DUPL º º - º º º § NITTTTTTTTTTTTTTg , ºf Tºll H. E E. P- E. : f Fº B E E E E …] n: Elſi | Film THE WALUATION OF PUBLIC SERVICE CORPORATION PROPERTY. a HARRATIVE of the History AD METHODS OF THE APPRAISAL OF SPECIFIC TAX PAYING PROPERTIES IN THE STATE or Michigan. TOGETHER WITH A BRIEF DESCRIPTION OF OTHER WALUATION UNDERTAKINGS, A REVIEW OF LEGAL OPINIONS BEARING ON QUESTIONS OF PROPERTY VALUATION and a - - Discussion of PRINCIPLEs of valuation. O O. O. O. O. O. SUBMITTED TO THE UNIVERSITY OF MICHIGAN AS A THESIS FOR THE DEGREE OF CIVIL ENGINEER. o o o o • BY HENRY BARLE RIggs, A. B., Kansas University, 1886. TABLE of conteſts. Chapter. - - Page. I. Introductory. . l II. The Relation of Public Service or Quasi Public Corporations to the People. 9 III. Explanation of Terms Used. 23 IV. The Michigan State Appraisals - Organization. - 29 W . The Michigan State Appraisals - Office and 42 Field Methods. Wiſe The liichigan State Appraisals — Special Prob- 56 lems of the Mechanical Department. VII. The Michigan State Appraisals – Overhead Gherges. 61. WIII. The Michigan State Appraisals - Right of Way Values. 66 TX. - The Michigan State Appraisals - Non-Physical Values. 83 X. The Michigan State Appraisals - History and Results. 87 XI. Railroad Appraisal of the State of Texas. 93 XII. Railroad Appraisal of the State of Wis consin. 98 XIII. The Minnesota State Railway Appraisal. 105 XIV. The Washington State Appraisal. - l16 XV. Tho valuation of Traction Properties in Chicago. 122 XVI. The Commercial Valuation of Railway Operating 128 Property of the Department of Commerce and Lab Or. XVII. The Extent of Appraisal Practice. - 137 C * XVIII. XIX • XXI. XXII. Appendix "A" Appendix "B" apter. TABLE OF CONTENTS. Review of Some Methods of Waluat, ion ana Some of the Criticisms Of the Michi- gèn Appraisal. The Determination of Element S of Waltle and Methods of Waluation by the Courts. Physical Values, and Methods for Their Determination. Non-Physical Walues, and Methods for Their Determination. Conclusion. Professional Records of Members of the Michigan. Appraisal Staff. Bibliography • Page: 140 175 210 232 Appraisal. Apportionment of Values on Mileage Basis. Appreciation. Adams, Henry C. SUBJECT INDEX. -I* * &£9 º Reasons for requiring. l Difficulties encountered in making. 5 Definition of terms, as used 23 in the State of Texas. 94. in the Stät; e of Wis consin. 98 in the State of Minnesota. . 105 in the State of Washington. 116 in the City of Chicago. 122 What must be taken into account in 160-161 - making. Different Methods for determining 211 values. 56–162-203 Owner entitled to the benefit of. 164-165 His connection with the Michigan work 83 His method of valuation of intangibles. 85 His Work on the Chicago Valuation. 123 º In charge of Commercial Waluation ) 128 of the Census Department. His description of the Commercial Valuation. 130 Criticism of his work by Charles Hänsel, 144 Criticism of his work and methods ) by W. H. Williams. 147 Alvord, John W. Board of Review in Cooley, Mortimer E. Computation: Co-operation of Railways: His method for computing going C On- 141 G. eTººl. Criticism of his plan by D.W. Mead. 142 Personnel of . . . . . . . . 39 Duties of . . * * -- a 49. 40 His appointment as Appraiser in Mich- igan - - º - 6. * º $29 His exact relation to the Michigan Work. . . . . . Member of Board of Appraisers, Chicago 122 Männer of computation of values . . 48 Preservation of not es and memoranda . 49 Tables for computation of values . . 51 Classification of Inter State Com- merce Commission. , e º . 54 used in Important questions of policy must be decided before . - tº- - 187 In Wis consin appraisal . . . . . . 98-104 In Minnesota. TT . . . . . . 105 Lacking in Washington appraisal . . 116 Not undesirable . . . . . . . . 181 Classification of Properties in a general appraisal. . . .188 -II- * * * 39-40 Cleveland - Compilation. Contingencies. Capitalization of Net, Income. Detroit. Depreciation. Definition of term – original cost. . . 23 Washington appraisal undertook to . determine original . . . . . 11.6 Original cost cannot control in a Vēluation . . . . . . . . 1.65 Original cost objected to , as impossi- Tole to Secure accurate dat, & . . . 182 Per mile of making Michigan appraisal 90 Per mile of making Minnesota f 115 Per mile of making Washington 77 119-121. City Railway Waluation . . . . . . 137 Final compilation in Michigan . . . . 55 See overhead charges. Method adopted by Adams in Census f Department; Valuation. . . . . 128 City Railway Valuations. . . . . . 137 Determination of in Michigan . . . . 45 None applied in the Texas appraisal. . 95 Not placed in the field in Washington appraisal . . . . . . . . 117. Mortality tables - the use of . . . 117-195 Authorized by the Courts. . . . . 165-170 Discussion of methods of determining. 185-195 -III- d S Liscount on Bond Design - Proper or Improper: Development of the Art. Excessive Capital. Engineering: Employes of Michigan Appraisal. Floating Equipment. Not included in Michigan . . . . . 62 Advocated as a proper capital charge by Williams . . . . tº tº 147 Mr. Williams' argument, opposed. . . 148–200 A matter for determination. With other non-physical element, S. . . . . 202 Effect on physical values. . . . . 206 Reduced as a result of the Texas appraisal . . . . . . . . . 96 Burden of , may not be imposed on the 3 Public. º º +- + º e e e * 1.59 See overhead charges. Requisite S, in Selection . . . . . 36 I. Oyalty and energy of . . . . . . 37 Sālāries paid, in Michigan. . . . . 91 Basis of assignment of values Michigan 56 it. rt 17 ºf 17 WiS consin 99 Minnesota 105 ff # , H rt º - TW- Forms – Blank for Inventory: Franchise Walues. Filing Records. Going Concern Value. Hänsel, Charles. Inter Stjät; e Commerce Classification. Interest, . Intangible Values. See Inventory. See non-physical values. Method adopted in Michigan . . . . . Alvord's method of computation. . . Criticism of Alvord's plan by Mead. Discussion of , by the Supreme Court of Maine . . . . . . . . . Cases where not justified. . . . Definition of . . . . . . . . . Argued that it should not be given a place in excess of allowance for overhead charge S. . . . . . His criticism of Adams' vallies. º - See overhead charges. See Nor–Physical Values. ºrr - W - 49 141 142 173 211 215 216 Inspection: Inventory. Tiānd - --- Legal Expense. Tiegal De Gisions. Mead, Daniel W. Description of methods of field, Michigan 45 On the Chicago & Northwestern Ry. . . 46 Of special structures . . . . . . . 47 Of freight Cºrs . . . . . . . 58 Of locomotives . . . . . . . . . 59 Of vessels and marine equipment. . . . 59 Personally made by Minnesota. Appraiser. 106 In the field advocated. . . . . . 184 Forms for making of , used in Michigan. .. 34–41A Preparation of inventories in Michigan. 35–42 Walue of, as a check . . . . . . .44-181-18 Made by Railroad Companies in Wis con– Sin. 98 Forms for making of, used in Wis consin. 104A Forms for making of, used in Minnesota. 115A Difficulties encountered in making a C OTre Ct. . . . . . . . . . 32–44–181. Methods of Valuation in Michigan. . . 66 Classification of Lands. . . . . . . 67 Examination of real-estate transfers, Michigan. . . . . . . . . 68 Value of - for railway purposes. . 69–190–107–19 Reasons for adoption of increment or multiple in determination of railway value. . . 71–101–108–110–19 Methods adopted in Wis consin. . . . 100 Methods adopted in Minnesota. . . . . LO7 Terminal lands in large cities, Minnesota . . . . . . . . 109 Unreliability of personal estimates . . lll Methods adopted in Washington. . . . .118 Discussion of land values by the Courts 164 See overhead charges. See pages "X" and "XI. His criticism of Alvord's plan for determining going value . . . . 142 Milwaukee. City Railway Valuations. . . . . . 137 lichigan: Reason for undertaking valuation. . . 29 Departments of appraisal . . . . . . 30 Time limit; and difficulties of appraisal. . . . . . . . 33 History of valuation subsequent to 1900 87 Valuation — market value of Stocks and bonds . . . . . . . . 88 Error in reports concerning appraisal. 88 Results to State, of work of appraisal 91 Final figures of appraisal of 1900. . 93A NeW Jersey. Making an Appraisal . . . . . . . 137 Nebraska. Making an Appraisal . . . . . . . 137 Non-Physical Value. Definition of terms . . . . . . 24-26-179 Illustration of non-physical value. 27 Method for determining, Michigan . . 83 Professor Adams' connection. With work. 83 Not used in Wisconsin. . . . . . 103 Method adopted in Chicago. . . . . 125 Alvord's two methods – franchise value . 143 Alvord 'S plan – going Concern . . . . 14l Court, S have considered. . . . . . .168 Different elements not separable . . . 212-225 Franchise values discussed. . . . £21 Conclusions regarding, . . . . . . 227 Organization Expense. See overhead charges. Original Cost: See Cost;. —WTT- Overhead Chârge S. Physical Value. Public Service Corporation. Public, The . Purpose of the Appraisal: Right of Way. Real Estate. Used in Michigan. . . . . . . . 61 Reasons for using the contingency item 63-201 Texas practice in matter of , . . . . 95 Wisconsin practice in matter of , . . 99 Minnesota practice in matter of , . . 106 Used in the City of Chicago Valuation. 124 Argument in favor of , by W. H. Williams. 149 General propriety of the use of . . . 196 Definition of terms . . . * * . 23-, 26-178 Final figures of, in Michigan. . 92A Should reflect amount of present capital investment . . . . 177 Definition of the term. . . . . 9 Their relation to the people . . . 10-21—158 What they are entitled to . . . 11-159 Should have more c ordial relations With the public . . . . . . 14 Employes and officials not active in public affairs . . . . . 16 Trend of training in employment under, 17 What the public is entitled to . . . 11-159 Charge S of , against corporation. . . 18 Should not be allowed to affect results l'9 See Tänd. See Tiānd. - WIT T- Reduction of f C 3 p i t; & l Stevens, John F. Taxation. Terminals: Unit; Prices. Valuation. Value: Williams, W. H. -- fashington. er mile, result of Texas Work . . . . . 96 p Appraiser of New York, New Haven & Hartford Ry. . . . . . . 137 Tables showing percentage of assessed value to commercial valuation of 1909. . . . . . . . . 20A Value due to Terminal Properties. . .204 Used in Michigan appraisal . . . . 51 Used in Texas appraisal . . . . . 95 Used in Minnesota appraisal . . . . 105 Used in Washington appraisal . . . . 117 Discussion of what Gonstitute proper, l?0 See Appraisal. Variations in . . . . . 6 Definition of . . . . . Assignment of values of floating equipment . . . . Final Våliles Submitted in Michigan . . . . . . . 92A What may be considered in deter— mining a fair, . . . . 160–161– 213 Elements which enter into final, 178– 214 Different methods for determining, 211 .23.24.25-213 56-99-105 His criticisms of the Michigan Vâlûâtion. . . . . . . . 146 Comments on the report of the Appraiser . . . . . . . . 119 -IX- Legal Decisions Referred To: Tos Angeles Water Co. vs. Los Angeles Weatherly vs. Capitol City Water Co. Myer VS - Brown. º - º * º th 4. National Water Co. vs. Kansas City. Smyth V.S. Ames . . . . . . . . Stone vs. Farmers Loan & Trust, Co. . . Covington & Ilexington Turnpike vs. Sanford. . Knoxville Wat; er Co. º º g º º º San Diego Tand Co. vs. National City Columbus Southern Ry. VS. Wright. (103 U.S. 711) Tº E - (Ala. 22 So. 140)." (65 Cal. 589) 3. 62 Ted. 863) 11 *: 11 12 12 12–164. (169 U.S. 466) 13–158–182– . (116 U.S. 307) (164 U. S. 578) (212 U.S. l. ) (174 U. S. 739) (151 U. S. 479). 213 13 13-159 21 1.61 161. Franklin Co. vs. R. R. . . (12 Lea (Tenn.) 521-537-538–539) 161 State Railroad Tax Cases. Delaware R. R. Tax Case. Erie Ry. Vs. Pennsylvania, Western Union Telegraph Co. vs. Mass. Pullman Palace Car Co. vs. Penn. . Maine vs. Grand Trunk Ry. . . . . P. C. C. & St. L. Ry. VS. Backus. . . C. C. C. & St. L. Ry. VS. Backus. . . . M. C. R. R. vs. Powers. . . . . . . . . San Diego L&nd & Town Co. vs. Nation- äl City. - º 4- * º o - - - - - Sön Diego Land & Town Co. vs. Jasper. – K– (92 U. S. 575–607) 161-162 (18 Wall 206) ( 21 Wall 492) (125 U.S. 530) (141 U.S. 18) (142 U.S. 217) (154 U. S. 430) (154 U. S. 444) (201 U. S. 245) (74 Fed. 83) (110 Fed. 714) 1.63 l62 163 163 Legal Decisions Referred To: (Continued) Cotting vs. Kansas City Stock Yards Consolidated Gas Co. vs. City of New York. . . . . . . . . . . Willcox vs. Consolidated C&S Co . . . Knoxville vs. Water Co. . . . . . . € Waterville Appraisal instructions . . -xI (82 Fed. 839) 164 (15.7 Fed. 849) 165– 221 (212 U. S. lº) 169-224-233 (212 U. S. l.) 170–229 (97 Maine 185) 172–233 Brunswick Appraisal instructions. . . (99 Maine 371) 172 CHAPTER I. I N T R O D U C T O R Y. 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. None of the fields of engineering specialization requires greater care, or calls for more skill, experience, integrity or sound judgment than this one. The individual engineer, or commission of engineers, 6 rºl- tering upon an appraisal of large magnitude, and particularly one including properties of more than one company, Will find conditions varying in every case, and each property presenting new, complex and confusing elements of value to pass upon and determine . . Prior to the year 1900, there had been but few calls upon members of the profession for large appraisals, and the lit- erature descriptive of engineering effort along this line W8,S practically nothing. Since the year 1900 there have been a number of very extensive appraisals 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 cer– tain methods and principles have been brought out, and enough has been added to the printed literature to enable us to compare meth- ods of work, and to fix with reasonable certainty upon some as cor- -l- rect and to discard others as improper. There are so many complex factors entering into the problem of valuation, so many widely differing 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 should be made of the subject. It, should be examined from all angles, every possibility of dan- ger from legislation regarding this subject 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 prin– ciples of railroad valuation are applicable to the appraise- ment of other classes of corporate property, and so many of the arguments advanced by engineers and others, and so many judgments of courts have been rendered in connection with wat- er-works and gas company valuations that it is not desirable to limit this discussion wholly to the problem of Railroad Wal- uations. The reasons for requiring that valuations be made may be broadly divided into two general classes. list, A.S. A. MATTER OF PUBLIC INTEREST. - To safeguard the public, and particularly the investing public, against unworthy and dishonest corporation securities; to assure the public that corporations are bearing their legitimate and proper share of the burden of taxation; to furnish a proper basis for fixing equitable and just rates for the services rendered to the pub- –2- lic 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 issues of Stocks and Bornds. Such was the purpose of the Texas valuation. (d) Fixing a Price for Sale - - Many of the water works and electric light valuations are 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. ºness ºme ºsmºsºsºsºsº amerººms To guide large investors in securities in making their invest – ments. To secure a safe and up-to-date basis on which to nego- tiate a sale of the property, a purchase of the property, a re- organization of the property, or a consolidation With other like properties, and to secure justice to honestly administered cor- porations. The great majority of appraisals under this head have been in accordance with some other method than those adopted in the state valuations. + It is not intended in this paper to engage in any ar- gument as to the various purposes of appraisal or even to urge -3- * - - - - - the necessity or desirability of a general appraisal of proper- ties. 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 need- ed 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 dis- cussion of the methods which should be used in arriving at a correct figure of cost of reproduction and depreciation - not to questions involving the propriety of any use of those figures when reached. The propriety or legality of their use as a basis for arriving at an assessed valuation, as a basis for rate mak- ing (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 conce ded no place in this thesis. It is assumed that these questions would all be taken up and a sat- isfactory answer reached before a valuation would be ordered. - The different elements of value in a property, the re- lations of this property to the public, the methods of determi– nation of the Worth of these elements of value that have been adopted in the past by men engaged on valuation work, a compari- Son of these methods, a discussion of the objections that have been made to them, and a presentation not only of the author's views as to proper methods, but those in which he disagrees with usages adopted by others – these are the limits of the scope of this thesis. No matter what particular end is to be served by a val- uation, the commission engaged upon it will be asked to furnish a fair value , perhaps with reasonable limitations in the instruc- tions, perhaps with a general indefinite instruction to find the value. They will encounter, among other difficulties – º 1st, The fact that human machines are not exact dupli- cates and that a large measure of error must be allowed for, on account of the personal equation of the men engaged upon the work, and individual errors of judgment are frequent on any work of mag- nitude. This personal element must be corrected by uniformity of method, by constant checking, and so far as possible by subordina- tion of personality to System. 2nd, The fact that human selfishness is a dominant qual- ity, and the railroad manager who opposes methods that 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 is— sues, 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 upon an unenlightened public opinion to create sufficient outcry to in- fluence the work to his advantage, are all actuated by a perfectly human desire 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 wheth- er results are not frequently affected by the knowledge of their intended use, and whether a system can be applied to the work that -5- will entirely remove such causes of error. If an engineer, or a commission of engineers, is direct- ed to examine a certain property, and report the true cost of re- production, depreciation, or present value, taking into account all facts connected with the property, the final figures should be no different whether the report was to be used as a basis for reorgan- ization, sale to another corporation, or was 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 by them is a neces- sary preliminary upon which depends the accuracy, fairness and jus- tice of the other work which is to follow theirs. This work is an engineering work, a statement of certain physical property, the es- timated cost of reproducing it new, less the estimated deprecia- tion, and beyond the differences due to personal judgment, their figures may not vary. The word "value" is a word in common use in our language, yet a word whose exact meaning is vague in the minds of many people. It is true that the yalue of a property is an unstable figure, liable to fluctuations caused by natural or artificial causes, and 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 limit- ea to a determination of cost of reproduction and depreciation, a valuation commission should be governed by the following rules: - - -6- No account may be taken of the purpose for which the result- ant figure of value is to be used, and the result should not vary, no matter what that purpose may be . The resultant figure should be the honest judgment of the men composing the commission as to the actual cost of repro- duction, present physical value, or "fair value", and should be arrived at by a systematic and scientific method which takes into account all the facts concerning the property, its physical property, its strategic location, its operating revenues and expenses, and its franchises, rights, competi- tion, opposition, and all other tangible or intangible ele- ments which would affect values. The method of valuation should be such as to minimize or entirely eliminate all dif- ferences due to errors of personal judgment. All properties being appraised are considered as operating properties. A dead, inert property, not in use, cannot be considered as coming under such a discussion as this, and Such properties are not treated in this thesis. 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 author 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 of every valuation, and that instinctively, men engaged up- on the appraisal will find themselves modifying their figures to -7- 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 unwitting- ly almost instinctively coloring his results by some old preju- dice of his early years of employment, or Some loyalty to his own ideas of governmental or economic policy. The author 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. CHAPTER II. THE RELATION OF PUBLIC SERVICE OR QUASI PUBLIC CORPORATIONS TO THE PEOPLE. In the consideration of questions of value, the engi- neering 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 in- volved, 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 imbued with the perfectly human desire to defend cor- porate interests from attack of any kind; on the other side is public opinion, often unreasonable, often misinformed and fre- que Sntly prejudiced. - It appears necessary, therefore, to briefly consider 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 establish- ed and maintained between the people and those corporations or- ganized to perform certain of the functions of the state. A public service or quasi public corporation is a cor- poration which is operating under the terms of rights, grants or franchises given by the public either to this particular corpo- ration direct, or granted by statute to a class of corporations. The property of the corporation is used to render cer– tain services to the public with the expectation of financial –9- 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 wat- er 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 certain rights from the people 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 facili- ties build and develop the country traversed by the railroad, and this growth and development not only operates 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 prop- erties was furnished in the hope of, and with the expectation of, a proper financial reward. It has frequently happened thet Such properties have been built years in advance of suf- ficient development to support the enterprise, built in fact without expectation of immediate returns, and often long periods of time have 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 immense tracts of land, by the payment for certain service at such rates as would largely re- —l O- lieve the company from loss in operation, by the remission of taxes, and by the direct donation of funds. The company is clearly entitled to earn a reasonable profit on the actual capital invested, in addition to all the legitimate cost of operation, payment of texes, 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 reason- able profit and expenses. Increases in tonnage, population and consequent net earnings of the corporation should entitle the public to a benefit in reduced charge for service, where the in- creased earnings 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 jus- tice. - 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. The United States Courts held, in the case of Los An- geles Water Co. - vs - City of Los Angeles (103 U. S. 711), that at the expiration of a 30 year franchise, which provided that the city was to pay for the value of all imporvements, 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 —ll- the city terminated it by making or tendering payment, the passage of an ordinance by the city fixing rates was void. The Alabama Courts, in the case of Weatherly - vs – Capital City Water Company (Ala. 22 So. 140), held that the acceptance of a franchise involved a grave responsibility and that the company could not stop furnishing water and fire pro- tection 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 on e qually with the other." t - Judge Brewer, in the Kansas City Water Works case (62 Fed. Rep. 853) said, "All contracts involving property rights and obligations between municipalities and individu- als, must be presumed to be based upon and to recog- nize the ordinary laws of business transactions." In 1905, the Maine Supreme court issued a Set of in- structions to appraisers appointed to fix values of certain properties. The Court, sets forth its views as follows: - "Summarized, these elemental principles are, the right of the company to derive a fair income bas- ed upon the fair value of the property at the time it is being used for the public, taking into account the cost of maintainerice and depreciation and the current operating expenses, and the right of the public to de- mand that the rates shall be no higher then the services are worth to them, not in the aggregate, but as indi- viduals." The Supreme Court of the United States has again and again reiterated its views, which may be summarized as follows: -l2- "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 fights of the public are not to be ignored. * * * * * The public cannot properly be subject- ed 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 right- fully be required to submit to unreasonable exac – tions for the use of a public highway established and maintained under legislative authority." 164 U. S. page 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 confisca- tion. Under pretense of regulating fares and freights, the state cannot require a railroad cor- poration to carry persons or property without re- ward, neither can it do that which in law amounts to the taking of private property for public TºlS 62 without just compensation. * * * * * . * . (ll6 U. S. page 307 ) In the case of Smyth - vs - Ames (169 U. S. - page 466), the Court says: & "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 the corpora- tion as represented by its stocks, bonds and obliga- tions 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 be - ing 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 -13- 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, as the foregoing quotations show, been clearly defined by the Courts. That the mutual relations existing between the manage- ment 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 strug- gling to exist. The sums of money involved in the dealings of the corporations are so stupendous in comparison with the amounts used in ordinary private business, even that of consid— erable magnitude, that the majority of the public cannot compre- hend 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 fully 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 in- telligent 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 un- just , and to consider them all as exceedingly prosperous. This has been taken advantage of by politicians for their own selfish ends and has led up to sundry legislation, much of which has -14- 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 upon the amount of capital invested, but upon 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 establish- ment of stations and terminals, 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 unreason- able and burdensome. Nearly one-half the states of the Union have by law required a two cent, or two and one-half cent, pass- enger fare, regardless of density of population, amount of traf- fic, or other considerations which might render such rates un- reasonable. The regulation of the carriers, by legislature, by railroad commissions, by state officials and by courts, the addi- tion of burdens of expense and the cutting off of revenue, all these give considerable ground for the opposition of the carriers t;O 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 diffi- cult 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 ad- -15- mission that the State of public opinion which compelled the pass- age of these laws has been brought on largely by the corporation officials themselves. There is probably no more loyal body of men in America today than the officials and employees of the railroads. Their loyalty is all, however, 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 pub- lic 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 em- ployer, they have few equals, but it is doubtful if any equal number of meri, 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 an 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 abso- lutely true, it will not do to pass over the notable exceptions. Such men as James J. Hill, M. E. Ingalls, and others of the high- er officials, who have taken an active part in public affairs, have been men of 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 man- agement of one road to compel all their employees holding munici- –16- pal offices to resign, is bound to react and create hostile feel- ing 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 train- ing is that the railway service has in it thousands of men who become impatient with any effort to regulate or control, who per- mit their irritation to show, and who by their own attitude cre – ate unnecessary hostility. Mr. F. A. Delano, President of the Wabash, in an address at Hannibal, Mo. , March 25, 1909, said, "In ordinary manufacturing or commercial enterprises, every man has his own notions about the conduct of his business and does not want to be in- terfered 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 corpo- rations 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 regulations and control, there is noth- ing in that argument which makes public interference any more palatable to the man, or group of men, who are interfered with." This address beautifully 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 mana- gers, 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 -l'7- correct, information as to the operation and depreciation of their properties; also, it is unfortunate that when a corpora- tion 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 railway or 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 there is on the part of the corporation officials an apparent unwillingness to admit right motives on the part of anyone advancing theories regarding cor- porate regulation and control, due largely to the training and atmosphere surrounding the corporation service. The public has a large bill of particulars. The pro- motion of Wildcat companies is one, such, for instance, as the "New York and Chicago Air Line" project, which only a year or so ago drew between two and three million of dollars out of 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 saved this and hundreds of other like swindles. Any move to secure such a law has always been opposed by the management of large and legitimately operated corporations un- der 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 -18- possible cost or value of railroad, street railroad and other properties, and the making of large personal fortunes by the promoters is a matter of such frequent occurrence that it is difficult indeed to dismiss it with a mere denial. There is hard- ly a community of any size that has not had its example of "con- solidation", "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 swin- dle. These, to say nothing of some gigantic deals involving millions, will sooner or later compel some form of regulation Of issues of stocks and bonds. In the last analysis it is the money of the people, the hundreds of thousands of Small invest- ors, 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 form of con- trol of Stock and bond issues as will make impossible the pure- ly speculative "wildcat" corporations, and so safeguard minor corporations as to furnish at least reasonable security to those whose money is invested, all forms of corporation security must be under auspicion with the public, and the agitation for con- trol 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 SO safeguard this form of corporate security that it can be treated as any other form of sound in- vestment. It should not be necessary to require that all in- -19- vestors in corporation securities be financial experts. It is the opinion of the author, based upon his own 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 corpo- rations. If such be the fact, it would seem that the interests of the great railway corporations would be in no wise jeopardiz- ed by sane and reasonable control. - The theory of taxation is that everyone shall bear his proportionate burder 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 Commissions commercial valuation of railroad properties, it will be conceded that the results give a set of figures for all the States of the Union, secured by a uniform method of computation and distribution. Table No. 1, which is a compi- lation from Tables I – II of Bullet in 21, shows clearly why in certain States corporate taxation is a live issue, and if (as Mr. Williams suggests 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 in- e quality shown by this table is such as to compel these changes. |-20- - TA B L E No. 1 . - - e COMPARISON OF ASSESSED VALUATION AND COMMERCIAL VALUE OF RA|LWAY FROPERTIES ſ==== STATE H=Hºº:::::Harºl O R. TO COMMERCIAL TE R RITORY 5INGLETRACK! JUNE-350 - 1904. YEAR ANMOUNT PE R CENT ALABAMA 4,66955 502 || || OOO | | 905 539.26026 559 ARKANSAS 4. 