the
physical property leads to a duplication, for if the passenger or
shipper pays for this maintenance charge, it should not be counted as an
item of physical value as a basis for determining what is a reasonable
rate.

The case is similar to that of a locomotive: When new, it is kept in the
vicinity of the shops, because trouble from lack of proper adjustment
and weak parts is likely to develop, and the maintenance charges may be
much higher than a few months later when the machine has "found itself"
and, as an operating machine, is more efficient than when new. However,
no one will insist that it has an added physical value in dollars and
cents, or that the excess cost of repairs and maintenance during its
early life should be added to its cost of reproduction now; in fact, it
is a second-hand machine, and the maintenance charges must be paid for
out of its use.

Generally, when a roadbed is turned over to the operating department by
the construction department, it is in good line and surface, and if an
appraisal were made at that time its condition would be 100%; but as
soon as it is placed under traffic, it begins to depreciate, as shown by
the fact that it requires constant attention to keep it up. If the
roadbed is cross-sectioned at each station and actual quantities
calculated from cross-section notes, there would be no depreciation, but
if the grading quantities are calculated from profiles of the line, as
constructed some time previously, and for a standard width of sub-grade,
with a percentage added for shrinkage, and allowance made where banks
have been widened, etc., it will probably be found to exceed the actual
measured quantities, because the action of the elements in washing the
slopes, the wearing of the shoulders of the embankment due to foot
traffic, etc., will show some depreciation in quantities. It is common
practice to carry the item for grading over to the present-value column
at 100%, or, with no depreciation. This practice, together with the
present condition of the ballast due to maintenance, and that part of
contingencies which covers washing of slopes, filling of ditches, sink
holes, etc., certainly takes care of all adaptation and solidification
which should enter into a valuation of physical property.

No appraisal was made of the intangible assets. A great many arguments
have been advanced for and against such an appraisal, and in South
Dakota it was held that the earning ability of any corporation due to
its franchise, strategic location, efficient organization, going-concern
value, etc., while perhaps an element of value to be considered in a
transfer of the property or if assessed on an income basis, should not
enter into a valuation which would be used for determining a just and
reasonable return on the investment, because the greater the earning
power the greater would be the return, and that this condition would
produce a never-ending increase in returns; whereas, when the returns
reach a point at which they will not only pay a fair dividend on the
investment, but take care of any depreciation in the physical condition
of the property and make all needed improvements in roadbed, buildings,
and equipment, demanded by the traveling public, shippers, increased
traffic, or natural causes, they should be kept to that point. There are
several hundred miles of railway in South Dakota which have been built
out of the surplus earnings of the parent corporation—in other words,
with money supplied by the traveling and shipping public—but which are
owned by the railways and on which they may earn another surplus for
constructing more extensions, etc., etc.

The original South Dakota appraisal, as of June 30th, 1908, on forms
similar to those used in Minnesota, has been supplemented by yearly
appraisals corrected for all additions and deductions made during the
fiscal year. For this purpose a new set of forms[29] was prepared, with
the various items classed in accordance with the "Classification of
Expenditures for Road and Equipment," as prescribed by the Interstate
Commerce Commission, and arranged so as to facilitate showing the yearly
changes.

R. A. THOMPSON, ASSOC. M. AM. SOC. C. E.[30] (by letter).—This paper is
considered by the writer to be the most complete treatise ever written
on the valuation of public service corporation property, and the author
deserves the sincere thanks of the entire Engineering Profession and all
others interested in this most important question. Its presentation is
most timely, in view of the agitation, particularly on the subject of
railroad valuation, which is now engaging the attention of Congress and
the law-making bodies of the several States, as it contains much
valuable information relative to decisions of Courts, in addition to
clear and concise expositions of the methods in vogue for the
appraisement of corporate property, etc.

It is a fact—rapidly coming to be recognized by legislative and judicial
bodies—that the prescription and regulation of tolls, charges, and
assessments against public corporations cannot be made systematic and
intelligent unless there is provided some estimate of the value of the
property involved, based on the cost of its replacement or reproduction.
Particularly is this true of railroads; and such regulation of the
affairs of these corporations as has heretofore been essayed by State
and National commissions, has generally been on illogical bases,
unsatisfactory alike to the proponents and the companies. Results have
been had, it is true, after a fashion, but there have been endless
disputes and litigation, with the prime questions involved no nearer
solution than before. One has but to contemplate the varied and often
antagonistic legislation promulgated by the several States, relating to
corporation management, and the many rulings and decisions of the
different courts and commissions on the subject of regulation,
assessment, and adjudication of corporate rates, revenues, taxes, and
tolls, to become convinced of the complicated and tangled condition of
the situation, and to realize the necessity for the early establishment
of some logical basis on which to establish the fabric of corporate
control.

While it is not maintained that an appraisement of the physical property
of public service corporations will be the panacea for all such ills,
the writer firmly believes with the author that such appraisal, as a
beginning, is absolutely necessary, and when effected on some fair and
reasonable basis, will contribute largely to the successful solution of
many of these intricate problems.

With the estimate of the physical value of a property before it—which
represents money actually invested, together with such accruals to costs
as it may be determined that the owner is reasonably entitled to have
considered—any Court, tribunal, or commission is in a better position to
mete out impartial justice, whether it be the regulation of a rate, the
assessment of a tax, or the imposition of a fine.

Although the author's experience in valuing corporate property has been
principally in connection with the Michigan appraisal of railroads, and
to him is largely due the credit for devising methods for, and carrying
forward to successful completion, this thorough and most excellent work,
it is refreshing to note his inclination to give credit to the work of
others along the same line in other States, which, it is to be
regretted, has not always been the case with writers on this subject.
There is no doubt that the work of the Michigan and Wisconsin Boards of
Appraisal—conducted under the advice and direction of some of the most
eminent and talented engineers and economists in the United States, and
practically without regard to expense—is the most complete and perfect
of its kind heretofore attempted; yet there are many features in regard
to the organization and execution of its details about which there may
be an honest difference of opinion, as viewed by those who have been
similarly employed.

It is but natural—as suggested by the author—to find the "individual"
character of the appraiser (which has been moulded by his environment,
training, and former service) reflected in his opinion, and this would
be most probable in the organization for, and carrying on the work of,
appraising a railroad property, which involves consideration of
practically every phase of engineering and economics. The judgment of
any man is essentially warped along the lines of his experience, and he
is necessarily biased and prejudiced in favor of or against certain
practice. As a consequence, therefore, it is not reasonable to suppose
that any one man, or set of men, can formulate a system for valuing
corporate property which will be perfect in all its details, and be free
from objection and criticism.

The writer was employed for a number of years as Engineer for the
Railroad Commission of Texas, and had charge of the valuation of
railroad property under the Railroad Stock and Bond Law of that State. A
paper on the methods used by this Commission was prepared by him and
published by the Society.[31] This Stock and Bond Law was enacted in
1893, and the railroads then existing were valued in 1894 and 1895. The
average value of 8,860 miles was $15,844 per mile. This valuation was
made by Charles Corner, M. Am. Soc. C. E., now Resident Engineer of the
Rhodesia Railways, South Africa, and Mr. H. J. Simmons, now General
Manager of the El Paso and Southwestern Railway System. The actual cost
of this work is not available, but is estimated at about $2 per mile.
The engineers making the appraisal secured maps, profiles, and all
available information from the offices of the railroad companies,
including all the construction records and estimates of quantities which
were preserved. Appraisal was made only after one of the engineers had
made a personal examination on the ground, accompanied by assistants to
aid in measuring structures and estimating quantities.

All valuations made since 1895 have been of new railroads making
application for issuance of securities, and in all cases the deeds for
right of way and depot grounds, the contracts for construction, the
actual quantities of construction of all kinds, the plans and
specifications for all structures and construction, and all other
information which the engineer desired, were submitted by the railroad
companies to enable an accurate appraisal of the value of the property
to be made. It is not possible for valuations of this character to be
made under more favorable circumstances. Up to October, 1909, more than
3,500 additional miles had been valued, and in all cases the estimates
limited the securities which the companies might issue.

Writers on railroad valuation have generally been inclined to discredit
the work of the Texas Railroad Commission and the system of appraisal
used by it. One writer, of more or less prominence, has referred to it
as the "cheap" method. While it may be true that other appraisals have
been more expensive, it is a fact that those of the Texas Commission
have served their purpose well, and the railroads, as a rule, have made
little complaint. As a matter of fact, it is highly probable that the
valuations of railroad property made by the Texas Commission have been
of greater utility, as far as the public is concerned, than those of all
other States combined, and, at the same time, no injustice has been done
the railroads.

It appears that those who have interested themselves in investigating
the Texas method of railroad valuation—including the author—have failed
to construe the real meaning and intention of the Stock and Bond Law.
Apparently, it was passed for the purpose of limiting railroad
indebtedness—and is referred to by Mr. Riggs as serving only this
purpose—but while its effect has been to accomplish this most
successfully, its enactment carried with it a deeper significance.

This law was passed at the same time as the General Railroad Commission
Act of the State, which gave to this Board absolute control over all
freight rates and tariffs, and also other powers not possessed at that
time by any other State commission. The decisions of the highest Courts
at that time laid stress on the right of carriers to maintain rates
which would afford a reasonable return on stocks and bonds outstanding.
Hence, to delegate the regulation of rates to any tribunal by any law
which did not carry with it also the right to supervise and restrict
mortgage indebtedness to some reasonable extent, appealed to the
legislators as being essentially ineffective. The effect of the law has
been to reduce steadily the average outstanding stocks and bonds of the
railroad companies of the State from an average of $40,802 per mile in
1894 to $31,910 in 1909—and this, too, in the face of a recognized
increase in the physical value of the properties—thus depriving the
railroads of one of their most potent weapons of offense when contending
against the Commission's orders. It is a matter of common knowledge that
the indebtedness per mile of railroads of other States has increased
greatly during this period. It is also a fact that the railroads of
Texas have, except in rare instances, contended that injustice has been
done them in the enforcement of this law, and the market value of their
stocks and bonds has steadily risen. Also their physical condition is on
a par with that of railroads in other Southern and Western States, and
their incomes from operation are as substantial. The practice of
"watering" their securities has been effectually stopped, as regards
local issuance, and any interest which might have accrued on such
securities has been saved to the public.

It has been contended that the Texas valuations of 1894-95 were too low,
and did not, even at that time, represent the fair value of the
properties. This is perhaps true to a certain extent, but it must be
remembered that the costs of materials and construction then were less
than at any time before or since; and, viewed from the present-day
standpoint, they seem to have been inadequate. It must also be
considered that real estate values throughout the entire State were very
low, compared with present values and with those of lands in other
States. Although the writer admits that the margin was very narrow,
still he is of the opinion that the valuations as made represented
closely the cost of reproduction of the physical properties at the time.

The valuations of 1894-95 stand to-day on the Commission's records as
"the value of the property," except in cases where there has been
application and necessity for re-valuation. The machinery of the law did
not provide that these appraisals should be kept "up to date." The
mortgages on these railroads are still outstanding, and there has been
no call for another appraisal, except in a few instances. The Commission
has decided that in its opinion the "present value" of any of the
railroads already appraised is represented by the original valuation
plus the value of all permanent improvements and betterments added. This
principle has been carried out with those railroads which have applied
for re-valuation for any purpose, and the Commission has admitted the
same in testimony which it has given before the Courts.

Since the appraisals which the Texas Commission makes are primarily for
the purpose of limiting indebtedness, and the carriers are entitled to
have these at least equal the cost of their property—the investment with
certain additions to cover promoters' profits—no consideration can be
given to depreciation of structures and equipment, although the
application for valuation and process of issuing of securities may be
had several years after completion. The writer holds that there is
strong argument in favor of not taking into account "depreciation," and
of estimating the value of the property as being entirely "new,"
whatever purpose the valuation is proposed to serve. This is apparent,
as already stated, when the valuation is to serve as a basis for
limiting the issue of stock and bonds. Is there any logical reason why a
valuation for this purpose should not also serve—as far as it
pertains—as a basis for taxation or for regulating freight rates? As far
as the State is concerned—and to be consistent—should not "one"
valuation serve all purposes?

Suppose that a State should create a board clothed with powers of rate
regulation, taxation, and authority to restrict indebtedness, and also
prescribe that it should appraise the value of the property of the
railroads, and use that appraisal as the basis for its acts. Would it be
logical for that board to make and apply one system of valuation for one
purpose and another system for another purpose? Manifestly, it would
have declared that a valuation was a "valuation" for all purposes, at
least as far as the physical property was concerned; and, when devising
a method for making its appraisals, it should incorporate therein all
the elements of value which might apply logically to either purpose. The
writer believes that "depreciation" of roadbed and structures would have
no place in such an appraisal, on the one hand, nor its negative, but
fully as intangible and difficult of concrete estimate, "adaptation and
solidification of roadbed," on the other.

It should not be understood that the writer maintains that taxation
boards should not go beyond the valuation of physical property to arrive
at a final basis for assessment. There are certain intangible elements
which should be taken into consideration when taxing property, chief of
which is the net income. It is only as far as physical valuations apply
in either case that he considers that there should be uniformity.

He does not approve at all of incorporating in an estimate of the
physical value of a railroad property such an element as "adaptation and
solidification of roadbed," which is credited with so much importance in
the Minnesota valuation. In the first place, such an element is
incapable of being measured in tangible terms and reduced to a
dollars-and-cents basis; second, it cannot be reproduced in the sense
that other property is reproduced, and its value does not appear in the
capital account of the railroad; and third, it results from the action
of the seasons on the one hand, and the working over of the roadbed by
the maintenance forces on the other, the cost of which appears in
operating expenses. One is constrained to believe that the engineer who
insists on incorporating such an element in an appraisal of the physical
value of a railroad is hard put to find material with which to swell his
estimate. When noting the large difference in value per mile of the
railroads of Minnesota, as compared with those of Michigan and
Wisconsin—adjoining States—it would appear that undue prominence had
been given to this and similar factors.

The writer's experience as appraising engineer for more than 10 years
with the Texas Railroad Commission, and for the past 2 years as a
construction engineer—having built about 160 miles of railroad in
Oklahoma and Texas—confirms his belief that, in the absence of actual
figures of cost, right of way and other railroad real estate should be
appraised at but little in excess of the market value of abutting
property. The practice of the Texas Commission has been to add from 25
to 50 per cent. The conditions under which railroads were built in
Michigan, Wisconsin, Iowa, and Minnesota cannot have been radically
different from those in the Southern and Western States. In Texas it has
been a rare instance when a railroad has had to purchase all of its
right of way. Also, contiguous lands have greatly increased in value
since the advent of the railroads. It would appear highly illogical to
advocate that these increased values should be multiplied by 3—or even
1½—and used as a basis for taxing the railroads on the one hand, or
taxing the public on the other, by permitting indebtedness to be issued
against it, the interest on which the latter must pay. The railroad
recently constructed by the writer traversed fertile and thickly
populated areas, already quite well served with transportation
facilities. Only a small fraction of the necessary real estate was
purchased by the railroad company, and only in a few cases of such
purchase did it pay largely in excess of the market value of the
land—and these were where the road interfered with houses and other farm
improvements. In cities and towns, land was acquired at practically its
fair market value. For rural property, the ratios used by Professor
Taylor in the Wisconsin appraisal appear to be quite fair, but in cities
they are too high—especially for the Southwest. The Minnesota ratios
appear to be unreasonably high.

Any appraisal of the physical value of railroads—in the absence of
figures as to their actual cost—is necessarily only approximate, and is
correct only within certain limits. Especially with regard to the old
roads, where original cost data cannot be had, the values applied to
property and construction must be largely speculative. It is impossible
to build two railroads in the same territory, on the same
specifications, for the same amount; yet, on the basis of cost of
reproduction, an appraisal board must apply the same value to each.

The writer believes that unless there is more uniformity as to methods
of valuing corporation property, as between the States, all valuations
will be more or less discredited, as they should be, by the Courts. It
is to be hoped that this paper will be generally discussed by the
Profession, and will lead to the adoption of more uniform methods.

CHARLES H. LEDLIE, M. AM. SOC. C. E. (by letter).—The following is
suggested as a method of procedure for determining the fair and
equitable value of a property:

1st.—Examine carefully the statutes governing corporations of the class
under examination.

2d.—Form an opinion as to whether or not the locality can support such a
property, by inquiry regarding the different businesses carried on, bank
clearings, railroad facilities, what the surrounding country produces,
etc.

3d.—Find from the archives of the company a general description of the
property, from its conception to the date of appraisement.

4th.—By close examination of the minute books, directors and executive
committees, there can be ascertained all the details of organization,
issuing of stock, bonds, and other forms of indebtedness, contracts for
equipment, supplies used in the construction, etc.

5th.—Obtain from the general manager or the superintendents an
explanation of the details of operating and maintaining the property,
including the different classes of service, rates, etc.

6th.—Go over the property, examine it carefully, and talk to any and all
employees from whom it is thought that any information can be gained.

The foregoing will give a general knowledge of the property under
examination, and will enable one to begin the real work. The examiner's
assistants must be competent and experienced men.

7th.—Examine all the vouchers, from the beginning of the company down to
the date it began operation; classify their contents under the
respective heads for the different classes of material used in the
construction, for example, pipe, engines, cable, etc.; then prepare
blank tables for each heading, having columns for size, quantity,
prices, and total; and abstract each voucher. Do the same with the
vouchers for labor, general office salaries, general expenses, interest,
taxes, legal, etc. This, when completed, will give the detailed cost, as
shown by the vouchers.

Next check the vouchers back through the books, and draw up a statement,
which will show the total book cost and, no doubt, will differ from the
voucher total. It is likely that many items will be found for which no
vouchers exist, a list of these is made and if the officers cannot give
a satisfactory explanation of any of them they are omitted. The total of
what remains is added to the voucher total and represents the cash
expended for the benefit of the original property, as shown by the books
and vouchers.

8th.—Take all the remaining vouchers of the company (it is supposed that
the examiner has already been informed by the officers, and by his
inspection of the records, of the extensions and betterments which have
been made), separate the vouchers for materials, labor, etc., from those
on operating, etc. Next classify them by years, and then proceed as set
forth in 7th, and add the different yearly amounts to the total of the
original plant. This will show the amount of cash expended (according to
the vouchers and books) on the property, for its physical plant,
organization, etc., from its beginning to the date of appraisement.

Every examining engineer should know (or can obtain) the prices for
materials, labor, etc., during these periods of original construction,
extension, etc. If the prices are the same, or about the same, as at the
time of purchase, the above total stands as the cash expended; if there
should be much difference—and sometimes there is—take the detail of the
materials as found in the vouchers, affix the proper prices, and do the
same with labor, etc., and this total will be what, in the judgment of
the examining engineer, the plant should have cost. A mean between this
latter total and that in 8th is taken, in order to be fair and
equitable. This amount, in place of that given by 8th, is then used as
the cash expended on the physical property. If no difference is found in
prices, then the total cash as shown by 8th is considered as the total
to be hereafter used.

9th.—A careful detailed inventory is now made of the physical property
as it exists at the date of examination. This often requires some
excavation in order to determine sizes, quantities, and conditions. The
prices used to ascertain the total of the inventory are made by taking
the average of all those paid for materials, labor, etc., of the same
class, during each year of the property's existence. (The writer
considers it manifestly unfair to use the current prices in this
calculation, for they may be very much below or above those actually
paid, and in either event an injustice would be done, whereas, if the
average prices are used, the examiner cannot be accused of unfairness.)
To this total cost, as shown by the inventory, 5% is added for
engineering and superintendence; 3% for general office salaries, 2% for
general expenses, 1½% for legal and organization expenses, and from 5 to
10% for contingencies. (This latter percentage depends on the judgment
of the examiner, who, after studying the local conditions carefully, can
determine from his own experience what difficulties have been met in the
construction. It is not believed that a hard-and-fast rule can, in
equity, be laid down for this latter percentage.) This total represents
the value of the tangible property, based on the inventory. The
inventory cost and that set forth in 8th (or possibly as modified by
prices current when the plant was built) are averaged, and this result,
plus the supplies on hand, is the fair and equitable amount of cash
which has been expended on the property. This is used in finding the
"Fair and Equitable Value."

10th.—Next take the inventory of the plant set forth in 9th, affix the
current prices at the date of appraisal, and to this total add the same
percentages for engineering, etc., as set forth in 9th. This gives the
cost of reproducing the property, with the same classes of materials,
size and make of engines, etc., as is now in it, to which total add the
cost of materials on hand for the total of cash required to be expended
at current prices to reproduce the plant as it exists.

It is often found that this latter total is greater than that set forth
in 8th, for the reason that the engines, etc., may be of types which are
now abandoned or obsolete, and the manufacturing company, having to make
patterns, etc., would charge more for them than the original price at
the date of purchase.

This reproduction cost at current prices is only to give the examiner
information he may or may not require later in the investigation to
determine some point that might arise in ascertaining the "Fair and
Equitable Value."

The writer considers it unfair to call the reproduction value the cost
of a modern plant which will give the same service and output, because
one is not dealing with the value of a modern plant, but with that of an
existing property.

11th.—From this cost (using the detailed inventory to find the extent of
property still in existence), calculate the amount of depreciation for
each section of the plant, this being based on the present condition of
the different parts and what their future life may be. The total
depreciation is then deducted from the result found in 9th, and this
remainder is used as the "Fair and Equitable Value" of the tangible
property at the date of appraisal.

The intangible value (called by many names) must now be determined. It
consists of rights, from the State, county, city, or any one or more
combined, which the company must have in order to carry on its business.
These rights in nearly all States are taxable, and taxes are collected
on them. The Supreme Court of the United States has in the past held
that they are property, notwithstanding what State "Courts and
Commissions" have set forth on this subject, and in the writer's
examinations they will be treated as property until the Supreme Court of
the United States decides otherwise.

There are in general three classes of franchises, namely:

  I.—Those granted by the State to conduct a business, where no county
  or city franchise is necessary, only requiring the company to obey
  the ordinances for excavation, etc. The charter of the Laclede Gas
  Company, of St. Louis, Mo., is an example of this class.

  II.—Those granted by the State to carry on a business subject to a
  county or city franchise.

  III.—Those granted by a city to an individual, singular or plural,
  or a company, to do business within its limits or a section thereof.

In each case the right may be a contract, for it may require a payment
for the franchise granted, either in a lump sum or in yearly
installments, or in the form of services rendered, such as for light,
etc., free service of some kind, or a combination of any two or all of
them.

The manner of determining the value of "Intangible Property" is as
follows:

(_a_) The gross collected earnings are audited for each year during the
period the company has carried on its business. The same is done for all
vouchers, _i. e._, operating, maintenance, salaries, legal, general
expenses, interest, insurance, and taxes, and includes every item
disbursed. Whatever this latter amounts to, is deducted from each year's
gross earnings as already found, and the result is the true net earnings
or deficit for each year.

(_b_) The true net earnings are added together and the mean taken; if,
in the period from the beginning to the date of appraisement, any
deficits are found, these are deducted from the total of the
plus-earnings, the result is divided by the total number of years, and
this gives the true average net earnings. This is then capitalized at
the legal rate of interest of the State in which the property is
located. The result is used as the value of the "Intangible Property."

12th.—The amount given by 11th is added to the result obtained by 9th,
and this total is the "Tangible and Intangible Value" of the property,
and the "Fair and Equitable Value" of the property at date of
appraisement.

If it is found that grave mistakes in design or judgment have been made
by not employing competent people, and money has been wasted in
construction, the plant is re-designed, for the original plant, and its
cost estimated. The same is done for each extension, using the prices
paid at the different periods, and this result is used in place of 9th,
as the cash cost at the date of appraisement.

In determining the intangible value, if it is found that the management
has been careless in order to make large net earnings, at the expense of
the physical property, estimates are made of what the property can be
operated and cared for (here the practical knowledge of operation, etc.,
is necessary), and these results, plus taxes, etc., are subtracted from
each year's collected earnings. The mean or average of these results is
considered as the true net earnings, which are capitalized and added as
set forth in 12th.

The writer holds that consumers or purchasers should not pay for
avoidable error or ignorance, and the amount of the securities issued on
the property is not considered as entering into the matter of "Fair and
Equitable Value"; when they do, the method is somewhat different.

The mean true net earnings are used in determining the intangible value,
because franchises have average values, as earnings and expenses
fluctuate in corporations, and, when intangible values are to be
considered, they must not be based on the last year's net earnings, for
if they are, they may give a very large result in one year and a small
one in the next; therefore, to be fair, the mean true net earnings
should be the basis of the intangible value. If the company has been
over-capitalized, and no sinking fund or depreciation has been set
aside, it is the present owner's misfortune. If the company calls
something a betterment, and it is found that the betterment has only
replaced something, it is not allowed, but is classed as maintenance; on
the other hand, if the replacement is larger, and capable of rendering
greater results, such as a larger engine, pipe, cable, etc., the cost,
less the cost of what it replaces, is allowed as a betterment, and if
the old part is sold the proceeds are deducted from the betterment
charge, for if it is credited to maintenance, it increases the true net
earnings. This is often done, but is not the correct way to treat the
matter, for it increases the intangible value.

13th.—When new rates are to be established for a period of future years,
the manner of determining the "Fair and Equitable Value" is the same as
has been heretofore set forth. The new rates are based on averages, and
the first step necessary is to ascertain what gross revenue the company
must have in order to pay all classes of operating expenses,
maintenance, depreciation, taxes, interest on the "Fair and Equitable
Value" of the property, and a reasonable profit.

To obtain this amount, the procedure is as follows:

(_a_) Find the percentage of increase of the operating expenses for each
year over the prior one, for a period of generally five years preceding
the date of examination (a longer time may be taken if, in the opinion
of the examiner, it is necessary), and then ascertain the average annual
increase of the percentages. The result thus obtained is taken as the
increase percentage for the operating expenses for the new period of
time.

(_b_) In order to determine what the operating expenses will average
during the time the new contract is to run, take the amount of the last
year's operating expenses as a basis and add to it the percentage found
by (_a_). This total is the operating cost for the first year of the new
contract. The amount for the second year is found by adding to the cost
of the first year the percentage found by (_a_), and so on for each year
of the new period. These results are added together and their average is
then used as the mean cost of operation for each year during the full
period.

(_c_) The same method is followed for maintenance and taxes, in order to
find the average maintenance and taxes for the new contract's life.

(_d_) Depreciation on the plant begins from the date of appraisement,
and is estimated on the physical property by using for each section the
percentages used in determining the "Fair and Equitable Value."

(_e_) Interest at the rate of 6% is allowed on the "Fair and Equitable
Value," and 6% profit.

The question of extensions and betterments to the original plant must
now be taken into consideration.

(_f_) The amount of the betterments and extensions have already been
found for each year of the property's existence, and an average of them
is taken as the amount the company will spend on extensions, etc.,
during each year of the new contract. On this sum 6% interest and 6%
profit is allowed, and, for depreciation, the same percentage as used in
the original plant.

It will be seen that all the expenses of operation, etc., of these
extensions have been allowed in (_b_), where the increase has been added
for each year for these extensions and betterments, as they are assumed
to increase the cost of operation, etc.

(_g_) The amounts found by (_b_), (_c_), (_d_), (_e_), and (_f_) are now
added together, and to the sum 5% is added for interest, taxes,
operation, etc., which may be caused by the necessary increase in
capital expenditures, for a greater growth than could be foreseen at the
time the new rates were established, for losses, etc. This total is used
as the basis for establishing the new schedule of rates.

14th.—The next step is to determine what part of the amount found by
(_g_) must be paid by the different classes of consumers.

(I) First ascertain the yearly percentage of increase in the output of
the plant for the five years before the new contract is to go into
effect (or longer if, in the opinion of the examiner, it is necessary);
then find the average increase of percentage during the before-mentioned
five years. Add to the last year's output the percentage found above,
this result representing the output for the first year of the new
contract. Continue this operation for each year in the same way as the
operating expenses were found in 13th (_b_). The average of these
results will be the average estimated output during the life of the new
contract.

(II) Next find the amount of the total output each class of consumers
used during each of the five years, and then find the average yearly use
during this period. Put these into percentages of the amount of the
average output for the five years, and then use the percentages as the
amount each class of consumer will use of the average output found in
(I) during the period of the new contract.

This gives the average amount of the output each class of consumers will
use during the average life of the new contract.

(III) Next find the average percentage of the total revenue each class
of customers paid during the five years. Take these percentages as the
average percentage each class will pay of the average revenue necessary
during the time the new contract is to run.

(IV) Having found the average amount of the required revenue that each
class must pay, and the average amount of the total output each class
will use, dividing the former by the latter for each case will give the
rate each class is to pay during the new period.

It is often found in plants that large extensions have been made to
supply a special contract for a long period of time, and these
extensions are set aside for the exclusive use of this contract. In such
cases exclude the cost, etc., of this part of the plant from the "Fair
and Equitable Value" in the matter of adjustment of rates.

In determining the operating expenses, etc., in such a case, find the
percentage of the total output this special output amounts to; then,
using this percentage, find what part of the total power-house expenses
of all kinds are caused by this special contract. This result is
deducted from the total power-house expense, and the remainder is the
power-house cost of furnishing the consumers with their share of the
total output. If it is found that special employees are required to
deliver this special output, their cost is deducted, and the same for
the maintenance material used. Taxes and interest on the cost of this
special equipment are found by ascertaining the percentage this cost of
the special equipment bears to the whole plant.

The above results are deducted from the total operating, maintenance,
taxes, and interest disbursements, and "Fair and Equitable Value," and
the remainders are used as the cost of the last year's expenses for
furnishing the consumers with their share of the product and the "Fair
and Equitable Value."

The same method is used in determining the revenue paid by the consumer.

The above result, _i. e._, cost of operating, etc., is then used as the
basis for estimating the expenses for the period of the new contract, as
heretofore set forth.

If the charter comes under Class II or III, the city no doubt has
incorporated a clause for the adjustment of rates, and the method used
above is followed.

15th.—Where the franchise has expired and is going to be renewed, the
same method holds.