2644 | 24,626,000 | 90.1 3 A.7 O9.623 27.8 CALIFORNIA 6262.54|| 355O694000 | | 904 92.578,550 26.5 COLORADO 4.976.24 98.26 ſ.OOO | | 903 A 94.92 ſ 35 250 CONNECTICUT |O | 7.72 | O 5569000 | 90.2i | 20.4936 A5 | | 4.4. FLORIDA 355 584 8 OA67OOO | 904 2 [.8 || 7.478 27 | GEORGIA 6.504.72 | 56.6O3OOO | 903 6 3 | O38 || 0 40.3 |DAHO |.416 |.5 5 9 |.877C) OO | 3 O.4. | O | | 53576 | |.0 |LL / NOIS | 1.62274, 8 O 505 70 OO | 904 A 25.709 O35 6 38 INDIANA 6.9 || 785, 37.5, 54 I.OOO | 9 OZ}. | 6,5863,367 4.42 IOVVA 985923, 2544,847.000 || || 90A 57.555 | 60 | 67 KANSAS 8.8 | | A 3: 356.25.56.OOO | 90A 6 OO 93.554 | 6.9 KENTUCKY 3.253.00 || 55772OOO | | 904 77,658 OAO 499 LOUISIANA 3.8987A 234 O J.OOO | | 904 29044. 95 289 MICHIGAN 866O29, 277.597OOO | | 904 | 96.79.5000 709 M|NNESOTA 7.8 || || 04 46.6.7.3/1000 MISSISSIPPI 3490.25 | O 768A.OOO | 902 2.98/17640 27.7 MISSOURI 77 || |.05 309763OOO | | 903 97.9 | 6869 25 |.6 MONTANA 3.267 || 0 | 96.2O3OOO | 904 256,759.827 | 8.7 N EBRASHCA 562O88. 26.25, 17OOOO | | 904. A 6.08.2853 | 8.5 NEVADA 986.56 A 37,450 O O | 904. | 3778,049 35 |.5 NEVV HAMPSHIRE, 1,27597 79.7860 OO | 904 2262.5000 283 NEW JERSEY 2.2778.5 ±52535680 OO | 904. 23 1.655 525 69.5 NEVV YORK 8.29.729, 8 98.222000 | 903 229.582O6A. 25.6 N. CAROLINA A.O.75.OO | | 5 || A 6,000 | 904 6948 O974. 6 1.4. N. DAKOTA 3. 90.77 | 233900 OO | 904. 22 || 60304 | 8.0 OHIO 9. 96.68| 6697.97000 | 904 | 33358,945 | 94. OKLAHOMA 26 || | |03 78,668000 | 905 | 1936.31 7 | 52 PENNSYLVANIA | | }.023.24| |.42O68OOOO RHODE ISLAND 2 | | 89 257 / 9000 | 9 OA. | 5832O03 6 ſ.6 S. CAROLINA 3 75.28 7.5500000 | 903 29,467.7 || 6 390 5. DAKOTA 2.04, 7 || A. A 9.646.000 | 9 OA | 4.354.930 28.9 TENNESSEE 354.80.835 | 2 || | 66,000 | 903 58.5256.566 . 46.6 TEXAS | 1.8A 803: 2377 8000 | 904 95.2097.85 40.0 UTAH 1.77969 90.325,000 || > | 904 20,6824.6 | 22.9 VERMONT I.O 63.25 57 35 | 1.000 || || 9 O2 27344,020 733, VIRGINA 393233 21 1.31 5000 | | 904 6 3.269.623 377 WEST VIRGINIA 2836.83 20 1.799000 | 904 2877 | .358 | 42 WASHINGTON 53.5583 | 32.83570 OO | 90A 26.066.949 | A.3 VVIS CONSIN 7048.76 284.51 0000 | 904 2 8.0 24,900 .7 6.6 VVYOMING 1.24770 | 00.5 07000 | 904 7.498.232 7. 5 ARIZONA | 75 .35 68.2556 OOO | 904 6.66 W 34.9 97 DIST of COLUMBIA 252.00 * 5.57&O OO | 904. 2.486.024. 44.6 NEVV MEXICO 2504.66 8.640.000 | | 904 3.5 || |.558 99 TOTAL U.S.A. |2| 5.932 || 5 || | .244.852000 -- - - - - - - - - - - --------—----- - r- - - - - - - - - - --> -- 2O.A. It is needless to cite further instances; enough has been said to indicate : – - lst . That the corporations and the public have such intimate business relations that a blow at either must neces — sarily seriously injure the other. 2nd. That the courts have quite clearly defined the legal relation existing between the two interests. 3rd. That there is lacking a proper spirit of mutual confidence and the two interests at the present time are gener- ally hostile. 4th. That there have been errors and abuses on the part of both corporations and public. 5th. That capital invested in corporations is, and should be, the money of the people, and that it should be so safeguarded as to prevent its loss by manipulation, and to in- sure a fair return. 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. -l) which is as follows: - "Regulation of public service corporations, which perform their duties under conditions of neces- sary monoply, Will occur with greater and greater fre- quency as time goes on. It is a delicate and danger- ous function, and ought to be exercised with a keen serise 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 burder 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 -21 – the sanctity of private property, and that state or community which seeks to invade it will soon discov- er 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 Ser- vice 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. –22- CHAPTER III. EXPLANATION OF TERMS. In order that there may be no doubts arising as to the exact meaning of terms used throughout the following pages, a series of definitions or explanations is submitted. Appraisal or Valuation is used interchangeably, and refers to the engineering work of determining the present worth of both physical end intangible properties of corporations. Cost of Reproduction refers to the estimate of cost of repro- ducing the physical properties as they exist on the date of the appraisal, all elements entering into the cost being con- sidered as new and not affected by the elements of deprecia- tion or obsolescence. Cost or Original Cost refers to the actual amount of money paid for the property, either when it was originally con- structed, or in its condition at the time of the appraisal, the latter. Case being original cost plus the cost of addi- tions and betterments to property, 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 is 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 the name of this element of value is unfor- tunate, as it mey lead to some confusion. It must be clearly kept in mind that where this term is used, it refers only to physical property as depreciated, and is in no case internded to refer to the final or "fair value" of the property. Non Physical or Intangible Value is a term 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 which are not attachable to the physical property. all of the foregoing terms have to do with the deter- mination of the elements which enter into the final value of the property. What is "Walue"? In arriving at a definition of the exact meaning of this term, as applied to the property of a public service corporation, a large number of elements must be taken into account. By reference to standard authori- ties, we find many definitions of value, none of which appear to fully meet the requirements as the term is here used . . Be- fore any consideration of these elements which enter into the value of corporation property, or attempting to arrive at a determination of methods to be used in fixing proper figures of worth for each of these elements, it is proper and neces- sary that a clear definition of value, the thing sought to be ascertained by the inquiry, be determined upon. \ ------- -24- The use of the term "commercial value" has been con- sidered, instead of "value", but it is not used, for the reason that the term is held to be more properly applicable to the selling or exchanging value of fractional interests in the prop- erty, and that methods of computing commercial value of securi- ties are in common use which cannot be adopted in an engineer- ing valuation. While the Standard Dictionary definition of "commercial value" – "the source of commercial value , according to different schools of economists is, (l) the de- gree of want felt for a commodity as shown in the relation of supply and demand; (2) the amount of labor embodied in it; (3) the cost of reproduction. Practically, commercial value is that for which a thing can be sold or exchanged at a given time or place" – and the definition given by Professor Adams – "the estimate placed upon the worth of a property, regarded as a business proposition" - are both in a measure involved, the writer considers that the term "commercial value" is too narrow and restricted to be prop- erly used. As a definition of that estimate of worth which an engineering commission should report as the result of a complete appraisal, the Writer would submit the following: The velue of a property is its estimated worth, at a assass....mºmasºs tº - ºr- sº ** ** given time, measured in money, taking into account all the ele- ments 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: –25– 1. The physical property element of value, being those things which are visible and tangible, capable of being inventoried, their cost of reproduction determined, their de- preciation measured, and without which the property would be unable to produce the commodity upon the sale of which its in- come depends, this physical property being considered 3.S &Il operating entity, and not as a collection of inert and partly worn out equipment ; and being so considered, it carries as part of the physical value, those costs and charges which are an inseparable part of cost of construction, but which do not appear in the inventory of the completed property. 2. The non-physical or intangible elements of value, being those things which added to, or teken from, the worth of the physical property, make up the value, and which include whatever accrues to the property by reason of its operation, or by reason of grants, contract rights, competi- tion, 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 upon 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 author is strongly of the convic - tion that this relation is such that value cannot be ascer- -26- tained without a determination of physical worth. The physi- cal property element represents the investment upon which a fair return is to be earned, and in most cases an appraisal is necessary for the determination of the amount of money ac- tually 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 Mich- agen may be cited. Road "A" occupies a narrow valley, through high and abrupt hills. Its alignment is fair for hilly country, its maximum grede is 1%. It has a number of bridges, all short and low. Its cost of reproduction might reasonably be placed at $28,000 per mile. The mining town at one end ships its heavy tonnage down grade, to the lake port at the other. Road "B" was built several years later, and being barred from the only valley, built a line across the hills, in- volving heavy grading, very long and high Steel trestles, a longer line, maxium grades of 2%, and a heavy elimb 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 8. small fraction of that which can be hauled with the same pow- er by Road "A". A reasonable figure for cost of reproduction may be given as $60,000 per mile. Here is clearly a case where the older, cheaper 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 •27- the relative difference. A higher rate, while permitting Road "B" to live, greatly adds to the value of Road "A", while Road "A" can operate at a profit on rates that would not permit "B" to pay expense S. Here is clearly an instance of non-physical values not only positive in the case of "A", but also negative as to "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 cor- poration to do business. Without the physical property, it could not produce the commodity which it sells. The amount of money actually invested in acquiring that physical property repre- sent S the measure of capital upon which it is morally entitled to earn interest and profit, and in the stage of production and financing of the enterprise, all hope of earnings is based upon the amount of money required to construct the property. These considerations lead the author to contend that the true method of valuation of a corporate property is to first deter- mine the cost of reproduction of the property and its deprecia- tion, and affect this figure by any applicable positive or neg- of v ative non-physical elements alue . -28- CHAPTER IV. THE MICHIGAN STATE APPRAISALS. O R G A N I Z. A T I O N. The State legislature of Michigan, at the session of 1899, passed an act creating a Board of State Tax Commis- Sioners, 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 Sept. 1, 1900, the Board of Tax Commissioners appointed Professor Mortimer E. Cooley, Miem. Am. Soc. M. E. , Appraiser of Properties. Immediately there after, the gener- al organization was mapped out along the following lines of division of labor and responsibility: º l. 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 - all of these were retained by the Appraiser, who was the final arbiter on all matters referred to him regard- ing the details of the work. 2. Civil Engineering. The appraisal of all prop- erty which in the course of construction would fall under the Supervision of the Civil Engineering department of a road. This work included land, roadway, bridges and structures. This department was in charge of Henry E. Riggs, Mem. Am. Soc. C. E. , of Toledo, Ohio. 3. Mechanical Engineering. The appraisal of all motive power, rolling Stock, and of all 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 and machinery. This department was in charge of Theodore H. Hinch- man, Jr., Mem. Am. Soc. M. E., of Detroit, Mich. - In the matter of final assembling of figures, com— putation of percentese values, and compilation of final re- sults, both Mr. Hinchman and Mr. Riggs worked together with joint general supervision. 4. Telegraphs. The inspection of all telegraph properties was under the charge of William S. Conant, Mem. Am. Soc. M. E. , of Detroit, Mich. 5. Telephones. The appraisal of all telephone properties in the State was directed by William J. Rice, of New York. . 6. Wessel Properties. All vessels belonging to companies whose property was involved by the appraisal were in- -----4-----------~~~< * * *-- 2: --> --- “... --, - -30- spected and appraised by Prof. Herbert C. Sadler, Mem. Inst. Nav. Arch. & Marine Engrs. , Professor of Naval Architecture and Marine Engineering at the University of Michigan. 7. Plank Roads and River Improvements. A branch of the investigation involving the property of a number of small corporations was in charge of the late D. Farrand Herry, Mem. Am. Soc. C. E. , of Detroit, Mich. In the following narrative, no special mention is made of the work executed under the direction of Messrs. Conant, Rice and Henry, for the reason that these gentlemen really had charge of independent appraisals which were carried on along similar lines to those adopted in the railroad ap- praisal, and no methods were used which were different from those of the railroad appraisal; hence, any description of their work would be in a large measure repetition. This omis- Sion is in nowise to be construed as any reflection upon the importance or high character of their work. The organization as outlined above, while necessari- ly at points touching and overlapping, was generally so clear- ly defined that there was no duplication of work. Each head of a department was made responsible for the work of his special department, and directed the laying out and execution of the work done by his men. The first task, after the general organization was decided upon, was to determine the general methods to be a- dopted and the manner of getting the necessary detailed in- formation. The magnitude of the work was appalling. There º –31- were severty-eight different incorporated companies owning some 10,000 miles of railroad, scattered over 54,000 square miles of territory. In addition were a number of Small, un- incorporated railroads, telegraph, telephone, plank road and Other corporations, many of which had no records, no complete inventory, and no department so organized that the informa- tion could be readily secured. It was determined – To make or secure a complete detailed inventory Of every piece or parcel of property belonging to each company. To examine each separate thing, place on it an es- timate of cost of reproduction and depreciation. To prepare as a basis for the final figure of value an estimate of the present value, being the cost of reproduc- tion less the depreciation. Having determined upon a detailed physical inventory and appraisal, the next step was to so outline the work that absolute uniformity should be secured throughout. Difficul- ties that 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 Commis- sioners rendered every possible assistance, but the Board of State Auditors were not at first fully committed to the work, and the uncertainty as to whether bills would be paid or not , seriously delayed the employment of men and the full commerce- ment of work for three or four weeks after the first organiza- tion was made. –32- (b) The attitude of the Railroad Corporation mana- gers, while not actively hostile, was a serious cause of de- lay as they could not fore see what effect the work might have upon the interests in their charge, and while not refusing ac- cess to their records, they delayed and held back information, and in faet, a long time elapsed before all of the companies opened their records to the Appraiser and his staff. (c) The condition of the records themselves was confusing. Many small corporations had absolutely nothing in the way of records of buildings, bridges, land or other prop- erties. Others had very complete records in certain depart- ments and very imperfect ones in others, while still others had records which had every appearance Of being complete but which were not up-to-date. - Facing an appraisal of this magnitude, with a time limit of only four months given for the entire work, with de- lays at the outset which seriously hampered the organization for two or three weeks, the Appraiser was compelled to employ this time in the preparation of all the blank forms which were used on the work, and in conducting correspondence with the men who were to make up the workins force, and investigating their references. The blank forms were the result of a series of con- ferences between the members of the staff. It was by this time quite evident that no great amount of help could be hoped for from the corporations. Had it been possible to secure ac- cess to the records of such companies as the Michigan Central –33- or Lake Shore & Michigan Southern Railway, before the final drafts of the forms were prepared, the author believes that several might have been simplified, and that many improve – ments could have been made. However, this was not possible and the forms were prepared and printed before access had been granted to any railroad office. - That a few changes in 1904 were made was to have been expected; that these forms were almost in their entire — ty made a basis for similar work of the Wisconsin Appraiser, some three years later, was in the nature of a high compli- ment, and goes far to answer criticisms that have been made of this part of the work, which are 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 arrange- ment. It may be seid here properly, that the uncertainty as to what the final attitude of the companies would be, made it essential that the Appraiser prepare, if need be, to make his inventory by personal inspection in the field. This was indeed 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 in- formation desired, it is not probable that the short 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 must furnish any information. The securing of this data in- -34- volved the employment of a large number of men and would have been a serious expense to the companies, so much so that re- fusal to comply would probably have followed such a request. Many of the companies had no men in their service able to pre- pare 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 in- telligently from the records of other companies than men un- - familiar with the needs of the Appraiser, and with no prior ex- perience. Therm, too, the work as it was secured was the work of one body of men, all technical men, all experienced in dif- ferent phases of railway work, and so was uniform and consist- ent. Had seventy-five or eighty different men, or sets of men, prepared these invent ories, 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 consideration that kept the Appraiser from considering any such plan of co-operation with the railroads as was later adopted in wisconsin and Minnesota, and that no consideration of 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. g Shortly after the final preparation of the blanks, access was granted to the records of the Ann Arbor Railroad, and almost immediately thereafter several other companies open- ed their files to the Appraiser, the State Board of Auditors determined to pay the bills as approved by the Appraiser, and –35– the initial difficulties were so far removed that it was pos- sible to carry out the plan of organization that had been de- * * termined upon, without any further delays. The personnel of the staff was considered to be of the greatest importance, and in the selection of men, the I'ê - quirements aimed at were , – experience in the construction and operation of railroads, thorough technical training, high standing in the profession as evidenced by membership in the American Societies of Civil or Mechanical Engineers or of other Societies of high standing, high moral and personal character. Politics, residence in the State and local influ- ence 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 rail- roads, and practically all of them returned to railway ser– vice. The names of dozens of these men are well known, and were it possible to give full credit to all by name, it would be desirable. (Appendix "A" contains a complete roster of employees, together with professional records of the Engineers). The minor positions of assistants in the field and in the com- puting and compiling rooms, were as Signed to younger men, gen- erally with some railroad experience, but in all cases graduates of technical schools - Cornell, Yale, Renssalaer, Michigan, Ohio State and other schools having representatives. The author believes that no more harmonious or loyal organization was ever gathered together before, nor has been since. Men who had held chief engineerships trudged miles in the wilds of Michigan, on foot, inspecting and inventorying property, and came in to the office and worked long hours at the computing tables with utmost cheerfulness and camaradarie. There was complete harmony, absolute loyalty, and as perfect a spirit of unselfish devotion to the Work as the author has ever seen in any organization. The fact that such a staff of Engineers of wide ex- perience in railroad construction and maintainence had been assembled made feasible the carrying out of a plan of the Ap- praiser which proved to be of great value. At frequent in- tervals 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 engaged on the work, and matters of policy, of detail of work, of general principles, and of rules and methods of conducting the appraisal were fully discussed, and Stenographic records 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 the individual judgment of the men themselves and harmon- ize and unity the methods and results of the appraisal. Special emphasis has been laid upon the organiza- tion of the staff which was associated with Professor Cooley . . . . . . . . . . - . . . . -37- «ºrº." *... --4---> *… --> is 4 - - ... →…→8--> *-ºs- - . in this work, for the reason that 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 c are is absolutely unjustified in fact. The men engaged upon it were of the high- est type of experienced, technically educated and highly quali– fied engineers; they put themselves into the work most unreserv- edly and gave the best that was in them, and they were loyal. 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, gather- ed 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 ex- ceed half a dozen was remarkable. In point of fact, almost every such case was found upon the return of the first notes to the office, and in only two or three instances was it neces- sary to send a second man to do work which had been once gone over. In several cases, men were sent over certain sections which had been inspected by someone else, with a view to get- ting a line on the personal judgment of the different men, but in such cases the results were astonishingly close and created the greatest of confidence in the figures of depreciation Which were being received. Looking back upon this work, after the lapse of ten years, after twice having fully reviewed it and examined all records, after having heard the men engaged upon it testify in ****-*-******* - º-ka-ki-zºtºzºº-º-º-º- - , , . . . . . . .* * : * . - - .-- - + • - court, and knowing the record of these men since the comple- tion of the work, the author believes himself fully justified in making the statement that no matter what opinion may be - held as to the accuracy, or reliability, or value of the re- sult, no charge of carelessness, neglect, undue haste, or lack of consideration can be sustained as against the staff. To further strengthen the work, and to eliminate still further the element of personal error, to guard against the danger of dulled perceptions due to constant application to the work, and to forest all if possible every point of ob- jection to methods, a Board of Review was chosen by Appraiser Cooley, to whom were referred: – The methods of inventory and valuation as determin- ed upon by the staff; All points upon which special discussion or differ- ence of opinion were noted in the working conferences; Questions as to elements of value in the physical property which were in themselves not tangible or capable of inventory; & - And finally, 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 ex- perience and prominence in Railway Engineering. This Board was composed as follows : — Chairman, Mr. Octave Chanute, Past President Am. Soc. C. E., . Former Consulting Engineer, Atchison, Topeka & Santa Fe Railway, but at the time not engaged in active railway work. Major George W. Vaughn, Mem. Am. Soc. C. E., Engineer in charge of Track Elevation in Chicago. Professor Chas. E. Greene, Mem. Am. Soc. C. E. , —39- Dean of the School of Engineering, University of Michigan. Mr. Chas. Hensel, Mem. Am. Soc. C. E. , Former En- gineer Wabash Railroad, former Chief Engineer Illinois Rail- way & Warehouse Commission, and who was General Manager of the National Switch & Signal Company. None of these gentlemen were engaged in any detail work on the appraisal, and 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 passed upon 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 service, while the service of Professor Green was that of the analyst and logician, and his clear and judicial mind enabled him to formulate the final arguments in many cases under consideration. - The author 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 large single part of this work, but that the whole work represents the best effort of sixty or seventy experienced –40- men working to secure a feir, honest, unprejudiced engineering estimate along such lines as would so far as possible eliminate all errors of individual personal judgment. It has never been claimed for the Work that it was a perfect work, or that it was entirely free from error. It has been claimed for it, and it is claimed that it probably repre- sents as close and conservative an estimate of cost of repro- duction and depreciation as it would be possible for any set of men to make under then existing conditions. 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 tirele SS energy kept the force at work day and night, and brought about the prompt completion of the detail work. His recognized high standing, his remarkable ability as an executive and organizer, and his powers of diplomacy more than anythins else brought about the final acquiescence of the railroad managers and kept up the confidence of the State authorities, and his personality pervades the entire work. After giving all due credit to the staff – and they are 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. T. c. ronm R. R. 2 Michigan Rail Road AerºRaisal. º º . . . ) º N sº - * --> C T - « » N º E. I - O R * ". . wº J///es V//er of /r/c/s Zºes, C. ſo C. Ivº ill ill. /Wººd, - late - . . . - - - - - - - l)atu - //ºcs/ schººſe /w’ssenger /ru// ///es /w/ /o/, /º/ ///es /er hour. /nspector. - - - - - - ****** ****, *t, *_ - º *I* I lºº - ---- "I-Nſ. --> "I tº it is SWITC'ſ ES "ROSSINGS - - MILE GRADE I'll's - RA II, |; A LI, \s"I - FENCE - | Rºsº sWIT'ſ "I || S ('ROSSIN - DRAINAGE ALIGNMENT REMARKS Yardage (lassification Kind tunitiºn \right Condition Ivind ºnliliºn Rind I'million \umber Ixinºl ºnlitiºn Mimler (unlition - - - M Lc Hic. An RAILROAD A PPF. Alsat- rºam R. H 7. Railroad. E R | D G E S It allu l--------------- state. ld Inspector. | late Include all wooden, steel or combination trusses, all girders and I beam spans -------o-o-º-º-ºw-co-o-º-o- liº TOUND A L’ ON SU-E-TEER/STER, UTCTTUTEz, E # * # * º . . . . -- -: = - ‘. º - + = J £ 4. 5 § 3 ; ; } * § * = . Specification for No. 2 # , # E = Lt CATION NAME OF STREAM : 5 * * * PIERs 3 5 # 3: # 3. KINI) # 5 - Tº ºf É 3. - - -- - - - -- - - - 2. - # = : # = 3.5.3.3 #º = ºr 5 3 Loading Required Panels : c g s : E → 3 5 㺠-2 53 - 2 – .S. - ºr. 7 • - -n. ~: ~. J. - - - - - - Michi GAN RAILROAD APPRA is AL. + c roam R. R. 17 - Railroad. DFAVN/ EF|DGES In this table furnish data as to draw span and pivot pier only—other spans in other bridge record. -----------------co-o-º-o-º-º-ai - - su PER's TRUCTURE TOTUTINT DALTTOINT Bridge Date LOCATION Name of Stream : of Approx. Heiuht Approv. Ilºil Length Kind SPECIFICATION FOR What kind of Kind of No. Erection Material Cubic Feet Abºve Fºulinn Below of Material Pomer used for - Masonry wa- Male Draw Span I.O.A.I.) ING Swinging Turn Tables Michigan RAILRoad APPraisal. T. C. Foram R. R. -o Railroad. C U L V E F T S - - º -o-c---acaw-co., cut-out ------ - -------------- --- --n i-inch Iron to inch iron Iron Pipe over - t - -- - ºn- --- --- --- Pipe º two in-h. - - - - D I V I S I O N ## * * * * -- - # # 5 ; ; * = # 3. E = - --- - - - - 7 - ~ - - - - t = - E + - 5 * > - - - - -- : - un ~ - - - J. : E - * ... : - = - - * ...; *... t .: = + 3 + - - .2 ºu -- - - -> =. -: J. : — c - - - 2 : 25: 253 # * : # 2, # * * * * * * = z = # 2, # # % = 3 = , s = É 2 3 * 3 - - #3 #33 -- E - 2 - - 2 - - - -- - 2 - – 2 J - * : T z C tº Z - - T. J. -> -- * - 5:- 3.33 = < * * * * * * * * * * * * * = & E = ? : E = # 3 : ; ; ; ; Z = - -- - - - - - - - - - - -- - º: .5-.5 - - - - From To 3 * ** 3: 5 § 3 ; ; ; ; * * ă ş 3 # 3 & 5 § 3 - 5 # 3 iſ : 5 : 5 7. Z ~ L Z ~ I 2 - - - - - - - z < x 2. .* - - - -- = MICHIGAN RAILROAD APPRAIs AL T. C. F--- R - - Railroad. ^ R C | | E S vºtive inspector. Date.… Field Inspector. ********** ***** co-erºt nºw -- - L → - - - - Bridge ----- ------ - .*.*. :-- * - * Location STREAM * Length of Biº Height ºf g ... N - ---- ---- - tº 3 E T = IXINI) () F A RCH KINI) () F MATERIAL .N. (). Built Span #5 2 |^eet = * * : * - - - - - - * : Michigan RAILRoAD APPRAisal. Railroad. T. C. Foram R. R. 20 COAL CHUTES. office inspector. Date - - -- -- Length Kind of Size of Number Capacity of Date - If Hoisting or Conveying LOCATION o Foundations - o Name of Builder achine in use, Trestle Trestle - Building Pockets Pockets built State What Kind - - - - - - Micrican Rail-Road Appraisall -------- - , - r --- - - ---- --- + - Railroad. \ \ * A l -- * - | A | I ( ) N > tº lº Date state whether power -stenin, unsoline, win- ------ -- - - -- --------- . - - - - - - - - - - - - - - - --- PUMP - Lºº. Lºu Mº House, TANIx Lºngth Location Source of - - - - - - - - - and Size of Water Supply - | Suction - -- -- - -- -- Date - Capacity Foun-i Date and - Kind Size Kind size º ºiz - --- pacity - - - - - - nd 1z- Built Size Gallons * Built Discharge - - - - . - - - | - - T. c. ro-R-R-2B Micrican Railroad appraisal - () RE DOCKS - - - - ºce in-pectºr Railroad. _ ". - - Date. --- - - - - - - ---> N ºr Al- ºr--Cºlº-tº-> . . - | ºux NTITLEs. ------- lºº | - - - - owned - - DIMI-Nstorts. Rººt- -- I - I - - - - | 1TEM. * Location. ºf type. - º, Bºirºn in ºn tº ºn - ºted - tº " " ' " ſºlº ºf wºº!"º", "º" ºr - - - - - - -- - - - - - - Michi Gan Rai LRoad AFP Raisal. - T. c. Fonº R. R-2s Railroad. C A R FERRY. TERY IN A S --- -- * º it is Hºu in - * - LS GENERAL DESCRIPTION - QUANTITIES WALU lº lº - - . - - - - - #TTT Iron and Bolts and Pºles. Lumber ºn ITEMS | Owner º Location º Type º Dimensions º steel. Nails, in feet feet ºn. º º - - - - - º, Pounds ºunds wind wind ºn - - - - - - - - - - - - - - - - - - - - T. c. Foºm R. R. 26 Michigan RAILRoap APPRASAL. - - - - - r - - * - " - - office inº - Railroad. ) º S \ N I ) \\ | | |R \ H º ----- - # 90 jū) is - - - - - - A A \, ºuk 's - Date. - tº-º-º-º-º: - - - - - T GENERA. L. D. Rºscº Pºtox. - º ºn tº Nºrºntºs. - wºn 1. U-Lºs. ---------- - - - - -- - - - Rºº, º an in unº. 1, ºn tº 1---- ---- by Location ºf Tºº Linen-in- º º, º º º - - T - Michi GAN RAILROAD APPRAISAL. - T. c. FoEM R. R. 15 Railroad. STOCK YARDS. Date E L LS Number of Size of Date of WELI LOCATION Yards - - - - Pens Feet Completion Depth Dimir Feet lill - - MICH IGAN RAILROAD APPRAISAL. T. C. For M. R. R. 14 Office Inspector. Field Inspector. ------ -------- … Railroad. TRACK ANI) STOCK SCALES. The Richmond & Backus co., DETRoſt. 143947 D a. t e NAME OF Capacity Date LOCATION Length - SCALES Tons Built MICH IGAN RAILROAD APPRAISAL. T. C. For M. R. R. 13 --- office insector. ... Railroad. STATEMENT OF MISCELLANEOUS lce Insp. Date BUILDINGS. - Field ins; or 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. - THE-R-H----------- ------- - | -- I Lºw RI-1-N Kind of Bldg., Date of LOCATION SIZE Brick, Stone () F EUILDING or Frame Completion Michigan RAILROAD APPRAISAL. T. C. For" R. R. 12 .......…. ---- - -- ſºv Office Inspector ------------------------------------ - Railroad. S | A | I()N BU I LI)| NGS. ---------------------------------------------Field inspector Date -------------------------- - ------ The Richmond a sackus co., DETRott. 