16th.—Where the franchise has expired and the city has paid a certain
amount for service, and is to buy the property, the same method is used,
except in determining the intangible value. For determining the latter,
the amount the city pays for service is deducted from the gross
collected revenue. From expenses is deducted the same percentage as the
amount of the city's payment is of the gross revenue; a net revenue is
found from this, the taxes paid are deducted, the remainder is
capitalized as heretofore set forth, and is the intangible value.
Whatever the latter amounts to is added to (or deducted from, in case of
deficit) the "Fair and Equitable Physical Value," and the result is the
price the city should pay.

Cities generally claim, and so do their "experts," that they should only
pay junk value, or the cost of a modern plant to give the same results.
This is eminently unfair, because the city buys a property which is in
full operation and it receives the full revenue, in addition to
obtaining service for itself at a less cost than it heretofore paid. The
difference between the cost to the city of furnishing the service
itself, and what it paid the company, is profit, but there is a charge
against this of loss in taxes. These two latter items, namely, profit
and taxes, generally balance each other, although the writer has known
of cases where the city was the gainer.

There are many points which can be advanced to establish the fairness of
the methods outlined herein, but they would take some time to explain,
and therefore the writer has only set out the plan he follows in his
examinations, hoping that it may be of some aid in establishing a
uniform method which will be upheld by the Courts.

It may be stated that recently this method was used in an examination,
going back thirty-five years, and the results were accepted by both
sides without question.

The writer has refused a number of examinations when told in advance
what result must be found, as well as in "expert" work, where the
examiner is expected to help make a case, regardless of his honest
judgment, for, by accepting such work, the engineer hurts his reputation
and lays the Profession open to such remarks as Judge Lacombe recently
made in the case of the Peoria Water-Works Company _vs._ Central Railway
Company.

The writer is fast coming to the conclusion that a great deal of legal
trouble is caused by the decisions of commissions, the members of which
have not had experience in these matters. If a commission consisted of
an able lawyer, a financial man, and an engineer who has had a broad
operating experience, its decisions would carry weight, and the Courts
would not be burdened with so many appeals.

WILLIAM G. RAYMOND, M. AM. SOC. C. E. (by letter).—This is, perhaps, the
best paper on the valuation of public service property that has yet
appeared. The author's analysis is very clear, and his arguments are
convincing. Three points the writer would like to consider; two of them
briefly.

The item, "going value," even if it is determined on logical reasoning,
as suggested by Professor Mead, would seem to be a dangerous item, and
one which might result in absurdities when estimated by an unscrupulous,
ignorant person. Moreover, the term has been differently defined, and
there is no certainty as to just what it means. The writer sees no
reason for the existence of such a term, or of such a separate quantity
as this term is supposed to represent.

The term, "franchise value," or, "value of the franchise," is used to
represent the difference between the capitalized net earnings and the
value of the physical property. Of course, there is such a difference,
either positive or negative, but there seems to be some objection by the
Courts to calling this "franchise value." The writer, therefore, would
suggest that, since franchise value is a very elusive item, depending on
the life of the franchise, the attitude of the community toward the
corporation, the activity of competing corporations, and numerous
indeterminate items, the term, "business value," or, "going concern
value," be used instead of "franchise value." "Going concern value" is
not as good a term as "business value" or "value of the business,"
because it may be assumed to include both the value of the business and
the value of the property. "Value of the business" would presumably
include the value of the franchise, and perhaps would not always be
represented exactly by the difference between the capitalized net
earnings and the value of the physical property, but would be this
difference affected by some judgment percentage resulting from a
consideration of the probable continuance of the franchise.

Mr. Riggs has truly said that the value of the physical property must
not be made to depend on the purpose for which the valuation is made;
that, for the business for which it is used, the value of the physical
property is the same, regardless of the purpose for which a valuation is
desired; but valuations are made for different purposes, and, while
there is room for argument as to the proper valuation to be used for
capitalization, taxation, or sale, there are perfectly definite methods
suggested for valuing property for these purposes. The writer has never
seen a statement—that appealed to him as at all rational—of a proper
method of valuing property for rate-making. Indeed, the writer has
said[32] that "proper traffic rates have no relation to valuation except
that the minimum net income should be at least sufficient to pay
interest on the physical valuation." The writer is not absolutely
certain of the correctness of this position, for a study of the public
right to regulate a corporation which is performing a semi-public
function seems to indicate that the public has a right to say, not only
that rates shall be non-discriminatory, but also that they shall be
reasonable.

Now, the writer is familiar with three bases for the determination of
what constitutes reasonableness of rates. One, which applies to rates as
a whole, is this: That the net income should produce not more than a
reasonable interest rate on the actually invested capital. Another is
the rate that the traffic will bear, and the third is a rate that
represents what the service is worth to the purchaser. Of course, a
difficulty arises in determining reasonable rates on any one of these
three bases.

The only difficulty with the first one is in determining what is a
reasonable interest rate on invested capital, and, as far as the writer
has read, no Court has yet determined what this is, although some Courts
have held that 5% is a not unreasonable return, that 8% is a not
unreasonable return, and, if the writer's memory serves him right, that
even 15% is a not unreasonable return.

There is great difficulty in the determination of what the traffic will
bear. It is a matter of the exercise of judgment and of experiment, and
must be applied to a considerable extent to particular rates, for
particular commodities, for particular places.

The third basis would seem to be the most difficult to use, although it
is one which has recently been established in important Court decisions,
and is mentioned by Mr. Riggs. What is a monopoly-provided service worth
to the user or purchaser? Suppose that a gas company charges $1.60 per
1,000 cu. ft. for gas, and a very considerable part of the populace
living in the city served purchases gas at this price. Presumably the
purchasers pay what the service is worth to them, and what they are
willing to pay rather than suffer the inconvenience of tallow candles,
oil lamps, or to pay a high price for electric lights. Suppose that
through a period of five years, by a series of reductions voluntarily
made, the price of gas finally reaches $1.15 per 1,000 cu. ft. Is this
gas worth any less to the consumer at the end of the five-year period
than it was at the beginning? So far as the writer can see, it is, for
only one reason, namely, that it can be had for less; but this has been
a voluntary reduction on the part of the supply corporation, and who
shall say that the service is not worth less than $1.15 to the consumer,
or who shall say that it was not worth less than $1.60 at the beginning
of the period suggested? The figures here given represent an actual case
which has occurred during the last five years, within the writer's
knowledge. There seems to be a growing feeling among the people that
rates as a whole must be fixed so as to yield only a reasonable return
to the corporation, and, apparently only for want of the suggestion of a
better method, a reasonable return has been held to mean a reasonable
return on the capital invested. Believing that there may be some ground
for the claim that rates as a whole should be thus fixed, and that the
return should not be unreasonable, let us consider how what is
reasonable may be determined.

In the first place, it appeals to the writer that the invested capital
is not the proper basis for estimating reasonable rates. If it shall be
finally established that a corporation is entitled to realize only a
reasonable interest rate on the capital invested, there will be no more
public service corporations organized; but, if the reasonableness of the
return may be based on the capital invested and the business done, there
will still be good inducement to capable men to engage in public service
business.

It would seem that the rate of return that is reasonable differs for the
capital invested and for the business done—that is to say, if the
capital invested is $1,000,000, an ordinary investment return of from 4
to 5% may be sufficient; and if the business done with this
million-dollar plant amounts to $10,000,000 a year, a reasonable return
may be 10% or even 15% of the whole.

Now, as has been suggested by Mr. Riggs, it is manifestly impossible to
capitalize the net earnings as a basis for determining reasonable rates,
because these net earnings are the result of certain rates already
established, the reasonableness of which may be in question; and if,
instead of speaking separately of interest rate on capital actually
invested and profit rate on business done, it is desired to obtain a
value on which to base reasonable rates, the following is suggested as a
method: Determine the physical value and the annual interest on this
physical value at an assumed reasonable rate, say 5%; determine the
annual expense of conducting the business, and assume a business man's
profit rate, say 15%, and find the profit that should be earned on the
business done. This, added to the total interest charge, should give the
net income, over and above operating expenses, that may be considered
reasonable, and this sum, capitalized at any given assumed reasonable
interest rate, would give a value which might with reason be used as a
basis for rate-making, rates being deemed to be reasonable as a whole
which furnish from year to year a simple reasonable interest rate on
this established value. Of course, there is no necessity for
establishing such a value, as the reasonableness of the rates will be
determined when it is learned that they produce not more than a fair
interest rate on the actual physical value of the property plus a fair
profit rate on the business done.

This method is not free from the objection that what is a reasonable
interest rate and what is a reasonable profit rate have never yet been
fixed, but it is much easier to fix these separately than to fix what is
a reasonable return on the capital actually invested or the physical
valuation of the property.

W. H. WILLIAMS, ESQ. (by letter).—Before entering upon the discussion of
the more essential elements of the problem presented by this paper, it
seems worth while to correct one or two misapprehensions under which Mr.
Riggs seems to labor, and to call attention to the rather extraordinary
temper in which he approaches the grave questions with which he deals.

Mr. Riggs' first serious misapprehension is that railway officers, as a
class, are, with substantial unanimity, opposed to any official
valuation of railway properties, and that this opposition was voiced
through the writer's discussion of Professor Henry C. Adams' paper in
favor of valuation, at the last annual (December, 1909) meeting of the
American Economic Association. Of course, on that occasion, the writer
spoke, as he now speaks, only for himself, but, more than that, he then
expressly disclaimed any such opposition, undertook to make suggestions
as to the manner in which a proper valuation could be obtained, and
directed his criticisms plainly at a proposal which contemplated, as he
then observed:

  "An incomplete and misleading valuation bearing the stamp and
  carrying the weight of governmental sanction, which can be of no
  practical advantage to the Government, the public, or the railways;
  but may easily injure the public and the railways by disturbing the
  confidence of the former and hampering the activities of the
  latter."

The writer then added:

  "It seems very clear that such a valuation as is proposed would be
  wholly useless to the Government for any practical purpose, because
  it would omit so many factors essential to any fair appraisement of
  the worth of the enterprises as going concerns."

Bearing in mind that the foregoing was addressed to the particular
proposal made by Professor Adams, that being the topic on which the
writer was invited to speak, a proposal expressly limited to the
ascertainment of cost of reproduction less depreciation (the equivalent
of cost of replacement with second-hand materials in a condition
equivalent to that of the materials in use and hereinafter referred to
as "cost of replacement") under the pseudonym of "physical value" (or
sometimes "inventory value"), it would seem as though Mr. Riggs should
sympathize with the writer's view, rather than with that of Professor
Adams. Certainly, Mr. Riggs is fully aware of the inadequacy of mere
cost of replacement to serve any useful purpose, for, after saying that:

  "No account may be taken of the purpose for which the resultant
  figure of value is to be used; and the result should not vary, no
  matter what the purpose may be."

He says, in another place:

  "* * * it is clear that the worth of the physical property, being
  the cost of reproduction less depreciation, is not necessarily the
  value of the property. * * *"

And, defining what he calls the "non-physical or intangible elements of
value," says:

  "These are those things which, added to or taken from the worth of
  the physical property, make up the value, and include whatever
  accrues to the property by reason of its operation, or by reason of
  grants, contract rights, competition, or location, which at the time
  of appraisal affect favorably or unfavorably the worth of the
  property."

The second misapprehension that is worthy of notice seems to have grown
out of a curious sensitiveness, on the part of Mr. Riggs, as to any
suggestion, other than his own, of criticism of any work undertaken or
theories advanced by Professor Adams. As to every reader, other than Mr.
Riggs, it is surely quite unnecessary to say that no attack has been
made upon Professor Adams by the writer at the New York meeting of the
American Economic Association or anywhere else. Certainly, it will be
conceded that some difficulty would attend an effort to respond to an
invitation to discuss before a scientific body a paper written by one of
its members without making any allusion to the author of the paper or to
his views or work, and those who have any knowledge of the history of
official railway valuations in the United States, and especially of the
proposal to undertake a Federal investigation of cost of replacement,
are fully aware that Professor Adams has been from the beginning, and
now is, the Hamlet of the drama, without whom it would become dull and
lifeless. Strangely enough, Mr. Riggs seems to wish to deny to Professor
Adams this prominence, for he says:

  "Professor Adams was associated with the Michigan appraisal, but had
  no connection whatever with the 'physical valuation,' to which such
  objection is taken, and his appointment was made after the work of
  physical valuation had been fully outlined and was well under way."

It is true that the scheme devised by Professor Adams, and adopted at
his suggestion by Governor Pingree, required the employment of civil
engineers for the preliminary work which necessarily had to precede the
final "valuation" by Professor Adams, but the bare statement of this
fact is utterly misleading. Professor Adams' own testimony in one of the
Michigan tax cases happily places his responsibility for the whole plan
entirely beyond controversy. He said:

  "In 1900 I was called upon by the Michigan State Tax Commission to
  determine whether railroads were paying a tax rate on their value
  equal to the rate on other property. With that problem in view, I
  formulated this inventory plan. * * *"[33]

Any discussion of the proposal for a National inquiry concerning cost of
replacement which omits to show that its most persistent advocate,
Professor Adams, has advocated and actually conducted or controlled
several successive "valuations," in Michigan, as Statistician to the
Interstate Commerce Commission, and as special employee of the Bureau of
the Census, made in accordance with other methods than those which he
now proposes to apply, is seriously inadequate; as seriously inadequate
as it would be to omit to state that, using what purported to be the
same method, Professor Adams, by changing the details of its application
and decreasing the rates of interest used in his computations, raised
his "valuation" of Michigan railways from $152,958,202 to $177,689,292
or 16.17%, each of the two calculations being presented to the public,
with assurances that it disclosed the actual taxable value, and there
being barely eighteen months between them. The writer is by no means
alone as an object of Mr. Riggs' dissatisfaction because of public
criticisms of Professor Adams' plan for estimating cost of replacement.
Thus, of a statement in which Professor Taylor, who conducted the
Wisconsin inquiry, questioned the validity of some of Professor Adams'
methods, he writes:

  "Undoubtedly this statement was made in good faith, and has gained
  currency by not having been corrected, but it is not the fact."

In another place, referring to a statement of comparative costs to the
respective States for valuation work, made by the Railroad Commission of
the State of Washington, he says:

  "It does not appear to be good taste either to criticize costs of
  work in other States, or compare the costs in Wisconsin and Michigan
  with the cost in Washington."

Referring to a paper by Charles Hansel, M. Am. Soc. C. E., who took part
in the Michigan valuation, Mr. Riggs says:

  "The one point to which special attention is drawn is Mr. Hansel's
  astonishing misconception of Professor Adams' plan of work. This
  misleading statement appears in the first paper and is reiterated in
  the second."

Again, of the report of the expert of the Washington Railroad
Commission, who had the temerity to declare that it found "little value"
either in Professor Adams' methods or his estimates of the cost of the
work, Mr. Riggs says:

  "Such sentences, and others which, by inference if not by name,
  reflect on work executed by men of high professional standing, are
  hardly in good taste, even if true, in a report to a railroad
  commission of another State."

Yet Mr. Riggs does not fail to criticize the method of "valuation,"
applied by Professor Adams in Michigan, in terms quite as definite as
any used by others.

Thus, he condemns the method used to estimate the value of the
non-physical elements appertaining to the Michigan railways, on the
grounds (first) that it made this value a mere derivative of the rates
existing, and (second) that it made no allowance for negative values
when cost of replacement exceeded real value, saying:

  "It will be seen that, in the case of a property in which the
  surplus earnings depend on excessive rates for service, it will fail
  as a method of determining a value for use as a basis of
  rate-making; and it fails, in the form in which it was used in 1900
  and 1902, to bring out those negative or subtractive elements which
  may be determined from the income accounts, in the case of
  properties which do not earn a fair return on the investment."

Of the published statistics of American railways, compiled in the office
of which Professor Adams is the responsible head, derived from annual
reports made in accordance with forms prescribed by the Interstate
Commerce Commission under his guidance, and containing items selected
from and depending on the uniform railway accounting system devised by
Professor Adams and imposed on the carriers by the Commission, Mr. Riggs
writes:

  "The published statistics are in such form that only the careful
  student of affairs can understand or analyze them, and but few of
  the public officials who receive them are able to read the reports
  of the properties and comprehend them."

Railway officers fall quite generally under Mr. Riggs' condemnation,
for, of them he says:

  "As a body * * * it is doubtful if any equal number of men, of equal
  intelligence, have as limited a knowledge of the fundamental truths
  of government, or knowledge so colored by bias. It is also doubtful
  whether any equal number of men have in their ranks so few who bear
  an active part in the duties and activities of citizenship, or who
  exercise large influence on their neighbors."

Such assertions as the foregoing need no comment; their intemperance is
their most effective refutation; yet a few recent examples may be cited:
Paul Morton resigned as Vice-President of the Atchison, Topeka and Santa
Fe to become Secretary of the Navy in Mr. Roosevelt's cabinet; Jacob M.
Dickinson, General Solicitor of the Illinois Central, became Mr. Taft's
Secretary of War; his successor with the Illinois Central, William S.
Kenyon, later became Special Assistant of the Attorney-General; Lloyd W.
Bowers, General Solicitor of the Chicago and Northwestern, was
Solicitor-General of the United States from early in Mr. Taft's
administration until his death a few months ago. Thus, within but four
or five years, the Federal Government took four of its highest officers
from the railway officers located in only one of the country's great
cities—Chicago.

Of a recent address by one of the ablest and most public-spirited of
railway officers, he says:

  "This address well expresses the spirit of the railway managers and
  employees toward all forms of investigation, and the complete lack
  of understanding, on the part of these managers, of the legal and
  moral relations which they bear to the communities which they
  serve."

Belonging to this so hateful class, and having also ventured to question
whether Professor Adams has said the last and most perfect word on the
subject of railway valuation, the writer is neither surprised nor
disheartened to find that he, also, has caused Mr. Riggs undisguised
dissatisfaction. It is a misfortune apparently inseparable from his
profession and his conception of his obligations to his employers and to
the public.

As has been already noted herein, the question is not whether railway
property shall be officially "valued," but rather (first) as to how the
"value" which is to be ascertained is properly to be defined, and
(second) how the determination of "value," as properly defined, can be
made most accurate.

The essential difference between the view advocated before the American
Economic Association by Professor Adams and that of the writer was, and
is, that the former now desires to exclude all elements of value which
are not physical and tangible, while the writer holds that, if it is
worth while to ascertain, on a general scale, at the cost of a
necessarily large expenditure of taxpayers' money, and as to a
particular date, so unstable a fact as railway value, the kind of value
the ascertainment of which could be of sufficient utility to warrant the
effort can be nothing less significant than the "fair value" which the
Courts have said is a proper element for consideration in fixing
reasonable rates of charge. The fundamental difference between these two
conceptions of value is admirably indicated by the following quotations,
both of which rest on the authority of the Interstate Commerce
Commission.


                              FAIR VALUE.

"The present value of a railroad property is necessarily very largely a
matter of opinion only; it depends upon a vast number of contingencies
and uncertainties, a road apparently of great value to-day may soon
become worthless by the opening of a competing line having superior
advantages or by the competitive struggles of other lines which operate
to reduce the income of all; the value of a railroad largely results
from the personal characteristics of its officials; the policy pursued
by directors for the conservative and economical or progressive and
daring, is a great factor in the determination of the current value of
the property; a railroad property is not necessarily worth what it would
cost to replace it and, on the other hand, it may be worth very much
more than that."[34]


                           REPLACEMENT COST.

"The bill in question makes use of the phrase 'fair value.' Unless there
is some legislative necessity, which we do not perceive, we question the
advisability of using this phrase.

"It would seem to us preferable to substitute a phrase which indicates
the fact that Congress desires an inventory valuation of railway
property. By inventory valuation is meant that the property of the
several railways shall be listed in detail, and that each kind or class
of property so listed shall have assigned to it a valuation to be
determined from the point of view of the contracting engineer, and not
from the point of view of a court or board of arbitration which, from
the nature of the case, cannot judge of what is 'fair value' except in
the light of some specific use to be made of the valuation."[35]

As has already been noted herein, and amply verified by quotations, Mr.
Riggs is fully aware that replacement cost and real value can rarely, if
ever, coincide, and therefore plainly agrees, as to that elementary and
essential point, with the writer and disagrees with Professor Adams, who
would ignore or destroy every non-physical element of value in the
property of all public service corporations. Mr. Riggs' recognition of
the inadequacy of mere replacement cost is shown also by the excellent
and convincing example which he cites[36] of competitive railway routes
between two Michigan cities which were built and are maintained and
operated under such conditions that the far more costly of the two,
which inferentially has correspondingly higher replacement cost, has
much lower earning capacity, both as to gross and net, and is therefore
actually worth much less than its less costly competitor. Mr. Riggs
explicitly favors full recognition of the non-physical elements in every
valuation; and, therefore, may be ranked as an opponent of any such
scheme of valuation as that advocated by Professor Adams before the
American Economic Association, or in the letter of the Chairman of the
Interstate Commerce Commission, hereinbefore quoted.

Mr. Riggs, however, believes that the determination of the cost of
replacement is an essential first step toward the ascertainment of real
value. He says:

  "The worth of the physical property is primarily that on which the
  value of the whole property rests."

The thought which the writer would place in opposition to the foregoing
is that: Physical property has no value which is not an expression of
its adaptation to economic needs. This is only another way of expressing
the inevitable economic law, from which there is no escape, either in
theory or in practice, that has been stated and sanctioned by the
Supreme Court of the United States, as follows:

  "But the value of property results from the use to which it is put,
  and varies with the profitableness of that use, present and
  prospective, actual and anticipated. There is no pecuniary value
  outside of that which results from such use."[37]

Mr. Riggs' own definition of value is not inconsistent with the
foregoing. He says:

  "The value of a property is its estimated worth at a given time,
  measured in money, taking into account all the elements which add to
  its usefulness or desirability as a business or profit-earning
  proposition."

The view of Mr. Riggs is that:

  "While ... the worth of the physical property, being the cost of
  reproduction less depreciation, is not necessarily the value of the
  property, ... the physical worth must bear some very definite
  relation to value...."

And he is, further:

  "Strongly of the conviction that this relation is such that 'value'
  cannot be ascertained without a determination of physical worth."

It is exceedingly difficult to comprehend just what Mr. Riggs means when
he describes the relation between real value (which he recognizes so
clearly as value in use) and cost of replacement as "very definite."
Certainly, he does not mean that it is a constant relation, or one which
can be ascertained until there has been independent determination of
both of the aggregates whose relation it expresses. In fact, the
emphasis which Mr. Riggs places on replacement cost has led him into the
grotesque fallacy of arguing that a correct estimate of real value is
only to be attained by ascertaining: (first) cost of replacement,
(second) real value, and (third) correcting the aggregate first obtained
by applying whatever "very definite" relation (ratio) is necessary to
make it agree with the second aggregate, which was from the beginning
the only aggregate really wanted. The accuracy of this characterization
of his proposed procedure is made perfectly clear by the following
quotation:

  "... the true method of valuing a corporate property is first to
  determine the cost of reproduction of the property and its
  depreciation, and modify this figure by any applicable positive or
  negative non-physical elements of value."

It is submitted that the clear meaning of the foregoing is that both
replacement cost and real value as derived from use must be separately
and independently ascertained, and that, these aggregates having been
compared, the former is to be corrected by whatever allowance for
non-physical value may be required to make it agree precisely with the
latter. The obvious suggestion flowing from this discovery of his theory
is that only value in use is wanted, as that is the only real value, and
as it must be separately ascertained in any event, no other and _pseudo_
value need be taken. The essential character of the method is as
described, even when it is applied through determination of the annual
value of the use and the assignment of one portion of such annual value
to return on the capital value of the physical property and another
portion to return on the capital value of non-physical property. The
real nature of the method is not even effectually concealed by the
capitalization of the income assigned to physical property at one rate
and the income assigned to non-physical property at a different and
higher rate. In fact, if it is necessary to conclude that a portion of
the net annual income of railway property is normally paid to, or in
respect of, a portion of capital entitled to a lower rate of return, and
the remainder to or in respect of a remainder of capital entitled to a
higher rate, the appraisal of the physical property is an excessively
costly, cumbersome, and inaccurate expedient for determining the amount
or value of either portion of the capital. Yet that is exactly what was
done in Michigan by Professor Adams, the "valuation" he then made being
completed before he altered his view by deciding that the non-physical
elements of value are entitled to no consideration whatever, and that
only cost of replacement is worthy of inclusion in an official
"valuation."

But is there any real distinction between the "physical properties" and
the "immaterial elements," such as the foregoing extract seems to
assume? Is not the superficial appearance of such a distinction
plausible but deceptive? A locomotive is an entity; so is a railway. The
separate parts of a locomotive are most of them independently valuable;
so are the separate parts of a railway; but a large share of the value
of the locomotive is the result of the nice adjustment of these separate
parts to each other and to the work to be done.

Take a hundred different-sized locomotives, each adapted to different
work under different conditions, and separate each piece of metal; it
would be possible to value all these parts, but the aggregate would be
far less than the value of the locomotives from which they were taken.
Again, it would be possible to construct from these parts a hundred
locomotives of such poor design, their respective parts so out of
adjustment and balance, that they would be worth even less than the
parts out of which they were assembled. The highest paid intelligence
has not yet contrived the perfectly balanced locomotive, but a large
part of the so-called "physical value" of every locomotive represents
this sort of highly paid intelligence put forth at every stage from the
opening of the mine where the ore was obtained to the delivery of the
completed locomotive. Take ten railways of a thousand miles each, every
one of them efficiently constructed, and equipped with proper terminals,
stations, signals, rolling stock, and trained employees, and each
properly adapted to the requirements of its territory and traffic;
separate them into piles of ties and rails, groups of locomotives and
cars, acres of land, unorganized bodies of men of varied capacity and
training; what sort of intelligence will it require to build up out of
these masses ten railways as efficient and useful as those that
originally existed? Why, then, should the "physical value" of the
locomotive include the assembling of its parts in proper balance and the
"physical value" of the railway exclude the cost of the much more
complicated adjustment of its elements of machinery and labor and
location to each other?

At an early point in his discussion, Mr. Riggs makes an announcement,
highly becoming on the part of one who proposes to deal with the problem
solely from the point of view of a civil engineer, that he does not
intend to argue the public utility of any sort of valuation, but only
the method by which it may best be made, should one be determined upon.
He says:

  "This paper is confined to a discussion of the methods which should
  be used in arriving at a correct figure of cost of reproduction and
  depreciation—it does not take up questions involving the propriety
  of those figures when reached. The propriety or legality of using
  such figures as a basis for an assessed valuation, as a basis for
  rate-making (rate-making being an art in itself involving
  complications as great as those encountered in valuation), or any
  arguments as to the justice or injustice of legislation restricting
  issues of stocks or bonds, will be conceded no place in this paper.
  It is assumed that all these questions would have been taken up and
  a satisfactory answer reached before a valuation could have been
  ordered."

Two pages after the foregoing paragraph, under the sub-heading "The
Relation of Public Service, or Quasi-Public Corporations, to the
People," Mr. Riggs proceeds to violate the wise, though self-imposed
restriction, and devotes no less than eleven pages to a defense of the
project on grounds of alleged public policy. In these pages he concludes
that such a valuation as he proposes—not a mere determination of
replacement costs, but a real valuation, with proper allowance for all
elements of value in use—would be of service in connection with (_a_)
taxation, (_b_) public control of rates, and (_c_) public control of
issues of capital securities.

In supporting valuation as an expedient in taxation of railway property,
Mr. Riggs seems to rely on a table made up from Professor Adams'
Bulletin No. 21, as expert employed by the Federal Bureau of the Census,
which table shows that the assessment of the railways of Wyoming for
taxation purposes in 1904 was but 7.5% of their commercial valuation, as
estimated by Professor Adams, and that this ratio varied greatly
throughout the different States, running as high as 114.4 in
Connecticut. Of course, nearly every one knows, even if Mr. Riggs does
not, that the relation between the real value and the assessed value of
all other kinds of property varies greatly from State to State, and even
in different portions of the same State. On account of this variation,
no table such as that offered by Mr. Riggs in support of his argument
can have any value unless supplemented and explained by data covering
the assessment of other kinds of property. It is worth noting, _en
passant_, that the so-called "Commercial Valuation," on which Mr. Riggs
rests this part of his argument, assigns a value equivalent to $32,054
per mile to the railways of Michigan and one of $45,211 per mile to the
railways of the prairie State of Nebraska. Possibly this variation in
the estimate of value is partly expressed in the conclusion that
Michigan railways are assessed at 70.9% of their value and Nebraska
railways at but 18.5 per cent. Obviously, there is no more need of
uniformity among the States in the taxation of railway property than in
their methods of deriving revenue from other kinds of property.

Also, Mr. Riggs admits that, when the Michigan valuation for taxation
was made, it was not diminished, as it should have been, by the use of
negative, non-physical value. This is fully equivalent to an admission
that the method was unjust to every railway not capable of earning the
full return on its replacement cost. He says:

  "The use of a negative or subtractive non-physical value was
  considered, and advised by Professor Adams....

  "Professor Adams and his associates, therefore, applied only
  positive values, where any such were found, although advocating the
  use of negative values."

And, of the method then used, he says:

  "... it fails, in the form in which it was used in 1900 and 1902, to
  bring out those negative or subtractive elements which may be
  determined from the income accounts, in the case of properties which
  do not earn a fair return on the investment."

And again:

  "... where the earnings have been fairly uniform and stationary for
  a period of years, and the property does not earn a sufficient sum
  to care for depreciation and annuity, it is clear that the value as
  an earning investment is less than the determined physical value,
  and that the physical valuation should be reduced by some amount to
  arrive at the 'fair value.'"

In his argument favoring the use of a valuation in rate-making, Mr.
Riggs affords no support to Professor Adams' contention that, for that
purpose, only replacement cost should be considered, and that, after
fixing the rates on the basis of the least favorably located and least
efficient line, so as to afford it a bare return on its replacement
cost, the surplus earnings at the same rates of its more favorably
located or better operated competitors should be confiscated under the
guise of a special tax. This extraordinary proposal, the character of
which is so illuminating as to the attitude toward railway property and
investments of the most prominent and persistent advocate of so-called
"physical valuation," is best stated in Professor Adams' own words,
which are as follows:

  "I cannot evade the conclusion that equity, as between various
  classes of roads, can never be attained until all the excess of
  revenue over the Constitutional limit be made a contribution to the
  public treasury, and that this contribution be made as a substitute
  for all taxes of all kinds and all sorts."[38]

On the contrary, Mr. Riggs distinctly upholds the right to earnings in
excess of the bare return, at the minimum rate of interest, upon the
cost of replacement, saying, _inter alia_:

  "It is contended that the determination of rates that will be just
  and fair to all competing companies involves other consideration
  than the valuation of either physical or intangible properties, and
  that when all these rate-making problems are properly solved, there
  will remain large intangible values on the well-designed plants."

Professor Adams has himself admitted that there is no possibility of
utilizing any valuation for the purpose of fixing specific rates, as
such a task is far beyond the capacity of any conceivable system of cost
accounting. Supplementing this admission, Mr. Riggs' opposition to the
plan proposed by the former and its gross injustice, so apparent to
every one but its author, destroys the last element of plausibility in
the suggestion that any sort of valuation could be of utility in that
connection. The writer is not overlooking the fact that the Courts, when
under the necessity of repelling efforts to confiscate railway
properties under the guise of rate regulation, and in view of the form
in which this necessity has commonly presented itself, have accepted
"fair value" as an element of importance in their inquiries; but if the
railways are entitled to charge rates based on the value of the services
they perform, it is clear that the question whether a rate or a schedule
of rates is reasonably adjusted to the value of the service or services
is very different from the question whether a fair return upon fair
value has been allowed. Assuming, however, the need of an appraisement
in every litigated case involving railway schedules, it is evident that
each case would have to have its own appraisement, for value is ever
changing and unstable. Mr. Riggs himself says:

  "It is true that the 'value' of a property is an unstable figure,
  subject to fluctuations due to natural or artificial causes, and
  that a material change in value may occur suddenly...."

Professor Adams proposed to keep his replacement cost up to date by
annual accretions equal to annual expenditures for extensions and
betterments; but this plan is illogical and inconsistent, for it
proposes to ignore that very essential difference between original cost
(less a proportionate allowance for wear and tear) and present worth,
which is the very basis of the argument in favor of any valuation at
all. Equally obvious objections, growing out of the instability of the
ascertained value of any particular date, apply to any plan which does
not provide for a re-appraisement every time the aggregate is to be
used.

The objections to the use of any valuation for rate-making which have
been cited are valid, and should be convincing, but they are
insignificant by the side of the fundamental objection that, as Mr.
Riggs says, "as a business proposition, the value of any property
depends on its earnings," while those who would thus utilize a valuation
are attempting to reverse the fact and make earnings depend on the
value. Such a reversal is impossible. Ascertain real value and you have
a consequence of earnings, past, present, and prospective, nothing else;
use this as a basis for a rate schedule and you get, as a mathematical
result, the present rates. The only way to derive any other result from
this method would be to use as the basis some figure other than the real
value, a method which would only be resorted to through moral turpitude
or intellectual incapacity. One might almost assume that Mr. Riggs knows
this, for he says:

  "Value is given to a property, either by reason of the fact that it
  is an instrument for earning profit, or that it does earn profit or
  gives promise of profit."

The substance of Mr. Riggs' argument on capitalization control is that
American railways are not often over-capitalized, but such evils do
obtain in other industries, and therefore railway issues of capital
securities ought to be restricted.[39] Unfortunately, he gives no clue
to the methods he would have applied, nor as to how far he would go in
interference with the normal action and interaction of commercial forces
in determining what securities can and ought to be issued. Railways are
not over-capitalized. Table 9, a comparison of official valuations and
capitalization, originally compiled by Mr. Slason Thompson, is
instructive.

                                TABLE 9.

    ═════════════╤═════╤═══════════════════════╤════════════════════
       State.    │Year.│Valuation by commission│State proportion of
                 │     │     or tax board.     │  capitalization.
    ─────────────┼─────┼───────────────────────┼────────────────────
    Minnesota    │1907 │           $411,735,194│        $334,979,691
    South Dakota │1909 │            106,494,503│         108,911,000
    Wisconsin    │1909 │            284,066,000│         249,299,060
    Texas        │1909 │            413,000,000│         412,465,743
    Washington   │1908 │            186,007,490│         153,493,940
    ─────────────┼─────┼───────────────────────┼────────────────────
        Total    │     │         $1,401,303,187│      $1,259,049,434
    ─────────────┴─────┴───────────────────────┴────────────────────

    ────────────────────────────────────────────────────────────────
    Excess of total valuation over total capitalization $142,253,753
    ════════════════════════════════════════════════════════════════

In view of frequent suggestions, in the public press and elsewhere,
which indicate that there is a widespread opinion that the securities of
railways have generally been watered, Table 10 is given. It is an
analysis of the consolidated balance sheet as given in the reports of
the Interstate Commerce Commission for 1908 and 1890.

Table 11 shows the length, in miles, of main and other tracks in 1908
and 1890.

The Commission, in its annual report, shows the securities issued per
mile of road (first main track), but does not show the results per mile
of main track (_i. e._, 1st main track, 2d, 3d, 4th, and other main
tracks), nor does it show the results per mile of all tracks (_i. e._,
main tracks, yard tracks, passing tracks, and industrial tracks). From
the consolidated balance sheet, it will be noted that the securities per
mile of road have increased 29%, while per mile of main track they have
increased only 24%, and per mile of all tracks they have increased but
14 per cent. However, deducting the investments in stocks and bonds of
other corporations, and showing the results only for the securities
issued on account of the cost of road and 12% equipment, we have an
average per mile of road of $62,388, an increase of 12%; and an average
per mile of all main tracks of $56,166, an increase of 8%; and an
average per mile of all tracks of $42,864, or a decrease of 0.7 per
cent. It will be noted that a considerable part of these increases is
due to increased cost of equipment, and the advantageous results
obtained from such investment have been clearly shown. Of the investment
in the track itself (cost of road), it will be noted that the cost per
mile of main track has increased only 5%, while the cost per mile of all
tracks shows a slight decrease in 1908 as compared with 1890.

These comparisons are more significant and convincing in the light of
the large expenditures since 1890 for the reduction of grades, revision
of line, interlocking towers, automatic block signals, increased weight
of rail, increased capacity of bridges, improved stations and terminals,
elevation of tracks, and the many other items going to make up the
additions and betterments, and increasing the book cost of the property.
The figures plainly prove that there has been no general practice on the
part of the railroads of the country, from 1890 to date, of issuing
capital securities without securing full value for the vast amount
referred to. Why, then, should any restriction be placed on the form or
manner of their future appeal for the very large volume of capital
necessary to keep abreast of American industrial development? Why should
they be limited as to what form of security they may offer in return for
the cash capital which they must obtain if they are to serve the public
adequately and properly?

       TABLE 10.—CONSOLIDATED BALANCE SHEET FOR RAILROADS OF THE
       UNITED STATES. EXCLUSIVE OF TERMINAL AND SWITCHING ROADS.

 ╒══════════════╤══════════════════════════════════════════════════════╕
 │              │                       ASSETS.                        │
 ├──────────────┼──────────────────────────────┬───────────────────────┤
 │              │            Total.            │   Per mile of road.   │
 ├──────────────┼───────────────┬──────────────┼───────────┬───────────┤
 │              │     1908.     │    1890.     │   1908.   │   1890.   │
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │RAILROAD:     │               │              │           │           │
 │Cost of road  │$12,035,195,403│$7,333,096,430│    $56,268│    $51,400│
 │Cost of       │  1,178,571,137│   422,290,951│      5,510│      2,960│
 │  equipment   │               │              │           │           │
 │Material and  │    226,250,462│    63,785,950│      1,058│        447│
 │  supplies    │               │              │           │           │
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Total         │$13,440,017,002│$7,819,173,331│    $62,836│    $54,807│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │INVESTMENTS:  │               │              │           │           │
 │Stocks owned  │ $2,115,313,379│  $489,049,859│     $9,890│     $3,428│
 │Bonds owned   │  1,271,311,512│   241,115,665│      5,944│      1,690│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Total         │ $3,386,624,891│  $730,165,524│    $15,834│     $5,118│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │CURRENT       │               │              │           │           │
 │  ASSETS:     │               │              │           │           │
 │Cash and      │ $1,213,575,272│  $307,871,188│     $5,674│     $2,158│
 │  current     │               │              │           │           │
 │  assets      │               │              │           │           │
 │Sinking,      │    154,975,409│   125,095,987│        724│        877│
 │  Insurance,  │               │              │           │           │
 │  and other   │               │              │           │           │
 │  funds       │               │              │           │           │
 │Total         │ $1,368,550,681│  $432,970,175│     $6,398│     $3,035│
 │Miscellaneous │ $1,277,458,795│  $710,300,536│     $5,973│     $4,979│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Grand         │$19,472,651,369│$9,692,609,566│    $91,041│    $67,939│
 │  total—All   │               │              │           │           │
 │  assets      │               │              │           │           │
 ├──────────────┼───────────────┴──────────────┴───────────┴───────────┤
 │              │                     LIABILITIES.                     │
 ├──────────────┼───────────────┬──────────────┬───────────┬───────────┤
 │SECURITIES    │               │              │           │           │
 │  ISSUED:     │               │              │           │           │
 │Capital stock │ $7,289,597,964│$4,179,156,990│    $34,081│    $29,293│
 │Bonds         │  9,441,200,261│ 4,462,577,079│     44,141│     31,280│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Total         │$16,730,798,225│$8,641,734,069│    $78,222│    $60,573│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │CURRENT       │               │              │           │           │
 │  LIABILITIES:│               │              │           │           │
 │Accrued       │               │   $25,341,994│           │       $177│
 │  interest    │               │              │           │           │
 │Other current │ $1,151,233,255│   440,513,629│     $5,382│      3,088│
 │  liabilities │               │              │           │           │
 │Total         │ $1,151,233,255│  $465,855,623│     $5,382│     $3,265│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Miscellaneous │   $845,115,552│  $394,918,201│     $3,952│     $2,768│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Grand         │$18,727,147,032│$9,502,507,893│    $87,556│    $66,606│
 │  total—All   │               │              │           │           │
 │  liabilities │               │              │           │           │
 │Profit and    │    745,504,337│   190,101,673│      3,485│      1,333│
 │  loss balance│               │              │           │           │
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Grand         │$19,472,651,369│$9,692,609,566│    $91,041│    $67,939│
 │  total—All   │               │              │           │           │
 │  assets      │               │              │           │           │
 ╘══════════════╧═══════════════╧══════════════╧═══════════╧═══════════╛
 ╒══════════════╤══════════════════════════════════════════════════════╕
 │              │                       ASSETS.                        │
 ├──────────────┼──────────────────────────────┬───────────────────────┤
 │              │   Per Mile of main tracks.   │Per mile of all tracks.│
 ├──────────────┼───────────────┬──────────────┼───────────┬───────────┤
 │              │     1908.     │    1890.     │   1908.   │   1890.   │
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │RAILROAD:     │               │              │           │           │
 │Cost of road  │        $50,656│       $48,109│    $38,659│    $40,033│
 │Cost of       │          4,961│         2,770│      3,786│      2,305│
 │  equipment   │               │              │           │           │
 │Material and  │            952│           419│        727│        348│
 │  supplies    │               │              │           │           │
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Total         │        $56,569│       $51,298│    $43,172│    $42,686│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │INVESTMENTS:  │               │              │           │           │
 │Stocks owned  │         $8,903│        $3,208│     $6,795│     $2,670│
 │Bonds owned   │          5,351│         1,582│      4,083│      1,316│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Total         │        $14,254│        $4,790│    $10,878│     $3,986│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │CURRENT       │               │              │           │           │
 │  ASSETS:     │               │              │           │           │
 │Cash and      │         $5,108│        $2,020│     $3,898│     $1,681│
 │  current     │               │              │           │           │
 │  assets      │               │              │           │           │
 │Sinking,      │            652│           820│        498│        683│
 │  Insurance,  │               │              │           │           │
 │  and other   │               │              │           │           │
 │  funds       │               │              │           │           │
 │Total         │         $5,760│         2,840│     $4,396│     $2,364│
 │Miscellaneous │         $5,377│        $4,660│     $4,103│     $3,878│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Grand         │        $81,960│       $63,588│    $62,549│    $52,914│
 │  total—All   │               │              │           │           │
 │  assets      │               │              │           │           │
 ├──────────────┼───────────────┴──────────────┴───────────┴───────────┤
 │              │                     LIABILITIES.                     │
 ├──────────────┼───────────────┬──────────────┬───────────┬───────────┤
 │SECURITIES    │               │              │           │           │
 │  ISSUED:     │               │              │           │           │
 │Capital stock │        $30,682│       $27,417│    $23,415│    $22,815│
 │Bonds         │         39,738│        29,277│     30,327│     24,362│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Total         │        $70,420│       $56,694│    $53,742│    $47,177│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │CURRENT       │               │              │           │           │
 │  LIABILITIES:│               │              │           │           │
 │Accrued       │               │          $166│           │       $188│
 │  interest    │               │              │           │           │
 │Other current │         $4,845│         2,890│     $3,698│      2,405│
 │  liabilities │               │              │           │           │
 │Total         │         $4,845│        $3,056│     $3,698│     $2,543│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Miscellaneous │         $3,557│         2,591│     $2,715│     $2,156│
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Grand         │        $78,822│       $62,341│    $60,155│    $51,876│
 │  total—All   │               │              │           │           │
 │  liabilities │               │              │           │           │
 │Profit and    │          3,138│         1,257│      2,394│      1,038│
 │  loss balance│               │              │           │           │
 ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
 │Grand         │        $81,960│       $63,588│    $62,549│    $52,914│
 │  total—All   │               │              │           │           │
 │  assets      │               │              │           │           │
 ╘══════════════╧═══════════════╧══════════════╧═══════════╧═══════════╛

It ought also to be borne in mind, in this connection, that, while there
could be no lawful mode for the revision of existing capitalization,
should it in any instance be found to be too small or too great when
measured by the results of such a valuation, the future issue of
securities must be controlled by the necessities of the carriers and the
state of the market, and is also practically restricted by the
Interstate Commerce Commission's accounting system, which declares what
expenditures may and what may not be carried into the capital account.
The law cannot compel any company to repudiate any existing security,
and if it could it is not to be supposed that Congress would compel such
an impairment of contract rights; public policy will not permit in
practice restrictions that would prevent the issue of securities to meet
the actual needs of the public and the carriers; the accounting system
prevents issues of any other sort. Further restrictions would be
cumulative and superfluous.

                               TABLE 11.

 ═══════════════════════════╤══════════╤══════════╤══════════╤══════════
           Track.           │  1908.   │  1890.   │Increase. │Percentage
                            │          │          │          │    of
                            │          │          │          │increase.
 ───────────────────────────┼──────────┼──────────┼──────────┼──────────
 Single track               │213,888.36│142,665.89│ 71,222.47│      49.9
 Second track               │ 20,209.05│  8,437.65│ 11,771.40│     139.5
 Third track                │  2,081.16│    760.88│  1,320.28│     173.5
 Fourth track               │  1,408.99│    561.81│    847.18│     150.8
 ───────────────────────────┼──────────┼──────────┼──────────┼──────────
   Total, all main tracks   │237,587.56│152,426.23│ 85,161.33│      55.9
 Yard track and sidings     │ 73,728.57│ 30,750.17│ 42,978.40│     139.8
 ───────────────────────────┼──────────┼──────────┼──────────┼──────────
   Total mileage operated   │311,316.13│183,176.40│128,139.73│      69.9
   (all tracks)             │          │          │          │
 ═══════════════════════════╧══════════╧══════════╧══════════╧══════════

  "The Interstate Commerce Commission in 1908 report that their
  Balance Sheet covers 'miles of road' aggregating 213,888.36 miles,
  whereas their statement of mileage represents all roads reporting to
  the Commission whether or not they furnished a Balance Sheet.

  "To analyze the Consolidated Balance Sheet, we have revised the
  statement of mileage to cover same roads as are included in the
  General Balance Sheet. The 'miles of road,' _i. e._, miles of first
  main track, are actual. The Commission's report not showing
  separately for each line the miles of other main tracks or yard
  tracks and sidings, the figures shown in the statement of mileage
  are _approximate_. It includes mileage of all second, third and
  fourth tracks. Undoubtedly, practically all of the second tracks,
  third tracks and fourth tracks are owned, or operated by, roads
  furnishing the Commission with a Balance Sheet. Mileage of Yard
  Tracks and Sidings is based on the proportion which the single-track
  mileage of roads represented in the Balance Sheet bears to the total
  single-track mileage of roads reporting to the Commission."

Mr. Riggs considers _seriatim_ nine objections to the ordinary methods
of estimating cost of replacement which were mentioned specifically by
the writer, as among the most important commonly omitted items, in an
address before the New York Traffic Club, delivered during January,
1909. He concedes that the writer is correct in urging that allowances
for "working capital with which to carry on the business" and for
"impact and adaptation" ought to be included, and were omitted in
Michigan and have been usually omitted. These are two of the nine
objections specifically raised. As to five others, Mr. Riggs seems to be
in considerable doubt. Concerning the objection that an allowance of 3%
for interest during construction is too low, he contends that it was
justified in Michigan by the "assumption," that the whole work of
replacement would be accomplished in one year, and also "that on long
roads partial operation would commence as various sections of the line
were completed." He admits that these assumptions "clearly would not be
proper" under different conditions, but appears to hold that they were
warranted as to the Michigan work.

Another of the writer's objections was the absence of an allowance for
"wear and tear of materials during the period of construction." As to
this, Mr. Riggs says:

  "This deterioration is a necessary incident to any construction
  work. It has not been customary or usual to take account of it. To
  add to the amount capitalized on account of this item would be
  manifestly improper. The only way in which this could be cared for
  would be in an adjustment of the depreciation reserve when raised to
  cover that which takes place during the construction period."

Of course, the depreciation account, when there is one, is a charge to
operation. Therefore, Mr. Riggs' anxiety to disagree with the writer has
led him into a frame of mind in which he is prepared to find that it is
"manifestly improper" to charge to capital the real cost of
construction, but is quite proper to charge to operation a part of the
cost of construction, even though this results in carrying into the
operating account items of expense incurred long before operation began
or could have begun.

Mr. Riggs thinks that the writer was incorrect in objecting that "a
uniform price for earthwork was used, thus ignoring the varying
character of soil and length of haul," but he admits that there was
"practically no classification in the Southern Peninsula of Michigan,
or, in fact, on 90% of the mileage of the State," and his defense goes
no further than to assert that "the price * * * was not much out of the
way when considered as a fair average for the territory."

His criticism of the objection to the use of a uniform price list for
materials, and ignoring the source of supply and the cost of delivery at
the point of use, is equally forced, for it admits that "no effort was
made to use different unit prices as between counties," and only
contends that "in a number of cases" differences in prices were made.

The absence of an allowance for interference by labor troubles, weather
conditions (which he admits are "a frequent source of annoyance, delay,
and sometimes of expense"), Mr. Riggs defends on the ground that it is
"an expense difficult to separate and set up," and therefore ought to be
covered by an allowance for contingencies. On the same ground, he could
easily carry every item of cost of replacement into the contingent
account.

The two remaining objections specifically raised by the writer are
squarely attacked by Mr. Riggs. As to one of them, the propriety of an
allowance for carrying charges up to the time of attaining a revenue
basis, has been admitted by the Railroad Commission of Wisconsin, but it
is a broader question than ought here to be discussed. The writer will
only suggest, at present, that in some form or other, these charges must
be on the whole and in the long run met out of net operating income, and
that the cheapest way, for the user of the services supplied, is to
carry them into the capital account—otherwise there must be an early
amortization of this item, which cannot do otherwise than to throw a
heavy burden on the early schedules of charges. The language of the
Wisconsin Railroad Commission on this subject merits quotation, and is
as follows:[40]

  "But new plants are seldom paying at the start. Several years are
  usually required before they obtain a sufficient amount of business
  or earnings to cover operating expenses, including depreciation and
  a reasonable rate of interest upon the investment. The amount by
  which the earnings fail to meet these requirements may thus be
  regarded as deficits from the operation. These deficits constitute
  the cost of building up the business of the plant. They are as much
  a part of the cost of building up the business as loss of interest
  during the construction of the plant is a part of the cost of its
  construction. They are taken into account by those who enter upon
  such undertakings, and if they cannot be recovered in some way, the
  plant fails by that much to yield reasonable returns upon the amount
  that has been expended upon it and its business. Such deficits may
  be covered either by being regarded as a part of the investment and
  included in the capital upon which interest is allowed, or they may
  be carried until they can be written off when the earnings have so
  grown as to leave a surplus above a reasonable return on the
  investment that is large enough to permit it. When capitalized, they
  become a permanent charge on the consumers. When charged off from
  the surplus, they are gradually extinguished. (These facts alone,
  however, do not always furnish the best or most equitable basis for
  the disposal of such deficits.) Whether they should go into the
  capital account, or whether they should be written off, as
  indicated, are questions that largely depend on the circumstances in
  each particular case."

The other objection that is squarely opposed by Mr. Riggs is the refusal
to allow for unavoidable discounts on the securities sold. Here he
quotes with complete approval an unnamed writer, who contends that the
impropriety of such an allowance is proven because, as between an issue
of $10,000,000 in bonds (par value) at 4% and at 4½%, the 4% bonds
bringing 90 and the 4½% selling at par, there is an annual saving, in
issuing the 4% of $50,000 in interest, and that, if the issue is to be
for fifty years, this saving is $2,500,000, or $1,500,000 in excess of
the discount. Of course, these figures are correct, but both Mr. Riggs
and his unnamed authority seem strangely to have overlooked the fact
that if a railway construction requires $10,000,000, it cannot be
obtained by issuing $10,000,000 in par value at 90. The comparison, of
course, ought to be based on the issue of enough bonds at each rate to
obtain equal sums of money. As $10,000,000 in par value of bonds sold at
90 would produce $9,000,000, the following comparison is based on the
issue of enough bonds at each rate payable in fifty years to secure that
sum.

                                            Fifty-Year Bonds,
                                     4½% sold at par.  4% sold at 90.

      Amount of capital required            $9,000,000     $9,000,000
      Par value of bonds necessary           9,000,000     10,000,000
      Annual interest charge                   405,000        400,000

  If 4% bonds are used:
      Annual saving in interest                                $5,000
      Fifty years saving in interest                          250,000
      Loss, original discount                               1,000,000
                                                            _________
                        Net loss                             $750,000

Of course, the foregoing figures are not absolutely accurate, for the
real net loss in the issue of the 4% rather than the 4½% bonds at these
prices would be the difference between the $5,000 annual saving in
interest and the amounts which would have to be set aside annually for
fifty years to produce $1,000,000, the amount of the discount, at the
end of that period. But the table is sufficiently accurate to expose the
curious error into which Mr. Riggs has fallen. Perhaps it will convince
him that it would be better, hereafter, not to stray so far outside the
field of civil engineering.

Mr. Riggs has little sympathy with those railway men who venture to
express the opinion that regulation ought not to extend so far as to
render it impossible to conduct the railway business in a business-like
way. His animadversions on railway men in general have already been
illustrated herein. He finds nothing worse with which to characterize a
previous utterance of the writer's than to say of it:

  "The manifest impatience with all forms of governmental interference
  with corporations, which so often characterizes the utterances of
  prominent railway officials, appears in this paper to a marked
  degree."

At the risk of incurring further displeasure, the writer will not omit
now to observe that, in his judgment, the whole question whether
railways shall be generally and officially valued, and how and by whom
the task shall be performed, is primarily conditioned by the country's
need of managing its legislative control of railway methods so as not to
restrict unduly the flow of capital into that industry. The steady
pressure for legislation during the last five years has so extended
legislative regulation that, for the first time, the sturdy, frugal,
conservative, "small investor" stands in the forefront of the problem.
His views of the stability and future prosperity of the American railway
industry now dominate the situation. What they are may be read in the
facts attending recent efforts to finance necessary improvements of old
and prosperous railways. It developed before the Interstate Commerce
Commission during the recent hearings in connection with the proposed
partial adjustment of rates to the diminished purchasing power of the
money in which they are paid, that one of the greatest of Eastern
railway systems, paying 8% annual dividends on its stock, which is very
widely distributed, had offered new shares to its stockholders at a
premium of 25%, and had found them unsalable at that figure, so that it
was obliged to recall the offer and put them out at par. Other testimony
disclosed the failure of one great company to obtain an offer of more
than 85 for its 4% bonds, while another had been forced to go to France
to raise $10,000,000, and many others have been forced to the expedient
of issuing short-term notes at relatively high rates of interest. It
also appeared that extensive proposals for new branch lines had been
abandoned or postponed, in view of the impossibility of obtaining funds
on reasonable terms.

Other testimony shows that locomotive shops and car builders are putting
out not more than half of their capacity; that the supply trade is
receiving no new orders. Never, since the beginnings of the American
railway industry, has the American and foreign investor been so
reluctant to supply necessary capital, or so doubtful of the future of
railway enterprises. This fact is not due to absence of confidence in
the industrial future of the American people, but is directly
attributable to the unanswered inquiry as to how far the policy of
legislative control is to extend. Either this question must be answered
in a manner satisfactory to the investor, or the credit of the
Government must be made available for the extension and improvement of
railway facilities, either through Governmental guaranties of adequate
returns to capital, or through Government ownership; for adequate and
properly constructed and equipped railways the public must and will
have. Thus far, the American public is ready neither for Federal
guaranties nor for Federal ownership; it is to be hoped that it will
never be ready for either. In this situation, if a Federal valuation is
to be undertaken, it is primarily important that it should be under such
auspices and by such methods that the investor will not be alarmed as to
its consequences. This is not a suitable occasion to attempt to lay down
all the considerations applicable to such a valuation, but it ought to
be perfectly clear that it must relate to value in use, not to some
concept of value limited to replacement cost which excludes some of the
most important elements of value (which are also those most worthy of a
return, because they represent the highest and most difficult social and
industrial services), in order to obtain a means of excluding these same
elements from possibilities of adequate reward.

One of the most important items to be considered is the "cost of
progress," which is sometimes referred to as "abandoned property," or as
"obsolescence." For illustration, in the revision of the grade and line
of a road, whereby the capacity of existing track is doubled, the
present instructions of the Interstate Commerce Commission require the
charge to operating expenses of the cost of that portion of the old line
no longer continued in use. If, however, the doubling of the capacity of
the line be secured by the construction of a second main track, the
entire cost of the new work can be charged to capital account and paid
for from the proceeds of the sale of capital securities. The latter
method becomes the easier to finance, but what of the comparative
results? Say, for example, the original cost of material of existing
property, including equipment, stations, yards, etc., was $10,000,000,
that the first main track cost $1,000,000, and that to double the
capacity of the main track would require a present expenditure of
$1,000,000, either for (1) a reduction of the grades and curves of the
first main track, or (2) for the construction of a second main track.
The increase in capacity is identical, but in the first case the cost of
train service to handle the tonnage is decreased 50%, and some reduction
in maintenance is secured, while in the second case no economies of
operation are effected, but the expenses may be increased. Undoubtedly,
Road (1) would be much more favorable than Road (2), yet the Commission
says a portion of the cost of perfecting Road (1) must be charged to
operating expenses, and cannot be capitalized. What general manager will
dare recommend such extensive improvements when the charging of a
portion of the cost to operating expenses will show the dividend as
unearned, and thus render the securities of the company no longer legal
investments for savings banks, trustees of trust funds, etc.? As an
alternative, he might permit the old line to remain, and by placing
thereon a few cars occasionally, could consider it as still in use, and
carry it in his capital account, thus avoiding the charge to operating
expenses. Thus, again, is it the method and not the result that is
controlled by these instructions. What should be done is to permit the
cost to be charged against the surplus accumulated during the years in
which the property to be abandoned was used. This would not affect
adversely the operating income of the year, and would not impair the
credit of the Company.

Plainly, the instructions of the Commission tend to compel a method that
is contrary to the economic law.

Obviously, any requirement as to valuation which would impose on the
carrier such a result as that shown would compel the continuance of the
less efficient service and prevent the progress which such replacements
express. The railway business is a continuing one, and an improvement
ought to be made whenever it can earn income, not only on its own cost,
but on that of the property abandoned, even though it cannot afford
income sufficient to wipe out the whole capital charge for the latter in
a single year. There is no reason for requiring each item of capital to
earn its cost in addition to its interest during its individual life.
Such a requirement would cry halt to progress. It is reasonable and
proper that such charges to operation should be made as far as the rapid
development of the art of transportation permits, and such is the
practice of every well-managed railway; but, to make the practice
uniform and compulsory, permitting no exceptions and allowing no scope
for individual judgment, is quite another thing. When the conditions
warrant such a course, the railway ought to be permitted to adjust its
accounts in a manner of which the following is typical:

                                                   Replacing.    Not
                                                              replacing.