143958 LOCATION - DESCRIPTION OF - Kind of late of SIZE Bldg., Brick, STATIONS BUILDINGS Stone or Frame Completion Micrº-Gan Rail-Road. APPRA-sau- T. C. form ra. R. 25 Railroad - - - office Inspector. Steam Shovels, Dredges, Pile Drivers. Date Field inspector. - - - ruraizºuzºt a suzzusco, bºrror fººtº - Year Size of Shop Cost Present - MAKE OF SHOVEL Property or Dipper - When Value REMARKS Built Cu. Yas. Number New % of New - - Michigan RAILROAD APPRAIGAL. T. c. Foram R. R. 21. - Railroad once Inspector. --- ... Ivailroad. CLASSIFICATION OF FREIGHT CARS, Nor E-under remarks specify whether box cars are ventilated, stock cars are single or double deck, gºndolas --- º are plain, hopper or drop bottom; also any other special features. - - - - - - - - - - - - -- Dixtensions or Can Borºw. - Trucks. - Cost - Super- - - - -> CLAss, Total . . . - Tº }. : Dolsters Bººts, . of each as Bºº .......... weight of ºutside- inside. ture. ºf wºº hanºl tºurish pate \ºm car GROUPS BY | Furniture, Capacity "ºn. . - W. Wººd. size ºr air º ºf ber in cº- r: Lºſ A. Rºx- NUMBERS. | Stock, Gon s trucks - - ºr sºlºr Ixi º and ind- service, plete dola, Flat, in ibs. Length cºmpo: “”, “ . . . . ; hand. when etc. over end Length. Width. Height. it. ite. * | * = Lew. | sills. 3 # - === - - - - - - - - - - - - - - - - No. to No. | | - - " - - - - T - F----- - McHigan RaiLRoad APPRaisa L. … Railroad. Division, Date * = - TH: UCIX's N. -- - | 3 || - - -: LM-ENslow - - - - - WHEEL's Sºº-ºº: - . - - - - NUMBER ; : 2: G = sº -- 3 3 || Issing - - 5* = ſ: * = . º: * - . . . . tºº 2. -- s # E w sº ºn "º ºf 3: . == º - - - > - - - - - - - - | Michigan Railroad Appraisal. T. C. Fon- R. R. 5. ...Railroad. LOCOMOTIVES - --- - cost when new-hoa------------------------------------------- Division, ... , Date, Note:"...º.º.º.º.º. ºººººººººº-º-º-º: - . - - - - : E weight without - ------- --- He- ---------- = - ... . ; - = render-tº- == -- - - - --- | Pºłº 3. ** * --- - -- --- --- º - º - - -- --- - -- - - - - - ------ -- INspection º Engine. Class. # wº. -- - - --- F. - ; : * - º:* **, *2 pa. c. tº cº e = ** = } - --- - # = 3 | ? s - . 2 = # = 3 = -at------ : n * * -- = 2 - - - - - - - --- - - - i - - - --- --- - . . - - ºlº sº Fºº Gº! Dº Nº. McHigan RAILROAD APPRAſsº- --- nº ºn º - - - - - - - Railroad. --- - º Office. Inspectºr, º REAL ESTATE, - | Date .....…. ºr Lººp ºr RAILROAD PURPOSES. Field Inspector - - - - - - - - --- ) º - - – Location. TOTAL TAXIS - - - - -----> - Lºcº PTION º AMotſn't - |ASSESSMENT AMOUNT. ****** COUNTY DISTRICT Pºº - - - - - - - - | | | | | - THIS SPACE FOR BE NDH M C. vi ic Hºt Gan RA. i. Froad a PPRAt Sa L. - * c : Fo-º-º-º- R - 23 Railroad MISCELLANEOUS EQUIPMENT, office inspecia, - - tºp. ROLLING STOCK. Field inspector - - Late Cost - Location. No. Naune. |--|-- -- º º When Renaikº - - - -11- New - - - - - - V. . - -------------- Mºcº lºan Rallinoan ºarsal - - - - - - SHOP MACHINERY tº in- - Railrºad. - : - - AND TOOLS - - ºt. - - - -- ~~~- - - - - - --- |-- - r - --- ºut --- - - - - > CHAPTER W. THE MICHIGA STATE APPRAISALs. OFFICE AND FIELD METHODS. After the preliminary work of organization had been completed, blank forms prepared, and a portion of the working force brought on the ground, the work was actively commerced and subdivided into four parts : – l. Office Inspection, or Invertory, 2. Field Inspection, 3. Computation, 4. Compilation for permanent record. The men chosen as field inspectors were old and ex- perienced railroad engineers, many of them ex-chief engineers. So far as possible, these men were assigned for a short period to office inspection, then sent into the field, after which they were brought into the computing office and set at the Work of computation of values, so that each man was engaged on many different phases of the work, and handled the notes of many of his fellow-workers, and no one man made up one com- plete appraisal, except as specially noted. MAKING THE Office Inspection, or the preparation of in- INVENTORIES. vent ories, was assigned to parties usually Of one or two experienced men, with two to four younger en- gineers who were to be used in the computing room acting as assistants. These men went to the general offices of the , railroad companies, made a complete examination of maps, pro- files, bridge and building records, records of motive power, . . . . . . - 42 - . rolling Stock, &c. - In short, they prepared, so 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 the financial books any data as to cost of property, but 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 the blank form themselves, a number had practically no records, while only One or two companies withheld information. The re quests for furnishing of blue prints of large yards and terminals, and of plans of standard structures, was generally cheerfully com- riſes with, and while no Such spirit of co-operation was shown as was later shown 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 se - curing of maps and plans, the gathering of data as to prevail- ing prices of labor and material, and the securing of some very valuable cost data, as to special structures and classes ~ . -43– of structures. All inventories were made up for roads or for divisions of roads with each class of property separately list- ed., (for example, station buildings, interlocking plants, bridges, &c.) SO that if need be , any special class of inspec- tion might be assigned one man, while to others could be assign ed the rest of the work on that particular road or division. WALUE AS A This office inspection furnished much valuable CHECK ON FIELD WORK. data for checking the individual judgment of the field men. For example, the number of cubic yards of ex- cavation and embankment on probably a majority of the mileage in the state had to be secured by the field inspect or, as rec- ords had either not been kept, or changes of line and grade had been so extensive as to destroy the reliability of records. Every field inspector, therefore, made his own estimate of 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 two or three thousand 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 follow- ing points which will be practically common to all large valu- ation jobs, i.e. . There was no uniformity of method in the keeping of records of permanent way and structures. There was a vast amount of carelessness in keeping records up to date, even on the larger road 8. The smaller roads not only have little or nothing in the way of a record, but have in many cases no department With employees qualified to make or keep such records. The purchase of new equipment, the construction of new buildings and bridges, 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 which makes book inventories derived from the roads of very doubtful value for use in an appraisal. FIELD The decision has been reached, after careful INSPECTION. - discussion, not to permit the field inspectors to place a value in money upon any structure, but to examine it, to make a full description of it in all particulars, and to place upon it a percentage which should represent the pres– ent value, or the depreciation from a similar new structure rated at 100%. The field inspectors were furnished the records of the office inspection covering the district assigned. They were given note books, tape lines, and various blanks for re- porting 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 velocipe de cars, although in the case of one or two of the roads, no satisfactory arrangement could be made and the men were compelled to go on foot. A careful personal inspection of every structure was made. If any corrections to the of – fice inspection record were necessary, they were made. If the structure was new, it was carefully measured, described and - - - * - - - iº sº * ..." A - •. -- *** *. * - -.' ****'. - . º. --, - . .” - - - ; : . . . . -- that large manilla paper envelopes of sufficient size to hold all reports, notes, maps, &c., of each road, or division, could be filed vertically. Each road was given a number; if several divisions on a road, each division was given a letter, as "lā-A", "lā-B", &c., and each division filed separately. Every report, book, map, or other paper, was stemped with the 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 was placed in charge of the filing and re- cording, and no one else was permitted to enter the vault. When a file was withdrawn, a receipt was taken which 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 cum- bers ome 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 to give an inventory based upon the railroad records, checked by a man in the field, with a percentage represent- ing the field inspectors' personal judgment as to deprecia- tion, together with a considerable amount of special data as & - - - . - ... . ; *.. ‘. . . . . . . a * - - - * *--- ~ ºº: "...' … . . . . . . . . . ºr jº. º.º.º. - . . . . . . . . . . . . . . . . ." to original costs, &c. It was now necessary to place figures of estimated cost of reproduction and depreciation in terms of money. The State of Michigan is geographically made up of two perminsulas, widely separated, with radically different conditions prevailing as to certain items of the cost of con- Struction. COMPUTATION This appraisal involved seventy-eight incorpo- TABLES. rated railroads and forty-sever unincorporated ones. It was necessary to adopt such a system as would apply uniform methods and prices to all like property. The field in- spectors were accordingly assembled and after conference it was determined to prepare a set of tables, covering all classes of railway construction, material and structures, values being C Orſ! - puted 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. These unit prices were the result of a most careful study and discussion. In the case of many items, such as clearing, grubbing, earth work, masonry, &c., the price was fixed by agreement during the discussion at a figure which represented a fair average of cost of this particular item furing a five year period preceding the ap- praisal. In the case of rail and rail structures an average -5l- price was secured from market quotations for a period of ten years, a price was fixed upon as the value of scrap, and the percentage of depreciation applied to the Wearing value of the rail. The unit price was $28.00. The agreed scrap value was #12. 00, leaving $16.00 as the wearing value of rail. If an in- spector reported rail at 90ſ, or at 30%, this percentage was taken of the #16. OO wearing value, to which was added the scrap value. The tables were so arranged that for any weight of rail and any percent age, 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 direct to first cost. In the case of bridges, the tables were prepared to give weights per foot and per span, for various lengths, types os Structures and loadings, and cost of reproduction only es- timated. Buildings of various standard railroad type were re- duced to estimated cost per cubic foot, and depot platforms to a cost per square foot. These tables were derived by reducing to this basis the cost of a large number of buildings of known cost, by comparison with cost data of some railroad companies, and of 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 -52- . were specially appraised. Ballasting and track laying and surfacing were classi- fied into three and four classes to cover the different general types of railroads and prices fixed per mile. In case of bal- lasting, a higher price was estimated for the Upper Peninsula roads, while ties and timber construction were estimated at a lower figure for these lines. In addition to these prices, secured by either an average of several years' quotations, or by agreement of ex- perienced construction engineers, many valuable figures of prices were obtained from manufacturers of locomotives, cars, mechanical equipment and bridges, and in several cases access was secured 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 of this mass of data, the unit prices for the valuation were determined. In the case of 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 per- mit the value of an engine of given weight and stated condi- tion to be diagramatically ascertained. The use of these tables and diagrams proved of incalculable benefit in reduc- ing the amount of work of the Appraisal staff, and in securing that absolute uniformity of method necessary to give the work Standing. - -53- 3:. sº <--> * . . It may not be amiss to state here that in such work, no set of unit prices could possibly be adopted that 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, G. R. & I. , Pere Marquette, and others, would be far in excess of the actu- al money paid out by these little roads. A few individual in- stances of such apparent discrepancy were cause of complaint and criticism, but very generally these did not , upon analysis, appear to be anything but a disagreement with book values which treated ties cut off the right-of-way as having no cost, or some similar item where locel conditions made certain first cost so low as to amount to a donation of property. Conce dirig the propriety of the objections, the reason for making the ap- praisal was to furnish information on which the legislature might determine whether the State should go from a specific to an advalorem basis, and in view of this purpose the objection became unimportant as it applied to but a few miles of road. ºffica- All work of computation was classified in strict accordance with the Interstate Commerce commissions classification of construction accounts, to which Were added one or two classifications not recognized by the Commission, &nd final summaries returned upon sheets similar to the illustration accompanying this thesis. In computing, the staff made use of all data of every - - -54- X- - * * * * : *-*.*...r nature which was before them, checked the judgment of the field inspector wherever any reliable data was furnished, took into account age, special notes or costs, and in case of any serious discrepancy in his percent age reported to the head of depart- ment for either a reinspection or for a conference with the Ap- praiser and inspector. In this department every possible safe- guard was thrown around the work to insure its absolute mathemat- ical correctness and to guard against errors of the personal equation. COMPILATION. After the completion and checking of the calcu- lations, they passed to the compilers, who ar- ranged and classified them, and who prepared the form of the final report, which consisted of a detailed list of every piece of property and every structure, a short description and speci- fication, 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 work was done after the entire com— pletion of all other Work and the disbanding of the organiza- tion, a small force being retained by the State to compile and put in permanent form all of the papers of the appraisal. This Work was done under the direction of Messrs. Jas. Walker and O. C. LeSuer, in consultation with Professor Cooley. These 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 taken from - * - e.” the envelopes, arranged in proper order and bound in large vºlumes . . . . . . . . . ... º. º. - . . $º & . - ; : ***.*... . . . . . - . . . . . . . . ; - ..º.º. . . . . . . - - 4. . . . . . . . . …º.º.º.º. . lºsº-, - ...— . . . . . . . . . . . ." ….º.º... . CHAPTER WI. THE MICHIGAN RAILROAD APPRAISALS. SIECIAL PROBLEMS OF THE MECHANICAL DEPARTMENT. The work comprised in the civil Engineering section of the appraisal dealt wholly with fixed property, located en- tirely within the state of Michigan, and offered no special difficulties in the way of assignment of values. True, the question of terminal values was under discussion, and the Wis- consin & Michigan Railroad offered a very pretty example, in that the revenue producing half of its mile age lay in the state of Michigan, while its shops, yards, docks and car ferries, com- prising the great bulk of its physical property, were in Wis- consin. This instance merely emphasized the fact that no state valuation of an interstate property can finally and definitely settle all the questions that arise. ASSIGNMENT The mechanical department was compelled to OF WALUE TO - STATES. 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 distribu- tion of values between territorial units on the track mile age basis as being a fair one. The study of the problem in Michi- gan indicates that while in most cases this is perhaps a just method, it will not hold in all cases. Assignment was made upon Several bases, as follows: - (a) Main line mileage, (b) Total track mileage, (c) Car and locomotive mile age of equipment operating in Michigan, (d) Car and locomotive mileage, entire equipment, (e) Freight car mileage of entire system. A comparison of results secured by these different methods shows in many cases very little difference. All the results 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 very high class main line between Chicago and Buffalo, part of the Way two lines several miles apart, the entire line was double tracked, and there was much third track. None of this line is located in Michigan, except some eighty miles of single track main line of the Michigan Division, between Toledo and Elkhart. The Company has, however, several hundred miles of branch line in Michigan, which comprises most of the branch line mile age 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 mile- age, 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 loco- motive and passenger car equipment, on the basis of equipment mile age on equipment operating in the state, and for freight cars, on the basis of C 8. Iſ mileage of total equipment, was found to be most fair. º ‘. . s: . R ry - 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 values that could riot be Sustained. FREIGHT CAR One of the most perplexing problems which was INSPECTION. faced by the mechanical department was the proper and satisfactory inspection and valuation of freight equipment. The freight cars owned by the companies were scat – tered over the United States and Canada, and the inspection of any considerable percent age of the cars owned by any Company was of course an impossibility. The fact that these cars had been purchased in series, so that there were considerable num- bers of cars in a group, all of the same age, and built accord- ing to the same specifications, made possible a valuation by groups. The acceptance, however, of any arbitrary percent age of depreciation by years, or the acceptance of the Master Car Builders' rules of depreciation, without making independent investigation with a view to 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. - Prices used were those of the Master Car Builders' Rules of Interchange wherever applicable. The leading manu- facturers furnished prices, and in many cases prices were se- ~ . . . . -58 - . - cured 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 Master Car Builders' rule for depreciation, which was therefore applied. In the 1902 appraisal this rule was accepted without any inspection or further study of the prob- lem. 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 this work was small. LOCOMOTIVES, The inventory of locomotive equipment was se- cured from the companies and checked against reports and equipment register. Personal inspection was made of every locomotive in the state, and a complete de- Scription made, and percent age of depreciation assigned. Curves of depreciation had been computed and platted, and in- spectors' figures carefully compared with the curve to elimi- nate possible errors. WESSELS. Professor Sadler's appraisal of vessels involv- ed a personal examination of every vessel. This Survey included, l. The hull of the vessel and general equipment, 2. The machinery and boilers. -59- An independent estimate of the cost of reproduction and depreciation was made, and wherever possible this was checked by comparison with detailed original cost. In case of material difference, various shipbuilders were consulted and independent estimates of cost secured. In every case, - these latter estimates were confirmatory of the estimated cost of reproduction, which figures were used throughout the appraisal. CHAPTER WII. THE MICHIGAN RAILROAD APPRAISALS. OWERHEAD CHARGES. There are certain expenses inseparably connected with the construction of any public work, which upon comple- tion of the work are not capable of physical identification, but which none the less belong to and must be a part of the cost of the physical property. These expenses are legitimate, and so long as the property is operated, a very large part, if not the entire expense, remains in the present value of the property as a "going concern." Appraiser Cooley and his staff took up the discus- sion of these items and disposed of those that were carried into the valuation by the placing of a percentage. These items 3.1°6 - - Engineering – Covering all the cost of preliminary and location surveys, design and Supervision of construction of the work, and all expenses connected there with. This was covered by a percentage charge of 4% of the cost of reproduc- ing the permanent way and structure, but not equipment. Legal Experise. This item is inseparable from con- Struction work and the percentage was fixed at one-half of one percent of the cost of the same items as affected by the engineering charge. Organization Expense. - Covering the cost of promo- !... *s • ‘ * 3: ... x *. - . . . .” - - - ; ::: * > . . . . . . . . . . - . - T. §§.: §. . . . . . . . . . - º - -- º T tion, financing and general supervision of construction, to- gether with general office expense. These items were covered by an application of 1-1/2% on the cost of the above items. Interest. - The item 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 a figure represented by 3% on the entire cost of c on- struction and equipment would be conservative, and this figure Wa S used. - Discount on Bonds - Was not included for the reas on 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 charge able to interest account, 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 construc- tion of a new railroad. Upon the theory that the cost of re- production 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 items to include in the appraisal. As to whether in every case the fixed rates were high enough is an open ques- tion. -* The Charge of 10; for Contingencies. Perhaps no single feature of the Michigan appraisal of physical property has been so generally criticized as the charge of 10% of the entire estimated cost , including all the percent age charges, to cover "contingencies". At the time the first appraisal was made, the author was not at all satisfied that such an item should be included. The reasons advenced were so strong that it was done, and the subsequent work of the author has fully convinced him that it was proper and justifiable, because (a) The conditions under which this particular inven- tory and appraisal were made, as to time and lack of co-opera- tion of the companies, made it practically certain that SOIn 6 items of value were missed in the appraisal, such as station and miscellaneous equipment, frogs, switches and track strue- tures, buildings owned by the companies and occupied by others, &c. , (b) That there were many and large elements of physical cost not ascertainable upon a physical inspection, such 3.S deep foundations, many thousands of yards of earth in swamps and sink holes (a very general condition of roads in the Southern Peninsula of Michigan), 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 author knows of many such instances on property which Was in his charge many years ago. In several cases there were expen- ‘ditures of $20,000 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 opera- tions, 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 esti- mate on earth was 17% per yard, with no allowance for overhaul. Very much of the grade in the state had actual costs far in ex- cess of this figure, and practically every road spends a large sum annually for the first four or five years which is charged to operation, which is in reality a part of the cost of com— pleting the roadbed of the company. - (e) No account was taken of appreciation of any of the elements entering into a road. There is no doubt that road- bed, for example, does appreciate, due to ballasting and track work. These items go far to account for the contingencies item on an old road such as the Michigan Central R. R. (f) There is a considerable amount of cost which cannot be taken out of capital where facilities are abandoned, Or line of grade changed. These changes are common to all grow- ing roads; they are due to the demands on the property of greater traffic; they are necessary to the welfare of the com- munity served; they are often made at points where no chargé of defective design will apply. They might be termed expenses due to the development of the state, and they were absolutely necessary in the development of the railroad business to its present standard of efficiency. They are incapable of exact and definite determination, and must of necessity be included as "contingent" expenses. It will be readily admitted that in the case of a new road, whose exact cost is ascertainable, whose records have been fully kept, whose original plans are on file, and whose history iS fresh in the minds of the officials, a charge for contingen- cies would not be justifiable in large amount; but in the case of the Michigan Central Railroad (a line over fifty 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 his– tory), and 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 Author in the years that have passed since these appraisals leads him to the opinion that the difficulty of estimating values on an old property is such that an appraiser might in many cases, with perfect propriety add 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" values. -65- CHAPTER WIII. THE MICHIGAN RAILROAD APPRAISAIS. RIGHT-OF-HAY WALUES. The work of the staff of 1900 on right-of-way and real estate values has been the subject of much discussion and criticism from attorneys and officials of railroads, and during the appreisal this branch of the work received much at- tention. The actual figures of right-of-way value in 1900 were subjected in the reappraisal of 1902 to the most radical changes that were made in the whole work. Owing to the import – ance of the subject, an account of the methods used in 1900, and in 1902, and the line of reasoning which brought about the changes of 1902, is desirable. The 1900 appraisal methods were as follows: - Work in the cities of 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 substan- tially unchanged in the later appraisals. - In the case of all other land valuations, in cities and villeges, and country right-of-way, a personal valuation was out of the question unless a very large and expensive ad- . . . • * 4:…wº-ºº-º-º-º-º- ... . . . . . . . . . . . . . . " dition to the staff was made, 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; there- fore , the matter of land values was turned over to a sub-de- partment of the civil engineering section, whose work may be briefly outlined as follows: - Classes of land were made. Farm land. Barren land. Willages under 500 population. Willages 500 to 3,000. Cities under 10,000. Cities over 10,000. i The percentage of waste land was fixed as a result of interviews with roadmasters, superintendents and other of- ficials and employees of the roads, by reports from field in- spectors and others. Letters of inquiry were sent to real es- tate men and benkers in every county in the State (some five hundred in all being communicated with ) as to land values in his own town or county. The responses, which were numerous and which indicated considerable care in preparation, were classified, and upon this data, supplemented by as much per- Sonal inspection as it was possible for a few men to give in a limited time, the values of the various classes of land We re determined by a system of averages. The naked land values were then taken and to these land values were added; South of a line East and West through Saginaw 125% plus a fix- ed charge varying from $8.50 per acre down was added to the So-called naked land values for farm land. No waste land values to be considered in this district. • North of this East and West line - Farm land 100% and fixed charge of $3.00 per acre, and up; waste land 200% plus fixed charge of $3.00 per acre. - For all village lands 125% plus #8. 50 fixed charge. For all city lands 100% plus $8.50 fixed charge. Slightly different figures were made for the Upper Peninsula. The result of this work was a very low set of 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 W&S made of the subject of real estate values. The offices of Register of Deeds in ten or twelve counties were visited, a careful abstract of all railway transfers for a period of ten 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 unim- proved lands was made. As a result of this study, material increases were made in the farm land values, waste land value S were eliminated, the 1900 valuetion mede by special appraisers in lerge cities was practically unchanged, while very radical changes in the way of equalization of values in village and -68- Small city lands were made. Inasmuch as the 1902 valuation was at issue in the Courts, the Author believes he is justified in discussing at some length the deductions of the staff on the conclusion of the 1902 preliminary studies which led to the final adoption of the new figures. We would fall into error if we should conflict country values for farm purposes, with country values for railroad purposes. There is undoubtedly a close relationship between the two classes of values, which the author has en- deavored to discover and which is indicated in the tables in this paper. The use to which land is put can and does change its value. Farm land in a certain township may be worth $50.00 per acre for farming, but the discovery of oil would affect values as far as oil purposes are concerned. The pres– ence 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 upon it give it a greatly increased earning power, and hence increased value. So with a railroad right- of-way, the continuity of the strip of land, the severance of lends crossed by it, the greater earning power it derives from the construction placed upon it ; – in short, the use to which it is put gives it a value far in excess of adjacent lands. An excellent proof of this is found in the fact that many thous- – -69- --- . . . and miles of right-of-way have been bought by promoters and either sold to a company which built the lines or used in fi- nameing the road. In no case has the selling price been based on farm values. It is not contended that railroad values do not bear a direct relation to land values for other purposes, as those things that 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 trans. portation facilities and the higher prices of land for all pur- poses. This is shown in the figures submitted here with . . For purpose of appraisal, therefore, in 1902, the Ap- praiser took the average values as derived from the 1900 ap- praisal, and by comparison with actual purchases endeavored to arrive at 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, he was forced to the following conclusions : – 1. – That the naked land value is not a proper value to use in country lands, but that the going value of country lands with all improvements should be used as a basis for figuring the added increment due to railway use . 2. — That a classific etion of farm land and waste land should not be made excepting es a basis for arriving at the relative differences in quality of land in different sec- tions of a county. 3. – That the added value for railroad purposes is - -70- - -->4. , r irº was . .” - - - ... *... . . . . . . …...... - “.....' ...º.:- due to three element S : – a – Continuity b - Severance or damages c - Charged earning power, all of which the farmer, or owner, has cognizance of in making his price. 4. – That we should take into account in making up land values, a – Cost of acquiring the land, or expense, b - Cost of the land itself. The reasons 8.Te º – lst. 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 usual- ly 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 five acres off 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 Walue of Right of Way". It is fair to assume that railroad company can purchase large tracts of land for gravel pits, or a narrow Strip adjoining, Widening its existing right-of-Way, at about market prices, as the elements of severance, abutting damages, &c. are absent. Prices for this class of land ought to be, and usually are, lower than those paid for a new right- of-way. of-fi ay, Gravel Pits, &c. TABLE II. * Country Land - Additional Strip for widening Right- Actual purchases are averaged from recent transfers and represent considerations paid owners, but not cost of acquiring. fixed charges and percent ages are added. The 1900 Appraisal averages show country land after Av. Price per Name of Road Acre for en- Av. Price and tire County, per Acre County. Description of Purchase. 1900. Appraisal. Transfer. Jackson M. C. R. R. Widening Right- of-Way. 84.47 156. O8 Kalamazoo M. C. R. R. Additional Right- of-Way, near Augusta. 89. 41 140. OO Kalamazoo G. T. W. Additional Strip for Double Tracking. 94. 59 120. 50 Cass M. C. R. R. Gravel Pit . 84. 97 94. 15 cess G. T. W. Additional Strip for Double Tracking. 71. 79 2O3, 53 Berrien M. C. R. R. Additional Right- of-Way. 109. 40 113. 66 Washtenaw M. C. R. R. Additional Right- of-Way. 49. 35 13O. 68 Washtenaw Ann Arbor R. R. Additional Right-of-Way. 88.60 ll6. 12 Ionia Pere Marquette Gravel Pit. 77. 50 125. OO *NOTE – The tables given here with are summarized from a very large mass of data introduced , as evidence in the suit of M. C. R. R. , et al - vs - Powers (The Michigan Tax Cases) and are selected as average examples of conditions throughout the Southern Peninsula. > . –71 A- It is evident from these figures that no such naked land values as those used in 1900 were considered by the farm- ers in placing values on their lands, as the sales covered in Table II 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. 2nd. 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, which were much lower than farm land, and in the poorer parts of the state, large percentages of barren land were used. This fact brought the average per acre of country land very low in many of the counties, and justi- fied 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 differences in actual value in different parts of the state. The Michigan Central, in Jacks on County, in the 1900 appraisal, was credited with having 309–1/10 acres of farm land (naked value #38. 00), average rate #93. 30, and 34-35/100 acres of barren land at 35.00 per acre. The field inspectors' reports were to the effect that part of the dis- trict between Parma and Albion, in the vicinity of Bath Mills, was waste or barren land. The Jackson & Battle Creek Trac- tion company parallels and adjoins the M. C. R. R. right-of-way from Parma to Bath Mills. An investigation of records of deeds showed that they bought 25. O2 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 rates of dif- ferent grades of country land, no one would be justified in putting any land south of a line drawn from Saginaw to Muske- gon at prices as low as $2.00 to $10.00 per acre. An average based on the 1900 classification of lands would probably elimi- nate all waste land classification, without any injustice be- ing done. TABLE III. The average per acre of country lands of the 1900 appraisal of the Jackson, Lansing & Saginaw Railroad after all the percent eges and fixed charges were added, are: – Jacks on County - - - 75. 71 Ingham " - - - 74.90 Clinton " - - - 42.38 Shiawassee " - - - 67. 18 Saginaw " - – - 40.80 Bay " - - - 38. 69 Arenac W – - 32.47 Ogemaw " - - - 8.69 Roscommon " - – - 10. 74 Crawford " - - 8.4l Otsego " - - - . 15. 62 Montmorency" - - 12. 38 Cheboygan " - - - 17. 13 This table quite clearly illustrates the extremely low figures applied in many counties in the 1900 appraisal. The fact that the 1900 rate varies about as the purchase price varies is shown in the fact that the Pere Mar- quette built a line in Montcalm Co., buying 155. 3 acres at $135. 19 per acre average, while the 1900 appraisal showed an -73- : * ~ *-*.*...*-- - - average of $29. 00 on 918 acres. 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. - 3rd. There can be no doubt that railroad right-of-way costs much more than an equal acre age of farm lands. The author has always been inclined to hold the view that an ordinary right-of-way through good farming country ought to cost from two to three times farm prices, and that anything over $2,000.00 per mile was excessive. The price of right-of-way has in recent; years been greatly increased over prices prevailing a few years ago. The Newton & Northwestern R. R. right-of-way, in the State of Iowa, cost for land #267. 00 per acre, on a line 80 miles long. This is nearly all country land; about one mile in the city of Boone (population 12,000) and about 1/2 mile in Newton (population 6,500) being the only city land to increase the average. The Rock Island System and 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 #65 to $100 per acre. The Toledo Urban & Interurban right-of-way, in Lucas Co., Ohio, was bought by the author in 1904 at an average price of $329. 21 per acre net. The average assessed valuation is #55. OO per acre. Going value of farm lands will range from $100 to $225; probably a fair average is $135.00 per acre. The prices paid by Michigan Railroads are fully sustain- ed by these personal experiences. -74- TABLE IV. * * * *-- *- a-º-º-º- *-*** *--~~~~ . . CHAPTER XII. RAILROAD APPRAISAL OF THE STATE OF W T S C O N S I N. 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 Professor W. D. Taylor, Mem. Am. Soc. C. E. The plan adopted, the methods of work and the general re- sult of independent studies conducted by Professor Taylor have been so fully described in various technical papers and reports elsewhere listed, that a very brief statement of points of dif- ference between the Michigan and Wisconsin work appears to be all that is here necessary. 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 preparation of his own, and thoroughly outlined his general plan and the scope of information desired before actual- ly organizing his staff or commencing work. In connection with the earlier stages of the work, conferences were held with the officials of the principal rail- Ways of the state, and a thorough understanding and plans for co-operation between the appraiser and the roads developed at these meetings. As a result of these conferences, each 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. -98- * c \,, - - . At the same time the appraiser organized a considerably smaller force than was used in Michigan, and made his own office and field inspection and secured data to complete the appraisal on the Small roads which did not have their own engineering or op- erating departments so organized as to do the work according to plan. - The work turned over 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 was checked over by the appraiser's men, sundry changes in quantity and price were made, and finally when the Work was compiled and put in shape for final 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 present value per mile in Wisconsin is higher than in Michigan, which is probably as it should be as Michigan has a le SS mile age 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 Inter-State commerce Commission, construction classification, the application of percent age values for engineering, interest during construc- tion, administration legal and contingencies (this latter fix- -99- t * . . . .23 ed at 5.5%), all being along similar lines to those developed in Michigan. The work of the Wisconsin appraisal was carried on at the same time that the second Michigan appraisal was in progress. The investigations made by Mr. Wan Ramst Pond and the author, as to the actual sale prices of right-of-way, fully discussed heretofore, were conducted at the same time that 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 author to the Attorney General in January, 1904. The tables in Chap- ter VIII are ebstracted from much more extensive tables 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 - vs – Powers. It is, therefore, not only Of great interest, but great value, as supporting Professor Cooley's right-of-way valuations to note a discussion by Pro- fessor Taylor of the paper of Mr. R. A. Thompson before the American Society of Civil Engineers, at the meeting of Feb. 3, l904, which quoted fully is as follows : — "An item in the author's method which tends toward a very low valuation for the Texas appraisal is that of right-of-way. The author says that the values applied to the right-of-way were in accordance with the current market value of the adjoining proper- ty. This may give very fair results across the Texas plains and grazing lands where much of the right-of- way is donated or sold at a nominal value as an in- ducement to build; but it is certainly very much below the figures the railways actually have to pay in thick- ly settled 'farming districts, or in crossing suburban - or residence property in entering cities. In such cases, the railways not only have to pay the very highest mar- -loo- * - - - , , ket values for the land actually taken, but they have to pay large amounts to cover real or supposed damages to contiguous property. In crossing a farmer's land, a road will have to pay for inconveniences imposed upon the farmer in the way of Smoke, noise, danger and inter- ference with the drainage of the land and its accessi- bility. Even cutting off the view of a part of a farm- er's land from his house, by a high embankment, has been known to more than double the cost of the land actually used. In this way the right-of-way value is usually very much greater than the market value of the land for other purposes. The information obtained from both the Michi- gan and Wisconsin appraisals would go to show that the ratio of the right-of-way value to the market value of the land for other purposes is greater for good farming lands than for any other kind. The writer made a thor- ough investigation in Wisconsin to determine what the right-of-way ratio had actually been in the case of the three most important pieces of railway construction done in the State in recent years. All these lines were constructed in 1900-01. One was constructed in the southeastern part of the State, in good farming lands, in a locality already well supplied with rail- road facilities. The next was in the northwest cen— tral portion of the State, where the land was owned in larger are as and was not nearly as valuable. The third was in the east central portion of the State, and the land was very variable. Portions of the last two lines ran through country already well supplied with railroad facilities, and portions were in new country. The disposition of the land owners toward the construction of the road was probably generally favorable in the last two cases, and unfavorable in the first. Quotations are here made from the circular letters announcing the result of the investigations to the several railroads of the State. The first investigation covered 32 miles of line . . - 'The direction in which the road runs, northwest and southeast, necessitated cutting into the farms at inconvenient angles. - In the investigation, all transfers not bona fide sales, such as where the con- sideration was $1.00, were excluded. Village right-of-way land was also excluded, and some cases where excessive rates per acre were paid for very small corners of land were excluded. * * * * We have seventy-four bona fide sales along the road from one land owner to anoth- er during the five year period ending June 30th, 1902, which included 5604: 5 acres of farming land, at a total cost of $304,323.00, giving an average price per acre along the line of road for farming iands of #54. 30. One hundred and sixteen bona fide sales of right-of-way - to the railway included 382. 57 acres at a total cost of $108,614. O7; which gives an average price of right-of-way land through the two counties of $283.90. Thus the road paid by or— dinary purchase an average of 52.2% of the market value of the farming land for its right- of-way land. ' ſ & The second investigation covered 35 miles of land. 'Forty-one land sales, in the said five year period, contiguous to the line of the road, included the transfer of 10, 775 acres, at a cost of $108,927. Ol, making an average price per acre of $10. ll. The largest transfer in the above was 738 acres, and there were ten of the forty- one transfers which included 280 acres, or more. Twenty-six transfers of right-of-way to the railway company included 247. 14 acres, at a cost of $10,166. 50, making an average price per acre of $41. 14. Thus the ratio of the right-of-way value to the market value for the right-of-way actually purchased * * * * was 407 percent. ' The third investigation covered 82 miles of land. "Four hundred and eighty-eight bona fide sales of farming land, during the five year period, contiguous to the road, included the transfer of 39,155.7 acres, at a total cost of #452,309.70, giving an average price per acre of $11.55. Two hundred and thirty-nine right-of- way, sales included 971. 37 acres at a total cost of $35,493. 13, giving an average price per acre for the right-of-way purchased in bona fide sales of $36. 54. This gives a right-of-way ratio for the whole line * * * * of 316 percent. ' It should be stated here that at a hearing loefore the State Board of Assessment, of various rep- resentatives of the railroad companies of the State, in January, 1904, it was claimed by the railroads that the results of an investigation made by them showed that the property owners of the State, knowing that the assessment of their property for taxation -lo2- was made up largely from data furnished by an ex- amination of the records of sales, had generally fallen into the habit of recording the considera– tion in Sales at amounts much below those actual- ly paid. Evidence was brought forward tending to support the conclusion that the records of sales throughout the state would show a land value of not more than two-thirds of the real value. If that contention is correct, the foregoing ratios shogld be changed from 522%.4O7%. and 31.6% + 34 %, 27.2% *::::: .######. and 3.16% t; O It is regrettable that these ratios for city property held for right-of-way and terminals could not be investigated satisfactorily, because no road in the State has built a line in recent years into any important city through which that road did not already have a line. As to the ratios which were fair to the roads in valuing city proper- ty, the writer was compelled to rely upon the re- Sults of his own experience in construction, and upon such outside information as was available . 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 pur- pose S. e In city property, the right-of-way value was taken to be i33% of the market value for other purposes, where the land was owned in strips of 100 feet 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 feet." No effort whatever was made in the Wisconsin Valua- tion to determine any non-physical or intangible values, the report covering only cost of Reproduction and present value of the Physical Properties. -103- The Wisconsin work is noteworthy as the first ap- praisal in which the hearty co-operation of the railroads was secured from the outset. In Michigan, the roads at the in- ception 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 verifica- tion purpose S. WISCOMSIN APPRAISAT, FORMS. The Wisconsin Appraisal blank forms were printed on sheets 8: X ll inches, the same size as Michigan's blanks. Twenty of their forms are practically identical Tith those of Michigan, as reproduced elsewhere. Engine Houses and Turnfables, Crossing Protection, Car Ferry Terminals, Alignment and Profile, and Real Estate are either Omitted, or the information secured upon other blank forms. * - The Michigan Field Inspection Report was used as a basis for Wisconsin's more complete Roadbed Report. The six forms shown on the accompanying photograph are materially different from the Michigan blanks. . . The scope of the inquiry in Wisconsin was practically the same as that in Michigan, and remarkably few changes were made in the forms in which the information was gathered. -104 A- - * - - --- --- ºn tº ſº ºn tº ºn tº º --- - --- - Lºº |- ºn in ſº tººl of 100 ºne ºf ſº ------- - - - - - - - - RO-L BE PART 1. ºn D REPORT, ºice-ºn-º-º- º nºr. - 100 º - - nºn- --- - - --- --------- - ºn ºn vºl. - - - - - - - - - ROADBED REPORT nºn-pººr, - ----------- ---T --- ºf- --- ºn--------- - --- --- -------- --- --- -in- - --- -nº- --- - - - - - - º S on-in- IGNAL APPARATUS. Fºr --- º -------------- - - - --- --- -in- - - - - - - between - sº - --- - LOCATION. Toºls. º Hand Cars. ------ - ind --- ºn ºn tº o, ºn ºne of ºn ºn. --- - ºn tº tº ºn. º, ſº ºn - - Wire, ºr Wooden --- º, a "ºn ſºlº ºpºl of 100 ºn. º, ſº ºn ºnal - --- Lººtº ----------- -- º - - - Telegraph, Instruments and Station Equipment. - - - - - -T-L -º-Lº. --- - - - - - - - - - - - == - * = - - - - - - - - - Fences, Cattle Guards and Highway Crossings. No Planº Wire ºr Milº. Length ºf ºn- - -nuitiºn Sinºle Line- --- Nº ºn- sº-ºn- ºr Milº. wº Size ºf Pºst- - - - --- - Timber Trestles and Openings. - --- Dºll"Tºw. º Lºu - --- Total ºth ºil-ºn-uniºr sunº- - º - Mººming ºr Lin lºt ºn - - " - ºul. A- Pºtion nº lºº. - - ºr ºn. ºntº --- ------------- Lºth -- --- º º ------ -- Telephone nºn- -- lº on-º-º-º- | - | || Dº º | ind ºn conditiºn F. B. M. ºnditiºn | attle Guard ºr ºn nºn- ºn ºr ºn --- in --- - - - - - - - ------- |-ºn- - - - CHAPTER XIII. THE MINNESOTA STATE RAILWAY APPRAISAT. A 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. Mor- gan, Engineer of the Railroad and Warehouse Commission of the state, whose full and complete narrative report is a very val– uable addition to the literature of the Valuation Practise. This work was undertaken after the completion of the work in Michigan and Wisconsin, and advant age was taken of the experi- ences 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 Physi- - cal properties were the two sets of figures shown in the final result S. - - Unit prices were fixed on the basis of current prices in the year 1905 in preference to an average of five or ten years. - - Apportionment of locomotives and rolling stock were made on an engine and car mileage basis. The organization Of an office force was undertaken and special study given to the Subjects of unit prices and the various local conditions sur- rounding the different properties, checking of quantities of earthwork, rail, &c., and preparing to harmonize and unify -105- the estimates as they should be received from the railroads. The point of greatest difference between this work and that in the other states, lies in the fact that the field inspection, instead of being made by many men, was made by ap- praiser Morgan himself, accompanied by two assistants, inspec- tion 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 was covered by this inspection, which 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 - - - -4-1/2% Contingericies - - - - - * * * * * * * * * * * 5% Interest – Time of construction varying ac- cording to mile age from 1 to 8 yrs. -4% In addition to these three items, the item of "Adapta- tion 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 the appraiser in his report did not more fully narrate the detailed methods by which he arrived at his re- sultant figure. LAND WALUATION. The vexed question of e proper value to give to lands owned by a railway company received at the hands of appraiser Morgan attention after e different plan than that of Wisconsin or Michigan. A number of special agents were appointed Who made an exhaustive study of the transfers and assessed values through- out the state. The discussion of this subject in Mr. Morgan's ſº report is exhaustive and of great interest. The author, at the risk of unduly lengthening this chapter, quotes as follows : — RIGHT-OF-WAY WALUES. "For ordinary purposes, the true value of land can be as certained with a degree of accuracy which in general Ought to enable the avoidance of any very wide differences of opinion regarding it, but the ac- quirement of lands for railway purposes presents con- ditions much more difficult to determine. The purchase of lands for a railroad right- of-way requires the consideration of two elements : — first, the fair value of the land taken, and second, the damages to the residue in consequence of a part of the tract having been taken for railroad purposes. The element of damages is dependent upon a variety of conditions, several of which may be men- tioned, as : the location and direction of the pro- posed railroad with respect to the boundaries of the property; the inconveniences and dangers likely to be suffered and attributable to the construction and operation of the line, such as the separation of the owner's house from his barn, or of his barn from his Well. The conditions arising and connected with the purchase of right-of-way are diversified according to individual circumstances and in no small degree is the cost of the land to the railway company affected by the manner of its acquirement, i.e. - by agreement and purchase, or by condemnation proceedings; the lat- ter process results in awards often equal to and some- times in excess of the consideration originally de- manded. The influence of public sentiment for or against the construction of a line of railway is a most potent factor in respect to cost. In varying degrees, these and other con- siderations make the lands purchased for a right- of-way usually more costly than the true or normal value of lands for other purposes. The variety of conditions and circumstances which attach to each individual purchase of right- of-way, if considered separately, could but lead to a maze of uncertainty because the actual cost of the individual parcels acquired ranges between a nominal amount and more than ten times the true value of ad- jacent lands. - - From the facts which have been gathered in respect to land values and right-of-way costs, it appeared practicable to establish a general rule applicable to the problem of right-of-way values as a whole. There are , however, individual examples, which owing to eligibility and peculiar adaptation of certain lands to the purposes of transportation, are extremely difficult to determine purely by rule with a degree of accuracy perhaps entirely convinc- ing. - It is, therefore, proper to state that in all of the work relating to the value of lands and to the appraisal in its entirety, the application of rules for the determination of reproduction costs have not been adhered to so rigidly as to preclude the rejection of results which it could be seen were plainly and palpably inconsistent and at . variance with either professional intelligence or common sense. Every means which seemed to furnish reliable information have been availed of, and bona fide sales of lands to railway companies covering the more recently constructed lines, consisting of more than 7,000 acres located in different parts of the state, for which more than $4,200,000. 00 was ex- pended in its acquirement, have been employed in de - termining the relation between the average normal value of lands and their average actual cost to the railway companies. * * * * * * CONCLUSION AS Careful and full consideration of TO COUNTRY all information made available for LANDS. establishing the value of the right- -108- MULTIPLE OF of —way owned and used by the railway THREE. 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) ap- plied to the true value or normal value of lands, as obtained from the transfers, would in general satisfy the conditions." * * * * * TERMINAT, WALUES. "The basis for the determination of the value of the lands in St. Paul, Minneapolis and Duluth was the 'sale method' familiar to all those who have investigated the subject of taxa- tion and real estate values. The process by which the sales method is applied requires no lengthy description. Each sale is accompanied by two values, - the selling prices and the assessed value from which the ratio of true to assessed value is obtained. The problem of the value of real estate in these cities was worked out on the general formu- la that : "As the assessed value of lands sold is to the consideration paid, so is the as- Sessed value of the real estate for the en- tire assessment district, to the full value thereof. " For more particular and detailed infor- mation as to the 'sales method', reference is made to the addresses of Mr. T. A. Polleys, Tax Commis- sioner of the Chicago, St. Paul, Minneapolis & Omaha Railway, and Dr. Thomas S. Adams, Professor of Economics, University of Wisconsin, in the pro- ceedings of the Minnesota Academy of Social Sciences, Wol. 1 – 1907." * * * * * "The following example will illustrate the practical workings of the principle upon which ter— minal property values were established: An important line owning terminals in the city of St. Paul recently purchased 44.67 acres of land within the city for $54,047.75; this same tract was at the time of purchase assessed at $18,135.00, which from the records of upwards of 10, 000 sales is nor- mally 60 percent of its true value. Therefore, its probable sale price, under normal conditions and for purposes other, than railroad use, would have been approximately $23,822.75 in excess of its true value when considered in the light of the relation which -109- which assessed value bears to sale price for the great bulk of property which is transferred from one individual to another, in which the prices paid may be regarded as unaffected by abnormal conditions or by such terms of necessity as en- able a deviation from the ordinary rules govern- ing the buyer and the seller in real estate tran- sactions. That only certain property is available for railway uses is manifest ; it is often fixed by topographical environments or by its particular eligibility for present needs or future require – ments. Choice is therefore not optional with the railroad company in the same sense that it is op- tional with the individual, The artifices resorted to by railway com— panies in their efforts to purchase property at normal prices are not enduring, and once it be- comes known, the prices advance sometimes with remarkable increases, and it was found from more than 200 sales of city property to railway com— panies that a wide range existed between the nor- mal value and the sale price of the individual purchases made. As might be anticipated, city property subdivided into small tracts enabled or justified the purchase of entire parcels in place of part there of, materially modifying the element of damages, which made itself manifest to so mark– ed a degree in the acquirement of right-of-way in the rural districts of the state, and in the cities as well as the rural districts, that no individual purchase of property could be taken as a criterion, but all of the railway purchases made during the past five years were taken into consideration in establishing the average ratio or multiple for each city. CONCLUSIONS. During the period referred to, the MULTIPLES railway companie S paid for the prop- IN THE erty acquired by them, over and above CITIES. its normal value, an amount Sufficient to justify the use of the following multiples : – \ St. Paul, one and three-fourths (l-3/4) Minneapoiis, One and three-fifths (1-3/5) Duluth, one and one-fourth (1-1/4) 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 rail- way companies. g In the development of these factors, it was fortunately true that the data available included -llo- the cost of the newly acquired terminals of three railway companies — two entering the city of St. Paul and one entering the city of Duluth. * * * * It cannot be assumed that in a Work of such magnitude, it is possible or practical to go into the ultra refinements of the question of land values, which it is believed would not materially alter the results. I desire, however, to point out at this time the desirability and importance of selecting a method for estimating right-of-way values that removes to a large ex- tent the element of personal opinion. While the process employed in the determination of right-of- way values in the Minnesota appraisal may not be regarded as perfect, yet it possesses the merit of continuity in the relations of value through the successive steps to the final results. It may be asserted in substance that the 'sales method' does not represent real value. I cannot presume to try to settle a question so re- plete with human mystery. It is sufficient answer here that if it does not represent real value, then the multiples used for the determination of right- of-way values must be correspondingly modified so that in the end the same result for right-of-way values, as well as for terminal values, ought to Obtain. - To elaborate somewhat on the estimates of values made by experts and appraisers of lands based purely upon opinion which long residence, intimate knowledge and familiarity with real es- tate transactions claim to enable, I know of no better illustration of the confusion which such estimates insure than is set forth in the apprais- al of the terminal properties of the Great North- ern Railway in the Steenerson Rate case, which was carried through the Supreme Court of this state, Some years ago. * Two sets of appraisers made estimates of the value of the terminal lands of the Great North- err, Railway, in St. Paul and Minneapolis. One of the appraisals was made by experts employed by the railroad company, and the other was made by experts employed by the State. The same method – that of opinion - was made use of by each of the appraisers with the result that in St. Paul the estimates of value were 272 percent apart, and in Minneapolis 182 percent apart. Considering that the value of the terminal lands ran into millions of dollars, —lll- it becomes apparent that with no foundation other than that of individual opinion, so widely at variance one with the other, there must necessarily be more or less embarrassment in reaching a conclu- Sion as to which estimate was reflective of values in the sense of substantial truth. The true value and the right-of-way value of lands returned in the reports of the railroad companies for the present appraisal of their prop- erties is based largely upon opinion. In the cities of St. Paul, Miinneapolis and Duluth, commissioners were selected by the railroad companies to return jointly for the several companies their estimates of the value of the terminal lands. In personnel, these commissioners were composed of men of high standing in the real estate business and substan- tial citizens in their respective communities; therefore, the defense of the results of my own inquiries, which vary widely from the estimates of these gentlemen, is upon the methods employed and not the mer. If the problem in hand contemplated the actual taking over of these properties, there might possibly be no alternative but to adhere to the principle that value depends upon its power to satisfy human want, in which event, no economic principle can prevail that is apart from man's es— timate of the want satisfying power. We are not, however, confronted by the conditions which such a procedure would impose, but it is sought to deter- mine what it would cost to reproduce these termi– nal properties in the possession of its present owners as measured by the value of contiguous and surrounding property, primarily without reference to present use, its indispensability for the pur- poses of transportation, or to strategy of loca- tion which, when pre-supposed, must tend to con- fuse the judgment as between reproduction cost as land and what its value may be regarded because it is utilized for a particular purpose. Cost of reproduction and value as a utility have no necessary or logical relation, and the fact that the terminal lands, or the properties in part or in whole, are not actually to be reproduced, or the fact that it might not be possible at all to re- produce them, or their equivalents, probably renders their present possession invaluable not only to the owners but to the communities dependent upon the facilities afforded for industrial activity and com- —ll2– mercial supremacy. It is not clear, however, that these elements, which can very conveniently be made the basis for extremely high figures of value, should either merit support or find justification in an estimate purporting to represent reproduc- tion cost. As a further evidence of the inequalities which spring from individual opinion of the value of lands for railway purposes, comparisons in the reports of the railroad companies in this apprais- al do not antagonize the facts referred to in the Steererson case. The incornsistencies are not in- frequent; sometimes the values are not high enough, more often they are too high. One or two examples here will be sufficient to indicate clearly the ex- tremes to which differences exist, and serve to show the confusion which would result to anyone called upon to analyze these opinions and reach a conclusion satisfying to the premises upon which it is believed a valuation of railways should be found- ed. The station of Fridley, in Anoka County, situated on the Northern Pacific and Great Northern Railroads, about 10 miles north of Minneapolis, is not incorporated; it has no business houses and is distinctly an agricultural district. The right-of- way of the Northern Pacific and Great Northern Companies adjoin and are parallel; the main tracks are about 16 feet apart and a small shed used jointly as a depot serves the patrons of the roads. In estimating the cost of reproducing its right-of-way within the station limits, the North- ern Pacific Company made no distinction as between the value of its right-of-way in the immediate vi- cinity of Fridley and that situated within several miles north and South of the station, because no local conditions prevailed which justified a right- of-way value higher than that applicable to occu- pancy through the agricultural region adjoining. The Great Northern Company in the prepara- tion of its estimate entertained a different opinion as to the value attaching to its right-of- way at Fridley, end for a class of property which the Northern Pacific Company estimated the cost of reproduction at six hundred dollars ($600.00) per acre, the Great Northern Company estimated at three thousand dollars ($3,000.00) per acre. In the cities where the value of terminal property is the work of the special commission ap- -113- pointed by the railroad companies, to which refer- ence has been made, I desire to call your attention to the facts and to the value placed on the terminal property of the Chicago, Rock Island & Pacific Rail- way Company, in the city of St. Paul. In acquiring the necessary property for the entrance into St. Paul, in 1901-2, the Burlington, Cedar Rapids & Northern Railway Company (now the Chicago, Rock Island & Pacific Railway Company), pur- chased a total of 45. 