 Capital account                                      $19,750     $5,000

 Additional net operating income attributable to        1,000        250
   this item

 Charge to operation for abandoned property               250

                                                       ______      _____

                  Operating gain                         $750       $250

A valuation adjusted in recognition of this developmental need would
include, in addition to the item of $15,000 for the replacement cost of
the new locomotive, an item representing "cost of progress" of $4,750
for the former locomotive. It is not to be overlooked that in actual
practice it would be easy to obtain this allowance by cumbering the
yards and round-houses with obsolete and superfluous equipment. The plan
of Professor Adams places a premium on such a course, and there are many
conditions under which it could and would be followed where it would be
less obvious and more detrimental. For example, it might be that an
additional track over a steep grade and a new alignment which would
avoid it would cost the same. The new alignment would give greater
operating efficiency, but it would require the charging off of the old
line; the new track over the grade would be more costly to operate, but
would leave the apparent capital unimpaired. It is such possibilities as
this that are giving pause to the investors who would otherwise supply
funds for the needed development of the American railway system. How far
this development has so far required the abandonment of property capable
of further use and having genuine capital value is indicated by
available records. The aggregate capacity of all equipment has increased
much faster than the increase in number of locomotives and cars. The
reports of the Interstate Commerce Commission only show this information
for the years 1902 to 1908, both inclusive. The average tractive power
of locomotives in 1908 was 26,356 lb., as compared with 20,485 lb. in
1902, being an increase of 5,871 lb., or 28.7% per locomotive. The
average capacity of freight cars in 1908 was 35 tons, as compared with
28 tons in 1902, an increase of 7 tons, or 25 per cent. Undoubtedly, the
average capacity of locomotives and the average capacity of freight cars
in 1908 was not less than 60% above the average capacity of 1890.

L. F. Loree, M. Am. Soc. C. E., President of The Delaware and Hudson
Company, as Reporter (For United States) to the International Railway
Congress, held in Paris in 1900, communicated with all roads in the
United States then operating 500 miles of line, or more, relative to the
capacity of cars actually in service. The result is shown in Table 12.

As a result of these improvements in roadway and equipment, the average
number of tons of freight handled per freight train in 1908 was 351.80
tons, as compared with 296.47 tons in 1902, an increase of 55.33 tons,
or 18.6 per cent. The average tons per freight train in 1908 was 351.80,
as compared with 175.12 in 1890, an increase of 176.68 tons, or 100.8
per cent.

These improvements have not been solely or mainly for the benefit of the
carriers, though there is no question that they have been prompted by
railway self-interest. The new car of 40 tons capacity is but 20% longer
than the old car of 13 tons, which means a great augmentation of the
efficiency of the private sidings and tracks of the manufacturers, as
well as the side tracks and terminals of the railway. Who would retrace
the steps of progress of the last decade or of the last two decades? Yet
the project to tie railway earnings to replacement cost, which makes no
allowance for the costly steps in such progress, is in reality a project
to tie them to their present state of development and to prohibit future
progress. Nor can it be forgotten that it is an inviolable law of Nature
that that which does not go forward must go backward—nothing can remain
stationary.

The story of the crude millionaire who wanted to know the value of the
"plant" of Oxford University, in order that he might duplicate it, is
not inappropriate, and ought to have some significance to those who
imagine that replacement cost would tell the story of railway values. Do
they imagine, because they are ignorant of them, that a great railway
organization carries no traditions of loyalty, of persistence in the
face of overwhelming difficulty, of generous recognition of public needs
and rights, of courageous adherence to the real interests of its
shareholders that inspire its personnel and provide a genuine _esprit du
corps_? Do they find no superiority in one organization over another, no
systematic economies of method, no especial adaptation to economic needs
that has value more genuine than any replaceable element, and is at
least equally worthy of compensatory return?

                  TABLE 12.—CLASSIFICATION OF FREIGHT
                 EQUIPMENT ACCORDING TO THE CAPACITY.

 ═════╤═════════╤═══════╤════════╤════════╤═════════╤═════════╤═════════
 Year.│ No. of  │ Five  │  Ten   │Fifteen │ Twenty  │ Twenty- │ Thirty
      │  Roads  │ tons  │ tons.  │ tons.  │  tons.  │  five   │  tons.
      │Reporting│  and  │        │        │         │  tons.  │
      │  (see   │under. │        │        │         │         │
      │ note).  │       │        │        │         │         │
 ─────┼─────────┼───────┼────────┼────────┼─────────┼─────────┼─────────
 1880 │A-7      │ 38,399│ 131,988│ 447,270│   89,420│         │
      │  7      │ 38,399│ 131,988│ 447,270│   89,420│         │
 ─────┼─────────┼───────┼────────┼────────┼─────────┼─────────┼─────────
 1890 │A-7      │ 16,450│  71,982│ 182,175│  651,740│  441,475│  548,670
      │B-13     │ 16,450│  72,082│ 240,900│  933,040│  624,125│  638,100
 ─────┼─────────┼───────┼────────┼────────┼─────────┼─────────┼─────────
 1893 │A-7      │  1,145│  34,088│ 144,795│  629,780│  734,350│  842,640
      │C-13     │  1,145│  34,238│ 255,795│  993,840│  947,500│1,112,070
 ─────┼─────────┼───────┼────────┼────────┼─────────┼─────────┼─────────
 1895 │A-7      │    355│  13,978│ 120,435│  589,140│  743,975│1,011,030
      │D-15     │    355│  20,863│ 245,709│1,186,320│1,103,100│1,493,700
 ─────┼─────────┼───────┼────────┼────────┼─────────┼─────────┼─────────
 1897 │A-7      │     20│   6,462│  92,585│  555,980│  761,150│1,224,030
      │E-16     │     20│   9,407│ 163,189│1,029,756│1,089,300│1,822,530
 ─────┼─────────┼───────┼────────┼────────┼─────────┼─────────┼─────────
 1898 │A-7      │       │   1,540│  94,275│  523,080│  721,425│1,314,840
      │F-27     │ 63,565│   9,491│ 418,551│2,190,360│1,654,850│4,831,170
 ═════╧═════════╧═══════╧════════╧════════╧═════════╧═════════╧═════════

 ═════╤═════════╤═══════╤══════╤══════╤═══════╤═══════╤═════════╤═══════
 Year.│ No. of  │Thirty-│Forty │Forty-│ Fifty │ Total │  Total  │ Aver-
      │  Roads  │ five  │tons. │ five │ tons  │number │capacity,│  age
      │Reporting│ tons. │      │tons. │  and  │  of   │in tons. │capac-
      │  (see   │       │      │      │ over. │ cars. │         │ity, in
      │ note).  │       │      │      │       │       │         │ tons.
 ─────┼─────────┼───────┼──────┼──────┼───────┼───────┼─────────┼───────
 1880 │A-7      │       │      │      │       │ 53,733│  707,077│   13.2
      │  7      │       │      │      │       │ 53,733│  707,077│   13.2
 ─────┼─────────┼───────┼──────┼──────┼───────┼───────┼─────────┼───────
 1890 │A-7      │       │ 4,000│      │     50│ 91,281│1,916,492│   21.0
      │B-13     │       │ 4,000│      │     50│119,513│2,528,747│   21.2
 ─────┼─────────┼───────┼──────┼──────┼───────┼───────┼─────────┼───────
 1893 │A-7      │       │ 4,000│      │       │103,315│2,390,798│   23.4
      │C-13     │       │ 4,000│      │       │145,440│3,848,588│   23.0
 ─────┼─────────┼───────┼──────┼──────┼───────┼───────┼─────────┼───────
 1895 │A-7      │ 70,000│ 4,000│      │     50│104,496│2,652,963│   24.4
      │D-15     │ 70,000│ 4,000│      │     50│171,307│4,074,217│   23.8
 ─────┼─────────┼───────┼──────┼──────┼───────┼───────┼─────────┼───────
 1897 │A-7      │ 74,865│ 4,400│   450│    150│108,118│2,720,042│   25.2
      │E-16     │183,190│ 4,400│   450│    150│174,315│4,322,432│   24.8
 ─────┼─────────┼───────┼──────┼──────┼───────┼───────┼─────────┼───────
 1898 │A-7      │ 75,320│ 4,480│   270│ 50,950│108,559│2,786,180│   25.7
      │F-27     │ 88,515│ 8,840│   270│104,700│385,765│9,409,918│   24.4
 ═════╧═════════╧═══════╧══════╧══════╧═══════╧═══════╧═════════╧═══════

 Note:—A—Figures cover only these roads:

 Reporting for 1880 and all other years, viz.:
                                      Allegheny Valley

                                      B. & M. R.

                                      C. of G.

                                      G. R. & I.

                                      Penn. Lines W.

                                      Phila. & Reading

                                      Wis. Cent.

 B—Includes roads under "A," also:
                                      Ches. & Ohio

                                      C. G. W.

                                      M. K. & T.

                                      N. D. & C.

                                      Phg. & Western

                                      Vandalia

 C—Includes roads under "A," also:
                                      Ches. & Ohio

                                      C. G. W.

                                      Mich. Cent.

                                      M. K. & T.

                                      N. D. & C.

                                      Phg. & Western

 D—Includes roads under "A" and "B," also:
                                      Mich. Cent.

                                      Southern Ry.

 E—Includes roads under "A" and "C," also:
                                      C. R. I. & P.

                                      Seaboard Air Line

                                      Southern Ry.

 F—Includes roads under "A" and "B," also:
                                      Ann Arbor

                                      B. & M.

                                      C. R. I. & P.

                                      C. St. P. M.& O.

                                      Grand Trunk

                                      Lehigh Valley

                                      Mich. Cent.

                                      O. R. R. & Nav.

                                      Penn. R. R.

                                      P. B. & L. E.

                                      Seaboard Air Line

                                      So. Pacific

                                      Southern Ry.

    TABLE 13.—STATEMENT OF RETURN ON INVESTMENT IN ROAD, EQUIPMENT,
  ETC., FOR ROADS IN THE OFFICIAL CLASSIFICATION TERRITORY, FOR ELEVEN
          YEARS ENDED JUNE 30TH, 1909, ALSO FOR THE YEAR 1890.

 ╒═══════╤════════════════╤═══════════════╤══════════════╤═════════════╕
 │ Year. │ Cost of road.  │    Cost of    │   General    │Material and │
 │       │                │  equipment.   │expenditures. │  supplies.  │
 ├───────┼────────────────┼───────────────┼──────────────┼─────────────┤
 │1909   │  $4,357,455,101│   $686,116,206│   $50,586,812│  $75,550,135│
 │1908   │   4,306,902,038│    669,751,320│    51,324,157│   86,201,748│
 │1907   │   4,438,582,438│    587,637,733│              │   91,923,338│
 │1906   │   4,269,066,800│    513,028,004│              │   80,479,333│
 │1905   │   4,110,883,904│    492,498,488│              │   65,875,071│
 │1904   │   3,906,766,459│    461,941,677│              │   72,240,521│
 │1903   │   3,830,580,776│    426,822,318│              │   64,458,257│
 │1902   │   3,744,205,552│    389,909,755│              │   50,565,290│
 │1901   │   3,682,894,343│    378,545,580│              │   47,746,178│
 │1900   │   3,620,630,187│    377,156,700│              │   49,940,838│
 │1989   │   3,566,223,557│    351,902,957│              │   31,162,907│
 ├───────┼────────────────┼───────────────┼──────────────┼─────────────┤
 │Total  │ $43,834,194,155│ $5,335,310,738│  $101,910,969│ $716,143,616│
 │  11   │                │               │              │             │
 │  years│                │               │              │             │
 │Average│   3,984,926,469│    485,028,249│     9,264,634│   65,103,965│
 │  11   │                │               │              │             │
 │  years│                │               │              │             │
 ├───────┼────────────────┼───────────────┼──────────────┼─────────────┤
 │1890   │  $2,927,221,233│   $283,407,139│              │  $35,262,205│
 ├───────┼────────────────┼───────────────┼──────────────┼─────────────┤
 │Total  │ $46,761,412,388│ $5,618,717,877│  $101,910,969│ $751,405,821│
 │  12   │                │               │              │             │
 │  years│                │               │              │             │
 │Average│   3,896,784,365│    468,226,489│     8,492,581│   62,617,152│
 │  12   │                │               │              │             │
 │  years│                │               │              │             │
 ╘═══════╧════════════════╧═══════════════╧══════════════╧═════════════╛

                        TABLE 13. (_Continued._)

 ╒═══════╤═══════════════╤═══════════════╤══════════════╤══════════════╕
 │ Year. │    Total.     │   Operating   │  Operating   │Net Operating │
 │       │               │   Revenues.   │  Expenses.   │   Revenue.   │
 ├───────┼───────────────┼───────────────┼──────────────┼──────────────┤
 │1909   │ $5,169,708,254│ $1,032,285,890│  $700,694,007│  $331,591,883│
 │1908   │  5,114,179,263│  1,049,545,984│   746,575,094│   302,970,890│
 │1907   │  5,118,143,509│  1,141,324,116│   794,998,803│   346,225,313│
 │1906   │  4,862,574,137│  1,044,552,909│   714,461,452│   330,091,457│
 │1905   │  4,669,257,463│    944,805,659│   658,337,498│   286,468,161│
 │1904   │  4,440,948,657│    899,868,519│   636,217,217│   263,651,302│
 │1903   │  4,321,861,351│    871,697,611│   601,864,284│   269,833,327│
 │1902   │  4,184,680,597│    782,975,559│   528,681,892│   254,293,667│
 │1901   │  4,109,186,101│    730,590,144│   491,657,899│   238,932,245│
 │1900   │  4,047,727,725│    698,368,829│   467,462,093│   230,906,736│
 │1899   │  3,949,289,421│    610,724,301│   413,390,359│   197,333,942│
 ├───────┼───────────────┼───────────────┼──────────────┼──────────────┤
 │Total  │$49,987,556,478│ $9,806,639,521│$6,754,340,598│$3,052,298,923│
 │  11   │               │               │              │              │
 │  years│               │               │              │              │
 │Average│  4,544,323,317│    891,512,684│   614,030,963│   277,481,721│
 │  11   │               │               │              │              │
 │  years│               │               │              │              │
 ├───────┼───────────────┼───────────────┼──────────────┼──────────────┤
 │1890   │ $3,245,890,577│   $524,767,906│  $348,388,268│  $176,379,638│
 ├───────┼───────────────┼───────────────┼──────────────┼──────────────┤
 │Total  │$53,233,447,055│$10,331,407,427│$7,102,728,866│$3,228,678,561│
 │  12   │               │               │              │              │
 │  years│               │               │              │              │
 │Average│  1,436,120,588│    860,950,619│   591,894,072│   269,056,547│
 │  12   │               │               │              │              │
 │  years│               │               │              │              │
 ╘═══════╧═══════════════╧═══════════════╧══════════════╧══════════════╛

                        TABLE 13. (_Continued._)

 ╒═══════╤══════════════╤═══════════════╤══════════════╤═══════════════╕
 │ Year. │ Net revenue  │   Total Net   │    Taxes.    │   Operating   │
 │       │ from outside │   Revenue.    │              │    Income.    │
 │       │ operations.  │               │              │               │
 ├───────┼──────────────┼───────────────┼──────────────┼───────────────┤
 │1909   │    $2,425,726│   $334,017,609│   $37,397,973│   $296,619,636│
 │1908   │     3,446,600│    306,417,490│    36,021,974│    270,395,516│
 │1907   │              │    346,225,313│    35,876,148│    310,349,165│
 │1906   │              │    330,091,457│    34,863,314│    295,228,143│
 │1905   │              │    286,468,161│    27,675,211│    258,792,950│
 │1904   │              │    263,651,302│    28,091,468│    235,559,834│
 │1903   │              │    269,833,327│    26,537,954│    243,295,373│
 │1902   │              │    254,293,667│    25,297,465│    228,996,202│
 │1901   │              │    238,932,245│    28,797,264│    215,134,981│
 │1900   │              │    230,906,736│    22,616,893│    208,289,843│
 │1899   │              │    197,333,942│    21,692,694│    175,641,248│
 ├───────┼──────────────┼───────────────┼──────────────┼───────────────┤
 │Total  │    $5,872,326│ $3,058,171,249│  $319,868,358│ $2,738,302,891│
 │  11   │              │               │              │               │
 │  years│              │               │              │               │
 │Average│       533,847│    278,015,568│    29,078,941│    248,936,627│
 │  11   │              │               │              │               │
 │  years│              │               │              │               │
 ├───────┼──────────────┼───────────────┼──────────────┼───────────────┤
 │1890   │              │   $176,379,638│   $14,753,550│   $161,626,088│
 ├───────┼──────────────┼───────────────┼──────────────┼───────────────┤
 │Total  │    $5,872,326│ $3,234,550,887│  $334,621,908│ $2,899,928,979│
 │  12   │              │               │              │               │
 │  years│              │               │              │               │
 │Average│       489,360│    269,545,907│    27,885,159│    241,660,748│
 │  12   │              │               │              │               │
 │  years│              │               │              │               │
 ╘═══════╧══════════════╧═══════════════╧══════════════╧═══════════════╛

                        TABLE 13. (_Continued._)

 ╒═══════╤═══════════════════╤════════════════════╤════════════════════╕
 │ Year. │ Operating ratio.  │ Percentage to cost │  Mileage of line   │
 │       │                   │  of road, cost of  │       owned.       │
 │       │                   │equipment, material,│                    │
 │       │                   │    and supplies    │                    │
 ├───────┼───────────────────┼────────────────────┼────────────────────┤
 │1909   │              67.88│              5.738%│           56,563.41│
 │1908   │              71.13│              5.287%│           56,328.79│
 │1907   │              69.66│              6.063%│           56,415.25│
 │1906   │              68.40│              6.071%│           55,990.12│
 │1905   │              69.68│              5.542%│           54,963.20│
 │1904   │              70.70│              5.304%│           54,643.50│
 │1903   │              69.04│              5.630%│           53,873.11│
 │1902   │              67.52│              5.472%│           52,980.70│
 │1901   │              67.30│              5.235%│           52,911.46│
 │1900   │              66.94│              5.146%│           52,495.25│
 │1899   │              67.69│              4.447%│           52,009.93│
 ├───────┼───────────────────┼────────────────────┼────────────────────┤
 │Total  │              68.88│              5.478%│          599,174.72│
 │  11   │                   │                    │                    │
 │  years│                   │                    │                    │
 │Average│              68.88│                    │           54,470.45│
 │  11   │                   │                    │                    │
 │  years│                   │                    │                    │
 ├───────┼───────────────────┼────────────────────┼────────────────────┤
 │1890   │              66.39│              4.980%│           43,094.73│
 ├───────┼───────────────────┼────────────────────┼────────────────────┤
 │Total  │              68.75│              5.448%│          642,269.45│
 │  12   │                   │                    │                    │
 │  years│                   │                    │                    │
 │Average│              68.75│                    │           53,522.45│
 │  12   │                   │                    │                    │
 │  years│                   │                    │                    │
 ╘═══════╧═══════════════════╧════════════════════╧════════════════════╛

If there were not abundant evidence that the railway industry is not
excessively profitable, there would be more reason on the side of those
who continually put forward new schemes of restriction; but, not only is
such evidence ample, but there is no evidence of any sort tending to
establish the contrary. Limiting the inquiry to the region east of the
Mississippi and north of the Ohio and Potomac Rivers, commonly known as
Official Classification Territory, the statement in Table 13, based on
the book cost of railways, with their equipment, supplies, and materials
on hand, is instructive. The data are from the reports of the Interstate
Commerce Commission.

The amounts shown in Table 13 as "operating income" are, as should be
remembered, those earned, and not those distributed as interest on bonds
and dividends on shares, which were necessarily much smaller. Bearing
this in mind, it is significant that the percentage of such operating
income to cost of property has not but once in the last twelve years,
the most prosperous duo-decade in the Nation's history, exceeded 6%, and
then only by a very small fraction; and that the average for the whole
period is less than 5½ per cent. Every one knows that the real value and
the actual cost of the railway property in this region greatly exceeds
its book cost, so that these percentages are undoubtedly much in excess
of the real rates of net earnings to value or cost of property.

P. E. GREEN, ASSOC. M. AM. SOC. C. E. (by letter).—It is not often that
there is presented to the Society a paper which shows such thoroughness
of understanding of a difficult problem, and as much real experience in
its solution, as is manifested therein; and the author is certainly to
be congratulated on such a logical and forcible presentation of the
subject. There may be some points on which engineers who have been
engaged in such work cannot agree with him; but certainly it cannot be
said that he has not argued very clearly and logically on nearly all the
debatable questions.

Those who have not had actual experience in making a valuation of a
railway company's property cannot have any idea of the enormous amount
of detail and labor necessary to make such a compilation of any real
value. It simply means that every detail of every structure of whatever
kind must be investigated, together with the various considerations
covering "intangible values," which the author has so ably discussed.

The writer was fortunate enough to be employed on the valuation of the
Chicago and Northwestern Railway property in Minnesota in 1906, and
possibly some details of the manner in which the actual field work of
the survey was done may be of interest.

The work consisted of making a compilation from records, or from actual
surveys when necessary, of about 625 miles of railway property,
including several important terminals. The property had been built
between 1860 and 1901, mostly in the early part of this period. The
portions which had been constructed during the latter part of the
period, say from 1890 to 1906, presented no difficulties, as the records
were very clear and complete, but the portions constructed in the
Sixties had practically no records. Some had been built by small
independent companies, which were acquired later by the Northwestern
System. On these old lines the records were practically nil, and those
in existence were soon found to be of absolutely no use. Even on the
newer lines it was found that many changes had been made within a few
years after their construction, and that it was sometimes more
economical, as regards time at least, to make a new survey of the
property than to use the records.

After examining all the old records very thoroughly, and endeavoring to
get some order and information out of them, it was decided that the only
way to do the work properly was to make a complete survey and valuation
of all the physical property. Several field parties were organized and
also an office force, about twenty men being put on the work. The
parties ran levels for profile purposes, cross-sectioned cuts where
necessary, noted evidences of clearing and grubbing, of the character of
the cuts, and the disposal of the material, examined the ballast for
depth and character, examined the rails for age, weight, and condition,
and noted the kind and condition of the fences, gates, farm crossings,
planking, whistle and highway-crossing posts, culverts, bridges, and in
fact every detail of construction. Advantage was also taken of the
survey to re-station the lines, to paint such stations on the rails, and
to set permanent posts, so that afterward the stationing could be picked
up at any time with little trouble.

In this way there was accomplished much work of value to the railway
company, for which there had been a demand by the division officials for
years, but which had not been done because of lack of men and money.

No attempt was made to assign depreciation, as regards the rails; this
was determined afterward, from the age of the steel in the track. It was
necessary, however, to make quite a thorough inspection of the ties, and
to note their condition, as they were replaced year by year singly as
they wore out. Almost every conceivable kind of timber had been used for
ties at one time or another. Treated and untreated ties lay side by
side; and thus there was great difficulty in classifying them with
regard to the kind of timber. With bridge ties and timbers of frame and
pile bridges, there was not so much difficulty, as they were open to
inspection, and had been inspected twice yearly by the Division Engineer
and the Superintendent of Bridges and Buildings, and accurate records of
their condition and renewals had been kept. The depth and condition of
the ballast also varied very widely.

In a very short time all the men on the survey became well acquainted
with the character of the work they had to do, and, as the work went on,
the progress of the party day by day was very much more rapid. At the
beginning of the survey, a progress of 6 or 7 miles of single track was
considered a very good day's work; at the end of the survey, the parties
were making from 12 to 15 miles per day.

There was considerable difficulty in setting proper values on the
hundreds of buildings, large and small, owned by the railroad. Most of
these buildings had never been constructed from plans, and it was
difficult to calculate what they had cost originally, and what it would
have cost to build them at the time of the survey. However, time books
were searched, and the contents of the buildings in board feet were
calculated, and, while in many cases their age was not known from any
records, it was nearly always possible to find out from somebody just
when they were erected.

As intimated before, the railway company derived much actual benefit
from the work, outside of the accurate knowledge obtained as to the
value of the property itself. Steel charts, bridge records, etc., were
established, and profiles, stationing, continuous bench-levels, etc.,
were all re-run or re-established; thus making the engineering work of
the future more consistent and uniform, and enabling more work to be
done with a smaller force. New maps of all the station grounds and
terminals were obtained, and all the records were put in better shape
than they had ever been before.

Examination of some of the old terminals brought to light many strange
and out-of-date conditions. Old wrought-iron rails of antiquated
pattern, old cast-iron frogs, etc., of a pattern which had not been in
general use for fifty years, were found in the track. On some of the
little-used sidings, the old wrought-iron rails were so worn that the
tread of the rail was entirely gone, only the web remaining to carry the
traffic, and such rails were still in use.

In such a valuation, also, many items, some of considerable magnitude,
were found which were extremely difficult to classify and assign to
their proper place. Such a one, for instance, as a soft, sand rock
deposit beside the track, which for many years had furnished engine
sand. Many thousand cubic yards of this material had been excavated, but
it had not gone into the roadbed as ballast, or to make fills, or to
widen embankments. It would hardly have been proper to classify such
excavation as grading, for it was an item of engine maintenance and
train operation. This is only one of numerous problems which had to be
solved.

After all the survey had been made, most of the work of compilation had
to be done. Some of it had already been done in the office by the small
office force, but the great mass had to be done by the men who did the
work in the field. This task was of almost incomprehensible magnitude.
There were thousands and thousands of items, and such a great mass of
figures that the ordinary man would become lost in the maze. The data
had to be checked and re-checked by men who were not accountants, and
sometimes most ludicrous mistakes were discovered. However, it was at
last accomplished, and the writer's recollection of the "Present Value"
of the Chicago and Northwestern property in Minnesota is that it was
somewhat more than $23,000,000 for the entire mileage (about 625 miles),
or an average of about $37,000 per mile of track. Hardly any of the
mileage would be called high-class or trunk-line track, but most of it
might be classed as second-class or important branch-line railway.

E. KUICHLING, M. AM. SOC. C. E. (by letter).—This paper is a very
valuable addition to the literature of a comparatively new subject that
is rapidly attaining great political importance, and it gives abundant
evidence of deep research and thought by the author. The reasons for
determining the true value of such properties, as well as the general
principles of making the valuation or appraisal, have been set forth so
clearly and convincingly that little can be added in this respect;
hence, there is room for comment only about details.

One of the perplexing questions is the determination of the proper value
of the right of way and real estate of a railroad. The land was
originally acquired at a certain cost, essentially for public use, and
in the course of time its value, as determined by reproduction cost,
usually becomes greatly increased by the development of the adjacent
land by its various owners. Without the railroad, such development and
appreciation of land values would probably not have occurred, and,
therefore, it has been argued by many persons that, for taxation
purposes, the railroad lands should be appraised at only their original
cost, while, for capitalization purposes, they should be appraised at a
value measured by that of the adjacent land at the present time. This
claim is based on the theory that the railroad is like any other piece
of public work, such as a canal, highway, or pavement, which is built
for the use of the public, and on which no tax is levied by State or
municipality. On the other hand, it has been held by some of our Courts
that a proper valuation must take into account the appreciation or
depreciation of land values; but, as the opinion of a Court is not
unalterable, the soundness of this doctrine cannot be regarded as
permanently established.

The author states[41] that there can be no serious objection to this
doctrine in relation to rights of way in the country and small towns,
although he admits that it is subject to exceptions in the case of
cities and terminal and dock properties. It will be of great interest to
learn his reasons for making such exceptions in the case of the most
costly lands, and whether the valuation of such lands should be more or
less than that of similar adjacent lands used for other purposes. From
the context the inference may be drawn that the valuation should be
somewhat higher than that of adjacent similar land in the case of a
steam or interurban railroad, because its holdings form a continuous
strip; but to the writer this reasoning does not appear satisfactory.
The statement of the Court, that "the value of land depends largely upon
the use to which it is put and the character of the improvements upon
it," does not necessarily involve a higher valuation of the property
than its cost, and it is quite conceivable that the actual value of the
property after being taken by a railroad may be much less than it was
before. The only reason in such a case for maintaining the purchase
price is to conserve the general valuation of the adjacent similar real
estate.

In dealing with the subject of depreciation, the author has been very
brief, as he did not consider it essential for the purposes of the
paper. This is to be regretted, as depreciation is an important feature
in every valuation, and so few trustworthy data concerning it are
available. The value of the paper would be greatly enhanced if the
author would give the assumed average life of the principal components
of a railroad, based on some definite traffic, and normal grades and
curves. Much diversity of practice in this respect prevails, and the
final judgment of the numerous experts who were engaged in the Michigan
valuations cannot fail to be of great interest. The same remarks are
also applicable to the unit prices adopted for construction and
equipment.

The subjects of expenses for organization, engineering, administration,
contingencies, and non-physical values are treated very thoroughly by
the author, and particularly interesting is his discussion of the
complex question of franchise value. After quoting from numerous
judicial opinions, he reaches the conclusion that the franchise simply
protects the owners of the property in their enjoyment of the earnings,
and that its value merges into the "fair value" of the property and
becomes inseparable from the other non-physical elements of value; also,
that the aggregate non-physical value of the property depends only on
the net income for a period of years. This method of estimation
certainly has the merit of being simple, rational, and free from all
hypothetical considerations. It is, however, obviously governed by the
rates charged for the services rendered, and if these are likely to be
altered at any time by governmental action, a corresponding alteration
in the "fair value" of the property will take place.

This consideration brings us at once to the intricate question of
reasonable rates, which involves the matter of reasonable design and
construction of the property. In most cases the working capacity of the
plant must be much greater than the average annual demand for the
service performed, as so-called "peak loads" of relatively short
duration must be provided for. The magnitude of these peak loads,
however, varies with the subsequent development of the territory, which
is necessarily conjectural; hence it follows that a comparatively large
amount of capital is often invested in an enterprise for the purpose of
taking care of such anticipated temporary demands, and on this
investment a "fair return" should be granted. This condition is
particularly noticeable in municipal water-works plants, where provision
must be made for supplying water for fire service to an extent which may
be several times greater than the normal hourly rate of consumption. In
the case of railroads, such demands can usually be met by adding to the
rolling stock at moderate expense, while in a water-works the outlay is
relatively greater because the entire plant must be adapted in the
outset to the anticipated maximum delivery in the course of a
comparatively long period of time.

The problem of rate-making has been excluded by the author from his
present paper on valuation; but, inasmuch as he is so well qualified for
the task, and also because the non-physical value of the property
depends mainly on the rates obtained for the service rendered, it is
hoped that he will deal with this feature in a subsequent paper, thereby
bringing out a discussion on the obscure subject of "fair return." It is
noticeable that these phrases occur frequently in judicial opinions, but
the fundamental principles on which a definite conclusion should be
reached are seldom set forth clearly.