55 acres for $137,298, 55. The estimated cost of reproducing this prop- erty today, as determined from the sales method us- ing the established multiple for St. Paul of one and three-fourths (1-3/4) is $255,198.97. The commission- ers appointed by the railway companies placed a value on this same property amounting to $978,262. 69. It is not deemed necessary or expedient at this time to discuss the testimony of the commission- ers who . made this valuation, which was subsequently given before the Master of the Federal Court in the case of David C. Shepard - vs – Northern Pacific Railway Company, et al. It is perhaps sufficient to state here that the amount determined upon, under my direction, as representing reproduction cost, did not from the character of the testimony offered, seem to require re consideration with a view to increasing or in any wise modifying the figures arrived at from our own inquiries. Were it not for the fact that the methods em- ployed under my direction and those made use of by the railway companies in the determination of right-of- way and terminal values are distinctively different and lead to results widely apart, it would not be necessary to enter upon its discussion in such detail, but having given it much consideration, I am not dis- inclined to set forth and support the principles upon which it is founded, because I believe their applica- tion is reflective of truths in a more demonstrable way and with móre apparent justification of confidence than any other which can be devised for the solution of so difficult a problem as that of right-of-way and terminal values." In the final compilation of results, two set S of Schedules were rendered: – \ A. Those which gave the land values with added increment. B. Those which omitted the increment. r - -114- A - The cost of the engineering work of the Minnesota appraisal was about $70,000. 00. This covered the valuation of 7596.4 miles of main track, 427.4 miles of second track, and 2414 miles of Side track – or e total of 10,437.8 miles of all tracks. There has as yet been no decision by the Courts . upon the Minnesota rate cases. MTNNESOTA APPRAISAT, FORMS. The appraiser in Minnesota in 1906 used forms of a larger size than was used on the Michigan or Wisconsin apprais- als. All sheets were 14 x 18% inches instead of 8% z 11 inches. The Michigan and Wisconsin, forms were used as a basis, but were remodelled and elaborated to a very considerable extent , and in many ways greatly improved upon. The care used in the preparation of these blanks was such that the author believes him- self justified in submitting photographic reproductions of the com- plete set, and expresses the opinion that they represent the most complete form for inventory yet used by any of the states on work that has been completed. - - The Nebraska appraiser in 1909 has returned to the iſion- igan size, 8% x 11, but varies considerably from the forms of the other States in arrangement, although 'clearly following earlier precedent. -115 A- - - swº-ti ºn Awº- ºn- - - º Lºcation tº mºn - - - º º 'º- - - - * Frºm sub-5 RUCTURE. ºn- rº- - --- --- --- ----- ----- - - nº º - - - tº Cºun - - Nº of Cºruſº Company º º 'º wºol/sº com/sºſomy sº Nº ºn - ºn AºA/SA/ or food --- ºn Minline roadway -- - - - - - - ... ... . . . . . . ----- Lºlº Lands for Right of Way, Yards and Terminals separate by cºunties, and for Incorporated oniº, Pillage, and tºwn ºn--- * Jºint with ºf ºur ºrately and indicate Divisiºn of ownership - - ** ***** ****** *-* *-* - ------------------- www. -nu- - -- --- -run a value. - wan. Nanu or wº- * º - - º - º, LAADs nº lºſs ºn tºurnals º .." º - ----- ºunty º " --- --- * * º º value --In- --- - value Purpose- --M.---- --- ºr Town will- will- -ul- will- All- - --- --- - --- ºr A- Per A- | ------ | º - ------ºo-º-º: WAREHOUSE com/M/SS/ow -. | | sººn Number city of ºn-º-º-º-º/A/SAL OF 1906 - - - - ----- - - RAILWAY TERMINAL PROPERTY - - º-º ºrº-n-Tre-----per------------------ -------- -- - ------------ º - --- ºn-N- ------> nºn-ºn-ºn-ºwn ºn --- - tiºn º ---, --- Al- wº. - --- --- - - - - º - Nº of ºnline company - - - ºn Nº. ºn - - ------ * Main lº - --------- - - - - --- - --- ºr brºwn-trea--mºrrºr-o-º-º-º-º-º-º- A- ---------------- --- - ----------------- Lutºninx * - - --- - - - - - - wº- - - - --- * - - - -- - - - --- --- - - - - ºr - - - - - | - " ºf operating company - Mºoſa ºn a wºuse cowºssow - - From - To RAILROAD Aº AºA of 1906 * ºf Min Line roadway ºf- Roadway Report - | ºth of Pºng, sº and - * Side and Industry Tracks Mº- In recording infºrmatiºn, shºw intain trace, *parate frºm Paning, side, and industry tracº. show Joint tracº separately, and mºre divisiºn ºf ownership. -- - - - - - - - - --- - -- ---------- - - - - -º-º-º-º-º-º-º-º-º- - B.A. L. L. As T. RAILS (Insert wºught of Rail per Yard, - - -in- - * time in nº wºn tº w, . wº ----- wº - - " Mile- * º tº º: ------- º º - * *-ºn-ºn-ºn-º-º-º-º: * *-ºn-º *- - -urn- - * * *rant company - M/WWF507A RAILROAD & WAREHOUSE cowºssow sº ºr º, . To RAILROAD APPRA/SAL OF 1906 ** Main the Rºy - º Roadway Report - ºth of Pºmº sº. - * Sºe and Industry Tracks º In ºrding infºrmatiºn, shºw ºn tº separate frºm Pºine, Side, and Industry Trurº. - Show Jºint tº separately, and indicate divisiºn of ownership. - - - - - - - --------------------- - wº- Lºanſox º - ANGLE BARs w- - - --- --- - - º º º º -- º º Pº ºf sº- ºn tº - - º, º sº. - º - - - - * * ºrane cº, - - winnesota ºn ºw ºn Nº. From 7- *A* - * * Line Rºy ºne- Road--port - ** Pºint, sº a - - - * Sº dº ſº, wº- tº ºrding infºrmatiºn, sº- -- ºne sº, and nº tº shºw ºr tº - nººn ºf ownerº. - - - - ------------------ ------------ -------------- --~~~~ - --- - - - ºn tº - - - - - - º ſº ºn º --- º º - --- - - º ºn º/Lº - - ºriu- Tº º - --- - - - - --- ºn ºperating company sºmºr ºn --- winnesota ºn road a warehouse commission º/LROAD AFPRA/SAL OF 1906 Pile Bridges & Timber Trestles Include Timber overhead Highway ºridge ºrected at Expense ºf Railway Company --Nºn-scrº-ox --- --- ------------ suppºrºtº-RE Foº - ºn tº - ºn- ºr ºn ºn- º º, ºn "º" º º º *''' nºn- º * * * º ºn -o-º-º: MINNESOTA RAILROAD & WAREHOUSE COMMISSION ºn- - - - ººººº. º RAILROAD APPRA/SAL OF 1906 sººn Number. From - Culverts -º-º-º-, ºr ºn ºr nº ºne ºn ---it- - --- - Location º --- ----- - - - - - - - º - ºne ºn ºw- *- Nº ºn º - -- I -----------------N- Track and ------ Tºols ºn-----------L--R cº-ºws ºr -- ----------- -------------------- - - --- --- ºr nºn- tº- tº ------ ºr º º---------------- REM- ºn ºrº----------------------- - 11- rooms - Tools - In sº Below, List Kind and Number of Tools, in use by Average Section and Bridge Crew, ºn Nº º ºr 'º º --- º º 'º Covering General Track and Bridge W. * --- - ºf Operating company - MINNESOTA RAILROAD & WAREHOUSE COMMISSION º RAILROAD APPRA/SAL OF 1905 - lºſin line Roadway ºne- Fences Cattle Guards and Signs - --- - -- - - - - RIGHT -- www Fºx-Es snow pences ---------> ------Rºss-s --------------------------> Locatiox -------- wº-º-º-º-º-º-º: * * * - --- ------------ - - - * * * * * * * * * * * * * * * * * * * * * --- ºl - - - - - - - - --------- - whistline Posts -º-n - * of ºperating company - MINNESOTA RAILROAD & WAREHOUSE COMMISSION ºn Number. From Tº RAILROAD APPRA/SAL OF 1905 - Stock Yards and Appurtenances - - - ------------------------ ---> ---------- Sºº --> - - --- --- - ºil-º- - --- - - * nº sº º 'º ºn ºn tº - º 'º º º - * * ºratºr company - ºwnwºoſa º º º º--- - --- - * ºr frºm º ºn Road - - - - Water Stations - - - - ----------- º - Pºtºs w---------> --> ºur-supply Puntº notºr, -wº- - - - ----------- --- - - Lºcation If well !". - , º, nºn- º - * - -- º º sºlº ºr nº ". --- º º - * º * * * * tº nº ºn nº ſº º ºn º - - - - - - - - - - - - - - - - - - --- " " ºr cºmpany MNNºoſa R4/Road & Wºººººoººººw º” ºr ºn to RAILROAD Aº wº - Coal Stations - - - - - - - - - - - - intº nºminal, nºnitºtion of ºutlininº ----------- ---------------------------------- ATION Type - - - - - - - - - - --- --- º - - --- --- ºwneral in untion tº º " " º 'º " " 'º' - º --- - *º-º-º-º-º-house commissionſ, *An ºval ºr of ſº Station Buildings and Fixtures º Including station ºupment and platform, . * . --- nº- -º- ”* - - - - --- - ------ ºn nº --- - - - --- -- ------ * * ºr ºf ºn ºr - - - - - --- - - -----ºf-colºssow - - --- dº nº - - - - - - - Miscellaneous Buildings field tº -- -------º-º-º- - ------- oºcººn, - -1194-00. ------ - *. - --N---------- -*-tt-tº-º-º-º-º: - - REMARKS - --- MINNESOTA RA/Lºoºº-º-º/AREHOUSE colºſ/MISSION - - RAILROAD APPRA/SAL OF 1906 - - - Field tº Engine Houses and Turntables ſpectºra - *110+º, -o- tº-------, co-ra. -------------- - Ex- ----------> TURNTABLE PITs --- ------ - - - - nº - - - - - d --- --------- running - - --- - º º º ºn tº -º- *- tº 'º "ºº" º º sº. wº. º' 'º" rºom º rº, ºr Form. -- - * * ºr tº - MINNESOTA RAILROAD & WAREHOUSE COMMISSION - -- º RAILROAD APPRA/SAL OF 1906 - - * - - - - - - Field ºpertº Cinder Pits and Track Scales - - - 21194-06 aaºº-º-º-º- --- -t-t-au-wºº. CINDER PITs AND Holst's TRACK SCALES --- - - - - ------- *** -º- ºr * * * *-ºn-ºn- - - wº- * one-ºn- *** ** REMARKS - --- - Nº dº cº, - - - - - - - - - -tº ºr --- Tº - - - wºr-º- ------------Plant-Ga-Plants ----- -- - Tººrºº --tº-sº cº-wr-sº-s-- --- L- --------- - - ------ -º- ºr --- - -- º ---------------- - ºf ºranº company --------- - - ºr Frºm Tº - ***Prºtº- º - General Repair shops -oºcoºr -1194 ºr ----------------, . --- MOTIVE Power AND REPAIR --> Lºcatiºn -------------- - - - --- , , , , , . - ------ - dimen-on- - *. General Description and Purposes for which Each Building is Used ----- --------- Wºme of ºrating company ºn mºnº, ºr º ----- Machines wºrn accompanying tools -------- ºn- - ºn - Form 20 M/WWESOTA RAILROAD & WAREHOUSE COMMISSION RAILROAD APPRA/SAL OF 1906 - Shop Machinery and Tools Separate by Buildings in Which They are Located Shaſting, Belting, Motors, Etc., to be Included on Farm No. 18. Pºwer Plintº to - *** **-tº-as-c-wº-º-º-º-º-º- MA-N-9 wit". Accompanyin: Tools machines with accompanying tools - - REMAtrixs ºr nººn Nº. nºn-Ma- Aº nººn "º" ºn Nºn-M.-- Aº nº º - w Reproduction ------ fºr-º- or, ºr " - --- - nº cºmpany - - - - -º-º-º-º-º-º-º/0// - -º-º-º/AL OF 1900 ºn Nº. - - --- Ducks and Wharves * -- or ore Handling Equipment --> - - ºn nº-------------- ------ - - - - - - - - - ----------------------------------- - *- - - - - mºn yºu . . . . . . . º Lºw-A-I-N - * * * * ºn " " - ºr ºr * * * * * * * * - - - - --in- - Nºne of dºwntº company MINNESOTA RAILROAD & WAREHOUSE commission sº wºnºr ºn º ºA/ ROAD APPRA/SAL OF 1900 - - - --- Interlocking Plants ". - - - - - - - - - - - - --- -- --- º *-* ºn “” "º" ºut ºn º º ------ -- --- -- * nº ºn tº a nºn º º ºr- - --- - - - - º º- - - - - - - Nº ºf ºratº company. -------- *- --- ------ ºwnwººt ºn Road & wºolºº -º-º: º/LºtD Aº-ºº- Signal Apparatus - - ------------------ -------------- --- ---------- - - - - ----------------- --- - - º * * * - - |- º, º Lº *-i- ºr º- - - - Nº of operating company -º-º-º-º-º-º: ºn Mºnºr ºn - ------ - - - - - - - - - -- - - - - - Telegraph. Telephone lines & Annurtenances 1----------------------, ----------- --- - - –º-º-º-º-º- || Lºcation owsºn -- ºr sº sº. Nº. -- ºr . --- - - -------> ºr ºf . * "º. º.º. º. º. tº "º" tº ºr --- - - - Form -º Name of operating company - MINNESOTA RAILROAD & WAREHOUSE COMMISSION - - - - - - RAILROAD APPRA/SAL OF 1905 - Locomotive in Service in winnesota total winner - - -- - Locomotives - - --- - --- ----------- E. - - º ºn - --- - - ºr wºn tº wº ----- * - --- "" º: --- -- --- cº- * cº- º, º sº nº º ºr º --------- * † º --- - ------ - - Name of operating company - - M/NNESOTA RAILROAD - ºr COMMISSION *nzerºmen on system. RAILROAD Aº AºA OF 1905 - *nzer Equipment alsº to wº Passe Ilºc T E [I 11 i pmen t -- ºrca, Mºe system ºn- - - Fºr car mºre ºn wº - - - - - - - - * --------- - - - - - --- - º - sº-N- º º --- ºn tº tº ". º --- "º- º * Sº sº º sº --- -- --- - - - - - - - - --- Wºme ºf ºwº ºn º ºoº-ºººº- - operating company - - ºn-ºn-º-º-º-º-o-º- - ºcar Mºyº wº Freight Car Euuinnent - * ºr ſº º - clº -- ºut I ºut ºn ºn-ºn- - --- -- *rial number- enºmen º, --- --- º º º º º - - - --- --- -- - ------ - Wºme of own, - ºwº ºn Wºº cº-ºw peratinº company. - ºn Rºtº-º-º-º-º-º-º: - Miscellaneous Equipment -- --- - --- - ----------- CHAPTER XIV. THE WASHINGTON STATE APPRAISAL. The State of Washington, through its board of Rail- road commissioners, made an appraisal of railroad properties within its borders, the work being under the direction of Halbert P. Gillette, Mem. Am. Soc. C. E. of New York. From the report of Mr. Gillette, as published in "Engineering Contracting", supplemented by information fur- nished by Mr. Henry L. Gray, Engineer of the Railroad Com- mission 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 of the Wisconsin and Minnesota appraisals in so far as they ac- cepted the inventory of the railroads, but made his own ex- amination of records. The Railroads of the state denied that they had any information whatever that would be of value to the Commission. - An examination of records of the Engineering De — partment was made. Records of the Accounting Department Were looked up and analyzed, various annual reports were ex- amined, 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 -116- * . . . . . .--. º. . . . - - . . . . . . . . . . . . . . - Kºº. . . …-: ***... . . . . . . . . . . . . . . . .:…'… ". * : , §§º:*:::::: *.*... . . . . . . .º.w... * : *::::::::......' ... . . . . . . alike Were adopted. It is somewhat difficult to determine from the report of the appraiser just what part of his report covers actual work done, and what part is the ory developed from his work, but pre- sumably maps were prepared end profiles secured which represent- ed the original conditions of construction, The field inspection was made on hand-cars or on foot, each field inspect or being furnished with the plans, profiles, &c., which had been secured. The same condition existed in Washington as elsewhere, i.e. certain records were not kept up and were found to be in- accurate and unreliable, and as a result the appraiser reports the condition such as "to cause much unnecessary work subse- quently in checking." Percent age of depreciation was not placed in the field, but was determined by "mortality tables", or by a determination of the probable years of structure life, then determining from the age of the particular structure under consideration its per- centage of depreciation, a method of procedure by no means new. It is not stated that any attempt was made to compare these tables with the M. C. B. rules for valuing equipment, and no field inspection of equipment was made . Prevailing prices of materials were used as a basis for estimating cost of reproduction. The value of motive pow- er and rolling Stock was apportioned among the State S on the basis of engine and car maleese. ... * - The land values were fixed by the Railroad Commission -ll/- – ºr ** -- **** - - -:… : sitting as a court; real estate men from the large cities, real estate experts brought by the railway companies, and others, testified, and based upon this testimony the value was deter- mined by the board. This was determined in the same manner as it would have been done in a condemnation case. There were three right-of-way experts, all of whom had had experience pur- chasing right-of-way for roads, in the regular employ of the Board, 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 lies in the effort to as- certain 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 fer as rate mak- ing is concerned, is indeterminate, as the United States Court S have held that the Commission may not fix freight rates. The supreme court of the State has held that they could. The Su- preme Court has also held that the Tax Commission should accept the findings of the railroad Commission for the purpose of tax- at ion, with the result, as stated by Mr. Gray, that over one and one-fourth million dollars more was received last year than any prior year, from railroad taxes. The report of the Washington appraiser differs wide- ly from other state reports in that it is diffuse, does not present the methods clearly and systematically, and it is dif- ficult indeed to trace What was actually done. The author is loth to criticize, but this report is such as to suggest com- ment on a number of points. . tº 1st, Very great stress is laid throughout the work on the cost of making the appraisal. Such an undertaking as an appraisal of corporation property is one that should be done thoroughly or left alone. It matters not whether the work of Professor Cooley or Professor Taylor cost five dollars a mile, or fifty dollars a mile, if a dependable result is se- cured. It does not appear to be good taste to either criti- cize costs of work in other states, or compare the costs in Wisconsin and Michigan with costs in Washington. 2nd, A number of criticisms, amounting almost to used reflections are made on the methods/ elsewhere. "Speaking for myself, I found the precedents es— tablished 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 the appraisal. " "In estimating present or depreciated values of structures, rolling Stock, &c., both Michigan and Wis– consin had sent experts into the field to estimate the percent age 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 se – cure the necessary data from the engineering and ac- counting 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 profes- A t Sional standing, are hardly in good taste, even if true, in a report to a railroad commission of another state. Whether he found little of value, or not, the appraiser's general line - ; : . ? # - - ". &$º & Art—as A-32:... . . . -- . . . . - - - - - —- ' - - - - - - * - . . . . ºne tº º - - - - - . . . * * * * * . . . . . . . . ,- - - L.A.'...ºx.a. '''''....”. . . . . . "º. . . . . . .......' . . . . . . . . . . . lº-º-º-º:. . . . º.º. of procedure was not radically different from Michigan and Wisconsin in getting all available data first from the com- panies, then in making a field inspection before fixing values If misled by erroneous profiles, he went into an error need- lessly, as it was fully known in Michigan that ree ords 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 M. C. B. rules for valuation were safe to use and to back up their use in court. The third quotation is a misstatement due clearly to a misapprehension of what really was done. 3rd, The spirit of suspicion of railroad men's motives is an unfortunate spirit to carry into a railroad appraisal, much less into a report. 4th, The author fully appreciates the megnitude of the task in front of the appraiser who is asked to deter- mine first cost plus improvements or betterments. Hardly a trunk line exists today that has not grown up from a small beginning, changed it S line, reduced its grades, added safety devices, changed the type of its bridges and buildings, increased the Weight of its rail, put in service much heavier equipment, — in fact, completely changed everythins except perhaps the original right-of-way. The task of going into old accounting department records and securing therefrom an accurate statement of cost is (and the author says it with the confidence born of exper- *…*.*... . . . . . . ience) an impossibility, a job of such magnitude as to be practically prohibitive. The different systems of account- ing, 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 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 thesis. 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 ex- plicitly described. The cost of making the appraisal was about $13.00 per mile of line. -º-º- -121- ii, iii iſ vi, i ". . . . . . . . . . . . . . . . " * CHAPTER XV. THE VALUATION OF TRACTION PROPERTIES IN CHICAGO. Luring the year l'906, a complete valuation of the property and franchises of the surface roads of Chicago was made under the direction of a commission consisting of Messrs. Bion J. Arnold, Mortimer E. Cooley and A. B. du Pont. The report of this valuation was published in the form of a pam- phlet which is now practically out of print as all extra - copies were long ago exhausted. The instructions of this commission, from the Chi- cago 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." Petailed invent ories and estimates of value were Submitted by the roads, and from time to time during the pro- gress of the work additions or corrections to these schedules were made. Reports showing income, operating experise 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, using the office and field organization of the Arnold Company, under the direct charge of Mr. George Weston, Mem. - Am. Soc. C. E. for the major part of the work, and retained -122- Messrs. T. H. Hinchman, Jr. and C. W. Conover, of Detroit, and H. E. Riggs, of Toledo, to give special study to cer- tain features of the appraisal. In the determination of franchise values, Dr. Henry C. Adams was retained in con- Sultation by the Commission. In arriving at the value of the physical proper- ties, 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 pre- Sented themselves, some of which were as follows:- "Upon what basis shall the cable properties of the company be estimated (a) as operating cable systems, or (b) as obsolete systems having no value ex- cept so far as the physical property can be utiliz- ed in the conversion of the cable lines into electric." t In the final conclusions of the Commission, part of the cable lines were treated one way, part the other. "What allowance, if any, shall be made for the pavements laid by the companies on their right-of- way." The discussion of these topics, together with the opinions of counsel as to the legal status is of interest. The Commission did not consider the value of paving as con- stituting 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. -123- The valuation of real estate was left in the hands of real estate experts familiar with values in the city of 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 items of "l. Legal Expenses – including those incurred in securing right-of-way and frontage consent S. 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 inven- tories, unfore seen difficulties of con– struction, and any and all other items of expense which cannot be fore seen." 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 here tofore described. The franchise and intangible property valuations amounting to some nine millions of dollars, or about one- fifth of the total, was a very important phase of the work, and the Commission gave up a large part of their 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. . . . -124- 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 fran- chises, respectively; and Third, The difficulties arising from the ab- sence of exact information as to the receipts and expen- ditures on the several parts of a single line covered by franchises of different length and character." The commission having arrived at such an adjust- ment of the difficulties as appeared just, determined the value of franchises in the following manner: — It was assumed that gross earnings on the differ- ent parts or routes of each system was in proportion to the car mile age. The system was divided into routes and car mile age determined for each route , and this data so compiled as to show car mileage, and consequently gross earnings apportion- able to each franchise. The next step was in the same manner to determine the proportion of operating expenses assignable to each fran- chise, the operating expense being assumed to be a uniform of gross earnings. A study of the conditions in Chicago re- sulted in a determination upon 70% as a fair proportion for operating expenses, taxes and maintenance. Next, the amount of capital investment to be Sup- ported out of earnings was computed by estimating the cost of reproduction of track and overhead lines under each fran- chise and apportioning the cost of land, power-houses, barns, cars, tools and stores, in proportion to car mile age. -125- 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 in connection with franchise Values arose which were : Where on a street, franchises covering part of the street have expired, and others remain in force, the conten- tion 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. Set aside on the ground that the value of any par- ticular portion of a street, or of a franchise, remains the same so long as the system is considered as an entirety. The second point was as to the value of traffic agreements. This complicated problem was also dismissed un- der the the ory 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 fixed by the companies on their own property included paving. The total figures reached in this - -126 - - - fºiesii iſ . . . . iri ºi... ', ... .....' ... . . . . . . . . . . . . . . - valuation were : – Companies' valuation including paving – 73, 555,675. OO Commission's " jº IT 50,994,782.00 Commission's " excluding " - 46,652, 747. OC This work affords many interesting problems and is perhaps the largest valuation for purposes of determining a price for purchase of property that had been made to date. * . . . - * - M. - - - . . . . . . . "... - - * - - > - .. - . - . - " ' ... ".. p"? " - . - “. . . . . - . 3. . . . . . . . . . - . ". . . - . . . - - . . . . . . * - - - - - ‘...',: . . . * - z - . . . . . . . . . . . . . . - - . . . . .”. • 4 * . . . . . . . . . . . - ‘. . . . ‘. . . . . . . . . . . . . . . . ... . . s. 3...º.º.º.º. . .iº. . . . . . º. º. . . . . . ... sº. º. º.º. : ;...’,” “...º.º.º. *: . . . “. . . . . . . . Tº T. “.… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..., ar.º.º.: 4-Tzºº.º. --> '...}, ...?. 2.- . . . . . ; – "...s.º.º. . . .' * *... : -->. CHAPTER XVI. THE COMMERCIAL VALUATION OF RAILWAY OPERATING PROPERTY - O F tºmºsºsº THE DEPARTMENT OF COMMERCE AND LABOR. In the year 1902, the permanent Census office W&S established, and the Director was authorized to collect sta- tistics relative to public indebtedness, valuation, taxation and expenditures. The Department of the Census co-operated With the Department of Commerce and Labor in the preparation of the appraisal of the commercial veluetion of railway prop- erties of the country. - The Report of this work, issued as Bulletin 21 of the Bureau of the Census, is the most interesting and valua- ble exposition of the Subject of railway valuations yet pub- lished, including as it does not only the report of this par- ticular 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 vel- uation of all railway property in all of the states, based upon uniform methods of appraisal and distribution which en- ables 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, although . - $ . - . . . . . . . . . . - - - - - - * -- - t - . - * - -- - . -- r . - … - tº . . . ſº - . - *- - ... . . . . . ." . . . …"...º.º.º. . . . • - - - - - - : . . . . . . .''.... . . . . . . . . . . . . . . . . ºn tº " .. 8 ' ' it will be noted that the method is really a capitalization of net earnings. owing t; O t, he nature of the inquiry, i. e. , to deter- mine what part of the wealth of the nation is devoted to rail way transportation, it was obligatory on the appraisers to adopt a method that would disclose as nearly as possible the true market value. Certain restrictions and limitations on the tem "value" and on the use of the resultant figures of the appraisal are suggested by Professor Adams, as follows: - INTERPRETATION OF FIGURES. "The valuation submitted in this report may be properly defined as the commercial value of prop- erty used by railways in connection with the business of transportation. By 'commercial value" is meant the estimate placed upon the worth of property re- garded 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 has is 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, interrailway contracts or agree- ments, and, third, the published records of the stock market. - w This is no place to enter upon the 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 transportations, 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 unreasonablene SS of the rates in question. The solution of the rate problem de- mands a separate valuation of the physical property. -129- Again, in so far as the Government is pre- cluded 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 valuetion 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 sub- mitted can be used as the basis of assessing railway properties for the purpose of taxation depends entire – ly 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." - * * * * * g. The methods adopted are explained in the most minute detail in the Bulletin, in a series of papers. The following description is in the words of Professor Adams, being an abridgment of his paper describing the work. METHOD OF VALUATION. "The value of railway property submitted in this report was arrived at by capitalizing the net earnings of individual railways and railway systems. It was not possible to apply this rule in all cases, lout its statement serves to indicate the principle upon which reliance was placed and to make evident the fact that this valuation is designed to reflect the :*; º; of railway property. Such ex- ceptions as were allowed in the application of this rule were themselves made by rule. It cannot be said that the values here submitted are in any sense the result of personal or arbitrary judgment. The process of valuation through the capital- -130- 3 * . . . . ." ization of income involves two fundamental questions: First, Wihat is the income to be capitalized? Second, How is the rate of capitalization to lbe determined? Income to be Capitalized: – Inasmuch as the value to be obtained is the commercial value of property used in transportation by rail, it is evident that the in- come to be capitalized should be confined to operat- ing income . It should be borne in mind that the income of railway corporations from investments in proper- ty not used in the business of transportation should be excluded from the sum to be capitalized. It should further be observed that the income which accrues to a railway corporation from invest- ment in the corporate securities of other railways is excluded from the basis of capitalization. The reason for this is that the interest and dividends which accrue upon such investments represent an inter- corporate transaction. It is of course the net income after taxes are paid, and riot the gross revenue, to which the rule of capitalization is applied. The only difficulty in arriving at a correct statement of net income arises from the wide divergence of practice relative to the inclusion of permanent improvements in operat- ing expenses. To accept the net earnings as reported would result in an unequal valuation of properties which follow different methods of accounting. It be- comes necessary, therefore, to exclude all expendi- tures for improvements from the expense account in order to arrive at a common basis of earnings for the purpose of capitalization. The difficulty of equalizing the valuation of different properties was not entirely overcome, how- ever, by the exclusion of permanent improvements from operating expenses. A study of the situation early disclosed the fact that the financial policy adopted relative to dividends and improvements, and to the use of the corporation surplus, exercised a decided influence upon the market valuation of rail- way properties as indicated by the purchase and sale of railway securities, and it was on this account found necessary to make a further adjustment in or- der to allow for the influence of these varying financial policies. Inasmuch, however, as this ad- justment was made through the rules adopted for de- termining the rate of capitalization, rather than through, the rules for arriving at the income to be -131- capitalized, its explanation Will be handed over to the discussion of that topic. The following is an explicit statement of the several steps in the method followed by this investi- gation for arriving at sums to be capitalized: First, From the reported operating expenses there were subtracted such sums as were spent for per- manent improvements charged to operating expenses. The remainder was accepted as the true operating ex- pense. Second, The true operating expense was then subtracted from the reported gross earnings from op- eration, and the remainder was accepted as the true net earnings from operation. te Third, From net earnings from operation there was then subtracted the amount of taxes paid. The final remainder was accepted as the true profit from operation for the year. - Fourth, If the operating mile age had been constant throughout the period examined (which period was five years wherever information was available for that length of time) the average was taken of the profits from operation for these five years and the quotient or average thus obtained was considered to represent fairly the average profit earning capacity of the property, or what might be taken to be the profit earning capacity on June 30, 1904, provided the changes in profits from operation, from year to year, were irregular in direction and not extreme in amount. Where, however, the profits showed a steady falling off, throughout the entire period of five years, the average for the last three years was taken, instead of for five years. Occasionally, if the profit showed a steady increase from year to year for five years, the average was taken for the last three years also, but more rarely than in the case where it fell off steadily, the purpose being to obtain always a conservative estimate of the profit earning capacity as of June 30, 1904. Fifth, Where the operating mileage