RICHARD T. DANA, M. AM. SOC. C. E. (by letter).—The solution of this
problem includes practically all the factors in the general subject of
economics, in which engineering occupies a large but by no means
preponderant part. Mr. Riggs has done some very valuable and pioneer
work in contributing this paper at this time; and the writer, in calling
attention to what appears to be a radical error in it, does not wish to
be taken as attempting to detract in any way from its great value as a
whole. It is most important, in the inception of such an investigation,
on the part of the members of this Society, to remove from the subject
the stumbling blocks as they appear.

The author makes the following statement:

  "It is true that the 'value' of a property is an unstable figure,
  subject to fluctuations due to natural or artificial causes, and
  that a material change in value may occur suddenly, but the 'value'
  of any given property on any given date is, or should be, from an
  engineering standpoint, a definite sum which may not be varied or
  changed to suit the whim or will of the people for whom the work is
  done."

The fundamental conception of a value is so important in an
investigation of this kind that it is worthy of careful and thorough
discussion.

The appraisals which the writer has had occasion to make have generally
been for one or other of the following purposes, namely:

   (I) Taxation, in the interest of the community or corporation
         taxed;

  (II) Bonding, in the interest of the banker or representative of
         persons who contemplated lending money on the property;

 (III) Rate-making, in order to determine what was a fair amount
         of money that the property should be allowed to earn for the
         owners.

Now, in general, a proper value for any property for any one of these
purposes is different from its proper value for any of the others. This
proposition is of immense significance, for the reason that, if the
value for the property arrived at, on one basis, be accepted and applied
for one of the other purposes, it will inevitably result in gross injury
and financial loss to some one.

In attacking this problem, one must be careful to take the correct
standpoint, which is not necessarily that of engineering. Engineering
science is indispensable for a large part of the work, but there are
other indispensables, which would not ordinarily be recognized as
engineering. The writer takes the view that engineering is a part of
economics, rather than economics being a part of engineering.

To illustrate this point, consider two objects, one of which is concrete
and simple and the other more complex.

  (1) A steam shovel belonging to a railroad, costing $10,000, new;

  (2) The entire railroad as an operating entity.

Assume for (1) that the shovel has been purchased recently, is in
perfect condition, and that the railroad has some work for it to
commence on as soon as it can be properly installed. What is its:

   (I) Taxable value,

  (II) Bonding value, and

 (III) Rate-making value?

(I) The tax assessor cannot properly appraise it at $10,000, because it
certainly would not sell for that sum, and if the community should have
to sell it for taxes the actual return minus the charges would be so
much less than the $10,000 that the community's books would show a heavy
loss; and this practice, if largely indulged in, would bring the
community into financial straits. The community must be exceedingly
conservative in its estimate, for this very reason; and, therefore, it
has been customary, almost universally, to tax such articles practically
on their sale value at what might be called panic prices. The company
which sold the shovel to the railroad would not buy it back two days
after the sale for more than the original price minus what that company
considers its selling charges, say 20%; so that, in this case, even if a
customer were at the door, the shovel would not be worth more than
$8,000, and a fair tax appraisal could not consistently be more than
$8,000 minus charges of, say, $250, or $7,750.

(II) Assuming that the railroad is a very small one, that it wants to
borrow money, and desires to put up the shovel as collateral for the
loan. What would be its loan value to the lender? In considering this
point, it is necessary to assume that no aid is rendered by the credit
of the railroad itself, but that the protection for the loan is to be
furnished by the shovel only. Now, the banker will reason that, in the
event of the note remaining unpaid, he will have to sell the shovel to
reimburse the bank for its loan, and he will be required to consider the
matter on a conservative basis. He cannot lend on the shovel up to its
full value, for in the first place it is not a "negotiable security." If
it were a security, with a free market on some stock exchange, he would
probably lend to the amount of 80% of its value, but a steam shovel in a
sand bank on a railroad is by no means as convenient of exchange, nor as
easy to foreclose on as a stock certificate in a banker's box; therefore
he will lend, or he ought to lend, less than 80% of its sale value,
minus the selling charges. If he lends more than this, he is lending on
the credit of the owner of the shovel rather than on the shovel itself.
Granted that the maker of the shovel is willing to buy it back at its
full selling price less the selling cost, the maximum loan value of the
shovel would be a little less than 64% of its purchase price, or $6,400.
To lend more than this on the shovel would not be conservative banking.

There is another bonding or loan value to this shovel, when it is
considered as part of the assets of the railroad, the bonds of which are
to be held by the banker, under which circumstances a higher value than
$6,400 would be admissible.

(III) If the value is to be determined with a view of ascertaining what
is a reasonable figure that the owner of the shovel ought to be allowed
to earn as a public utility organization, the problem is entirely
distinct from the foregoing two cases. Assume that the railroad is
entitled to earn at least 6% on its investment in the shovel. Now, its
investment is $10,000, because that is the money that it cost; and
nothing had been credited to its account, since the shovel had just been
purchased and had not yet done any work. The shovel cannot be considered
as being worth more than its cost, and it can easily be shown it is not
worth less for rate-making purposes.

These three illustrations, which are very briefly outlined, should
demonstrate the fact that there is almost no relationship between any
two of the different kinds of value which are being considered.

Now, from the standpoint of the railroad as a whole:

(I) Should railroad property be taxed on the basis of what the entire
railroad would bring on a foreclosure procedure? Obviously not, because
the railroad is taxed in sections. The Town of Squedunk will tax the
portion of the railroad that lies within that town, and will have
considerable difficulty in putting down as security for its own bonds
the locomotives and cars which go through once a week or twice a day at
40 miles per hour. To cover partly the flitting assets, it taxes the
railroad on a franchise value. It may tax a railroad's land on the same
basis that it taxes land owned by private individuals, notwithstanding
the fact that when the railroad buys the right of way it generally has
to pay more money per acre than the householder or the farmer. This unit
cost to the railroad may be two or three times that to the farmer, yet
the writer has never heard of a community attempting to tax railroad
property two or three times as heavily as adjoining property used for
private or commercial purposes.

(II) On the other hand, this same property is an absolutely sound asset
for the railroad, and the railroad probably bought the property from the
proceeds of the sale of bonds. If the public service commissions were to
rule that the railroad may be allowed to issue bonds only to the amount
of the taxable value of the property which is to be held as security for
the bonds, the result would be an absolute paralysis of railroad
construction. A bond is an obligation to pay so much interest for so
many years, and to pay back the principal at the end of its term. The
bondholder is interested in the absolute regularity of his interest, and
in the security that lies behind the principal, and it is to-day the
custom of banking houses to consider a bond well secured when, in a
territory of reasonably rapid growth, the principal is earning say twice
the interest on its bonds, and when the cost of reproduction is in
excess of the amount of the bonds, provided that the property is in good
physical condition. If it should be necessary to foreclose on the bonds,
it is then reasonable to suppose that some one else will buy it in for
at least the amount of its bonded indebtedness. What can this possibly
have to do with the taxable value of the track in the Town of Squedunk?
One may be 1.5 times the other, or three times the other, depending on a
multitude of circumstances.

(III) The value of the property for rate-making is a complex one to
determine, and, of course, there is no opportunity for a full discussion
of it here. One point, however, will serve to establish thoroughly the
difference between this and taxable or bonding value. If the community
is prosperous and the business is a good one and honestly managed, the
railroad ought to be allowed to earn a reasonable percentage, say, at
least 6%, on what has been put into it. If the community should decree
otherwise, then people will not build railroads for investment purposes,
and all will lose money. Now, it is a well-known fact that a new
railroad's earnings have to grow for several years before they are on a
normal basis, and part of what the owners of the property have put into
it is, for example, the interest on its cost before its earnings are on
a normal basis. This may amount to a considerable percentage of the
original construction cost of the property, if the business is several
years in developing. Granted that the community ought to allow the
property to earn a reasonable interest on what has been put into it,
then the rate-making value will be very much larger than the sum of the
taxable valuation of all its different parts. It will also be much
greater than its bonding value, because, as a bond proposition, it can
borrow money up to a limited percentage of what it is actually worth.

GEORGE T. HAMMOND, M. AM. SOC. C. E. (by letter).—The engineer called on
to fix the valuation of public service corporation property has so
little engineering literature on this special subject to guide him that
he must feel grateful to the author of this excellent paper for adding
so much of a kind that is very desirable.

Estimating the cost of an engineering structure in advance of its
construction is one of the most ordinary professional duties, but how
difficult it actually is, and how much engineers differ with one another
in their estimates on the same structure! Perhaps there is no
professional duty which calls for so much study and so much experience,
or which tests so closely the ability and capacity of the engineer. How
seldom professional estimators agree with each other; or designing
engineers with contracting engineers; as witness the bids received at
the public lettings of contracts when compared with the engineers'
estimates of cost; and, if this is true, which no one will attempt to
deny, how much more so is it probable that estimators will disagree when
they attempt to place a value on works already completed, and in
service, perhaps, for many years, in which various changes in value have
occurred, and in which questions of fact are mixed with legal questions
involving legal rights, as well as financial questions.

The tendency in all such valuations appears to be a mixing up of things
in general—like the witches' stew. Everything goes into the pot and is
boiled together until all becomes soup, at least until the official
commission, like the witches, considers it done and ready to be served
up in the form of a report. It is then observed that the substance
served out is of a complex nature; that the valuation of engineering
structures has become mixed with other and uncertain values; that the
whole value, as stated, is, after all, little better than the
commission's opinion of the value; and that another commission would
reach a different conclusion.

The author states that the valuation of corporation property:

  "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.

As the writer has recently submitted to the Publication Committee of
this Society a paper on the "Going Value of Water-Works," written by him
in collaboration with John W. Alvord, M. Am. Soc C. E., in which a
detailed discussion of this subject will be found, only enough will be
said to outline clearly his point of view.

The author says:

  "The physical property is that which enables the corporation to do
  business. Without physical property it could not produce the
  commodity which it sells. The amount of money actually invested in
  acquiring that physical property represents the measure of capital
  on which it is morally entitled to earn interest and profit; and, in
  the stage of promoting and financing the enterprise, all hope of
  earnings is based on the amount of money required to construct the
  property."

He also says:

  "It would seem reasonable to say that this difference between the
  physical value and the value based on earnings represents the 'good
  will,' 'established business,' or 'going value,' and all other
  non-physical elements of value."

In referring to going value, he says:

  "* * * Yet, to fix a value on it by the method described by him [Mr.
  Alvord] involves going into the realm of conjecture and speculation
  to a degree that could never be sustained. * * * It can be readily
  seen that the physical present value is not always—indeed, is not
  often—the 'fair value.' The 'fair value' may be more, or less, than
  the present value of the physical property."

  "* * * Is it not, then, proper to conclude that the non-physical or
  intangible value, composed of all these various elements of value,
  can only be determined absolutely by a study of the earnings and
  operating expenses? * * *"

He also says:

  "The contention that all the different elements of non-physical
  value merge into one intangible value, not capable of separation,
  will doubtless be objected to by many engineers and corporation
  managers. * * *"

  "The writer does not concede that 'going concern' is a proper
  element to consider in the physical value, as it does not represent
  any part of the cost chargeable to capital, and the physical
  valuation should be confined to the determination of capital
  invested."

Quotations might be multiplied. Those cited, however, will suffice to
recall the author's view, and to make clear the point with which issue
is taken.

Is Mr. Riggs right in his contention that going value is in fact an
intangible value; that going value is not an element of real cost to the
company, involving investment of capital; that going value, therefore,
should not be included in physical plant value; and that the company is
not morally entitled to earn interest and profit on it?

The writer contends that going value is as real an element of cost, in
the property of any public service corporation, as is the cost of any
portion of its physical plant. It pertains, however, to the business,
rather than to the physical plant, of the corporation.

Whatever the difficulties of its computation may be, whatever the
methods used—whether that adopted by the Wisconsin Public Service
Commission (which is essentially one of determining the original cost of
the going value and not its reproduction cost), or whether that perhaps
first outlined by Mr. Benezette Williams and George H. Benzenberg,
Past-President, Am. Soc. C. E., in the Middle West, and by William
Wheeler, M. Am. Soc. C. E., in the East,[42] a method which seeks to
determine the reproduction cost of the going value, rather than its
original cost—the going concern value has come to be recognized, by
water-works appraisers at least, as a substantial element in the cost of
the plant, and hence as differing essentially from the franchise element
or so-called unearned increments of value.

Is not going value in a "between" class—a middle ground between tangible
and intangible values—tangible in that it has involved real cost and
expenditure of money; intangible in that it is not as readily calculated
as are other reproduction cost items, is dependent fundamentally on the
earnings of the company, and that there is no tangible equivalent to
show for the expenditure, except the existing income of the corporation?
Surely its character is quite different from that of the franchise, as
ordinarily found, the value of which, while real, from the rate-payers'
point of view, seems to be made out of whole cloth; in short, seems to
be of fictitious value.

Certainly, the conjectural and speculative character of the
computations—as referred to by Mr. Riggs—involved in the determination
of going value is no excuse for failure to recognize going value as a
real element of cost, rather than as an intangible value. As a matter of
fact, the variation in the views on going value, by engineers who have
given this subject particular study, while greater than the variation in
their estimates of the reproduction cost of the physical plant, is still
far less than the variation in their views on franchise value.

As bearing on the proper basis for rate-making, the author's statement,
that the "* * * physical property represents the measure of capital on
which it [the public service corporation] is morally entitled to earn
interest and profit * * *" cannot be admitted, equitably or legally; and
it is not to be assumed that Mr. Riggs desired to imply that this
sentence summed up his final views.

Are we not, however, approaching a basis of rate-making, predicated on
the earning, by public service corporations, of operation and
maintenance expenses, depreciation allowance, and return (_i. e._,
interest and profit) on reproduction cost of the property, less accrued
depreciation, plus going value, plus a nominal allowance for the
franchise and other intangible values of the corporation? Is it not
possible that the recent depression in the business world has been due,
in considerable measure, to the shrinkage in the values ascribed to
franchise and other intangible value in public service corporation
property?

If we are approaching such a limitation, it is the more important that
the public should be educated to the fact—not theory, for it is a
fact—that going value, or going concern value, is a real element of
cost, covering an outlay in effort and money on the part of the
corporation, and as such is as much entitled to earn a return (interest
and profit) as is the other capital invested in plant. It is not on any
items of real and necessary cost to the corporation that the public
objects to paying tribute, but on the "unearned increments" and the
virtual monopoly "privileges" enjoyed by the corporation and created, in
large measure at least, by the public itself and by normal conditions of
growth and development for which the public, rather than the
corporation, was perhaps responsible—though in many cases it may be
urged truly that the corporation itself, rather than the public, has
been responsible for the development.

Such a basis of rating, while still dependent on sound judgment and
judicial treatment, is nevertheless not beset with the speculative
element involved in the capitalization theory, which, Mr. Riggs himself
admits, fails as a basis of rate-making except when predicated on fair
rates.

If the writer's contention, that going value is a real element of cost
in the property of any public service corporation, is sound, Mr. Riggs'
statement that, "It appears to be doubtful whether the Court can be
construed as approving such an element of value in rate cases," and his
interpretation of Judge Tayler's ruling in the Cleveland Street Railway
matter,[43] must be challenged.

Certainly, as applied to water-works valuation, Mr. Riggs' statement is
not justified. The Maine cases clearly include going value as an element
of value on which rates should be predicated; by inference, so does the
Kansas City case. In the Knoxville case it was in fact allowed by the
Master.

In equity it cannot be doubted that going value should be included in
the base on which the returns are predicated, if, as contended, it
involves real cost to the company; for the company must be permitted to
earn a fair return on this cost, or to liquidate it in some way, as
otherwise the corporation would suffer substantial property loss—from 10
to 20%, more or less, of the reproduction cost of its property. This
would be contrary to public policy, for, with such an outlook, capital
would not enter this field of enterprise, except at increased rates of
return, commensurate with this added hazard. To assume such increased
rates of return is to provide another means of liquidating such a loss.

As to "good will," it has seemed to the writer more proper to use this
term in private competitive corporation enterprises, as applied to the
element of value corresponding to the going value of the quasi-municipal
or public service corporation enterprises, which latter are in effect
controlled monopolies. If the term is used in its more colloquial sense,
such as the effect on earnings of having, in the office of the
corporation, men who meet the public pleasantly, who are good "mixers,"
and who are active in getting business, the value is substantially
included in the consideration of the income, in the manner involved by
going value determination and franchise valuation.

The depreciation question has been discussed so fully elsewhere that the
writer only calls attention to the fact that, while physical and
functional depreciation only are to be considered in a review of the
present physical condition of any plant, in considering a fair-rate
schedule, provision should also be made for contingent depreciation,
covering such items as cost incident to change in street grades or
construction of subways; placing structures under ground, which were
previously above ground; serious loss due to injury by electrolysis, the
distribution of which over a period of years rather than inclusion in
the operating cost for one year, is to be preferred, alike from the
public and from the corporate point of view, from the fact that it
spreads the burden to be borne by the rates, and prevents violent
fluctuation in prices or valuation of the public service corporation's
property. The public pays dearly for all hazards. It is wise, therefore,
to pursue the conservative course in providing adequate funds to meet
extraordinary conditions, and to give stability to the investment of the
corporation. Moreover, such funds can be carried in a separate account
which can readily be watched; any excess can be credited to future
reduction in depreciation account requirements, while a prolonged
deficit cannot perhaps be recovered by the corporation, in the light of
the Knoxville decision.

The comment that no hard-and-fast rule can cover determination of proper
depreciation allowances, is amply justified. In its final analysis, it
is a matter of good judgment, experience, and judicial temper.

The author's statement that the organization, legal, engineering,
administration, and general expense accounts, "should not be considered
as affected by depreciation, as long as the property is a going
concern," is not quite clear. Obviously, this is true with regard to all
the early organization expenses, as these expenses are incurred once for
all, and constitute a continuing asset similar to other elements of
plant cost. If, however, the author refers therein also to the
engineering and contingent item added to many of the reproduction cost
items making up the physical property, exception must be made; for when
an old structure, the life of which is gone, is replaced with a new
structure, new engineering costs are incurred, and the engineering
element of cost incident to the installation of the original structure
no longer inheres in the plant. It, too, has passed away with the life
of the structure, and, therefore, its cost should be liquidated, or
provided for in the depreciation account, as well as the cost of the
structure to which it was incident.

In the same way the "interest-during-construction" item is not a
continuing asset, but should be liquidated with the complete
depreciation of the portion of the structure to which it
relates. The replacement of the structure will involve new
"interest-during-construction" charges, commensurate with the
time required for construction. The value of the initial
"interest-during-construction" costs will have disappeared with the
original structure and, therefore, should be taken care of by the
depreciation account.

The method of making allowances for interest during construction,
suggested by the author,[44] accords closely with that used by Mr.
Alvord and the writer in a recent valuation of a large water-works
property, in which the "interest-during-construction" charges were
limited, and the contributions to depreciation account were begun, at
the date on which any workable unit of the property was assumed to be
available for service and to begin to earn a return on its investment
cost, even though the structure, as a whole, was not assumed to be
completed for a considerable period of years thereafter. Thus, for
instance, it might be assumed that as soon as the supplying works in a
water-works project were in operation, the investment in them and in the
distribution pipe system laid up to that time, would cease to be
credited further with "interest-during-construction" allowances, and
would be compelled to earn interest through the water rates or income
from water supplied to consumers—the fact that the interest charge could
not be wholly met, immediately at this time, being taken care of in the
resulting increment in going value.

Such a theory, of course, does involve a determination of the probable
order and rapidity of construction of the component parts of the
property, and this is usually made, in water-works valuation, in the
estimate of the reproduction cost of the property.

For the sake of completeness, in reference to the legal decisions of
importance in valuation proceedings, attention is called to the
Pennsylvania case, Brymer _vs._ Butler Water Company (179 Pa., 231),
referred to in the closing discussion on the writer's paper on
"Water-Works Valuation."[45]

In this case Justice Williams, speaking for the Supreme Court of
Pennsylvania, says:

  "By what rule is the Court to determine what is reasonable and what
  is oppressive? Ordinarily, that is a reasonable charge or system of
  charges which yields a fair return upon the investment. Fixed
  charges and costs of maintenance and operation must first be
  provided for. Then the interests of the owners of the property are
  to be considered. They are entitled to a rate of return, if their
  property will earn it, not less than the legal rate of interest; and
  a system of charges that yields no more income than is fairly
  required to maintain the plant, pay fixed charges and operating
  expenses, provide a suitable sinking fund for the payment of debts,
  and pay a fair profit to the owners of the property cannot be said
  to be unreasonable."

The Pennsylvania Court, therefore, in the words of William S. Wallace,
Esq., recognizes the single standard:

  "The Single Standard, according to the Brymer case, while
  acknowledging the full right of the public to regulate such public
  corporations, also recognizes as a prime factor its private
  character and the rights which accrue to it in that capacity, ...
  and holds to what seems to me the only rational and practicable
  basis, that a fair return, after deducting the charges above
  enumerated, _is_ a reasonable rate"; whereas, "the Double Standard
  basis of fixing a reasonable rate seems to accentuate the public
  side of the corporation and rather ignores the private element."

As to the propriety of the inclusion of a substantial recognition of
franchise value as a basis for rating, the layman may well confess to
perplexity, in the light of the conflicting nature of the two important
recent United States Supreme Court opinions referred to—the Knoxville
case, and the Consolidated Gas Company case—for, while substantial
allowance was made for franchise value, in the Consolidated Gas Company
case decision, in large measure apparently on account of its earlier
recognition by the legislature, in the Knoxville case, in spite of
legislative recognition of such value, and similar approval of the issue
of securities predicated on such recognition, the United States Supreme
Court failed to make similar allowance for franchise value.

The author's treatment of the unit price question and the contingency
item is intelligent and creditable. Engineers are prone to make
valuations based on "hindsight" instead of "foresight," on the
assumption that no substantial difficulties in construction were
encountered, when, in fact, substantial difficulties should perhaps have
been anticipated, and may actually have been encountered in the original
construction, record of them having been obliterated, however, with the
lapse of time.

The author's definition of the value of a property, as the "estimated
worth at a given time, measured in money, taking into account all the
elements which add to its usefulness or desirability as a business or
profit-earning proposition," suggests the advisability of recognizing
the other side of the ledger by modifying his statement so as to read:
"* * * all the elements which add to, 'limit, or detract from' its
usefulness or desirability as a business or profit-earning proposition."

While recognizing the author's view, that there is no separate and
independent method of determining franchise value, which is not based on
the determination of the value of the property as a whole, by
capitalization methods, it must be recognized that going value may be
determined independently, and may have a positive value, even though the
property as a commercial whole is worth less than the sum of the
physical value and the going value.

The Court, appraisers, and the author, alike recognize that there is no
one method of valuation of universal application. First cost,
reproduction cost, reproduction cost less depreciation, commercial value
determined by capitalization, worth of the service to the consumer, and
market price of the property, if such exists, all have their weight, in
varying degree in different cases. Whatever may be said of, for, or
against, these several methods of valuation, relates rather to their
significance, and the weight which should attach to the results obtained
by them, as evidence of value and of the effect of the modifying local
conditions, than to the soundness of the methods themselves.

In this connection it may be of interest to refer to a recent valuation
of a water-works property, in the appraisal of which the writer chanced
to participate, in which there was finally placed before the board of
appraisal a summing up of:

  1. The original cost;

  2. Reproduction cost less accrued depreciation, plus going value;

  3. The worth of the service to the consumers, based on a stated
      assumption of reasonable increment in value in excess of actual
      cost, upon which a return (or interest and profit) should be
      earned;

  4. The commercial or capitalized value, on certain assumptions based
      on present conditions, and also on possible future conditions
      which might be involved in a renewal of the City contract, which
      was to expire within two years.

That these determinations of value, from different points of view, had
an influence in moulding the opinion of the individual appraisers, there
can be little doubt; yet it is probably equally true that in no case was
like weight attached to the several items or bases of valuation.
Nevertheless, in the final valuation, the consensus of opinion as to the
value of the property, as a whole, was remarkably close, the extreme
variations in opinion being approximately 8%, more, or less, than the
final appraised valuation.

Attention should also be called to the necessity, in any valuation by
capitalization of income, such as that outlined by Mr. Riggs and used by
Professor Adams in the U. S. Government Valuation of Railroads,[46] of
determining whether the plant or property is in what might be termed an
over-built, normally developed, or under-built condition; in short,
whether the investing public has correctly gauged its momentary physical
condition with reference to its bearing on the rates, and whether the
earnings are in fact inadequate, commensurate with the service rendered,
or excessive. In the long run, due weight will be given to these facts;
in a brief period, they may be incorrectly gauged. In water-works
properties, unfortunately, there is rarely, if ever, a market price of
the securities which can be said to be credible or significant in
valuation. Therefore, in the valuation of water-works properties, it is
the more important that the appraisers should weigh carefully the
present character of the service furnished and the momentary adequacy or
inadequacy of the rates as predicated on such service, on the needs of
the community, and the existing standards of the day, if full justice is
to be done.

In conclusion, the writer reiterates his statement, that he has taken
issue with the author in no carping spirit of criticism, but with a
recognition of the difficulty and complexity of the work of appraisal,
and the conviction that engineers are under a moral obligation to do an
educational work in pointedly calling attention to the fact that the
going, or going concern, value, of a public service corporation's
property is not an intangible value representing an unearned increment,
but a very real and substantial item of cost in the property as a whole.
While the difficulty may be met by placing going value, as suggested by
the writer, in a middle class between physical plant and intangible
values, the placing of it in the same class with franchise and other
intangible elements of value, as suggested by the author, may, in the
judgment of the writer, do a serious injury to corporations, in failing
to give expression, in such a manner as shall be clearly within the
grasp of the popular mind, to the fundamental idea of the cost of
developing going value. While the writer has no personal interest in the
matter, on one side or the other, having served both municipality and
corporation in water-works valuations, he feels, nevertheless, that
engineers can do a genuine service, alike to the public and to the
public service corporation, in laying stress on the fundamental elements
of cost and value, and particularly those on which rates should be
predicated, in public service corporation property valuation and rating.

CHARLES HANSEL, M. AM. SOC. C. E.—So much has been said on the subject
of valuation of public utilities that, although the speaker has thought
on the subject for ten years, and has done considerable valuation of
railroad properties, he finds that he is considerably confused, for the
reason that the discussions seem to cover the whole field of
engineering, accounting, taxation, and economics; therefore he suggests
that, in order to get down to a basis of usefulness, a special committee
should be appointed to take this question under consideration.

The speaker had the honor of being associated with the Michigan
Commission, as a member of the Board of Review. Professor M. E. Cooley
was selected by the State of Michigan to take charge of the work of
organization, and Mr. Riggs was the engineer who organized the office
and field forces. Both these gentlemen were eminently successful in that
very difficult work. Mr. Cooley did this Board the honor of saying that
there were so many problems coming up in actually carrying out the work
(aside from the theories of taxation, rate-making, accounting, and
several other things, which could be found more readily in the Auditor's
office than in the Engineer's), that he had asked for the appointment of
this Board of Review, to sit as a Court, and to pass on the many complex
questions arising from day to day; and he had the satisfaction of coming
to the Board every day and saying: "Well, now here is a condition, and
how will I handle it?" Of course, actually, he knew more about it than
the Board, but he was kind enough to say that he would ask for the
Board's opinion. That Board adjudicated all these various questions to
the best of its ability, and the speaker has the satisfaction of knowing
that the valuation has stood in the Federal Courts. The subjects are so
fugitive and so illusive that very much depends on the point of view.

The speaker is now engaged in the actual task of trying to place a
valuation on some $300,000,000 worth of property in New Jersey,
involving the most important terminals in the United States.

The valuation of public service utilities is the most profound question
which has ever been before the Society, and it includes a great deal
which is outside of strictly engineering questions; in fact, the
discussions do not throw much light on the methods which should be
followed in making valuations.

The terminology of a subject is very important; in fact, the speaker has
found it so important that in his discussions with the Attorney-General
of New Jersey, in reference to the Railroad Tax Law, which he has been
asked to re-draft, that draft will be accompanied by a glossary, so that
the meaning of certain terms used in that particular Act will be clear.

In this New Jersey work some eighty-seven engineers and assistants are
employed, and for their guidance the speaker has prepared thirty-five
pages of very carefully considered instructions. These instructions are
accompanied by blue prints showing exactly how all field notes must be
recorded, with diagrams of trusses, culverts, and the like, and all the
elements of railroad construction.

The Tax Law of New Jersey states that, first, the true value of the real
estate shall be ascertained; second, the true value of the tangible
personal property; and the first law of 1884 stated: "and third, the
value of the franchise"; but somebody discovered that there was
something besides the value of the real estate, the tangible personal
property, and the franchise. They did not know what it was, but there
was something else; therefore, in the 1888 law they changed the third
division of value to read: "the remaining property, including the
franchise."

As an example of one of the difficulties of determining classification,
attention is directed to the term, Real Estate, which is broadly, but
seldom accurately, understood.

The Interstate Commerce Commission is the highest tribunal in the land,
in the matter of railroad accounting, but it affords no help in many
important elements of value; for instance, under the Interstate Commerce
Commission, real estate includes only such real estate (land) as is not
required for railroad purposes. All land actually used for railroad
purposes is classified under "Right of Way and Station Grounds."

When the engineers on the New Jersey valuation were sent into the field,
it was necessary to specify exactly what elements must be described as
real estate, and what as tangible personal property. The division line
had to be defined accurately for the reason that all personal property
is assessed permanently to the State, while, in the case of real estate,
the State receives the taxes on a strip not exceeding 100 ft. in width,
and the tax on all property used for railroad purposes outside this
strip reverts to the taxing district wherein it is found.