changed during the period examined, the adjust merit for vary- ing length of line was made as follows: - The sum of the profits earned for the various years considered was divided by the sum of the operated mileages for those years, and the quotient multiplied by the op- erated mile age on June 30, 1904. The result thus obtained, provided it did not materially exceed the -132- . profits earned during the last year, was taken to be a fair measure of the profit earning capacity. If, how- ever, it appreciably exceeded the amount of profit earned during the last year, a lower figure was taken, the aim being to secure a figure which should be a con- servative estimate of the profit earning capacity. Sixth, In case the operating property on June 30, 1904, included certain mile age which had reported in- dependently at some time during the period examined, separate Statements were made up from these independent reports, and such statements consolidated with regard to mile age and to profit from operation, so that the consolidated statement should contain all the physical mile age that was actually in existence at any time dur- ing the five years. From these consolidated Statements the profit earning capacity was determined in the same manner as stated in the above paragraph. Rate of Capitalization: The determination of a special rate for each railway system was necessitated. This was done by an extended series of computations resting upon the market record of each class of bonds and stocks issued. In order to eliminate what is commonly termed the influence of speculation, the market history of each railway system was compiled for twenty-seven weeks prior to July 1, 1904, and in case this history gave rise to the suspicion of unusual conditions, the period of study was more extended. The price accepted for bonds was, of course, the market price stripped of accrued interest ; and expected dividends were deducted from the price of stocks also, when the dividend history of the corpora- tion under review seemed to warrant such expectation. An extended preliminary investigation was made for the purpose of determining the character of the average to be used, which resulted in the adoption of the simple 'arithmetic average' rather than any 'weight- ed average ' which it was possible to make, with corre c- tions when necessary, in the direction of a weighted average. This rule was adopted because it leaned toward conservative valuation, for it was found that weighted averages resulted in a higher price, and consequently in a lower rate of return, than simple averages. For a complete explanation of the rule for ar- riving at capitalization, reference may be made to Mr. Meyer's paper, mentioned above. This paper contains an illustrative example, showing how the computation was made in the case of 'The Hypothetical Railroad', and care was taken that this case should bring all possible difficulties to notice. The following is a concise statement of the method followed: – . -133- First, The study of the market quotations covered in all cases twenty-seven weeks prior to July 1, 1904. In case the quotations disclosed abnormal fluctuations in price, this period was extended. For each particular issue of debt there was learned the amount outstanding, the rate of interest paid, the dates of the payment of interest, and the date of maturity. Second, The funded debt was classified accord- ing to the number, frequency, and character of trans- fers, and market quotations. This gave rise to three classes of funded debt. (a) Issues for which sales were sufficiently re- cent and of sufficient amount to warrant; a market valuation of the Security in question. (b) Issues for which sales were not sufficiently recent, or not of sufficient amount to war- rant a valuation, but for which recent "bid" and 'ask' prices were available. (c) Issues for which neither sales nor bids were of such a character as to warrant valuation; such issues were values by analogy with other issues in the system to which they pertain. Current liabilities were excluded from consid— eration. Doubtless there would be no disagreement as to the propriety of this rule. It is on the Side of conservative valuation. Stocks were classified as guaranteed stocks, preferred stocks, and common stocks. - Third, Quotations were 'stripped' of accrued interest and expected dividends, in order to obtain the price paid for the obligation as distinct from the income which it carried at the time of Sale. Fourth, The value of each issue of bonds was determined, and there was then computed (Deghuee's tables being used) the rate of annual return, and up- on this rate there was computed the amount of annual return upon the total issue. It should be noted that the excess of the aggregate amount of interest on the funded debt over the aggregate annual return is one of the forms of annual 'financial betterments' to which reference has been made. Fifth, The value of stock issue was determin- ed in the same manner as the value of bond issues, but the treatment of stocks differed in this respect, that in this case annual dividend payments and annual divid- —l34- ed returns to the stockholder are identical. The value of stocks added to the value of the bonds gives the aggregate value of outstanding securities. Sixth, The total corporate net income of the system or corporation whose securities have not been valued, as described above, is distributed as follows: (a) Annual return (not accrued interest) to the investor in the funded debt. (b) Dividends on stocks. (c) Physical betterments paid out of current earnings, whether charged to operating expenses or directly to income. (d) Financial betterments of all kinds. Seventh, The rate of capitalization was computed by dividing the corporate net income by the aggregate value of corporate securities. DISTRIBUTION OF VALUE. The use to be made by the Bureau of the Census of the valuation of railway property here submitted requires the distribution of this value to the several states and territories. This distribution must, of course, be made by arbitrary rule, and a great deal depends upon the nature of the rule adopted. An ex- haustive discussion of this general question will be found in the third paper appearing in the Supplement, contributed by Professor Meyer. By referring to this discussion, it will be observed that ten different methods are suggested for the assignment of railway values to the states. These are as follows: - 1. Single track mileage basis. 2. All-track mileage basis. 3. On the basis of the funded debt end other obli- gations. 4. On the basis of station population. 5. Car mileage basis. 6. On the basis of the original cost of construction. 7. On the basis of the density of traffic. 8. The gross-earnings basis. . -*-*.*.*…* ~ * 9. The net earnings basis. 10. On the basis of the cost of reproduction. An exhaustive study of these methods led to the conclusion that the gross earnings basis would re- sult in the most accurate assignment of the value of railway property possible. This is the rule that was followed in all cases where the accounts of the rail- ways furnished the necessary information." The work of Professor Adams and his associates is of great prectical 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 de- termined by a uniform method, which within reasonable limits furnishes a check on the work of the state appraisals. This method cannot, of course, 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 rioted in the case of values for taxa- tion in other states leads very properly to the query whether a value determined by this method is not very close to a true value. -136- CHAPTER XVII. THE EXTENT OF APPRAISAL PRACTISE. There have been many appraisals of property besides those reviewed in the foregoing Chapters. There have been several very excellent contributions to valuation literature as a result of the numerous waterworks appraisals. These papers are referred to in "Apperdix B". The States of New Jersey and Nebraska have had railway appraisals in progress during the years 1909-1910. Neither appraisal has gone far enough at the time of writing t; O add any points of interest to the subject. Waluations of street railway property have been made in several cities, among which Cleveland, Ohio, Detroit, Michi- gan, end Milwaukee, Wisc onsin, have been the most recent. The Cleveland and Milwaukee hearings have produced large records and have tended to finally determine certain principles of valuation. There have also been a number of valuations made for corporations, among which may be mentioned the Toledo Railways & Light co. valuation, by Messrs. Ford, Bacon and Davis; also that made for the New York, New Haven & Hartford Railway, under the direction of Mr. John F. Stevens, Mem. Am. Soc. C. E. wº This latter valuation offers some very interesting points, and in view of the eminent standing of Mr. Stevens as a railroad engineer, the adoption by him of methods of - - - - - . . . . ....! ‘. . . . . . . . . . . . . . .º.º.º.º. i., - ... *, *...* . . . . . . . . . . . . . . . . . . . . . • * : * > *g º - - - *. * - . - : . . ; *-*---sa.….~...~Psºi - xxx, F-º'; ' '.'…' . . . ‘. . . . .”.”... . . . . . . . . . . . . . . . . . . . . . _ _ _ - - * > . - . . . - - - . . - • . . . . . " . . . - -- . .22-23: 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 the 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 under the personal direction of Mr. R. B. Rifenberick. It is noteworthy for the completeness of its in- ventory which goes into the most minute detail, and for the excellence of the maps and drawings which accompany it, and which show not only every standard type of track, rail and all buildings and machinery, but which show every piece of track and overhead special work on the entire system. The work of the Detroit United Railway 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 of of it would hardly be proper. It is not too much to say, how- ever, that this work probably stands as the most complete in every detail as to inventory and ree ords of all American ap- praisals up to this date. It is evident that the demand for valuation work Of a high character will increase, and that it will come not *śrs. º, t £zºtºcº. ... “...-... º. . . . . . . * . . . . . . . . . . . - - - -* -- *- --- * : * L-3- - “... < ... *. . . • * * * . . . . . tº * ... -.wa. . . . . # T : . -- - *:::::: .. . . . . . .º. - --- ... -- - -25. . . . . . . .: only from States and Cities, but from Corporations. Much of the work done in the past has not been described in any of the publications nor before the scientific societies, and a great deal more of very valuable work has secured partial no- tice 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 testimorny. CHAPTER XVIII. REVIEW OF SOME METHODS OF VALUATION AND SOME OF THE CRITICISMS ON THE MICHIGAN APPRAISAL. Much of the available literature upon 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. In the proceedings of the American Waterworks As- sociation for 1902, papers by Professor D. W. Mead and Mr. J. W. Alvord were presented and quite fully discussed. The chief points of interest in these papers is the treatment of the intangible element of value termed "going value". Mr. Al- word 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 quantity known in other lines of business as 'good will". Nevertheless it is something more than good will in waterworks 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 appli- ances 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 con- structed, the inception of which is coincident with the date of arbitration. Such new plant is to be of an equal capacity with the older plant under consider- ation, and a due allowance of time in which to con- struct 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 as- sumed that it commences to obtain business in that community from those who are not previously accustom- ed to the free use of public water, except in a gen- eral 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 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 com- puted 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 addi- tion of revenue from hydrant rentals, and a table is prepared showing each year, the total business de- veloped, and the total losses if any. After this is completed, a fore cast is made of the business of the older works for the same period of time in the fu- ture that it takes the business of the new Works to e qual 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 re- quire to overtake it than will be the case if the business of the older works is stationary or decreas— ing. 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 work- ing plant are reduced to their present worth at the time of appraisement, and an estimate is made up which will adequately represent the financial advan- tage which the old works (already fully equipped and in running order, and having a large number of profit- able customers) will have over the new works where everything must be built and customers secured. It is necessary in making this suppositious estimate of the new plant to consider it in no way a competitor of the older works; there is not sup- posed to be competition between the new and the old, but it is left to the experience of the board of ar- bitration to consider how long it would take the new company to build new works, and build up business for the new works, until they had overtaken the business of the old company should it continue to occupy the same territory." Mr. Alvord's description of his method has been quot- ed fully, as it is an interesting one and one that has been often used. It is open to the very decided objection that it is purely theoretical, a rational method of computation per- haps, but based" on assumption throughout. It may be said to be a method which is within the field of pure speculation, as Mr. Alvord himself says that where experience in financial matters and the financial management of waterworks is not brought into the valuation there is usually to be found guesses of the wildest character. Professor Mead, in his discussion of Mr. Alvord's paper, speaking of this method and agreeing that it is a consisternt and logical method, 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. & * * * * * * It's very logic is an element of danger for if clearly presented from a biased standpoint to one previously unac quainted with its applica- tion, and if accepted without careful analysis, 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 businese value, Mr. Alvord considers the franchise value and presents two methods for its determination: – - lst, The physical value, depreciation and going value are entirely neglected, and the entire valuation fixed upon 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 it- self 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. 2nd, The cost of reproduction, depreciation and pres– ent physical value are ascertained, the going value computed. Then it is determined whether the net revenue is paying inter- est 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 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 neces- sary to cancel all obligations (including interest on the physical and business values) and the reduction of these sev- eral sums to a basis of present worth. - There are a number of other articles and papers re- ferred to in Appendix B, which are of great value and which are well worth careful perusal, but which offer no definite plan of valuation. Inasmuch as the general principles involv- - . . . . . . . . . . -143- . . . . . . . . ed 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 eminent engineers as Geo. H. Benzenberg, Kenneth Allen, Arthur L. Adams, Emil Keuchling and others in their various papers or discussions of this subject. The files of the Railway Age and Railroad Gazette, and of the Railway Age Gazette, contain many editorials and articles on the subject of valuation of reilroad properties. These are mainly written from the standpoint of the railway official, and present many metters of interest which are worthy of study, prior to the undertaking of a large appraisal. One series of articles in Railway Age Gazette, commencing with the issue of January 22, 1909, is e most masterly argument. It is to be regretted that the author of this article has not dis- closed his identity. The Michigan Waluation has been the subject of dis- cussion in two papers, by Mr. Charles Hansel, Mem. Am. Soc. C. E. , whose own connection with the work as a member of the Board of Review gave him probably a more intimate knowledge of it than anyone else not connected with the actual working or- ganization who has undertaken to review the work. His first paper, published in 1901, entitled, "What is the Value of a Railroad for Taxation?" is a discussion of the work of Profes- sors Cooley and Adams, written while the subject was fresh in his mind, and his second paper – an able argument for a govern- ment valuation – appeared in North American Review, in 1907. The one point to which special attention is drawn is Mr. Han- sel's astonishing misconception of Professor Adams' plan of work. This misleading statement appears in the first paper and is reiterated in the second, and is of such a character that to pass it unchallenged would be doing great injustice to Professor Adams. He states Professor Adams' plan as fol- lows: - 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 Prof. Cooley is $15,000.00, and, the net earnings as determined . by Prof. Adams be $1,000. 00, this capitalized at 5% would be $20,000. 00, and added to the present value would make $35,000. 00, which would be the sum upon which taxes were to be levied. In other words, if the company actually earns $1,000.00, it increases its value for purpose of taxation twenty times that amount. If, however, instead of a net earning of $1,000. 00 the company spends that sum in improving the property, it has only increased its taxable property by $1,000. OO." º This statement is not only inaccurate in itself, but involves the other error of assuming that the appraisal figure was to be used for taxation. It was not. It was merely in- formation for the benefit of the legislature to aid it 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- -145- physical property valuation. Professor Adams finds the net earning, in Mr. Han- sel's example, to be $1,000. 00 per mile. From this, in the method actually used, he deducted an annuity for the support of invested capital, which he assumes to be the present value found by Professor Cooley. In this example given by Mr. Han- sel, he would deduct 4% on $15,000. 00, or $600.00 per mile, leaving $400. 00 per mile as surplus, or the earnings due to non-physical elements of values. This capitalized at 5% would give $8,000. 00 per mile, which added to Professor Cooley's de- preciated figure of present value would make $23,000. 00 per mile, instead of $35,000. 00 as stated by Mr. Hansel. The most recent criticism of the Michigan valuation work was in an address before the New York Traffic Club, in January, 1909, by W. H. Williams, Third Vice-President of the Delaware & Hudson Company. This address is devoted to an at- tack not only upon the Work of the Michigan appraisal, but to one upon Professor Adams' work and upon the propriety of val- uation 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 Michi- gan Work, and there are so many statements which are erroneous, that to pass this document would hardly be permissible. The manifest impatience with all forms of interference, which so often characterizes the utterances of prominent railway of— - ficials, appears in this paper to a marked degree. After stat- ing that the present agitation for a physical valuation ep- f pears 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 in that state." This is a direct imputation of an improper motive, not only to Governor Pingree but also to Professor Adams. As stated elsewhere, the investigation was to determine whether the railroads were paying taxes upon the same basis of valua- tion 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 Professor Adams' appointment was made after the work of Physical Valua- tion was fully outlined and well under way. The opening statement is followed by a brief resume of the recommendations of the Interstate Commission and of President Roosevelt, and of bills introduced in Congress, also by quotations from Bulletin 21 describing the methods of val– uation used in Michigan and showing that practically a similar loasis was used in other States. Mr. Williams then summarizes This objections to the Michigan work: sº . * , l. "No allowance is made for discount on Securities sold. Discount is a partial capi- talization of the commercial risk had in making the investment, and it increases or decreases in . . . proportion so the probability of the earning power of money under existing conditions; - not only in this practice justified by long established com- mercial usage, but also bu judicial determination." The correctness of this position cannot be conce ded upon any grounds of economics or accountancy. It is answered conclusively in an article (elsewhere referred to ) in Railroad Age Gazette, January 29, 1909, as follows: - "There is considerable diversity of opinion as regards the proper treatment of discount on Securi- ties sold. There is a distinction between bornds rep- resenting 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 irre deemable. In relation to the former there can be but one tenable view. If a company can market its fifty year 4% bonds at 90% of par, it means that the company's credit is on a 4-1/2% basis, , and that it could market a like Security paying 4-iſ 2% 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 prepaying interest which would accrue during the life of the issue. If 10, OOO, OOO par value were issued at .90%, the discount would amount to 1,000,000, and the saving in interest to 50,000 per year, or 2, 500,000 in fifty years. Obviously the company cannot claim the privilege of capitalizing the discount, while the reby availing itself of the reduction in interest. If such a course were legitimate in the case of a 5 or 10 percent discount, it would be equally so if the discount were 50 or 75 percent, 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 obligatious 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 accumulated surplus. The capitalization of discount or stocks, involving as it does the introduction of fictitious values in capital assets, is wholly in- defensible. " - The author has failed to note any particular "judicial determination" which approves of the charge of any such item to .- ‘. . . . . . . . - . . . . º. º.º. -- - - **- " - capital account . 2. "The interest during construction is less than a reasonable return on the investment". The amount actually paid out for interest on money used during the period of construction, of course will vary, depending upon the time of construction and the way in which payments are made on construction materials. On the basis of a rate of 6% per annum, construction lasting one year, only a very small portion of the construction cost will pay 6%, while the great items of rail, buildings, motive power and equipment will be put into the work from ninety days to ten months after commencement of work and will actually bear but little inter- est. In the appraisal in Michigan, the assumption was made that all work must be replaced in One year, end 3% was an agreed 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' construction work are, in Michigan, put in partial operation as soon as built, is not unreasonable. Such an assumption would clearly 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 of the appraisals of physical property have been made upon the basis of securing 8. figure representing - . . . . . . ." - - * { + ...; . . . . . . . . . ... . . . . . . . . . . . . . . the cost of reconstruction of the property in the condition in which it existed upon the date of the appraisal including only items properly charge able to capital, cost of road and equipment. This is not such an item. 4. "No allowance is made for wear and tear of material, during the period of construction. Assuming eight years the life of a tie and three years the construction period, a substantial percent- age 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 hasterns 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 depre- ciation reserve when raised to cover that which takes place during the construction period. This reserve is later in the address objected to by Mr. Williams as improper accounting. 5. "No allowance is made for impact and adaptation. After the line is placed in operation, each fill will sink one foot for every ten feet of height. The slope of cuts must be increased to pre- verit 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 of "Appreciation of Roadbed", discussed elsewhere, which is per- haps a proper item, but a comparatively small one ; one of the examples cited is clearly maintainence. 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." º i., i. . . . . * ***, *i-fi ſ㺠- I j-, This is erroneous. Prices were used on the Michigan appraisal for earth, loose rock and solid rock. There is prac- tically no classification in Michigan Southern peninsula, or in fact on 90% of the mile age 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 ap- praisals. It would not be a proper figure to use as of an estimate based on 1909 prices, which have materially increas – ed over the prices of the period 1890 to 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 be- tween upper and lower peninsula, and an exhaustive study was made of rates to different sections, and it is believed that prices were adopted which took all these points fully into consideration. It is true that no effort was made to use dif- ferent unit prices as between counties, but in a number of cases differences were made in prices for different sections of the state, where either local conditions as to production of materials, or traffic rates, seemed to warrant it. 8. "No allowance was made for interfer- ence with work on account of labor troubles, con- dition of the weather, &c., 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 articult to separate and set up, and are * -151- clearly 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 numbered as "among other things" open to criticism. The following headings 8.1°e 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 sepa- rately set out and value; therefore, no effort, is made to fur- ther answer them point by point, than to say in general that if there is any value attaching to these items, it was pre- sumed to have been disclosed by the method of Professor Adams, and to further suggest 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. . 10. "No consideration was given to the leasehold interests" "Thus it will be seen that there remains to be de- termined many questions vitally affecting the value of the property without regard to its value as a 'going concern'. " - ll. "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 estab- lishment, nor should there be any difference in the basis of their value for taxation (exactly what Gover- nor Pingree maintained) or other purposes. There is, -152- °9′ on to both, the value due to location, good- will, &c." While the remainder of the address in question con- tains no specific criticisms of methods of valuation, it does go into a discussion of Sundry legal decisions, and conclu- sions are drawn quite at variance from those set forth else — . where in this paper. The thing most noticeable in the entire address is a lack of a proper spirit of fairness, an apparent inability to fully and fairly state the position of the men whose views are being opposed, and an undue emphasis in quot- ing some public official whose views coincide for the time being with the theories that are being advocated. The quot- ing from an address of Hon. Robert Shields, President of the Michigan Tax Commission, of 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); that the value as a "going concern" was not attempted to be given, and 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 end earnings of the C Ompany, undertook to determine a "rion-physical", "intangible", "franchise" or "going concern" value, which included all in- tangible elements, and which, added to the physical value was ...:::::::::::::::::::... . . . . . . . . . . . . . ****'. . . . . . * . sºuaºu's in Ilius ºil . . . . . . . . . . ... iſ nºt al... . . . "... "...ſai. ºf -" - ". . . . . 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 cor- rectness 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 1200 miles in length, between the same cities, but passing through a hilly and undeveloped territory a por- tion of the distance and through a farming sec- tion for the greater portion of the remaining distance; yet the advocates of a physical valua- tion would have us believe that there is no dif– ference in the value of the two if they can be replaced today at the same cost." The above statement is entirely unfair to every man who has been in responsible charge of the valuation in recent years in the states. No such theory has ever been advocated by any honest thinking advocate of a valuation. In the first place no interstate valuations have ever been made and no par- allel case to the one assumed is to be found, except in very short sections of roads, the most marked instance having been elsewhere referred to 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 largely or wholly cor- rect 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 this paper are devoted to an attack upon the plan outlined by the Interstate Commerce Com- —194–––. …< ~ . . . . * - . - :: ** , ºr . .” - - , …” •.: **::...— ... -, ...* i. tºº.…&tiº mission for valuation and upon some of the accounting methods of the Commission, points not proper to be discussed in this thesis, 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 evi- dent object of the entire address is to create a wrong impres– Sion regarding what has been done and a prejudice against the men who have been engaged upon state appraisal work and against those who advocate the appraisal of properties as a proper Step in the way of securing such information as will enable an in- telligent consideration of the great corporation problems that must be solved. -155 - CHAPTER XIX. THE DETERMINATION OF ELEMENTS OF WALUE AND METHODS OF WALUATION BY THE COURTS. The preceding chapters of narrative of methods of appraisal Work logically lead up to the question - "will these methods that have been adopted in various appraisal undertak- ings Stand the test of the courts?" After all, the final seal of approval must be Stamped upon 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 upon this sub- ject, quotations from judicial decisions will be noted which are literally correct as far as they go, but which are incom- plete and often very misleading, and often such incomplete quo- tations are presented as to give an entirely different meaning from what was intended. In order that no such charge may lie against this thesis, such cases as are quoted, are quoted fully enough to clearly indicate the intent of the court, even at the expense of undue length. An examination of all federal and Supreme court cases which bear upon the subject of property valuation has been made, and quotations at length from some of the older cases establish- ing precedent, together With citations to more recent; decisions ~156- are submitted, and 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 Welua- tion in Michigan, in connection with these decisions, discloses the fact that these methods 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 de- tailed methods adopted in the cooley Physical Appraisal have been sustained as to very many points, and in no case have any of such methods been unfavorably criticised, and while at this date the Supreme Court has riot squarely passed upon the propriety Of - any method for securing non-physical or intangible values, they have fully sustained the general position of Professor Adams in Several important points. In addition to the complete examina- tion of federal cases, certain very interesting and very valua- lole State cases have been examined and some of them are quoted. The Se cases involve looth matters of taxation and rate making. They cover Railroads, Water Works, Gas Companies and other classes of public service corporations, and clearly dem- onstrate the fact that any analysis of the subject of property Valuations must include all classes of corporations. Rate mak- ing and taxation, in themselves, are entirely separate and dis- $ tinct from valuation, which is a necessary preliminary step in either undertaking. For this reason, all references in these cases not of special interest in the valuation part of the prob- lem are omitted. º . . . . . . ... . -157- . . . . . . . . The case of Smyth vs. Ames (169-U. S. P. #466) was an action to question the constitutionality of a statute of Nebraska establishing rates. This case is of great interest , and based upon the ruling of the Court in this cause, the ap- praiser in Washington and the appraisers in Nebraska have un- dertaken 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 con- clusively determined by the legislature that they cannot become the subject of judicial inquiry. The reasonableness or unreasonableness of rates pre- Scribed 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 thesis 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 re- gard to the relation of the corporations to the people, and to element S of value, viz: "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 per- forms 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 COI) • . • -158- trol, though such control must be exercised with due regard to the constitutional guarantees for the protection of its prop- erty. * * * * * 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 refer- ence 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 in- terest on its obligations, and declare a dividend to stock- holders. - If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitaliza- tion 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 prop- erty and franchises used by a corporation as represented by its stocks, bonds and obligations, is not alone to be consid- ered when determining the rates that may reasonably be charged." (The Court here quotes le4 U.S. P/578 Covington & 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 pub- lic, 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 af- fairs have rights that may not be invaded by legislative enactment in disregard of the fundamental guarantee for the protec- tion of property. The corporation may not -159- be required to use its property for the benefit of the public without receiving just compensation for the services ren- dered by it. How such compensation may be ascertained, and what are the neces- sary elements in such inquiry, Will al- ways be an embarrassing question. * * * * o "We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corpora- tion maintaining a highway under legislative sanction must be the fair value of the property being used by it for the conven- ience 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 op- erating 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 i 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: 1st. That the Court; reiterates the relation of the people to the corporation as defined by Covington & Lexington Turn- pike Road vs. Sanford (164 U. S. P. 578) Stone vs. Far- mers' Loan & Trust Co. (116 U.S. P. 307). 