The vexatious question as to whether machinery is to be considered as
real estate or personal property was settled by the New Jersey Law,
which says that tangible personal property shall include all machinery;
but it left unsettled the question: what is machinery? After careful
consideration, real estate was divided into 74 classes, and all other
tangible elements were classified as personal property. Some of the
items of real estate are: ash-handling machinery and the like, chimneys,
cisterns, conveyors, dams, locks, lock machinery, electric wiring,
piping, heating, interlocking, signaling, pavements, reservoirs, shop
fittings, tanks, telegraph lines, track, track scales, transfer tables,
water-works, etc., etc. Generally speaking, all items of a fixed
character were included in the 74 divisions of real estate.

The difficulties of determining all the elements of real estate are
mentioned simply to call attention to what at first glance seems quite
simple, but on close examination is found to have great complexities.

The question of useful life depreciation, direct and indirect, due to
decrepitude or obsolescence, or both, is one of the illusive questions;
and then comes the value of the franchise.

The valuation of railroad property in New Jersey is further complicated
by the requirements of the State Tax Law, which specifies that the value
of the remaining property, including the franchise, shall be determined
after the "true value" of the real estate and tangible personal property
have been determined.

The speaker will not attempt a discussion of franchise values, as it is
a subject which requires the most profound study.

The author states that he is appalled at the speaker's misconception of
the method of determining non-physical value used by Professor Adams in
Michigan. The speaker is perfectly familiar with that method, and,
although having the greatest respect for Professor Adams' opinions, is
compelled to draw attention to two important elements of that formula
which are open to objection.

Professor Adams establishes his annuity on the depreciated value, rather
than on the cost, or the reproduction cost, which, in the speaker's
opinion, does not determine the proper annuity or reasonable fixed
charges to be deducted from net income before net surplus is
established. Bonds are generally sold at a considerable discount, and
represent the full cost plus this discount, consequently, the interest
on bonds or fixed charges will be greater than an annuity established on
cost, "reproduction cost," or "present value." Would it not more nearly
establish fixed charges or annuity, to take the cost plus discount and
commissions as the basis on which to apply the annuity rate?

While Professor Adams' formula establishes a larger net surplus for
capitalization than the method suggested by the speaker, he in effect
destroys this net surplus by charging against it all betterments
chargeable to income. It is quite clear that this gives the railroad
company a chance to absorb all net income into betterments, and thus
wipe out all net income, in which case there would be no net surplus to
capitalize, consequently, no non-physical or franchise value, and the
total value established under this plan would be less than if the
property had not been improved by the betterments—_reductio ad
absurdum_.

In reference to the question of whether or not the method of valuation
should be the same, regardless of the purpose to which the value is to
be applied, the speaker cannot agree with the author, and believes that
it is quite consistent to establish different values for different
purposes.

The completion of a large public utility, planned on such a scale as to
provide for the requirements of many years to come, utilizing but part
of its capacity, and earning less than its operating expenses and fixed
charges, with its rates of toll fixed by law, must be considered in a
different way than a well-established public utility, with business
forcing it to its utmost capacity, and with tolls not fixed by law.
There are many important elements bearing on this consideration of
value, and the purpose of the valuation should be known before
attempting to establish the value.

In New Jersey the work is complicated further by the necessity of
establishing the value of 122 separate railroad corporations, and the
assignment of all property outside the 100-ft. strip to each of the 450
taxing districts through which the 122 corporations, with their many
branches and spurs, are operating.

In order to determine the quantities and materials in the permanent way
and structures, nine engineer corps were organized, each corp consisting
of six men. With this force the center line of the main running track
was measured, and the exact distance in each taxing district recorded.
Cross-sections of the roadbed were made as often as changes in the
natural surface required, and accurate measurements and notes were made
of all structures; and, although in many cases the engineers were able
to secure the plans of the more important steel structures, the field
parties were required to obtain sufficient data to compute the tonnage
in case it was impossible to get these plans.

The field parties were also instructed to note the character of the land
and improvements adjoining railroad property, and record such other
information as was necessary for a comprehensive understanding of the
conditions attendant on the construction of a railroad in that locality.

The time allotted for the completion of the work is one year, and
although this is a comparatively short period in which to introduce a
premium system in field work, it was decided to inaugurate such a system
as would be as nearly satisfactory as possible under the conditions. A
record of each field force for each day in each month was made on
profile paper, using the horizontal lines to represent the number of
tracks, and the vertical lines to represent distance. Two horizontal
lines were allowed for single track, four for double track, and so on.
One mile was allowed for each vertical division of the paper, and, in
awarding the premium, there was taken into consideration, not only the
extent of territory covered by each field party, but much consideration
was given to the field notes, and a cash prize was awarded each month.

The results of the organization and encouragement to the field parties
are shown by the very great increase in the amount of work per man of
the field parties, which was nearly 300% during the time the parties
were in the field.

A great many questions hinging on interstate commerce, and involving
Fundamental, State, Federal, and International Law, are embraced in the
broad view of the valuation of railroad properties. The movement of
rolling stock through various States, and between the United States,
Canada, and Mexico, and the determination of the situs and domicile of
floating equipment, are subjects which, not only require considerable
knowledge of railroad operation, but involve many questions not clearly
determined by the Courts.

The subject is of such great importance that steps should be taken to
formulate methods of procedure, and, at the Annual Meeting of the
Society, the speaker will offer a resolution requesting the appointment
of a Special Committee to determine the proper methods to be used in the
valuation of public utilities.

J. MARTIN SCHREIBER, M. AM. SOC. C. E.—Engineers and those generally
interested in the valuation of public service properties are fortunate
in having the valuable information embodied in this paper. Although
there are some points on which the speaker differs with the author, the
following remarks are only offered in order to bring out, from
experience, some further phases of the subject, rather than as an
attempt to criticize.

A great deal is heard about the exact cost of reproduction, also
arguments in reference to the proper allowance for contingencies,
probably only involving a small percentage. The speaker questions the
propriety of advocating the exact cost figures. The carefully checked
cost figures of reliable contractors, with first-class engineering
organizations, submitting proposals on the same construction, are often
found to vary from 5 to 15% from the total cost. Different organizations
will sometimes be the cause of figures varying 5% or more, depending on
the efficiency and experience of the corps. A clever purchasing agent
will reduce an apparently precise estimate on equipment or supplies as
much as 10%; on the other hand, the condition of the market may be such
that the actual price paid exceeds the estimate by the same percentage.
Engineers who are responsible for estimating on, and the execution of,
construction projects generally add more than 10% for contingencies, as
it is practically impossible to anticipate them, and a precise estimate
is almost certain to fall short. It is unfortunate that it is almost
impossible to sustain contingency figures on the witness stand; for that
reason, probably, it would be more satisfactory to the lay mind, and to
the various courts, boards, etc., which are required to pass on
valuations, and do not thoroughly understand the technicalities of the
situation, if engineers would drop the contingency item and modify the
quantities or the unit prices.

If it is possible to estimate the exact cost of reproduction, certainly
considerable variation may be expected from independent sources in
computing depreciation and present values. Yet there are reputable
engineers who would have one believe (assuming that they know the cost
of reproduction) that by a simple field inspection they are able to
compute the exact present value.

Some time ago, the speaker heard an expert testify in the interest of a
certain city, for tax purposes, with reference to the value of a piece
of street-railway track. He first stated the valuation for reproduction,
and then the definite present value. The latter was greatly in excess of
the actual value. The expert, who was an engineer of considerable
standing, on cross-examination, did not know the height of rail from top
of head to bottom of groove, either at the joint or any other part in
its length; he did not know the exact depth of flange of the car wheels
which operated over that track, the headway, or the exact weight of the
cars used. He had assumed the condition of the ties, and that the track
was ballasted. Finally, he was compelled to admit that his determination
of the depreciation, by simply a field inspection, was a very rough
approximation. Now, it is not in every case in the past that a
corporation attorney, even with engineering assistance, has been able to
point out unfair testimony. Many times the speaker has heard incompetent
testimony admitted, on the general principle that the witness was an
engineer of note, even though his record had been made in other
specialities. Too much stress cannot be put on this phase of the
subject, and the speaker is glad that the author has mentioned the fact
that the personnel of those doing appraisal work should be of the
highest order. In the past it is probable that the failure to
discriminate properly in accepting incompetent testimony (not to mention
prejudiced testimony) was automatic, and this is the most important
reason for much of the hostility of officials of public service
properties toward all forms of investigation, as the author mentions.

Company officials know that they are often compelled to employ and train
specialists to furnish, within fairly accurate limits, the very
information which is being sought, and naturally they are skeptical
about the data presented by those who, though not intimate with the
property, purport to give exact cost figures. Any one who is able to
point out a consistent method whereby these exact figures may be
obtained surely will obtain credit for a valuable contribution toward
the solution of the complex subject of valuation.

Referring to the valuation of the property of the Detroit United
Railroads, mentioned in the paper, the Director of Appraisals for the
city estimated that the cost of the complete appraisal of the property,
which includes about 220 miles of single track, would be from $3,000 to
$4,000. Approximately, $25,000 has already been spent, not including the
expense sustained by the company, which furnished a large proportion of
the information.

Probably correct present value estimates which include depreciation may
not be even fairly approximated without intimate knowledge of the
particular property, and this should embody operation, policy of
management, past performance, study of historical cost (as far as the
records will permit), estimated cost of construction, and actual cost of
maintenance. The life of a piece of track or equipment, disregarding
obsolescence and extraordinaries, generally depends on the type and
details of construction, the service it has done, and the service that
will be required of it. Renewals should be made when the cost of repairs
reaches a certain figure, other conditions being favorable. It is a fact
that able engineers, intimately acquainted with the case at issue, and
employed on the same property, often have conflicting ideas in reference
to the life of track or equipment, one recommending immediate renewal
and another advocating longer operation.

The speaker does not intend to argue against the possibility of placing
fairly accurate values on reproduction or present value, but wishes to
bring out the fact that it is not as simple as the lay mind is often led
to believe. Further than that, he is of the opinion that the following
is essential for economical and satisfactory valuations for all
concerned:

(1) There should be co-operation of the appraisers with the public
service property officials, including operators, engineers, and their
records.

(2) Present values should be determined by:

  (_a_) Cost of reproduction,

  (_b_) Mortality tables,

  (_c_) Data of performance,

  (_d_) Field examination.

(3) The organization for the appraisal work should be of sufficient
scope, and should be allowed the time and funds which the project
reasonably requires.

(4) The appraisers should be carefully selected, the personnel including
men who have had wide experience in the particular class of operation;
and specialists should be obtained if necessary.

Mr. Riggs states that the valuation should be the same, regardless of
the principles at issue. It seems questionable to consider the fair
value which involves the non-physical value in costs or tax regulations.
Certainly, in the case of street railways in cities, where a percentage
is levied on the gross receipts, the non-physical valuation, only
representing present value, is necessary. Again, a physical present
value for taxation should not include the value of paving in the street
in the strip occupied by street-railway tracks. That the street-railway
company often pays an arbitrary assessment tax and keeps the paving in
repair, though it is in no way responsible for the wear, should be
sufficient to offset any obligation for other taxes. In some States this
is fixed by the Courts. The physical valuation, however, intended to be
used in connection with rates, cost, or capital regulation, should
include the cost of paving the railway strip. Referring further to the
question of including the paving in the physical valuation of street
railways, in the case of a decision of R. W. Tayler, Arbitrator, in the
proceedings between the Cleveland Electric Railway Company and the City
of Cleveland, on a basis of a renewal of franchises, Judge Tayler said:

  "Paving represents actual money expended. It belongs to capital
  account, and in its depreciated form is worth all the allowance that
  I have given it."

Also for rate-making and the capital regulation some consideration is
certainly due to obsolescence and change of art, while in taxation they
should not be included.

In conclusion, the speaker is optimistic enough to believe that the
problem of physical valuations will be solved satisfactorily for all
concerned. Co-operation of officials of the public service properties,
reliable testimony, with a better understanding by the Courts, will
certainly tend to clarify the situation. Non-physical values are very
difficult to determine, and their intelligent treatment will require
some well-defined procedure. Mr. Riggs' valuable paper will go a great
way toward producing a correct idea of the general proportion, and will,
no doubt, assist in the formulation of proper methods for valuation.

CLINTON S. BURNS, M. AM. SOC. C. E. (by letter).—The author is to be
congratulated on the detailed care shown in the presentation of this
subject. Perhaps few engineers who have not been called on to cope with
the subject of valuation of properties, realize or appreciate the real
complexity of the many varied problems encountered in work of this
class. To those who are engaged directly in appraisement work, this
paper will be a welcome contribution to the literature on the subject.

The author's statement that if a commission of engineers is directed to
report the true cost of reproduction, depreciation, or present value of
a certain property, the final figures should not differ, whether the
report is to be used as a basis for reorganization, sale, rate purposes,
or taxation, is open to argument. It seems proper that, if a property is
appraised in order to fix a selling price to a Government or
municipality exercising its right to purchase, the final figures should
be based on current prices of labor and material, because this does no
injustice to either party. It is evident that if the seller secures
payment for his property based on current prices, he may, if he desires,
reinvest the proceeds of the sale in similar enterprises at current
prices, so that thereby he secures the same benefits, whether prices are
high or low.

It is equally evident that if the purchaser (the municipality) chooses
to purchase the property, the right to purchase must be exercised at the
particular time permitted by the franchise. If prices chance to be
abnormally high at that time, the municipality is exactly on a par with
what it would be if compelled to build its own plant at that particular
time; while, if prices be abnormally low, the same relative situation
still exists. There seems, therefore, to be no possible injustice to
either party in using current prices, when the object is a sale or
transfer of the property. However, in determining a proper value as a
basis of rates, another factor must be considered. It is inexpedient and
against public policy to make frequent changes in the rate charged for
such commodities as water, gas, or electric current. Theoretically, the
rate could be fixed each year, based on an annual valuation of the
property, thus permitting a high rate one year and perhaps an abnormally
low rate another year; but, practically, this is impossible, for, aside
from the inconvenience of such a cumbersome system, no community is well
enough informed as individuals to comprehend any reason whatever for
ever raising rates. Raising rates is invariably accompanied by a wave of
indignation. However, it is apparent that a series of rates based on an
annual current price valuation of the property would average exactly the
same, during a term of years, as though the property were valued once
for all on the basis of the average prices of labor and material for the
same term of years, and the rate based on the one valuation thus
determined.

If the object of the valuation is to afford data for taxation, the same
argument applies as in a case of fixing rates. It thus seems proper that
the object of the appraisement should be taken into consideration before
it is determined whether to use average prices, or current prices, of
material and labor; and, if this is correct logic, the final figures
must differ according to the object in view; but, having determined the
proper unit prices to be used throughout any appraisement as being the
most equitable for the object in view, then, as the author well says,
the appraiser must not allow personal prejudices or fancied conditions
to influence his course. Above all, an appraiser must not be afraid of
his client. He must not allow his personal judgment to be swerved by the
latter's desires. It perhaps seldom if ever occurs that an appraiser,
representing a municipality, or State, is subjected to this unconscious
influence, inasmuch as his employer is merely a temporary public
official, and consequently he has no client to fear. He goes into the
work with a full knowledge that his employer knows little or nothing of
the subject, and his only desire is to reach results which will be
unquestionably fair to both parties.

On the other hand, the appraiser who is chosen by the owner of a plant
takes hold of the work with a feeling that he is expected to report a
value as favorable as possible to his client, and this feeling is
reflected in the report, regardless of how sincerely or conscientiously
he tries to avoid it.

One of the most intricate and yet interesting problems in appraisement
work is the computation of the "going value," or "business value" which
should be allowed in addition to the physical value.

In considering a competitive enterprise, such as a railway serving a
community in competition with another independent railway, this problem
must be treated in a different way than in a non-competitive business,
such as a water-works, gas-works, electric plant, street railway, or
similar enterprise operating under the protection of an exclusive
franchise, or under natural conditions equivalent to an exclusive
privilege.

In considering competitive enterprises, it is manifest that a railway
operating under conditions more advantageous than its competitor
possesses an intangible value equal to the measure of that advantage. It
is not clear, however, whether it is more proper to say that the railway
possessing the advantage has a positive going value, or whether the less
fortunate one has a negative going value. Using the rule formulated by
the author, being that of Professor Adams, with some modifications, it
is evident that many properties would show negative going values; but,
as pointed out by the author, the Courts hold that public service
corporations are entitled to earn:

  (_a_) Operating expenses;

  (_b_) Expenses of maintenance and running repair;

  (_c_) Taxes;

  (_d_) A sinking fund to cover depreciation and obsolescence;

  (_e_) A reasonable profit on the fair value of the property.

It is improbable that a reasonable profit on the fair value of the
property could be construed to mean less than the interest or revenue
from a like amount of Government bonds or other non-taxable securities.

This ruling of the Courts fixes the rates at such a figure as to
preclude the possibility of a deficit; from which it must follow that a
negative going value cannot be created by a compulsory reduction in
rates, for such action would be confiscation of property to the extent
of the negative intangible value thus created; that is to say, if the
Courts are right in the above ruling, then all intangible or going
values are positive, and must be determined by using the most
unfavorably situated railway as the basis of computation in determining
the question of reasonableness of rates; and the rates in turn must be
reasonable and proper before they can be applied to determine the
intangible value. This raises an interesting and far-reaching query.
Assume that a negative going value is the result of real competition
between two roads such that the "fair value" of the less fortunate
competitor is 20% less than its physical value.

If rates are based on this valuation, are they really fair rates? For,
suppose the rates had always been maintained at a point where the less
fortunate road could just support its physical valuation. Clearly, no
rate could then be enforced which would compel it to operate for less
than a reasonable profit on the fair value of its property, and the fair
value under this assumption is 25% greater than before, due to no effort
of its own, but simply to the fact that its competitor has not cut
rates, and has thereby preserved the original "fair value" of the less
fortunate road, and at the same time increased its own positive going
value by an equal amount.

In view of this analysis it is doubtful if it is ever proper to consider
the existence of negative intangible values, although it is true that
the commercial value does fluctuate, and may be less than the physical
value, due to rates which are too low, perhaps, or due to other
temporary causes.

The method quoted from Mr. Alvord for determining going value applies to
non-competitive enterprises only, as was stated by Mr. Alvord in his
paper before the American Water-Works Association. This method is open
to the criticism that the forecast of the business of the older works,
and of the new hypothetical works as well, is reduced to a monetary
value, based on the present rates, regardless of whether or not such
rates are reasonable. Rates are subject to legislative control in many
States, and there is absolutely no assurance that any other State may
not adopt legislation at any time permitting regulatory ordinances to be
enforced. Therefore, any forecast of the value of future business must
be based on reasonable rates, for otherwise it is merely an unwarranted
estimate based on a fond hope.

Taking into consideration the fact that rates must be reasonable, either
by virtue of present laws or laws which may become effective at any
time, perhaps in the immediate future, going value may well be defined
as the present worth of the amount by which the anticipated profits of a
going plant, operating at reasonable rates, exceed the present worth of
the anticipated profits of a similar hypothetical starting plant,
operating at those same rates. With this conception of going value, it
is impossible for a non-competitive property to have a negative going
value, and every operating plant has a positive going value, even though
operating at a loss.

The whole problem hinges on the question of "what is the reasonable rate
or proper return," and this should be determined in the aggregate as the
starting point. The Courts have persistently dodged the issue, and
properly so, whenever that question has arisen, leaving it for
consideration in each particular case, depending on the stability of the
business, the hazard involved, and various other local factors.

It may safely be conceded that this fair profit is something in excess
of the return from Government bonds, and for the purpose of this
discussion it matters not what figure is assumed as the fair
profit—whether 5, 6, or 10%, or what-not—the theory is the same in any
case. This is perhaps best explained by a practical illustration:

Take, for example, a water-works system, the physical present value of
which has been determined by the method of reproduction to be
$1,000,000, and denote the going value by the unknown quantity, _x_;
suppose, further, that 6% is considered a reasonable return on the "fair
value"—not yet determined, the "fair value" being $1,000,000 plus the
going value, _x_. Therefore, the rates must be such as to produce in the
aggregate an amount equal to the operating expenses, maintenance, taxes,
sinking fund, and depreciation, and still have a profit of 6% on the
fair value of the property. The anticipated profits of the going plant,
therefore, are exactly 6% of ($1,000,000 + _x_) = $60,000 + 6_x_/100 per
annum. The anticipated profits of the hypothetical starting plant will
be negative at the start, and gradually increase, finally reaching a
maximum of $60,000 + 6_x_/100 per annum.

It must be remembered that, in estimating the operating expense and
income of the starting plant, as well as the going plant, the figures
must be confined rigidly to the plant as it is found at the date of
valuation, and in no case should any account be taken of income or
operating expenses due to probable future extensions of the distribution
system. Many appraisers overlook this point, and predicate the
anticipated profits of the going plant on the past growth of the income
account, forgetting that a considerable portion of this growth is due to
extensions into new territory, and not to any material increase in
revenue from the territory already served. To include income from new
territory in the forecast of income is just as fatal an error as to
include the anticipated expenditure of new capital in the present
physical valuation. Either of these procedures is really an estimate or
appraisement of some other plant, rather than the one actually under
consideration.

To complete the numerical illustration, suppose it is determined that
the time required to construct the hypothetical starting plant is 3
years; that a portion of the plant is put into operation at the end of
the second year, taking over fire-hydrant rental equivalent to $20,000;
that the revenue from private sources aggregates $20,000 during the last
year of construction; that the expenses of operation, maintenance,
taxes, and depreciation amount to $30,000 during this year. After the
time of completion of the plant has elapsed, it has the total credit for
fire-hydrant rental, and it is assumed that the revenue from private
sources and the cost of operation, maintenance, taxes, and depreciation
increase as shown in Table 14, which illustrates the method of computing
the going value, and gives the resulting value for the case just stated.

Therefore, 171,005 + 0.2597_x_ = _x_; hence, _x_ = $231,000. This result
is based on the assumption that the starting plant earned no interest
during the construction period. If an allowance for lost interest during
construction has been made and added to the capital account already
being included in the physical appraisement of $1,000,000, then this
must be charged back against the going value found above. This is
clearly evident, because the calculations to determine going value date
from the beginning of the construction period, and the lost interest
during construction, therefore, is provided for in the result. Most
appraisers allow an item for lost interest amounting to the legal rate
of interest running for half the construction period, which, in the
illustration under discussion, would be $90,000; deducting this sum, if
previously included, gives $141,000 as the going value.

There seems to be no good reason for allowing lost interest during
construction as an item in the physical valuation of a property, any
more than for allowing all of the lost interest, up to the time when the
property begins to yield a return equal to the rate of interest. It is
one of the problems in finance, and is much better treated as an element
in the going value, as shown in the above illustration.

One of the most difficult factors on which to agree in computations of
this nature is the element of time required for the hypothetical
starting plant to acquire the business. Were it not for this
uncertainty, going value could be computed with mathematical precision
by the method suggested.

In determining the physical valuation on the basis of cost of
reproduction, such items as cost of taking up and replacing street
paving over the pipe lines, cost incurred by reason of sewers and drains
encountered, interference due to electric wires and conduits,
interference of traffic, and other metropolitan conditions which add
greatly to the cost of construction, must be allowed. Wherever such
metropolitan conditions exist, there must also be present a
corresponding necessity for the use of water under pressure. People use
water because of necessity or convenience, and not on account of any
feeling of obligation or loyalty to the water company.

   TABLE 14.—COMPUTATION OF GOING CONCERN VALUE, BASED ON REASONABLE
                                 RATES.

 ╒════════════════╤═════════════════╤════════════════╤═════════════════╕
 │  Year, dating  │   Legitimate    │Hydrant, rental │Domestic revenue │
 │ from beginning │ profits of the  │ taken over by  │   of starting   │
 │of construction.│  going plant.   │starting plant. │     plant.      │
 ├────────────┬───┼─────────────────┼────────────────┼─────────────────┤
 │Construction│1st│$60,000 + 0.06_x_│               0│                 │
 │  period.   │   │                 │                │                 │
 │            │ 2d│ 60,000 + 0.06_x_│               0│                 │
 │            │ 3d│ 60,000 + 0.06_x_│         $20,000│          $20,000│
 ├────────────┼───┼─────────────────┼────────────────┼─────────────────┤
 │  Business  │4th│ 60,000 + 0.06_x_│          40,000│           55,000│
 │development │5th│ 60,000 + 0.06_x_│          40,000│           80,000│
 │  period.   │6th│ 60,000 + 0.06_x_│          40,000│ 90,000 + 0.06_x_│
 └────────────┴───┴─────────────────┴────────────────┴─────────────────┘

 ╒════════════════╤═══════════════════════════════════════╤════════════╕
 │  Year, dating  │    Interest on the starting plant.    │ Operation, │
 │ from beginning │                                       │maintenance,│
 │of construction.│                                       │ taxes, and │
 │                │                                       │depreciation│
 │                │                                       │on starting │
 │                │                                       │   plant.   │
 ├────────────┬───┼───────────────────────────────────────┼────────────┤
 │Construction│1st│If the physical validation contains an │           0│
 │  period.   │   │  item for lost interest during        │            │
 │            │   │  construction, the same amount must be│            │
 │            │   │  credited to the starting plant as    │            │
 │            │   │  interest earned.                     │            │
 │            │ 2d│                                       │           0│
 │            │ 3d│                                       │     $30,000│
 ├────────────┼───┼───────────────────────────────────────┼────────────┤
 │  Business  │4th│                                       │      50,000│
 │development │5th│                                       │      65,000│
 │  period.   │6th│                                       │      70,000│
 └────────────┴───┴───────────────────────────────────────┴────────────┘

 ╒════════════════╤═══════════════════╤══════════╤═════════════════════╕
 │  Year, dating  │Total difference in│ Present  │Present worth of the │
 │ from beginning │anticipated profits│  worth   │excess of anticipated│
 │of construction.│of the two plants. │ factor.  │profits of the going │
 │                │                   │          │       plant.        │
 ├────────────┬───┼───────────────────┼──────────┼─────────────────────┤
 │Construction│1st│  $60,000 + 0.06_x_│      95.2│  $57,120 + 0.0571_x_│
 │  period.   │   │                   │          │                     │
 │            │ 2d│   60,000 + 0.06_x_│      90.7│   54,420 + 0.0544_x_│
 │            │ 3d│   50,000 + 0.06_x_│      86.4│   43,200 + 0.0518_x_│
 ├────────────┼───┼───────────────────┼──────────┼─────────────────────┤
 │  Business  │4th│   15,000 + 0.06_x_│      82.3│   12,345 + 0.0494_x_│
 │development │5th│    5,000 + 0.06_x_│      78.4│    3,920 + 0.0470_x_│
 │  period.   │6th│                  0│      74.7│                     │
 └────────────┴───┴───────────────────┴──────────┴─────────────────────┘

                                  Total going value = 17,005 + 0.2597_x_
                                  _x_ =  $231,000

If highly developed metropolitan conditions are present, new business
will be acquired in the hypothetical starting plant much more rapidly
than where such conditions are yet to be developed. For this reason the
problem cannot be based on the early growth of the same plant, and,
there being no exact duplicate of conditions in existence elsewhere, the
estimate of time required for the business development period is purely
speculative, and must be assumed with great care and judgment, else
injustice may be done to one party or the other in the resulting going
value.

It is interesting to note that, in the Michigan appraisal, the allowance
of a percentage for contingencies was bitterly contested by the
railroads as improper. Probably every appraiser who has been connected
with rate cases has seen this same item strenuously insisted on by the
corporations.

The author's query: should a corporation which is compelled to abandon
appliances while yet serviceable, in response to public clamor, be
allowed any item of value in the appraisal on account of such
appliances, seems to be best answered in the negative. If the appraisal
is for the basis of making rates, the corporation is fully compensated
by the fact that its depreciation account provides for all abandoned
machinery, and the average past depreciation is usually considered a
fair criterion of the future. If the appraisal is for purposes of
taxation, it would seem improper to levy tax on abandoned or rejected
machinery or equipment. If the appraisal is to determine the present
value of a property for sale under condemnation proceedings, it is
likewise difficult to conceive any reason for allowing any present value
on account of property abandoned or rejected, and, indeed, if such
abandoned material had any value at the time of its removal, it is more
than likely that such value was converted into cash at that time.

The statement that no appraiser would be justified in placing a going
concern value on a property 3 years old, or 10 years old, unless the net
earnings were such as to indicate that the property had a commercial
value in excess of the physical property, is questionable. "Commercial
value" is not exactly synonymous with "going concern value," for, as
usually considered, the term "going concern value" represents the
difference between a dead structure and a live one. A property might be
compelled to operate temporarily at rates insufficient to return the
legal rate of interest on the physical value of the property, and while
this condition continued, its commercial value would be less than its
physical value, and yet this same property is worth more while running
than if operation ceased and the business was allowed to die.

HALBERT P. GILETTE, M. AM. SOC. C. E. (by letter).—In common with others
who have written on the subject of appraisals, the author omits
consideration of one of the most important elements of the cost of
producing the property of a public service corporation, namely, the
development expense.

Development expense is the deficit in "fair return" on the investment
during the early years of operation, while the business is being
developed to a point that will yield a "fair return" on the investment.
Unless this development expense is charged to the capital account as
fast as it occurs each year, it should draw compound interest up to the
end of the development period. Development expense might be regarded as
a part of the non-physical value of a plant, and a few years ago the
writer so regarded it. Latterly, however, he has come to see that it
does not differ one iota in principle from "interest during
construction," and, therefore, is properly a part of the cost of
production or of reproduction of the property. During the construction
period, interest on the investment is charged, and properly so, as a
part of the physical cost. Does this interest cease the day after
operation begins? Not a whit. The owners of the property are entitled to
a fair interest—a "fair return"—on their money, from the day it is
invested. At first they receive it in the form of "interest during
construction," which is charged to capital account. After operation
begins they must either be allowed to earn more than a "fair return"
during the fat years following the development period, or the deficit
below a fair return incurred during the development period must be
treated exactly like "interest during construction" and added to the
capital account. If public service corporation managers have chosen the
first of these two methods, it does not relieve the appraiser of the
duty of adopting the second method; for the object of appraisals for
rate-making purposes is to limit capital to a "fair return" on the
investment. In brief, if there are to be no "fat years," then every
"lean year" must be credited with its deficit as fast as it occurs.

This, the writer concedes, is a radical departure from such precedent as
already exists, but we must not overlook the fact that we of to-day are
establishing the precedents for appraisals in the future. The whole
matter of valuations for rate-making purposes is still in a nebulous
form, as far as the public, and indeed, as far as the Courts, are
concerned. In the end it will devolve upon engineers to establish
logical methods of appraisal. To do so, they must be able to look on the
problem both as engineers and as jurists. Up to the present, however,
this broadness of vision has not characterized most engineering
appraisers, nor is it to be wondered at when the Courts themselves are
in a maze.

A great deal has been heard lately about "going concern value."
Ultimately, the Courts will hold that, as far as rate-making is
concerned, there is no such thing as "going concern value" in the
present meaning of the term. "Going concern value," in the final
analysis, consists of two elements: First, development expense (as
previously defined), and, second, capitalized surplus earnings. Surplus
earnings are ascertained by deducting from net earnings both taxes and a
low rate of interest on the investment, equivalent to interest on bonds.
Many factors may affect surplus earnings; but, that "going concern
value" consists largely of capitalized surplus earnings, cannot be
denied. What are surplus earnings? The public replies that they are
mainly the result of extortionate charges. This is doubtless correct in
many cases; hence, any investigation of costs which has for its object
rate-making must inevitably lead to repudiation of that part of "going
concern value" which is based on surplus earnings, if the surplus is at
all large. In a word, we reason in a circle if we capitalize surplus
earnings, calling the result "going concern value," and then undertake
to use "going concern value" as one of the factors in judging the
fairness of rates. To express the problem mathematically, we cannot
solve for a variable when the variable is allowed to exist on both sides
of the equation. Yet that is precisely what some rate-making bodies are
trying to do, and it is precisely what the Courts have often attempted
to do.

To escape this confusion there is but one possible step, and that is to
eliminate "going concern value" entirely. We must first determine the
element of cost, which the writer terms development expense, and we must
regard this item as a part of the cost of reproduction. We must next
cease to consider small rates of interest as being a "fair return" on
this cost of reproduction. When first-class mortgages draw 5%, it is
folly to talk of 6% as being a "fair return" on capital invested in a
business enterprise, especially when this 6% is figured on the actual
cost of reproduction of the property. It may be that 7% is an ample
"fair return" in some cases, but in others 10% will be found none too
much, considering the small size of the business and the risks involved.

The writer will not at this time discuss methods of determining how a
"fair return" should be estimated, but, in general, the process should
be as follows: From the gross earnings deduct the operating expenses and
taxes to obtain the net earnings. From the net earnings deduct a small
rate of interest (equivalent to interest on bonds) on the cost of
reproduction. The remainder is profit, and should be expressed as a
percentage of the gross earnings. This percentage of profit can then be
compared with similar percentages made by merchants, manufacturers,
farmers, and other capitalists, and then it can be determined logically
by comparison whether or not the profit made by a public service
corporation is "fair." We must adopt this method of attacking the
problem or we shall inevitably drive capital away from railway and other
fields of public enterprise.

The writer estimates roughly that a profit of 10% on gross earnings, as
above deduced, is about the same as a direct return of 7% on the cost of
reproducing the average steam railway.

In a recent appraisal of a street-railway system, the writer determined
the actual development expense of the property, deducing it from the
accounting records. It was an astonishingly high sum, even assuming only
7% on the cost of reproduction as being a "fair return." During his
appraisal of all the railways in the State of Washington, for the
Railroad Commission, the writer made a similar study of development
expense, but this was not included in his estimate of the cost of
reproduction, as it was then regarded as being a part of the "going
concern value" and he was not commissioned to ascertain the "going
concern value" of the railways. Not a single railway, as far as he
knows, has ever presented to a State Railway Commission, or to the
Interstate Commerce Commission, an estimate of its development expense
along the lines indicated. Instead, the railway companies have talked in
general terms of long construction periods—often claiming 20 years or
more—and of great expense incurred in building up the business, and of
franchise value, and of a score or more of non-provable costs. The
consequence is that they have frequently lost entirely the one great
item that they are clearly entitled to, namely development expense,
which is an item which can be absolutely proved from their accounting
records, and, therefore, rests not on the "hot air" testimony of
experts, but on facts that are incontrovertible. In like manner, other
public service corporations have often signally failed to prove the full
worth of their properties, because their claims for "going concern
value" have been ignored entirely. When a franchise expires, the "going
concern value" is usually looked on by the public as worthless, nor is
this view to be wondered at.

Mr. Riggs proposes adding to the physical value a minus "going concern
value," and he is logical in doing so, if it is conceded that values for
rate-making rest on profits; but this the writer does not concede for an
instant. Values for rate-making cannot rest on the very thing that it is
aimed to regulate, to wit, the rates charged. Until engineers and public
service commissions and Courts free themselves from this confusion of
cause and effect, there can be no rational theory of rate-making.

Values for rate-making must rest primarily either on the actual costs of
the production of a property or on estimated costs of reproduction,
including therein both interest charges during construction and the
sequel thereto—development expense.

Of almost as great moment as the item of development expense is the
question of depreciation. The author, in common with most engineers,
holds that depreciation should be deducted. This is a consequence of
regarding a public service plant as if it were a machine bought in a
second-hand store. A public service plant is a device which is intended
to perform a given service forever. It is true that its parts are
subject to wear, and must be renewed from time to time; but the plant as
a whole is everlasting, or practically so. Managers of public service
corporations, perceiving this fundamental truth, have rarely established
sinking funds for the redemption of any considerable part of the plant.
In a great railway system the renewal of a freight car is not a
proportionately larger item of expense than is the renewal of a tooth in
a steam shovel bucket owned by a contractor. This fact, coupled with the
permanence of the railway plant as a whole, has led railway owners to
make no provision for a return of the money lost in depreciation.
Railway ties in a large railway system inevitably reach a condition such
that their average age is exactly half the life of the average tie.
Shall a sinking fund be provided for ties? If not, where does logic
place a line of demarcation? When does an element of the railway plant
attain a condition of sufficient importance to warrant "writing off"
some of its value from the capital account? The facts are that railway
managers have not "written off" anything worthy of mention for
depreciation, and, in the writer's opinion, they have been perfectly
logical. Consequently, the operating expenses have been much less than
they would have been during the early years, had a sum been placed
annually in a sinking fund. Therefore, the development expense, as
deduced from the accounting records, is less than it would be if a
sinking fund were provided; and the amount of this difference is
precisely the amount of the depreciation. In other words, if
depreciation is to be deducted from the cost of reproduction, it must be
added to the development expense ascertained from the accounting
records; so that, in the final analysis, depreciation should be ignored
entirely in any appraisal of a public service corporation where the
object is either rate-making or purchase of the corporation by the
public. One qualification to this statement is needed, however, and that
is that the depreciation shall not have gone far enough to result in an
average age of plant less than half the life of the plant—that being the
ultimate normal operating condition.

Engineers have a duty to perform, in making an appraisal of the sort
under consideration, which is judicial in its character and should not
savor in the least of the pawnshop. The engineer engaged by a public
service commission should not for an instant make it his object to "beat
down the price," no matter by what far-fetched theory he may effect the
result. Nor are engineers inclined to do this, except when they regard
themselves merely as agents of the public by whom they are employed.
Unfortunately, many appraisers have as yet failed to realize that there
is a vital distinction between the dealings that should exist in public
affairs and those that actually exist in private matters involving the
purchase and sale of property. In the latter case, the buyer usually
takes every possible advantage of the helplessness of the seller. Is the
seller ignorant? See that he remains so. Is the seller hard-pushed for
money? Grind down the price accordingly. Does the seller offer goods
which are a bit shop-worn? Dwell on that fact, to the exclusion of all
else. Such are the tradesman's arts, and such, the writer fears, have
been the arts of some appraisers of public service property.

The writer believes that, under one form of agreement or another, nearly
every kind of public service can be more economically and better
performed by a public service corporation than by the public itself
through employees directly hired. But if America is not to pass speedily
into Government ownership and operation of all public utilities, there
must be a pronounced change of attitude on the part of the public toward
capital now invested in public service corporations. Even as engineers,
we are apt to be unconsciously influenced in our attitude toward public
service corporations, not only because of the present public attitude,
but because we are often put to great inconvenience by the
ill-considered resistance of the corporations whose property we are
called on to appraise for the public. Our duty plainly consists, first,
in regarding a public service corporation as a public agent, and,
second, in allotting such values that this public agent will receive a
full and fair return for every dollar judiciously and honestly spent in
building and developing its property. In carrying out this plan, the
writer finds it wise to study the entire financial history of a
corporation, going carefully through both the construction accounts and
the operating accounts from the beginning.

The desirability of analyzing the actual costs of construction,
betterment, and operation of public service corporations, preparatory to
estimating the cost of reproduction, cannot be too strongly urged upon
appraisers. Unfortunately, many corporations refuse access to their
records, or claim that the records are too incomplete to be of value.
However, when they realize that from those very records can be deduced
one of the largest items of cost of reproduction, namely, the item of
development expense, they are certain to show as much willingness as
they now show aversion to disclosing their records.

The writer has recently completed an appraisal of a street railway
system, the managers of which placed at his disposal the entire
accounting and engineering records. From these the development expense
was deduced, and forms an item which can be demonstrated in Court, if
need be, instead of being the subject of unsupported "expert testimony."
As far as the writer knows, this is the first time that a street railway
corporation has voluntarily opened all its books for use in an appraisal
which may be made public. May it not be one of the harbingers of a
far-sighted action on the part of public service corporations, which
will result eventually in eliminating entirely the hostile attitude of
the public toward its accredited agents?

Reverting again, and finally, to the question of development expense, it
will be seen, after study, that the method of deducing it from the
accounting records provides for every possible item. The cost of
advertising, the cost of colonization, and canvassing by agents engaged
in building up the business tributary to the corporation, the cost of
developing an efficient business organization and an efficient
plant—every possible item of developing the business finds accurate
record in the development expense deduced from the accounting records as
outlined. This may not be apparent at first glance, but a little
consideration proves it to be so. If, for example, $20,000 has been
spent annually for ten years in advertising to secure business, the
operating expenses have been increased exactly $20,000 for each of the
ten years. Consequently, the annual deficit below a "fair return" on the
investment has been made $20,000 greater each year than it would have
been had no expense for advertising been incurred. In other words, the
deficit below a "fair return," which is the development expense, shows
automatically the amount spent for every such item as advertising. The
writer regards this automatic register of development expenses as being
one of the most important features of his method for determining such
expense. It removes the entire problem from the realm of guess-work and
expert testimony, and makes it a problem in engineering economics. It
involves no question as to whether or not the existing rates charged for
freight, or for any other service, are fair.

ARTHUR L. ADAMS, M. AM. SOC. C. E. (by letter).—This paper, in spirit,
diction, and contents, is a masterly presentation of the best thought
and argument, by engineer specialists and the higher Courts, concerning
this difficult subject—a presentation which only one intimately
associated with the question for years, as has been the author, could
hope to make. It is of special interest, too, because it deals
fundamentally with the Michigan railroad valuation, now ten years old,
and deservedly considered somewhat ancient in the evolution of what may
be termed the logic of valuation methods. The frank acknowledgment of
the now apparent deficiencies or errors of that work, notably in the
defective method and resulting under-valuation of real estate, as well
as the upholding of that which still appears to the author to be sound
in principle, are excellent manifestations of the constructive and
judicial spirit so necessary to the making of any substantial
contribution to the art.

Unanimity of opinion in matters of detail, even among those specializing
in this line of practice, cannot be expected, especially in a general
discussion. Details must receive their emphasis from local coloring and
local conditions. Making allowance for these local conditions in
Michigan and other contiguous States—notably conditions of population
and flat topography—and remembering that the basis of the paper is a
railroad valuation for purposes of taxation, and not a water-works
appraisal for annual rate-fixing in a semi-arid region of rapid
development, or some other widely differing utility, it seems to the
writer that the author has been singularly fortunate in giving
expression to views with which specialists will for the most part agree.

The limitations of the logical application of the methods suggested,
however, are not sufficiently defined. Early in the paper an effort is
made to avoid the necessity for this, and to simplify the treatment by
limiting the scope of the paper, in the following language:

  "This paper is confined to a discussion of the methods which should
  be used in arriving at a correct figure of cost of reproduction and
  depreciation—it does not take up questions involving the propriety
  of those figures when reached. The propriety or legality of using
  such figures as a basis for an assessed valuation, as a basis for
  rate-making, ... will be conceded no place in this paper."

Such a restriction, however, seems to the writer to leave the subject
much confused. It is impossible to judge of the propriety or soundness
of a method of valuation while ignoring its purpose and failing to point
out the limitations of its logical application. To confine discussion to
a consideration only of cost of duplication and depreciation of physical
properties is presumably an attempt to avoid the difficulties incident
to the application of such results to specific purposes, and is in line
with the frequent argument of some attorneys in litigated valuations,
that the engineer must not encroach on the province of the Court by
having, much less expressing, any idea relative to the application of
his figures to the final solution.

With this doctrine the writer has no sympathy. The engineer is
essentially an economist, and no one is more fully qualified to aid,
either directly or as an adviser to the Court, in the final
determination of value for specific purposes, provided he is trained in
the construction, operation, and valuation of such properties as are
under consideration. To accept any less responsibility than this is to
become party to inferior measures leading to popular misconception, and
is justified only as a practicable first step toward the final
realization and acceptance of the larger duty.

All suggested methods of valuation should be subjected to close logical
analysis, with a view to their purpose. The unsuitability of the method
used in the Michigan appraisal to many classes of appraisals is
apparent, and can be readily indicated. Much space is given to
justifying the appraisal of all so-called non-physical elements by the
capitalization of the residue of net earnings after allowing interest on
the investment in the physical properties. This the author refers to as
Professor Adams' method. The addition of the physical to the
non-physical values, as thus determined, is supposed to give the value
of the property as a whole. It is evident that it gives, by indirection,
the same total valuation as would be obtained by the direct
capitalization of net earnings without any determination of physical
values, _per se_, and, as a method, is therefore not what it purports to
be. Since value, by this method, is in reality dependent on earnings, it
follows that where rates are fixed by governmental authority, with the
property value as the base, as is done annually in California in cases
of privately owned water and lighting plants, the method suggested is
without logical application, and the property values of such
corporations must be determined and justified on other or modified
grounds. Hence the necessity for dealing with such elements as so-called
"going concern," franchise, and other possible assets, each
independently, as is usually done in water-works appraisals, instead of
collectively, as in the Michigan appraisal.

It should be made clear, therefore, that the method used in this
railroad appraisal, for the determination of non-physical values, simply
reduces the whole to one of capitalization of net earnings, and
presupposes no governmental regulation of rates with the value of the
property as the base; and, unmodified, has a comparatively narrow range
of application.

The author seems to see difficulty ahead in dealing with rate-making by
this method, for he says, near the close of his paper: "There are many
intricate problems in connection with a valuation for rate-making or
taxation which really belong to these undertakings, not to valuation,"
but, in stating some of these difficulties, he does not point out the
impropriety of determining value by capitalizing that (earnings) which
it may be the object of the valuation to determine and fix.

Regulation of rates by governmental authority, which means their
limitation to that which is reasonable and just, will probably in the
future be the purpose in the making of most valuations of the property
of public service corporations, and no methods or rules for the making
of appraisals can be considered as being at all complete or fairly
comprehensive which do not meet the logic of such an end.

If capitalization of net earnings is to determine railroad values for
rate-fixing, whatever the process, it must presuppose a fair and
equitable rate, thus following the rate, instead of the rate following
the property value. This is but a shifting of the difficulty; for, what
constitutes a fair and just rate, irrespective of the value of the
property used, is at least as difficult of determination as is the
property value, irrespective of its earnings. Valuations, to be useful,
must have their purposes carefully predetermined, that the right
application of principles may be made.

Perhaps nowhere more than in California has thought been directed along
this line, for the organic law of the State for thirty years has
required the annual fixing of rates for water and light companies by
public official bodies, and many important cases involving rates and
valuations of large properties, chiefly in later years, have been tried.
Unfortunately, the most important and best tried of these have not yet
reached the United States Supreme Court. The result, thus far, is too
long a story to be told now, but it may be said that capitalization of
earnings in any form is not regarded as a logical basis of value under
such conditions. Franchises, as they exist here, are not regarded as
having value, unless from unusual circumstances. "Going concern" value
is recognized, but its money measure is sought through other channels
than present net earnings.

The author's emphasis on the necessity for eliminating the personal
equation, as far as possible, is commendable, but a large exercise of
discretionary judgment is inseparable from the process of appraisal. The
fullest investigation of all pertinent facts should be made. Too much
must not be expected from rules and formulas. They are education only.
Governing principles must be understood, and subsequent procedure the
writer cannot better express than in the words substantially as used on
a former occasion:[47] Having considered the various factors likely to
influence the value of any property under consideration, and having
summarized the results, it will remain to determine the varying degrees
of importance and weight to attach to each, and to decide, in view of
all the attendant circumstances, what the amount is on which the company
is entitled to receive a suitable return. This final solution can never
be reduced to a mathematical formula applicable to all cases. The
inquiry will have established approximate limitations, both as to
maximum and minimum, but there will then usually be found remaining
quite a wide intervening field for the exercise of discretionary
judgment.

That the final result will depend to some extent on the personal
equation, does not of necessity detract from its worth. It only shows
the greatness of the problem, which requires for its solution the
exercise of faculties higher than the application of mere formulas and
mere routine, faculties which are rooted in laborious thought, in ripe
experience, in moral worth.

A word concerning the use of experts on work of this class: Most
valuations grow out of or grow into cases at law. Under the prevailing
order, the litigants secure the services of the necessary expert
appraisers, who, in the course of examination, are subjected to
processes usually much better calculated to magnify than to harmonize
differences, and to cloud rather than to clarify issues, to the
detriment of the record, the confusion of the Court, and the attempted
discredit of the witnesses and their profession. Self-defense is
calculated to lead witnesses into undue reliance on rules and
mathematical formulas, as direct means of obtaining the desired result,
instead of aids for the final exercise of a right judgment as to the
real value of the property for the purpose intended, simply because it
is easier in dealing with attorneys to justify mere mathematical
processes than to support opinion resting on considerations of a general
character, not always readily measurable in figures. This tendency leads
also to under-valuations. A change in the process of Court procedure
relative to such expert evidence is needed, and the influence of the
Profession, both individually and collectively, might be used to secure
the appointment of such witnesses at the instance of the Court, instead
of the litigants, to the great advantage, both of society and of those
more immediately concerned.

C. D. PURDON, M. AM. SOC. C. E. (by letter).—A comparison of some of the
more important items in the Minnesota valuation may be of interest. In
the "Cost of Construction of Roadbed and Track," the principal items
are:

                      Land                 25.46%
                      Clearing and grading 21.49%
                      Rails                12.72%
                      Bridges               7.01%
                      Ties                  6.72%

These five items amount to 73.40% of the total cost, and "Adaptation and
Solidification of Roadbed" to 4.53%, the other twenty-three items
amounting to 22.07 per cent.

The estimated value of "Adaptation and Solidification of Roadbed" ranges
from $543 to $1,542.80 per mile, averaging $1,231.92, which includes 4½%
for engineering. If engineering is omitted, the average for all roads is
$1,124.95, and for "Carrying Roads"[48] $1,128.16.

The "multiplier" for cost of right of way was ascertained from the
market value of land in the vicinity, as shown by late transfers, and
the prices paid for right of way at about the same time; this cost
ranged from 195 to 891% of the market value. Taking "all roads," the
cost of land for terminals was 71.05% of the total cost of land for all
purposes, but only 3.78% of the quantity.

A. MORDECAI, M. AM. SOC. C. E. (by letter).—Mr. Riggs has done a
valuable service in preparing this very able and painstaking paper, as
the subject of the proper value of Public Service Corporation property
is one but lately demanding attention. When the country was undeveloped,
and the railroad companies struggling for existence, and often ahead of
the needs of the people, no criticism was made; but, during the last few
years, securities have increased so largely, the increased issue often
being manipulated so as to accrue to the benefit of a few individuals in
place of the great mass of original security holders, rates have been
made and defended on the plea that the increase was necessary to pay a
fair interest on the capital invested, and increases in assessments for
taxes were fought and criticized to such an extent by the companies that
the public seems to think it absolutely necessary to have some
investigating and regulating power. It argues that the history of the
past shows that we cannot depend on the officials themselves, not from
any desire to be dishonest or unfair, but merely that they cannot reach
the proper point of view. After years of struggling, they cannot see the
justice of being obliged to show their books or have their incomes
disturbed, while they see a neighboring factory, owned by a like
chartered company protected by patents and copyrights, greatly enlarged,
and the company paying a very handsome return on an ever-increasing
capital, without investigation of any kind.

No one supposes that any body of legislators or a committee selected
from one should understand the situation better than the managers
themselves, but the public, forced to look somewhere, demands that its
representatives try to regulate these matters and see that no abuses
occur, fully aware that the machinery is not perfect. It asks:

  As to Capital: that the company can show proper value for the
  securities issued, and, if an increase is made, the sum obtained
  should be used for the betterment of the property;

  As to Rates: the Courts have said that what the company is entitled
  to ask is a fair return on the value of that which it uses for the
  public convenience;

  As to Taxes: what is the true value of the property of the company,
  treating it with absolute equality, as compared with that of other
  taxpayers?

It is to determine what these values are that the Engineer among others
has been called on. The literature on the subject is increasing, and
there are some decisions of the Courts which help, but there are yet
perplexing and intricate questions to be determined; not to be answered
by captious criticism and indignant retort, but by an honest effort to
arrive at some common ground of fairness to both State and Corporation;
for, after all, the Corporation is a part of the State, a great
distributor of money, a large taxpayer, its stockholders men of worth
and capacity, and there should be no desire to penalize it or interfere
with its legitimate prosperity. The Corporation is surely dependent on
the State and the good will of the people for its welfare. Mistakes have
been made, no doubt, just because this common ground has not been
reached, and the writer thinks that it is largely within the province of
the Engineer to establish it.

In arriving at either of these values, the chief tangible asset is the
value of the physical property. This can be determined with a great
degree of accuracy, and though by no means alone representing any of the
values, it seems to be indispensable as a basis and starting point. The
balance sheets of the Corporation commence with a statement of the cost
of road, plant, etc., and must be checked to permit correct deductions
from the results of operation shown in them; and, for purposes of
taxation, they would seem to be particularly reliable.

The Engineer called on to make such a valuation for whatever purpose
should, under like conditions, value each item the same for all, but it
does not follow that every item, including the percentages added, should
appear in the total valuation for all purposes. There are legitimate
charges in valuations made to determine capital which should not appear
in one made for assessment for taxes. Unit prices should not change, but
the purpose for which the valuation is made should properly be
considered in arriving at the final figure.

To or from this valuation, especially if made to determine proper
capital, there must be added or subtracted certain values for intangible
property, often found by a study of the income account of the
Corporation. This makes the official ask: Why make a valuation of the
physical property at all if your final result depends on the income?
Because it is one item which cannot be manipulated; it does not change
materially from year to year; it is not dependent on rates or income; it
forms a very large item in the assets of the Corporation; and it is a
sound basis on which to stand.

For the purpose of determining the proper amount of securities, the cost
of reproduction at present prices would seem to be the value sought;
whereas, for taxation purposes, or to determine a proper selling price,
the present value is what is required, allowance being made for
depreciation. A railroad, for instance, might be considered as an
instrument for transporting passengers and freight, and, though the ties
are not new, the rails worn, and the locomotives of an old type, they do
their work just as safely and expeditiously, and, if no account is to be
taken of the cost of maintenance, the road might be considered to be
worth as much as if new.

The officials of the Corporation are generally perfectly willing to give
any facts or to furnish access to any records they may have, but are not
willing to state their opinions as to prices, depreciation, etc. The
Engineer is making the valuation, not they; and they reserve the right
to criticize, at the proper time, both the results and the conclusions
drawn from them. The Engineer should be absolutely fair and just, not
using improperly the information obtained, but endeavoring to reach
results which appear to be unquestionably correct. He must divest his
mind of the innate desire to minimize the consequences of his decision
to the Corporation, on the one hand, or to favor the State or his
employer, on the other; it may be difficult, but on his ability to do
this depends the success or failure of his work.

Considering the subject generally: in making the valuation of the
physical property, the organization should consist of one man in charge,
and under him a field organization and an office organization. The
property, if large, should be divided into convenient districts, with a
division engineer and necessary assistants in charge of each. Care
should be taken that these assistants are competent men, though they are
often hard to obtain for temporary work of this character, and there is
not sufficient time in which to weed out and perfect an organization.
They should be men of experience on the particular class of work to
which they are assigned, and should be tactful and courteous. Stress
should be laid on keeping plain, neat notes, not too crowded; on
watchful care of the party working in the field, to prevent accidents,
and on the necessity of absolute correctness in calculations and
figures, in the multitude of which it is surprising how many mistakes
will creep in unless special care is taken to check every step
thoroughly. The office engineer should be equally competent, and
accustomed to systematizing and analyzing, so that the results will be
arranged systematically, not only as considered by themselves, but as
far as possible according to the classification of the Interstate
Commerce Commission, so that, no matter where made, they can be easily
compared.

The work, if large, should be standardized. Everything to be reported
should have a form for the purpose. These should be as concise as
possible, calling attention to the essential information, but not in too
much detail. Unit prices should be established after proper
consideration.

_Reproduction Value._—In ascertaining the reproduction value, the aim
should be to obtain prices for which the material could be purchased and
the work let to responsible parties at the date of the valuation. Real
estate and depreciation are probably the two items in which there will
be the largest differences in opinion as to values, and both should be
determined by the personal examination of experts, following some
prearranged system. One founded on the Somers system might do for the
land, and certain percentages of depreciation per year, varying for the
three conditions of good, fair and poor, for the structures and
equipment, but the results in any case should be examined and passed
upon by some one person so as to eliminate the individual equation as
far as possible.

It is when the figures thus reached are before him that the Engineer
finds himself confronted with many perplexing problems. To what items
should percentages be added, and in what amounts? A small change in such
items often makes a large difference in the total. There is not much
trouble about general expenses, legal expenses, engineering, etc., as
these are undoubtedly proper items to be added, and the amounts of the
percentages are not difficult to determine from sufficient study of the
property. Opinions on such matters will not vary greatly, but there is a
difference with regard to such items as leasehold interests,
solidification, contingencies, interest and taxes during construction,
commissions and discounts on securities, working capital, value of the
good will, and considering the property as a "going concern," about
which opinions will differ much more widely.

Leases from the company are like any other book asset. Leases to the
company should be considered as the land is considered. What is the
present value of the leasehold interest for the remainder of the term
for which the rental is fixed?

_Present Value._—In ascertaining the present value, it would seem that
something should be allowed for solidification, the amount depending on
the manner in which the work was built, its age, the likelihood of
damage by the elements, etc. Possibly a percentage of appreciation on
the value of the earthwork and masonry would be the fairest manner in
which to consider it. Due care must be taken, however, to give proper
credit to good work and not put a premium on inferior construction.

A percentage should be allowed for contingencies in all cases, but this
is not necessarily the same for every piece of property. The estimate is
made on a completed piece of work, consequently, if done with proper
care, this item should not be as large as if the estimate were made for
work to be constructed; but there are many things, not seen by the
estimating engineer or disclosed by available records, which must be
covered by this item, such as buildings bought with the land and
afterward destroyed, damages paid for reasons not now apparent,
difficulties encountered in excavating wet or hard material, amounts
spent in dredging, in artificial and difficult foundations, losses
during construction on account of strikes, washouts, etc. These are
perfectly legitimate charges, and are likely to have occurred, and
proper allowance should be made for them.

It would seem that interest and taxes during construction is a
legitimate charge, and therefore, in the cost of reproduction,
sufficient amounts should be added to cover it. Care should be taken to
make the time long enough, as engineers are often too sanguine as to the
length of time necessary to complete a certain piece of work. It is true
that a part of a railroad, for instance, may be completed and opened for
operation, but the net revenue derived would be very different from that
of the completed road with its terminals and connections.

A new corporation can rarely market its securities at par, not only on
account of the chances taken by the investor, but also because, being
human, he likes to think he is buying at a bargain, getting something a
little below its value; consequently, inducements vary from a small
discount on bonds to a share or two of stock thrown in. To what extent a
reasonable discount is a proper charge against construction may be
considered an open question. It might seem fair that a certain fixed
percentage be allowed in valuations, to determine capital for
commissions and necessary discounts, varying according to the amount of
the securities. This need not cover the whole amount of the discount,
but only that portion which experience would consider essential in
marketing unquestioned securities.

Consideration of the items working capital, good will, etc., may not
properly belong to the Engineer, but rather to the Statistician, except
as the former hears of such items being used as an argument against the
necessity for a valuation of the physical property of a corporation. It
is often asked, for instance, how can a value be placed on the property
of the Pennsylvania Railroad Company, with its great commercial
position, its magnificent terminals, and its splendid organization, all
the result of the expenditure of much time and money? It is certainly a
difficult problem, but the Pennsylvania Railroad is one of the greatest
properties in America, possibly in the world, and because the proper
valuation of this property is surrounded with difficulties it does not
follow that the valuation of the properties of all other public service
corporations are equally troublesome. The very difficulty of the task
shows the importance of having firm ground for the first step. Having
that, it may not be as hard as imagined to take others.

Thus it is seen that there are many perplexing questions for the
Engineer to consider, and many details for him to work out, in doing
which Mr. Riggs' paper will materially help. Above all, the Engineer
must aim to be impartial; he must arrive at such a point of view as to
see both sides with equal distinctness, and judge fairly and justly,
trying to determine some well-defined laws and formulas which will serve
as a basis in ascertaining the values desired.