2nd. That the basis for computing a fair rate is the fair val- ue of the property, which must be arrived at by a compu- tation or series of computations, taking into account many different factors. 3d. 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. e 4th. That no such stress has been laid by the Court on origi- mal cost as has been construed by some appraisers. -- The principles enunciated in Smyth vs. Ames are reit- erated by the Court in San Diego Land Co. vs. National City . -160s. - (174 U. S. P. 739) with the further ruling, viz: *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 com- pany 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 Sug- gested by the appellant is, however, defective in not requir- ing the real value of the property and the fair value in them- selves 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 con- Sidered-- just to both the company and the public." In the case of Columbus Southern Ry. vs. Wright (151 U. S. P. 479) the Court quotes approvingly from Franklin Co. vs. R. R. (12 Lea (Tenn) 521-527-566-539) &nd ShoWS that the doc- trine 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 personality, its rolling stock, its choses in action, and its franchise. The franchise is a privilege conferred by the charter of incorpora- tion, 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. * * * * o o o O O o O O O O O O O O". " O O O - 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 propor- tion 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 there on. The value of , a roadway at , any given time is not the original cost, nor a fortiori, , its ulti- mate cost after years of , expenditure in º āfīd improve- ment S. 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 º: largely upon the use to , which it is put and the char- acter of the improvements upon it." " " ? • * * The mileage basis of apportionment is sustained in State Railroad Tax Cases, tºº – 92 U. S. P. 608 Delaware R. R. Tax Case, – º 18 Wall 206 Erie Ry. Vs. Pennsylvania, – sº 21. " 492 Western Union Tel. CO . VS • Mass , , – 125 U. S. 530 Pullman Palace Car Co. vs. Pennsylvania l41 U. S. 18 Maine vs. Grand Trunk Railway, - mº 142 U. S. 217 P. C. C. & St. L. Ry. VS • Backus, - - 154 U. S. 430 and other cases, so that 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 equitably be so apportioned. Un- less the value of a railroad be determined and then that val- ue apportioned between different territorial units in propor- tion 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 ap- portionment which is subject to modification, or which will lead to error. In an Indiana Tax Case C. C. C. & St. L. Ry. Vs. Backus, 154 U. S. p. 444, Mr. Justice Brewer, of the Supreme Court in handing down the judgment says: *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 ". . . . ...<-- as . . .- ...'...": "Tº * , , 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 . * O O O O ° The value of property results from the use to which it is put and varies with the profitable- ness of that use, past, present and prospective, actual and anticipated. There is no pecuniary value outside that Whigh results from Such use . * O O O ° 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, mugh of that yalue ##### 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 M.C.R.R. vs. Powers (201 U.S. p. 245), the question of method of valua- tion was not passed upon loy the Courts for the reason that after the evidence was in and during the argument counsel for the rail- road admitted that the Cooley Valuation was as correct a figure as it was possible to secure under the existing conditions, meth- ods 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, called upon to squarely pass upon 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 upon kindred questions in a few cases, among which San Diego Land & Town Co. vs. National City (74 Fed. 83) and San Diego Land & Town Co. vs. Jasper (110 Fed. 714) hold as above, and Cit; e most of the cases referred to , and 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 . . . . . . . - - - . . . . ; • . . . .”… ', ºf •l63- - . . . . . . ; prospective number of consumers, and is no more unchangeable than the value of any other kind of property." He cites as an illustration the effect of a year's dr outh On the value of an irrigation plant as temporarily af- fecting the value of the property. In the case of Cotting vs. Kansas City Stock Yards (82 Fed. 839) the Circuit Court touches upon one very inter- esting argument, in 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 prop- erty may properly be employed when it is valued for different purposes . . When a valuation is g;9; On property which has , be- Gomè affected by a public use, for the purpose of ascertaining whether the maximum rate of gompensation fixed § law for its use is reasonable or otherwise, it is obvious that the income de- rived there from by the owner before it was subjected to legislat- ive 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 #3P. criterion of value, because the stock may not represent he money, actually, invested, , and furthermore because, the property may have been §º: máinly with referenge to its intomě W #3; #8 ###"; On the #####"ignºn; iS ;..." TDr Oper Will OWYle!" . Thà...V. U15 € 3S le illºn KS TOIT Ope 1 W 11, h O ####; §bjáč to fe; štíšš control. On the §§§ Han #y- évérº, whéâ property” is visited for the purpose issè stateå, it is clear that the owner there of 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 # *. an increased value. the owner cannot be deprived of such 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 W. W. Co. vs. Kan- sas 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: - -164- "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? o o o o o o 9 ° We are not satisfied that either method, by itself, will show that which under all the circumstances can the adjudged the "fair and equitable value." Capitalization of earnings will not , because that im- plies 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 re- producing , 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 gompleted System of Water Works, Sugh as the company has, Wigh- out a single connection between the pipes in the streets and the buildings of the city would be a £ºgº. 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 º le supply the city but actually supplying many buildings in city, Y1O P#1; #### § capacity #Weiß #éa;#1; earning, make #vy, true that the 'fair and equitable value' is something in excess of the cost of reproduction." - The foregoing authorities cover practically all of the older cases in the Federal Courts. These cases have been examined and such of the subject matter quoted as would show the conclu- sions of the Courts as to what constitute the various elements of true value. The latest Federal decision bearing up on the sub- ject, and in many ways the most replete with argument, is in the case of Consolidated Gas Co. vs. City of New York (157 Fed. p. 849) which was decided in December, 1907. In this case the valuation was determined by the mas- ter by:- l S t; O A valuation of tangible assets, consisting of real estate, plant mains, services, meters and miscellaneous equipment, and the property of sub- Şidiary 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 treated as tangible property. 2nd. ) Finally an intangible value of $20,000,000 was assigned by him £o the franchise and good wiii.; - -165- - . . . . . . . . ; Objections were raised as follows, viz: (A) ( Land values represent no original investment by ) the company, does not indicate land especially ( appropriate for the manufacture of gas and in- ) creases apparent assets without increasing earn- ( ing power. ( The values of physical property are not original ) cost, but are cost of reproduction less depre- ( ciation. (B) ( Some of the property cost more than new articles ) of the same kind would have cost at the time of ( inquiry. Some are of designs not now favored by ) the scientific and manufacturing world. (C) The disputed questions involved, so far as tangible property is concerned, were : 1.- Whether the values ascribed to the several enumer- ated items are based upon competent and persuasive evidence. . 2. – Whether the method of valuation pursued by the mas- ter 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 chapter, the Court holds: "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 apprecia- - tion, 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 af- | fected 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 ling •. ’’ ‘‘ ºf . . . . . . J.-1.- : -** . . . ‘. . . --- - . . . .” -: • - . . . . . * ... ºf . . . . . *.x, 2 v º: , . * . - * . * . . . . . . . ...º.º.º., sº sº..... : :"... º.º.º.º. º. . . . . .”. ... . . . . ." . ºrs: - ... ". . . . . . . . . . . . . . . . ºf under the city of 1827, then the owner there of 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 deprecia- tion 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. C O O O O O O O O O O O O The so-called money value of real or personal prop- erty is but a conveniently short method of expressing present potential usefulness and 'investment " becomes meaningless if con- strued, to mean What the thing invested in cost generations ago. Property, whether real or personal, is only valuable When us é- ful. Its usefulness commonly depends on the business purposes to Which it is or may be applied. Such busine SS is a living thing and many flourish or wither, appreciate or depreciate; but Whatever happens, its present usefulness, expressed in finan- cial terms, must be its value. * * * * * * * It is not to be inferred that any American government intended when grant- ing 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 citi- zen. 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 there- of in the case of equally unearmed and possibly unmerited depre- Giation. - I think the method of valuation applied by the report to land, plant, mains, services and meters lawful. To 'working capital, Coke & Coal Co. & 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 tak- en up and working capital is defined as "The amount of cash necessary for the safe and con- venient transaction of a business, having regard to the owners' 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 the Court reduced the "working capital" from $3,616,000 to $1,616,000. Perhaps the most novel and most 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 con- tinuance upon the franchise without which there can be no use- ful organization. Tangible property has a certain value entire- ly apart from franchise or right to continue business, but good will in the sense of the organization for the business of fur- nishing gas can have no existence what ever apart or detached from the franchise conferring the necessary privilege. Would anyone think of capitalizing good will of this kind and dis- tributing 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 con- ceivable good Will of a gas company in this city is about equal to that of the street cleaning department of the municipal gov- erriment, . " - 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 ex- haustively discussed by the Court (157 Fed. pages 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 prop- erty, but as productive and inherently valuable property and to add their value, if & Scertainable, to complainants capital ac- count 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 Co. (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 consider- able 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 G Ourt; in that it was not a case for a valuation of good will. It con- curred with the lower court in holding that the company was en- titled 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 his 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, upon which basis the estimated return under the new rate upon the valuation of $55,612,435 was 5%, which rate, in view of all the circumstances is held to be not confiscatory, and to be a not unreasonable return upon the investment. The franchise value, as commented upon in these cases, is referred to at considerable -169- length in Chapter XXI. On Jan. 4th, 1909, another case was decided, viz: Ynoxville vs. Water Co. (212 U.S. 1) which in some respects is of greater value to the engineer than any others cited in its determination of methods. In this case the appraisement Wº. S made in minute detail of the tangible property and the sum of $10,000 added for "organization, promotion, etc.', and $60,000 added 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 is 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 val- ued 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 de- termined by the master by ascertaining what it would cost to reproduce the existing plant as a new plant. The cost of re- production 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 iri 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, depre- ciate not at all, and sometimes on the other hand appreciate. Put 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 elabo- rate analysis of the cost of construction. To arrive at the present value of the plant large deductions were made on ac- count of the depreciation. This depreciation was divided into complete depreciation and incomplete depreciation. The come. “ plete depreciation represented that part of the original plant -170- Which through destruction or obsolescence had actually per- ished as useful property. The incomplete depreciation rep- resented 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 reason- able return, the amounts of complete and incomplete depre- ciation should be added to the present value of the surviv- ing parts. The court refused to approve this method and we think properly refused. A water plant with all its addi- tions 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 pro- vide 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. * O O O O 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 pub- lic regulation of its prices comes under question, the true value of the property then employed for the purpose of earn- ing a return cannot be enhanced by a consideration of the er- rors of the management which have been committed in the past." O The court holds that there was error in only con- sidering the operations of the company for a period of one year, and that this should have been extended to enough time to remove danger of abnormal business conditions and observe the effects of certain ordinances. It thus appears that the United States Courts have laid down certain rules which may be regarded as fixed and -171- definite, and Which must be followed. The value to be deter- mined 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 re- production, depreciation, appreciation, all these, and any other things that will throw light upon the "fair value" must be taken into account and given such weight as they are entit- led to. Any fictitious book value, due to over issues of stock and bonds, is to be given no weight, lout the appraisal must give the fair value, in the light of all the facts, of the prop- erty 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 cases gives practically nothing more in the way of definite conclusions as to methods than has been cited. Perhaps the most complete and painstaking consideration of appraisal problems giv- en by any court was that given by Judge Savage, of tie Supreme Court of Maine, reported in 97 Maine 185, and 99 Maine 371. These proceedings were neither rate cases nor taxation cases, but pro- - ceedings 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 de- - º cision contains some interesting views on "going value", and º -172- the Court's remarks on the general difficulties in making rules 42 ppraisement are exactly to the point : 4- for an a "There are many difficulties, if not dangers, in at- tempting 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 comprehen- sive 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 proper- ty may or may not have a value independent of the amount of rates which for the time being may be changed. A public service com- pany may under some circumstances be required to perform its services at rates prohibitive of a fair return to its stockhold- ers 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 struct- ure, pure and simple, consisting of pipes, pumps, engines, reser- voirs, machinery and so forth, with 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, un- less 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 bus- iness, it is a going concern. The value of the structure is en- hanced by the fact that it is used in and in fact is essential to , a going concern business. We Speak sometimes of a going con- cern value as if it is, or could be separate and distinct from structure value, - so much for structure and so much for going con- cern. 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 the structure is more valuable. The franchise, however, is limited, other and competing franchisee may be granted, a franchise may exist en- tirely independent of a structure. He holds that the structure -173- 3.- :- 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 cust, Omers for services rendered. It is three fold in dis- cussion, 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 esti- mation 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 article there on in Wol. XLIV. TranS . Am. Soo. C. E. , pp. 1-74 by Mr. Leonard Iſlet calf consti- tute an extremely valuable addition to the literature of appraise- ment;S . It is clear from a study of all the cases referred to in this Chapter that the Courts have laid down a line of precedent that is equitable and just, that the interests of both public and corporations will be safeguarded, and that the likelihood of any such unfair or improper valuations as the corporation Iſla, Y) ºne agements fear passing the scrutiny of the Supreme tribunal is but remote . -174– CHAFTER XX- PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION. All of the foregoing narrative of methods adopted in recent valuations, of review of judicial opinions, and of com- ment upon the expreseea opinions of various engineers and rail- way officials is presented as being proper and necessary to Sup- port the contention that the Michigan Waluation, while not the first appraisal Work, was the first valuation work of large mag- nitude undertaken by any state, that it was a work which estab- lished many precedents, and that the complete discussion of meth- ods and principles in connection with and following this apprais- al has given it probably a greater general value than any Simi- lar undertaking. The Wisconsin work, which immediately followed that of Michigan, was along similar lines to the Michigan physi- cal valuation, and carried the work forward adding to and strength- ening certain features of it. It may, without any impropriety, be claimed that these two appraisals have laid down the general lines upon which this class of engineering effort Will be large- ly directed in the future. It is desirable, in closing this thesis, to indicate such general methods of procedure in valuation practice as may be said t;o have been thoroughly established by precedent, and to present - ºf - * :- - ** - §: •l?5- . . . ; ... ::::::::: * such argument as will support the contention that such methods are proper. - - The fact has been emphasized again and again by every author upon the subject that this class of problem is not capable of exact mathematical solution, that no matter how much care may be exercised in the execution of the Work, the result, is tem- pered by the personal judgment of the men engaged upon 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 upon 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 cor- porate control, viz., 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-- -176- l. - Be based upon a careful Study and analysis Of all the information applicable to the case in hand. 2. - That it must so separate the various elements that every step of the Work may be reviewed and supported. Public interest demands that in any valuation cer- tain 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 de- struction of industries and removal of tracks leading thereto, the destruction of equipment and facilities, the depreciation in value of adjacent property, along with Wear and tear and ob- solescence have gone to effect the destruction or loss of capi tº sº tal on many Michigan railroads. The case in 212 U. S. page 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 present value. The appreciation of value of lands by reason of -177- 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 proper- ty, 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 clearly appears that there are two classes of ele- ments of values in the final value of a public service property, those that are physical, and those that are intangible. There are Various of the physical elements of value that are not ma- terial or susceptible of inventory, but which, none the less, attach themselves to the physical property, are capable of de- termination within reasonable limits of certainty, and which should be taken into account and computed as physical property. In the subsequent discussion of physical and intangi- ble 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 concluded by the author that the physical value, or present value of the physical property, should fairly rep- resent the actual capital invested in the property at the date of appraisal; that it should be made up of the sum of the va- - rious element S that constitute the cost of reproducing the prop- erty together with any appreciation that may have been added to any of them, less all depreciation. - =l78- That ion-physical or Intangible Value is the difference between the "fair value" as defined by the Courts, or the rea- sonable value of the property as a business or producing prop- erty 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 either 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 no matter 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 reproduc- tion, under existing conditions, less depreciation. This fig- ure is definite,within reasonable limits, and it cannot be con- ceded that it is permissible to vary it , submitting One result as a present physical value for taxation, and another and dif- ferent 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, but in any -179- case, for purposes of furnishing information, this element of value should be determined, and as in the case Of physical values, it should be an unchangeable figure, 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 it- self, and no general set of rules can be laid down that Will be capable of universal appreciation. It is deemed sufficient to call attention to general matters of major importance and to re- fer to some points that have not been touched upon in the preced- ing 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 proper- ty 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 naturally divides ~180° itself into four parts, viz: I. The preliminary study. II. The inspection. III. The computation. IV. The preparation of the final figure. I. - The preliminary steps to be taken 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 Wiscons in and Iſinnesota was done in co- Operation with the railroad companies, who prepared (generally, not in every case) their own inventories upon forms adopted by the appraiser. In Michigan all of this information was secured by the appraiser. There can certainly be no valid objection t;O the use of information compiled by the companies, Whose famil- iarity 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 inven- tory from recorded data lies in the fact that very few sets of rec Ords are corrected to date and many additions and erasures Will of necessity have to be made in the field. - It is of great assistance in making a field inspec- tion 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 • ... * * - - . - - - . - - . . ** , ” '.…: - * - ... * * * * - - • . - • * * - - . . . . . . * . . - A . . .” - ... :: * : *: ; §§ - - . fº - •- - - . . . . . . . . . . ... " " - . . . . . . . . . . . . . . . . ºf ::, ... ' ... - 4: ‘º a rººf' º . . . . ...}}} el. 8 le . . . . . - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . º.º.º.º. § view to securing such as will simplify 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, op- erating 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 oper- at ions . It has been claimed by the appraiser in Washington--- and the view is also held by the Commissioners of Railroads in Nebraska--that original cost is essential in view of the Su- preme Court's decisions, particularly in Smyth. VS • Ames. The author 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 as certainable, 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, whose records are complete and whose 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 -182- and earlier consolidation, it is practically impossible to se- cure either the old financial books or the old construction re C- ords, 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 bet terments that have been made from year to year is one of appalling magnitude and of utter uncer- tainty and conjecture. Keeping in mind the fact that prior to July 1st, 1907, the railroad companies of the country did not have a system of uniform accounting, and that additions to prop- erty were charged to operating expenses to the extent of hundreds of millions of dollars; that policies were different on differ- ent 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 ap- proximating a complete statement of cost would be getting into a maze of figures that would be confusing, unreliable and inca- pable of proof. - It is, therefore, the conclusion of the author 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 orig- -183: inal 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 construc- tion cost, plus additions and hetterments, less property de- stroyed, of the I.iichigan 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 apprais- er 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 upon estimated figures throughout than to use What purported to be actual costs on part and estimates on the balance. If original cost is essential, it is hard to get away from accepting the book values of the companies, as these, ob- jectionable 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, to be of the great est value, should be made by civil engineers or mechanical engineers of long experience, preferably by men who have had charge of their re- spective departments on railroads of considerable extent , or of properties similar to that under investigation. The author is -184- . . . . . 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, its condition noted, &ny special features fully described and everything that would tend to affect its value made careful record of . The argument has been often made that the fixing of a percentege of depre- Giation by a man in the field is purely arbitrary and amounts t; O 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 any form of mortality tables is based on a system of averages. The actual depreciation on rail, for instance, varies greatly, conditions of traffic, curvature, gradient, condition of rolling stock and various local conditions tending 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 aver- &geS • The author' has inspected Station buildings over fifty years old, whose percentage of condition, and Whose adaptability for the service required of them, would give them a very high percentage. He is also familiar with buildings less than ten 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 8. result. -185- In the Gase of a Water works inspection so much of the value is included in the system of distribution mains, a form of property that is inaccessible, that much more dependence must be had on a figure based on age, but there, too, as full investigation should be made as possible to determine to what extent tuberculation or electrolysis hea affected the condition of the pipes . The general inspection, made in Minnesota by the ap- praiser With two assistants, Would appear to be an excellent thing as a review of the whole work, but whether each an in- spection would be sufficiently thorough on which to base e 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 con- struction of newſ property or destruction or removal of old, and a compilation of all information which will permit of 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, it faile upon the field inspector t;O call particular attention to all matters specially affecting the values of the property he is inspecting. - - e - 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 is gathered greatly . . . . -186- - - - - º . simplifies the work, not only in the office, but in the field. III. — Upon the completion of the field work, with all of the preliminary data in the office, the work of computa- tion must proceed, and With this part of the work there are a large number of quest ions which must be taken up, considered, and definitely answered. The classification and arrangement of all of the in- formation 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, the checking, the filing and indexing, and the numerous other routine details of work need not be specially referred to as they must be worked out for each appraisal. The matters of principle that will be met With 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 : mining depreciation? What elements shall depreciation be mad (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 es- timates of cost of reproduction, and how shall they be deter- mined? - (o) {ow shall right of way and real estate values be ascertained? Shall such elements as appreciation, or any increment 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 deter-º *...*.* . . . . . - . . . .'; ... . . - - * : ' ' ". . . . . . . . - . - - . . . . ~~ .*, *, *.*.*.*.*.*.*.*.*. * * * , • * , - - - - - - - .* “. . . . . . . . .- -- 4. • * *- : * * * . . > -- - , yº. ... ... ºººººº... . . . . . . . - - . . . . . . . . . . . .”. -.. v . . . . • *: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ." . . . . . * * * . . . . * , . . . . . .” ‘’,” ºf 3. ...' ...º.º. ..º.º. º.º. º.º. . . . c....... . . . . . . . .”.” ”, “...s.º. t; O GOver ? (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 adapta- bility, proper or improper design, and the economics of location? (h) How shall values of such property as locomotives, cars, etc., be geographically assigned? - - (i) What is the effect upon values of large terminals? (j) Should any allowance be made by reason of rapid development of the art? - These are, by no means, all of the perplexing questions that arise; each valuation offers some that are special, but these cover the more important points. (a) CLASSIFICATION OF EROPERTIES: In making an appraisal involving the properties of a large number of companies, such, for instance, as any of the state railroad appraisels, 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 equite- bly with the large trunk line roads, or even with smaller roads in a good territory and doing a good business. Several such proper- ties exist in Michigan in a district which was originally a lum- 3. #1 co & - . . * * ber producing country, and at the time they were built lot ditions 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 that 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. mether 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 shall 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 upon the valuation, if con- sideration is not given this subject, and a conclusion arrived at. It is the author's opinion that the second, or appli- cation of an intangible, subtractive value, is the proper solu- tion except in the case of roads that would not to-day be rebuilt. In fixing 8, 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. e189- . . . . . . . . . . . . . . . . . . ; * - - - . . . . . . . . . . . . . . . . . . . . . . . . . .”