W. B. RUGGLES, M. AM. SOC. C. E. (by letter).—In his discussion Mr.
Lavis quotes the case assumed by the _New York Sun_, of two bridges over
the Ohio River—one between Cincinnati and Newport and one 20 miles
below, between villages, etc.

In 1898 the writer was employed by the Board of Supervisors of
Cincinnati to put a valuation on its Ohio River bridges for purposes of
taxation, and the many points of view, as to their cost and their actual
value to the owners and to the communities, were at that time, and have
been frequently since, considered by him. In this particular valuation
the duties of the Engineer were comparatively simple and plain, for, as
there were sure to be controversies on two points at least, first, as to
the right of the city to levy any tax on the bridges as such, and
second, as to whether any control by the city extended to the center of
the river, informally but generally recognized to be the division
between the cities for police and similar purposes, or only to the
northerly low-water mark, the limiting boundary to the "Territory
Northwest of the River Ohio," as recognized by the ordinance of 1787, it
appeared to the Board to be advisable, in the earlier stages of their
efforts, to avoid, as far as reasonable, any controversies concerning
details of the valuation, and the writer was instructed to give the
bridge companies the benefit of any doubts.

The railroad bridge of the Cincinnati Southern Railway, the one lowest
on the river and having the little village of Ludlow at its southern
end, and thus most nearly filling the conditions of one of the assumed
structures of the _Sun_, is, with its railroad, the property of the
city, and the Supervisors believed that, under the terms of the lease to
the operating company, it should not be taxed.

Of the other four bridges, the Cincinnati and Covington Elevated Railway
and Transfer Bridge—commonly known as the Chesapeake and Ohio Railway
Bridge—the Covington and Cincinnati Suspension Bridge, the Central
Railway and Bridge Company's Bridge, and the Newport and Cincinnati
Bridge, commonly known as the Pennsylvania Railway Bridge (all noted in
the order of occurrence, passing up the river), the writer had official
or semi-official reports giving such details of at least the principal
features of the structures that in a measure they supplied quantities,
weights, and some prices; those lacking were either calculated from
actual measurements taken on the structures or supplied from plans
furnished by the companies, since, as the several companies relied on
defeating the efforts of the supervision on legal grounds, they conceded
values which otherwise might have been strenuously contested. As long as
the writer knew anything of the results, the Board of Supervisors was
unsuccessful in its purpose to get the bridges, as such, on the tax
duplicates; but that has no particular bearing on the points raised in
this discussion. Of the five bridges, three are primarily railroad
bridges. The Cincinnati Southern Bridge has one footway only, on which
it formerly collected tolls; all the others have footways and wagonways,
and the three above the Chesapeake and Ohio Railway Bridge carry
electric railways. The Newport and Cincinnati (Pennsylvania Railway)
Bridge has all the features of steam and electric railways, wagonways
and footways. In some particulars these bridges differ greatly, for
instance, the bed-rock of the river lies at the surface of the most
easterly (Pennsylvania Railway) bridge, and for each successive bridge
is found deeper, as the river is followed westward, the river-span piers
of the Chesapeake and Ohio Railway Bridge being 54 ft. below low water
and those of the Cincinnati Southern Railway Bridge being likewise very
troublesome.

The two bridges with exactly the same uses—double footways, wagonways,
and electric lines—are the adjacent Suspension and Central Bridges, one
having the City of Covington and the other the City of Newport at its
southern terminus, but these differ most widely as to valuation. The
Suspension Bridge, as reported to the writer by the late W. Hildenbrand,
M. Am. Soc. C. E., with the consent of his company, was valued at only a
little short of $1,000,000 as reinforced; that of the Central Bridge
Company, as reduced from the reports of the engineers, was very nearly
one-third, only, of that amount, both without any right of way, as real
estate was in all cases listed separately. At that time, however, the
traffic over the Suspension Bridge, counted in persons and vehicles
passing over its several lines, was not far from as relatively greater
than that of the Central Bridge as its valuation was higher, and it was
more indispensably necessary, as the writer views it, than either the
Central Bridge above, or the Chesapeake and Ohio Bridge below it, for in
the thirty odd years of its use (it was completed in 1867), the
adjoining communities had adjusted their lines of traffic to it, while
that passing over the other two bridges occurred more because of little
differences of convenience (not, however, to be considered otherwise
than an important provision in traffic of such magnitude).

Disregarding other differences, such as the unit prices of 10 or 11
cents per lb. for iron paid by the Suspension Bridge Company in the time
of the Civil War, compared with 4.47 cents per lb. for the new cable
wire or 3.32 cents per lb. for the new structural steel, it appears to
the writer that the element of more or less indispensable use by a
community, as well as the greater freedom of movement in the river below
by reason of there being no piers in the stream, are elements of value;
but that they are items to be reduced to figures for the purpose of
taxation is not so clear, any more than that there is equity in any
demand that might be made that the New York Central and New York, New
Haven, and Hartford Railroad Companies should be taxed on the additional
$22,000,000 expended in the electrification of their lines about New
York City for the comfort, convenience, and edification, not of the
patrons of the roads alone, but of the public at large, without—as just
concluded by an eminently able board—any marked economies in operation.
There is no question in the writer's mind that any one line of railroad
is several times more valuable to each individual in inland regions,
such as Mexico and Arizona, than an equal mileage in Connecticut with
its Sound harbors, steamship lines, good wagon roads, and numerous but
non-competing railways, partly because of the relative usefulness, for
which no practicable substitute could be found, and partly because these
newer States have not entered on all these multifarious lines of
governmental activities, such as policing and safeguarding for public
health and the like, and, much as funds are everywhere desirable, could
possibly defer for a time some of these developments of civic zeal. It
does not appear, therefore, that the discriminations in valuations
disclosed by the author's Table 1 are altogether without a good basis in
relative convenience, although clearly extreme; but, as the law of most
States is understood by the writer, such discriminations may not usually
be made with strict regard for the legality of tax assessments.

It is true, as remarked by Mr. Riggs, that a bridge is, of itself, not
usually a desirable feature of a railroad, but it must be clear that if
there were no river between Cincinnati and her sister cities in
Kentucky, communication between the two States might be entirely free,
and the business opening for toll bridges would not exist; consequently,
in these particular cases, the bridges cannot be considered undesirable.

One other consideration bearing on values has been at least suggested by
the study of the Cincinnati Suspension Bridge. It is, as indicated, the
oldest river bridge at Cincinnati, the second or third oldest over the
Ohio River, and, though repaired and strengthened, it has never been
supplanted by an entirely new superstructure. The next oldest bridge is
the pin-connected Pennsylvania Railway Bridge, built five years later
than the Suspension Bridge, but, at the time of this valuation, it had
been entirely replaced by quite a different structure—even the masonry
was largely rebuilt. In a degree this comparative facility with which
provisions for the greater loads can be provided without condemnation of
the leading features of the structures has been shown in the Brooklyn
and Niagara Bridges, though not by any means perfectly, but the point
the writer would make is that this element of ease of reinforcement, or
with which provision can be made for greater loads, is to be considered
in the author's "Physical Property Elements of Value," as doubtless he
has concluded.

HENRY EARLE RIGGS, M. AM. SOC. C. E. (by letter).—The discussion of this
paper has been so full, and so much of it is devoted to bringing out
methods of valuation not fully covered in the paper, that it does not
appear to the writer desirable to do more than to clear up one or two
matters which may have been left somewhat ambiguous in the paper, and to
review the main points on which there is apparent disagreement among
engineers who have engaged in valuation work.

The writer wishes to express, to those who have added so materially to
the value of the paper by their discussion, his sincere appreciation and
his thanks, and he regrets that, owing to the length of the paper and
the extent of the discussion, it will be impossible to review all the
points raised.

It would appear that there are a few matters in regard to which the
writer did not succeed in making his views entirely clear; consequently,
a few words on these items may not be amiss.

_Overhead Charges Versus Unit Values._—The point raised by Mr. Higgins,
that the determination of any percentage figures to be applied to cover
overhead charges must be carefully considered in connection with the
unit prices that have been adopted and applied to the items of the
physical inventory, is well taken. On all valuation work with which the
writer has been connected the various local conditions were taken into
account, and, for each item a figure was used which, it was believed,
would fairly represent such price as would be named by a contractor for
the work under the existing conditions. Therefore, all elements of
hazard to contractors, and contractors' profits, have been included in
the unit price, leaving to be treated under overhead charges only those
elements of cost which the corporation under investigation would be
compelled to bear.

The determination of a proper set of unit prices for a valuation
involves a very careful study of prices and local conditions, so that it
would appear to be impossible to establish any fixed rule which would be
generally applicable to all appraisals. If the unit prices adopted be
the cost to a contractor, then the overhead charges must be made large
enough to cover the contractor's hazard and profit. Every appraisal
should be accompanied with a report or statement, showing clearly what
has been done in this matter.

_Items to be Inventoried._—In reference to the items to be inventoried,
the construction placed on one sentence by Mr. Newton is entirely
foreign to the meaning which the writer intended to convey. Mr. Newton's
statement of his own views is entirely in harmony with those of the
writer.

_Discount._—Messrs. Henry C. Adams and W. H. Williams have both
discussed discount, and both take exception to the conclusions of the
writer. This would appear to be a subject on which there is disagreement
in all professions. Very able and experienced railway managers and
accountants will be found on both sides. Since the paper was written,
the writer has been engaged on the appraisal of a comparatively new
property which was defendant in a condemnation suit. In this case,
20-year bonds were issued in 1905, and sold at an average discount of 15
per cent. The discount has been treated as an interest charge on the
books of the company, and was being written off from year to year. The
question arose: Should the discount balance (approximately
three-quarters of the discount) be added to the physical value and paid
by the parties acquiring the property; or should the loss be sustained
by the owner? The treatment of the account on the books of the company
was in exact accord with the writer's first contention, but a careful
study of the case in hand led to the conclusion that equity demanded
inclusion of the unamortized discount in this case. Had the condemnation
taken place in 1925, after all the discount item had been charged
against operation, no part of this amount would appear to be proper in
an appraisal. This case is cited as being the only one which has come up
in the writer's practice in which he has been inclined to recognize the
propriety of including the item. The writer is not yet convinced that
his first conclusion was in error.

Professor Adams suggests several different claims made as to the
discount item. If any one of them be adopted, has suitable agreement
been advanced for treating the item as a capital charge? Clearly, the
amount of money involved in the discount item is not paid by the company
until the maturity of the bond. It is not invested in the physical
property of the company until it is paid. If written off from year to
year and charged against operation, or treated as a deduction from
earnings or from surplus, it would hardly seem proper to include it in
capital at the end of the period. The writer is open to conviction, but
he has not yet been convinced of his error on this point. Happily, this
is an item, the amount of which may be exactly determined from the books
of any company under investigation; so that, whatever the final
determination may be as to the propriety of its inclusion in an
appraisal, the amount to be treated is not a matter of estimate.

_One Value Versus Several Values._—The writer has called forth
discussion on this point from several members, and, in view of some of
the discussion, he believes that a few sentences may tend to clarify his
views:

(1) An appraisal should be in complete detail, and should show fully,
not only all schedules of physical property and of unit costs and
depreciation percentages on which physical values are based, but should
completely detail all schedules based on an examination of the books.

(2) The final summary should include every element of value which enters
into the property, and which should enter into the "fair value" or "true
value" of the property, if valued for any purpose whatsoever.

(3) An assessed value for taxation purposes should not necessarily
include all the items in the engineering valuation; but an assessment
can be made with absolute fairness if all the facts are at hand and in
such form that non-taxable items are separable.

(4) If rate-making or the sale of the property be the ultimate object,
the work of making rates or of negotiating the sale can be carried on to
better advantage with a complete appraisal than with an incomplete one.

(5) The work in the States of Minnesota and Washington was done with one
object in view. It was ultimately used for another purpose. If a low
valuation is deliberately made for taxation purposes, serious
embarrassment is likely to arise when rate legislation is contemplated.
It will be very difficult for an engineer to sustain his position when
he submits one "true value" or "fair value," with the expectation that
it will be used as a figure for assessed valuation, and another and
radically different one as a basis for rate-making. It would appear to
be much easier to submit a complete set of schedules, showing the cost
of reproducing the physical property, depreciation, present physical
value, together with all other elements affecting the final value, and
then to point out that certain modifications would appear to be proper
in an assessment for taxes.

(6) The actual making of rates or of assessments for taxation is not a
duty usually assigned to a body of engineers.

Mr. Dana's discussion is directed to this phase of the subject, and
brings out a number of points which are suggested above very fully.

This is a matter on which engineers have radically differed in practice,
and it involves a principle of valuation which should be finally
determined as soon as practicable. Further discussion in connection with
this paper would hardly accomplish any definite end, therefore it is
left, with emphasis on the fact that there are radical differences of
opinion regarding it.

_Going Concern._—The discussion of this paper, taken in connection with
the paper by Mr. Alvord before the American Water-Works Association, and
the recent paper by Messrs. Metcalf and Alvord,[49] brings out clearly
three points of view:

(1) That of Professor Henry C. Adams, stated by him in various
publications, and advocated by the writer in the paper: That there is no
going concern value, as such, but that all intangible elements of value
merge into one non-physical value, which may be determined by a study of
the income accounts of the particular property under investigation.

(2) The "Wisconsin Method," sometimes called the Cooley Method. The
general principles of this are described so fully and so clearly in Mr.
Gillette's discussion, under the head of Development Expense, that
further explanation is unnecessary.

(3) The method advocated by Mr. Metcalf in his able discussion of this
paper, and by Messrs. Metcalf and Alvord in their paper.

The writer cannot concede the accuracy of the position of Mr. Burns,
that interest during construction should be eliminated from the physical
valuation of the property and included as part of the "going value."
Interest during construction is no less a part of the actual cost of
constructing the property than the rails in a railroad or the water pipe
in a water-works plant. Nor can the writer accept Mr. Metcalf's
optimistic view of the probable action of the Supreme Court when it will
be called on to pass squarely on the "going concern" value in a rate
case. Mr. Metcalf says:

  "Certainly, as applied to water-works valuation, Mr. Riggs'
  statement is not justified. The Maine cases clearly include going
  value as an element of value on which rates should be predicated; by
  inference, so does the Kansas City case. In the Knoxville case it
  was in fact allowed by the Master."

This is all true. The Knoxville case, however, reached the Supreme
Court, and the Supreme Court squarely side-stepped "going value" in the
following words:

  "We express no opinion as to the propriety of these two items
  ['organization promotion, etc.,' and 'going concern'], 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."

Judge Lurton, in upholding an intangible value in the Omaha case, and
quoting among others the Kansas City case and the Gloucester and Norwich
cases, which approved and followed the Kansas City case, significantly
adds:

  "No such question was considered on Knoxville Water Co. [212 U. S.,
  1] or Wilcox _vs._ Consolidated Gas Co. [212 U. S., 19]; both cases
  were rate cases, and did not concern the ascertainment of value
  under contracts of sale."

The writer quite inclines to the views expressed by Mr. Gillette, and
fails to read any approval of "going concern" or "going value," as
advanced by our water-works brethren, when the determination of a value
on which to base rates is the issue.

That there is sound logic in Mr. Gillette's argument for development
expense—which differs in the last analysis but little from Mr. Metcalf's
presentation of "going value"—the writer will admit. There are many
corporations in existence to-day which have made substantial investments
in creating a successful business after the physical plant was completed
and in operation. It hardly seems equitable that such an investment
should not be taken into account in fixing a value. The real difficulty
lies in drawing the line between the really valuable property, and one
which is truly a profitable investment, and that property which, by
reason of poor business judgment in its creation, faulty or uneconomical
construction or bad management, is not earning a reasonable profit.

The writer has given some study to the theory advanced by Professor
Cooley in the Milwaukee Street Railway case, and later adopted by the
Wisconsin Commission in the Antigo Water case, but is not yet ready to
accept it. The hypothetical curve appears to be acceptable and
reasonable, but the actual application of the formula to cases which
have come under the writer's attention, fails to show a profit at the
end of a period of years. If the rule be stated: "the greater the
deficit in earnings the greater the value," then this method may be of
general application, but it does not appeal to the writer as sound
business to advocate the assigning of any non-physical or "going" value
to a property unless the property has, for some years, actually been
earning a return on the investment which is large enough to justify
fully the claim that it is worth more than it cost, or more than its
present physical value. If, during the first few years, there was a
deficit, due to the expense of creating the demand for the commodity
produced and building up the business to a profitable condition, it may
be sound to include this element in an appraisal. The actual cost may be
determined, but the cost of reproduction is pure speculation. The actual
cost of a ton of rail, a locomotive, a boiler, or the copper for a
transmission line bought fifteen years ago may be radically different
from the cost of reproduction of the same physical things to-day; but
that cost of reproduction is radically determined as the things are
being bought and sold in the open market. Not so, however, with the
development charge, or cost of creating a business. Conditions are not
the same, they may not be at all similar.

Without arguing the subject further, the writer submits that this is a
matter that requires the greatest of care in its treatment. The adoption
of any rule which will assign a "going value" to a property which has
been managed so that it not only has never earned a large return on the
investment, but has not taken care of depreciation—a property which
would not appeal to financial men as a sound investment at its physical
valuation—will not only be difficult to sustain in the Courts, but will
tend to discredit the entire subject of valuation.

The writer's present feeling is that the term "going concern" ought to
be eliminated from the nomenclature of valuation practice, and that
scant consideration ought to be given to any attempt to include
anticipated profits in any manner in a valuation.

Mr. Kuichling has suggested that some further data as to the Michigan
Appraisal might be of value. Unfortunately, the writer has not in
available form information as to different classes of railroads. Table
15, based on the average of all the roads in Michigan, was prepared by
James Walker, Chief Engineer of the Michigan Board of State Tax
Commissioners, after the completion of the Michigan Appraisal. Column 2
gives the percentage of each item to the entire cost of reproduction.
Column 3 gives the average percentage of conditions. The remaining four
columns give the average cost of reproduction per mile on various
mileage bases.

It must be borne in mind that Michigan is geographically unlike any
other State in the Union, that the mileage of high-class main-line
railroad is relatively small, and that there is a large mileage of cheap
branch lines and logging roads. As a result, these general averages are
of little value for comparison with similar figures in other States,
where trunk-line mileage forms a greater percentage of the entire
mileage.

In closing, the writer believes that it is but justice to himself to
correct a few misleading statements in Mr. Williams' discussion which
might cause serious misunderstanding of the writer's views.

Mr. Williams refers to his discussion of Professor Adams' paper before
the American Economic Association in December, 1909, he also again
refers to the same paper, and conveys the impression that the writer
discussed this particular article in the paper before this Society.

Reference to page 105 will show that the writer did not refer to this
paper (which, in fact, he did not see until his own paper was in print),
but to one written by Mr. Williams in January, 1909, and given the
widest publicity, not only by its distribution in pamphlet form, but by
publication in the columns of _Railway Age Gazette_.

                               TABLE 15.

 ╒═════════════════╤════════╤════════╤═════════════════════════════════╕
 │        Item.    │  Per-  │Present │   COST PER MILE, ON BASIS OF:   │
 │                 │centage │ value. │                                 │
 │                 │of each │  Cost  │                                 │
 │                 │item to │  per-  │                                 │
 │                 │ entire │centage.│                                 │
 │                 │cost of │        │                                 │
 │                 │ repro- │        │                                 │
 │                 │duction.│        │                                 │
 ├─────────────────┼────────┼────────┼──────┬────────┬────────┬────────┤
 │                 │        │        │ Main │  Main  │  Main  │  Main  │
 │                 │        │        │track.│ track  │ track, │ track, │
 │                 │        │        │7,082 │  and   │ bran-  │ bran-  │
 │                 │        │        │miles.│ bran-  │ ches,  │ ches,  │
 │                 │        │        │      │ ches.  │ spurs, │spurs, 2│
 │                 │        │        │      │ 7,813  │  and   │sidings,│
 │                 │        │        │      │ miles. │sidings.│  and   │
 │                 │        │        │      │        │ 10,718 │ second │
 │                 │        │        │      │        │ miles. │ track. │
 │                 │        │        │      │        │        │ 10,883 │
 │                 │        │        │      │        │        │ miles. │
 ├─────────────────┼────────┼────────┼──────┼────────┼────────┼────────┤
 │ 1. Engineering  │     2.7│     100│   761│     689│     503│     495│
 │ 2. Right of way │    13.7│     100│ 3,918│   3,551│   2,589│   2,542│
 │ 3. Real estate  │     0.4│     100│   122│     110│      81│      79│
 │ 4. Grading      │    10.7│    99.9│ 3,064│   2,777│   2,025│   1,994│
 │ 5. Tunnels      │     0.6│    95.2│   162│     147│     107│     100│
 │ 6. Bridges      │     4.0│    78.9│ 1,133│   1,027│     749│     738│
 │ 7. Ties         │     5.5│    55.2│ 1,578│   1,426│   1,040│   1,024│
 │ 8. Rails        │    14.1│    76.2│ 4,052│   3,673│   2,678│   2,637│
 │ 9. Track        │     1.9│    77.7│   543│     492│     359│     353│
 │    fastenings   │        │        │      │        │        │        │
 │10. Frogs,       │     0.7│    70.7│   207│     188│     137│     135│
 │    switches     │        │        │      │        │        │        │
 │11. Ballast      │     1.8│     100│   525│     477│     347│     342│
 │12. Track laying │     3.2│    97.6│   926│     839│     612│     602│
 │13. Fencing      │     1.4│    58.9│   390│     354│     258│     254│
 │14. Crossings    │     0.3│    70.5│    86│      78│      57│      56│
 │15. Interlockers │     0.2│    89.4│    71│      64│      47│      46│
 │16. Telegraph    │     0.1│      52│    36│      33│      24│      24│
 │17. Stations     │     0.2│    75.7│   580│     526│     384│     378│
 │18. Shops        │     0.1│      68│   305│     276│     202│     198│
 │19. Shop         │     0.5│    79.6│   156│     142│     104│     102│
 │    machinery    │        │        │      │        │        │        │
 │20. Water        │     0.4│    71.9│   103│      93│      68│      67│
 │    stations     │        │        │      │        │        │        │
 │21. Fuel stations│     0.1│    66.4│    43│      38│      29│      28│
 │22. Elevators    │     0.6│    75.5│   189│     171│     125│     123│
 │23. Warehouses   │     0.1│    71.1│    37│      35│      24│      24│
 │24. Docks and    │     2.7│    69.3│   781│     708│     516│     507│
 │    wharves      │        │        │      │        │        │        │
 │25. Miscellaneous│     0.6│    69.4│   174│     158│     115│     113│
 │    structures   │        │        │      │        │        │        │
 │26. Locomotives  │     4.4│    56.4│ 1,274│   1,154│     342│     829│
 │27. Passenger    │     1.6│    71.2│   452│     409│     299│     294│
 │    equipment    │        │        │      │        │        │        │
 │28. Freight      │     9.7│    69.4│ 2,787│   2,525│   1,841│   1,813│
 │    equipment    │        │        │      │        │        │        │
 │29. Miscellaneous│     0.3│    60.3│    99│      90│      66│      65│
 │    equipment    │        │        │      │        │        │        │
 │30. Ferries and  │     0.8│    63.5│   244│     221│     161│     159│
 │    steamers     │        │        │      │        │        │        │
 │31. Electric     │   0.004│    96.6│    13│      12│       9│       9│
 │    plants       │        │        │      │        │        │        │
 │32. Terminals    │        │        │      │        │        │        │
 │33. Legal        │     0.3│     100│    95│      86│      63│      62│
 │    expenses     │        │        │      │        │        │        │
 │34. Interest     │     2.6│     100│   747│     677│     494│     486│
 │35. Organization │     1.3│     100│   373│     339│     247│     243│
 │36. Contingencies│     9.1│      82│ 2,602│   2,358│   1,712│   1,695│
 │37. Total cost   │   100  │    82.1│28,623│  25,945│  18,914│  18,627│
 ╘═════════════════╧════════╧════════╧══════╧════════╧════════╧════════╛

The writer does not care to permit to go unnoticed the imputation that
he has attacked railroad officials as a class. If such inference is to
be drawn from this paper, he desires to correct it.

The writer was in railway service for some years, for six years in an
official position. For the past fifteen years he has been, at frequent
intervals, on special service for railroads. He is at present under
employment by two of the principal railways of the country. He has many
warm friends in the service, many in official capacities, and he is
fully cognizant of the high ability, integrity, and loyalty of railway
employees, and by employees he means to be understood as including all
classes, from the highest officials down.

Inasmuch as our railroads form our greatest industry, and inasmuch as
the active heads of the large roads have under their control such
properties as but few in other fields are called to administer, it
follows that there are hundreds—yes, thousands—of men in railway
service, competent to fill any office in the land. The writer repeats:
it is a pity that the demands of their work are such that they cannot
give more of the benefit of their highly specialized training to the
public service, and that they have so often apparently misunderstood or
misconstrued the perfectly honest attempts of public officials to find a
remedy for real evils.

In closing, the writer desires to say that he regrets the impossibility
of treating the subjects of depreciation and fair return in a
satisfactory manner without unduly lengthening this discussion.

It may not be out of place to say that, in the writer's opinion, a fair
return on the average public service corporation property should be
considerably in excess of the figures usually named. There is but little
incentive to invest in railways, street railways, or other public
service corporations, if the limit of return is to be 7%, or 8%, or even
10%, on the actual investment. This is especially true where the hazard
of investment is increased by term franchises under which the companies
are operating. The writer has the most absolute confidence in the
ability and integrity of our Supreme Court, and is led to believe that,
on a proper showing, confiscation will not be permitted.

He also believes that, in general, the great mass of intelligent people
wish only absolutely fair dealing with the corporations.

On making a full and frank showing of facts and conditions, the public
service corporation which is honestly financed and honestly operated,
need have little fear of ultimate justice.

The public service corporation which is administered, not to render
service to the public, but to permit stock speculators to reap a
harvest, can hardly hope for the same brand of justice, and it is hardly
to be expected that such a corporation will welcome publicity.

-----

Footnote 19:

  _Electric Railway Journal_, January 8th, 1910. p. 76.

Footnote 20:

  December 4th, 1910.

Footnote 21:

  _Railroad Age Gazette_, July 24th, 1908. p. 587.

Footnote 22:

  _Engineering News_, June 16th, 1910, p. 697.

Footnote 23:

  March 4th, 1910.

Footnote 24:

  _Railroad Age Gazette._ July 31st. 1908, p, 627.

Footnote 25:

  _Engineering-Contracting_, May 25th, 1910, p. 468.

Footnote 26:

  _Railway Age Gazette_, March 4th, 1910, p. 437.

Footnote 27:

  _Electric Railway Journal_, January 15th, 1910, p. 110.

Footnote 28:

  Professor of Political Economy and Finance, University of Michigan.

Footnote 29:

  For convenient reference, a set of these forms is filed in the Library
  of the Society.

Footnote 30:

  Now M. Am. Soc. C. E.

Footnote 31:

  _Transactions_, Am. Soc. C. E., Vol. LII, p. 328.

Footnote 32:

  "Elements of Railroad Engineering."

Footnote 33:

  Michigan Central _vs._ Powers Record, p. 500.

Footnote 34:

  Second Annual (1888) Report of the Interstate Commerce Commission, p.
  64.

Footnote 35:

  Letter of Hon. Martin A. Knapp, Chairman of the Interstate Commerce
  Commission, to Hon. Stephen B. Elkins, Chairman of the Senate
  Committee on Interstate Commerce, covering a then pending bill
  providing for railway valuation, March 25th, 1908.

Footnote 36:

  Pages 18-19.

Footnote 37:

  C., C., C. & St. L. Ry. _vs._ Backus, 154 U. S., 445.

Footnote 38:

  _Proceedings_ of the 22d Annual Meeting of the American Economic
  Association.

Footnote 39:

  Page 11.

Footnote 40:

  Decision and order of the Railroad Commission of Wisconsin, issued
  August 3d, 1909, in the case of Hill _et al._ _vs._ Antigo Water
  Company, pp. 84-85.

Footnote 41:

  Page 139.

Footnote 42:

  Shortly after the Kansas City Water Company case and the classic
  decision of Mr. Justice Brewer, and since developed by the suggestions
  of a number of engineers, among them John W. Alvord, M. Am. Soc. C.
  E., whose admirable article on "Going Value of Water-Works," presented
  at the Milwaukee Convention of the American Water-Works Association,
  held in 1909, is familiar to all students of water-works valuation.

Footnote 43:

  Page 155.

Footnote 44:

  Page 144.

Footnote 45:

  _Transactions_, Am. Soc. C. E., Vol. LXIV. p. 94.

Footnote 46:

  Bulletin 21. Department of Commerce and Labor, U. S. Bureau of the
  Census.

Footnote 47:

  "The Principles Governing the Valuation for Rate-Fixing Purposes of
  Water-Works Under Private Ownership." By Arthur L. Adams. _Journal_,
  Assoc. of Eng. Societies. Vol. XXXVI, No. 2.

Footnote 48:

  The Minnesota Commission classified all roads as "Carrying Roads" or
  "Switching Roads," the latter being mostly Union Depots.

Footnote 49:

  This paper will be published in a subsequent volume of _Transactions_,
  Am. Soc. C. E.




                          TRANSCRIBER'S NOTES


 1. Used a comma instead of a space after every third digit from right
    to left in numbers of more than three digits in keeping with authors
    preference.
 2. Table 9 on p. 228 has an error in the math. The total of the second
    column is $1,259,149,434 instead of $1,259,049,434. The latter does
    agree with the difference arrived at in the next line.
 3. Added "Grand total—All assets" to last line in Table 10 on p. 230 as
    this description agrees with the actual totals provided.
 4. Silently corrected simple spelling, grammar, and typographical
    errors.
 5. Retained anachronistic and non-standard spellings as printed.
 6. Enclosed italics font in _underscores_.
 7. Adjacent identical columns duplicated more than twice were not shown
    in the representations of the forms.
 8. The forms that were too wide were split. The following section(s)
    originally continued to the right.