.4: … . . . . * * ~ *... *::::::::::::::: **ś 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 terri- tory served, officient or inefficient management, or other reasons not connected with the physical structure and hence such differences \. are reflected in the earnings and are clearly elements to be ad- justed in the non-physical valuation. (b) UNIT VALUES: The general reliability of the appraisal rests very large- ly upon the reasonableness and fairness Of the various prices that are applied to the different parts of the property in making the estimate of cost of reproduction. These unit prices should be determined before eny actual figures are made. They should be made up from the most complete data that is available, and before be- ing tabulated they should be carefully reviewed by all the ex- perienced men engaged on the appraisal in order that no figure that is either too high or too low may be used. - As a basis for unit prices, the average of either five or ten years should be used in preference to current prices on all such material and equipment as is fairly stable in price. Rail . and all forms of rail structures, machinery, locomotives, cars, etc., can all be reduced to such a unit that averages can be se- cured which will eliminate the error due to a period of extreme high or low prices. - * In the case of such material as lumber and ties, whose price 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 laid down. Which Will be found : applicable to all appraisals. The unit prices must be such rea- sonable figures as can be sustained in court. Their adoption should not be final until every possible test of their accuracy and real- . sonableness 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 considera- tion that may affect them, the adopted figures should be applied * to all property alike. The use of different unit figures for dif- ferent roads in the same territory is highly undesirable and should #. .* : 7.2. be avoided. (c) RIGHT OF WAY AND REAL ESTATE: The work that has been accomplished during the past dec- ade in valuation, and the study of values for taxation and rate mak- ing, have brought into prominence the perplexing features of land - values as applied to corporation property. It is comparatively sim- ple to fix within very close limits the reproduction cost of tracks, bridges, buildings, locomotives or any of the other elements of physical structure. Not so with the land. A few years develop- ment 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 take into account the appreciation or depreciation of land val- ues cannot be sustained. There can be no serious objection to the doctrine that the property of a corporation generally in- creases or decreases in value in proportion as adjacent property increases or decreases, and it must therefore be admitted that a value based upon the sale value of adjacent lands is a reasonable one, and must stand. This reasoning will, of course, be subject to exceptions, in the case of terminal properties, docks and Wa- ter 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 tº OWns and Cities. The next question to be determined is whether the in- Crement of value due to the use of the land is a proper one . It mºsºmº Would appear that in the use of land for Water works, gas works, street car barns, or other isolated tracts of land used for cor- poration operation, this increment Would be much less than in the case of a Steam or interurban railroad whose holdings form one continuous and unbroken strip, and in the case of street rail- roads, water works, and like properties it would be indeed diffi- cult to compute and afterwards sustain any considerable incre- ment. 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 pur- poses 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 dis- tricts well served by roads and sparsely populated regions, yet the difference is very marked and is capable of determi- nation by an examination of the public records. This difference on be determined either by a compari- son of railway purchases and of other transfers as was done in the later studies in Michigan and in Wisconsin, or by extending the investigation to include assessed valuations, and base 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 up on an analysis of act- ual transfers than to undertake to fix values by any methods of examination and personal appraisal. Enough instances have been cited in earlier chapters of the Wide divergence of expert opin- ion to show conclusively that such a method, applied to the housands of a cres of lands of a large corporation, may lead to serious error. - - A Single attorney or real estate man who has had ex- perience in abstracting and conveyancing, and who has bought some right of Way, can go through the records of an average coun- ty whose largest city is 20,000 population or less, abstract all railway transfers for five years, locate them on the maps, ee- . cure data as to actual selling prices of nearby lands, and at the end of a comparatively short time be in position to furnish ris- ures which will establish the relation between sales for railway and other purposes in that county. The work that half a dozen such 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 will require sufficient time to make com- plete examinations, probably necessitating a special force for such city work. - - The question has been asked on every appraisal, - should this railway purpose increment be added to the value of the property? Clearly, yes. The Supreme Court quotes approvingly from the Tennes See Court, as follows (151 U.S. p. 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 reiterated again and again. The fact that for railroad uses the strip must be continuous, that it must be so lo- cated as to permit curves and grades which conform to the require- ments of the road, that no matter what damages may accrue to ad- jacent property the road may take its strip, that its use is en- tirely changed and a structure placed upon it that is capable of vastly greater earnings than the property produced before, all these elements add to the cost of the property when it is ac- quired 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 noth- ing, but in a state which is thickly settled and with many rail- roads, this element Will increase with a good degree of unifornity, while in terminals the price rises to almost inconceivable figures, It is capable of being determined, and as it is clearly an element in the cost of reproduction, the author 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: This discussion has thus far not dealt With the subject of depreciation at length, and it is not considered essential to the purposes of this paper that it be done. There has been raised by the state appraisals a question as to the propriety of the use of mortality or life tables as against a personal inspection and the placing of a percentage based upon individual judgment. Either method is liable to error. It is certainly desirable to secure the personal 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 we know the age of the building and the average life of structures of ite ClàSS • The result of the Michigan inspection of rolling stock was to fully sustain the rules for valuation issued by the Master Car Builders' Association, and it clearly is not only proper, but extremely desirable, to apply tables to such equipment as freight care, which are scattered all over the United States, and which it would be absolutely impossible to completely inspect for any road or system. On the other hand, the life of steel rails cannot be determined by any simple table, as the number of car movements over it, the weight of motive power, the speed of traine, its lo- cation on a curve or on a heavy grade, and many other conditions affect its life. So, too, With buildings and locomotives and other equipment. The character of Service rendered, the nature - and extent of repairs, and the way in which they have been main- tained add to or take away from any life assigned by the tables, so as to render the tables valueless in many individual instances. In placing depreciation, allowance should be made not only for wear and tear due to use, and to decay due to the ele- ments, but it, Should also be made to cover that depreciation due to obsole Scence, or the fact that the facility is of an anti- quated 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 deprecia- tion. The method that is 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 author believes that the use of expectancy tables would greatly facilitate the work in many cases, the data is often lacking upon which to found a complete set of tables and to support them and justify their use; and he . ther efore considers that any use of tables should be safeguarded in every possible manner, and that the personal inspection of fixed property should always be made • (e) IMATERIAL ELEMENTS OF PHYSICAL PROPERTY: There are certain expenses which are inseparable from the construction of any public Works, which are a necessary and proper part of the cost, which are arranged for in the original financing, but which are not capable of identification after the -196= completion of construction work. These expenses are: 1. – Organization: - The cost of the original organization of the company, securing the charter and franchises, arranging the financial plan and cost of securing the funds for construction. By this latter clause it is intended to include all salaries and expenses of officials soliciting and negotiating for funds, services of trustees and all other proper expenses which are usual and unavoidable in the process of exploiting a projected enterprise and interesting capital there in , IXiS count; on bonds is not included and any allowances for "premium" Or "bonus" or other cash payment to any party for services in se- curing funds, which are in excess of legitimate expenses should receive scent consideration at the hands of appraisers. , ,- 2. - Legal Expense: The cost of attorneys and all legal expenses, costs and fees in the organization and during the construction of the property. - fºr 3. – Engineering: Including reconnaissance, preliminary and location Surveys, supervision Of construction, and design and superin- tendence of special structures. The Čost 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: The cost of the management during the construction. The direction of the enterprise. 5. - General Expense: The cost of the general office organization during the construction period, and numerous minor expenses not distributable It is not possible to build any public service plant without incurring all of these items of expense 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, Vihich in a large property runs into thousands or hun- dreds of thousands of dollars, has no value at the commencement of operation, nor does it appear that this value is subject to depreciation as long as the property is an operating plant. The author holds the view that the line between physical and non- physical elements of value should be drawn as follows, viz: 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 prop- erty 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 of the foregoing items are charges against - the physical property. As long as the property is an operating property, these items of velue remain part of the physical prop- erty, and the author contends that they should not be considered as affected by depreciation as long as the property is a going Other items have been included in the appraisal by dif- ſerent engineers, which are of a somewhat different nature and some of which are open to argument ; among these are Interest. During gonstruction. This item is clearly an allowable one, but serious differences of opinion develop as t;O a proper amount to allow in making an appraisal. The corporate history of the Ann Arbor Railroad in Iiichigan shows that it was built in sections of 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 prop- erty extended over fifteen years, no section Was under construc- tion much over one year. This is typical of much of the railroad construction of the past, and on such a property the interest - : charge would be comparatively Small. O 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 struct- ures which would extend the period of actual construction for periods of three to five or six 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 inter- est during the whole period. - The preotice in the state appraisals has been to fix a percentage uniform for all properties. This practice has had th -199- º argument in its favor 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 cor- rect to use the corporate history of each company, determine the actual construction periods and use a rate based upon the actual time in each case. This can be determined with a fair degree of a C Cura Cy , and a reasonable percentage determined, to equalize the varying periods of time on which the interest runs on different parts of construction. - Discount upon bond S 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 in- terest and should under no conditions be allowed. * . . . 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 earninge. The author fails to perceive any possible 3.1" as gument in favor of adding such an item to the permanent value of t; he property. In making an appraisal, after the physical value is determined, it is usual to set up a statement of stores and sup- plies, 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 ap- praisal. While the items of cash and stores and supplies were shown in the Michigan Appraisal, they did not appear as part of . . . . . . . -ºoo- < * . *: the physical value, nor Were they taken into account in computing intangible values, but being taxable property, they were separate- ly reported. (f) CONTINGENCIES: The use of a percentage for contingencies in the ap- praisal in Michigan was bitterly contested by the Railroads as im- proper and excessive. Ten per cent was used in Michigan, five and one-half per cent in Wis consin and five per cent in Minneso- tà . Subsequent work in Michigan has demonstrated that the use of as high a figure as ten per cent was fully justified and t; he probability is that the latest Michigan appraisal did not so º far eliminate omissions, inaccuracies of description and excess cost of construction due to difficulties, &S to justify much re- duction in the percentage. The percentage to be applied to cover contingencies, in making an appraisal, is a proper matter for consideration and in some cases conditions might well be such that a smaller al- lowance even than the amounts fixed in Minnesota would be proper, but such cases Would doubtless be the exception. It is believed by the author to be proper practice to add liberally for the con- tingency item. The strongest argument against it is that it is incapable of being definitely described and located and is dif- ficult of exact proof, and it has been claimed that it therefore partakes of the nature of a non-physical element, and that if there be any value over and above the physical property value, it . . . . . . . . . . . ...º-, . " * . - - • '.' : - * ºf:--. * * * * A w. . . . . . . .” “i : “ . . . . • . •. - . . .” jeºC) e º º.º.º.º. “ (: . . . . . . . . . . . .esºzºw, * * : *. 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 author 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 in- ventory 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 lo- cation, design and construction. In some properties it may be, 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. So, too, With rail- roads. 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 sep- arate it from any one of half dozen other items that may be brought up. It opens the door t; O endless speculation as to what might or might not take place under somewhat different conditions. It was for these reasons 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 Sub- ject 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 it is used by Mr. Wil- liams and Iſr. Morgan, the appreciation or solidification of road- bed, 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 road- bed item in the Physical Appraisal, as appreciation or solidifi- cation. 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 three or four years of operation to bring it up to 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 con- struction cost. (h) APPORTIONMENT OF VALUES: The apportionment of values of locomotives, cars, miscellaneous equipment, shops and those other parts of the cost of building a railroad 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 the distribution of values between territorial unite when made on a track mileage basis, as equitable, it is hardly likely that a court would look with favor upon an appraiser appointed by High- igan giving any consideration to values of bridges, track Or buildings in Ohio. Thus far, every state appraiser has con- cerned himself only with the fixed physical property in his OWIn state together with his proportionate share of the floating prop- erty. The methods that may be considered are track mile age, car mile age, locomotive mileage, train mileage. The method that is finally used must be such as Will give the most fair result for the property under consideration. In some cases one or more of these methods will give a fair val- ue, 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 terminel 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 Gomes from the operation of the Whole. The problem would be sim- plified 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 values has been arrived at, but nothing in the way of a solution of the terminal question. A road owns three hundred miles of line in Michigan and seven miles in ohio. That seven miles includes its largest terminal, its principal connections are there, it has a fine property and is in the capacity Of land- lord to several other roads. What part of that terminal value , if any, is assigneºle to the State of Michigan? It would decid- edly not be proper to appraise the entire property as a unit and assign only the proportion to Ohio that seven miles bears to the Whole length; it is equally not fair 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, Jer- sey 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 these 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 pian has been suggest ed for either 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 treat- ed., and to assus ºt if there was any value assignable to high- igan by reason of outside terminale, 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 that has yet been made has established any rule of val- uation that 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 possi- ble for the appraisal board to make an exhaustive study of this Subject and reach definite conclusions as to the real extent; , man- ner of computation, and proper method of distribution of these Values • (3) DEVELOPMENT OF THE ART: Is any value assignable to property on account of ex- penditures by reason of the rapid development of the art? This question seems not to have been squarely asked or answered in con- nection with any of the past appraisals. Every piece of material, every facility, that is pur- chased 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 re- placement and earn a profit. No matter whether such a reserve is created on the books or not, this is the theory, and under it, while accident may wipe out certain new property, other property šešº • * . . . . . . . . . . . . . . . . ...'...'...'s . . . . . . . . . - - - - " . . . . . . . - *::, . . . . . ‘...º.º.º. . . º . . . . . . . . . . . . * *; . . . . . . . . . . . . . . . . * . . . *º * $º.' ... . . . . .º.º.º. ...'…'... tº 3...?... . . . . . . . . . . . . . . . . . . . - -* . . . . . . . . .....' ... . . . . . . . . . . . . will outlive its expectation and maintain the average life of the entire group of facilities. There are countle SS C&S eS Where this Will not hold. The rapid development of our large cities has compelled our electric line S to externd largely. The demands of the people for more fre- quent service, more rapid service, more modern and larger equip- ment , have greatly shortened the term of life of power plant equipment and cars. The rapid development in the art in elec- tricity, the congestion of traffic in public 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 move- ments of traffic and increased safety to the public. These changes are not due to the fact that the original installation was defect- ive. They are due to the demands of the public for frequent, safe and speedy service, --demands that 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 rea- son 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 -207- ,4- investment greatly in the large centers of population. To answer it affirmatively in some cases might amount to confiscation of - property. The author inclines to the view that as far as apprais- al is concerned, the value due to the remaining life of the aban- doned 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 re- placing 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. p. 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 our 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 nat- ure on the ground that it constitutes an element of extra hazard. The Se and other 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 t; he 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 appreisal. IV. - 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 the classification of the Inter-State commerce Commission is more desirable now than it was ten 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. -209- CHAPTER XXI, NON-PHYSICAL VALUES AND METHODS FOR THEIR DETERMINATION: In the published articles treating on the subject of valuation, much stress is laid upon 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 te impracticable to re- capitulate the various arguments in support of giving these elements a place in the appraisel. - The author 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 of the fact; that; it does earn profit, or gives promise of profit. The actual invest- Iment 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 a fair rate of interest on the money invested, and, carrying out the - clearly expressed idea of the courts, such intangible value can only ac Grue when the retes charged for the service are fair and proper rates. The capitalist seeking investment bases his ideas of value upon:-- - (a) The market price of stocks and bonds, an estimate of Worth based primarily upon actual earnings of the property, but àffected tº O some ext ent by outside conditions; or - (b) Upon the capitalized net income, or actual earnings of the property; or . - (c) In the case of a new property upon an estimate of What the probable earning capacity of the property will be, When the business is more fully developed. •, ... • Methods (a) and (b) ignore cost of construction, or pre- sent investment in physical property and base a value upon past . performances. Method (c) is based purely upon hypothetical earn- ings, 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 con- cern" value , in excess of original cost, upon a new property, nor - would he be justified in placing such a value on a property three years old, or ten years old, unless the net earnings were such as to indicate that the property had a business or commercial val- ule in excess of the physical property value. - . . . 'between the physical value, and the value based upon earnings rep- resents the "good will", "established business", or "going value" and all of 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 Michi- gan Central Railroad, and say that a certain sum of money represent- ed "good Will", another sum "established business", and still another sum the "franchise value." The "going concern value" of the Michigan central Rail- road is exactly analogous to the going concern value of Mr. Al- word's hypothetical water works. Instead of having water pipes connected with buildings along the mains, and considerable aume invested in appliances for using the water, we have manufacturing plants located along the railroad, connected with it by side tracks built by the industry, and depending upon the transportation fa- cilities of the road for their connections Wit; h tº heir customers, the very life of the manufacturing plant dependent upon it, S Gon- nection with the road. This is "connected good Will" of the same kind as described by Mr. Alvord. Yet to fix a value upon it by t; he methodi aescribed by him involves going into the realm of conject- ure 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 SO determined would be absolute- ly 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 ac- count. (169 U.S. p. 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 by the term "fair value", to be the value as a business or commercial property, taking into account the actual investment ex- isting in the property, together with any favorable condit, ions Which would enable it to earn, upon rates which were fair and reasonable to the consumers, an income in excess of a usual rate of interest on the actual investment, or any unfavorable ones which under the S & Iſle rates would reduce its earnings to less than usual interest. If such an interpretation be allowable, it would appear to be cor- rect 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 a then, proper to conclude that the non-physical or intangible value, composed of all these various elements of value, can only be de- termined absolutely 'by a study of the earnings and operating ex- penses? Is not this clearly what the Court had in mind in the Nebraska Rate Case? - Much of the argument upon the subject of going values and other kindred elements of value consists of statements of theory and of 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? Ilust not this result be based upon absolute fact, S P Th 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 judg- ment, based upon the experience not only of the engineers making. the appraisal, but of the entire scientific world, and, if prop- erly made and properly checked, there should be no very wide di- vergencies in results. The items of general expense. These must be estimated, based upon available Statistics. The exact determination of these items will be made comparatively easy as statistics based upon 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 upon the work, the ele- ment of uncertainty, due to errors of personal judgment, can be . . . . largely eliminated. - . - - * ... • The next question to be determined is whether there is, - - ‘. . . . . . . . . . . . . . . . . - * - . h - . - - - - - . . . • ‘, - . . . . . - ; : * : * * : . - • . . . . . . .” “...- ... ... . . . . . . . . . . . . . . . . . . . . . . - - k - - - - - ... • - * * * - - - - . . . . . . . . . . . - - . . . .' - . . . . . . " ... • - '- - - . . . . . . . *- : * ~ * * > . . . r . ** . 2- * - - - * * - - - - - - - : -- . . . . . . . . . . . . . . *...*.*.*.*.*.*. . . . . . . . . . . . ." . . . . . ‘. . . . . . . . . - . * * . . . . ºne: ſº.A: I - * . . • , . . ... ". . . . . . . . . . . “. . . . . . . . . . .';… ." . , ; ; ; ** ‘. . . . . . . . . . . . . . . . . . . - , - . . ; . . . . . . . . . . . . . . . . . . . $- * , . . . . . . . . . . . . ... ºr , ...— . . . - . .*,- - - , , - - - . . . . .” ‘. . . .** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .'; sº : at the time of the appraisal, any non-physical Value, and if so, gº 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 l, eing 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 ammºgº 3. 3. 6. £) {A. YAT value. If, however, there is, after all these changes are taken, of , a met earning which is large enough to pay four or five per cent upon the physical property and still leave a surplus, is it not perfectly reasonable and proper to hold that this Surplus rep- resents earnings on all intangible elements of value? The G Ont; ention 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 op- eration 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 -215- to this element of value , The author does not concede that "going value" 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 prop- erty as inventoried should be added proper figures to cover or- ganization, legal, administration and engineering experise and contingencies. All of these items are in the nature of addi- tions on account of the fact that the property is a "going con- cern." It is maintained that these costs should carry to the present value column as values for the reason that all of these Service S rendered in connection With the creation of the prop- erty 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 at- Solutely disappear, but, also all increments of value , by reason of the special use of the property, are wiped out, and there exists only a lot of partially Worn-out and partially obsolete machinery and equipment salable at scrap values, buildings built for a purpose that renders them unfit for other uses, and land partially salable at going prices and much that will not sell at all. . - - - As long as a ga S works, a water works, or a railroad is in operation and earning, it is e "going concern" and all -216- 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 viewſ of these things, it would seem to be highly improper to add to physical value anything more for "going con- cern." In the final report of U. S. Judge R. W. Taylor, arbi— trator in the Cleveland Street Railway matter, in December, 1909, the following language Supports the above contention, viz: "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 equip- ment, and putting them into successful operation. The expendi- tures 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 estab- lished business of the concern. This really is covered by the "going concern value" as defined by Messrs. Mead and Alvord. The only manner in which this can be intelligently determined is by an analysis of income accounts. 3.- Cost of Handling Business: A railroad With heavy grades, bad curves, poor equipment or unskillful management is not nearly as valuable a property as one Whose line and grades 8.T. & good and Whose management is far-sighted, economical and skill- ful and which handles its business at a lower cost per unit . - - In such cases the differences in location and manage- ment are bound to show in the earninge, adding to the Physical Value of one property and possibly taking from the value as shown - -217- - . loy the physical appraisal in the case of another. 4. – Good Will, Established Organization: These &IC e valuable asset, S. It is difficult, indeed, to attach exact weight to these elements of value, except as they are shown in the in- tangible value shown by the earnings. In most cases of public service companies, as is argued elsewhere, it is doubtful if. Such elements are entitled to have any place in a public valuation. 5. - Franchise Values: Covering various Specific items arising out of the ownership of special franchises, or out of the general rights granted by law to corporations. All of these elements of value have been presented and have been supported by able arguments. No one has offered a meth- od of separating these elements. While there is universal recog- nition of their existence in the case of many properties, they are Supported by nothing visible or tangible. They are practi. cally inseparable one from another. They are not always present, and the application of any such arbitrary rule as that Suggest ed by Iſr. Alvord would make it possible to place values which were purely fictitious. It therefore follows that if they are to be considered at all, they must be treated as parts of one intan- gible value and that value 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 upon its physical property (in other tº . -218- 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 so squarely hold that the rates charged for Services must be no more than the particular ser– vice 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 atta Gh 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 rate S should be lowered. It is contended that the determina- * tion of rate that will be just and fair to all competing com- penies involves other consideration than the veluation 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 so separate the tangible and intangible elements that the further work of rate making or assessment may not be complicated by improper ele- ments, which are included among the items of the physical prop- erties • . In consideration of Franchise or Coing Walue, the history of the corporation should the investigated with a viewſ 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 to Water works ere 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 nat- ure of "good Will" and the question very properly arises, in the ase 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 frequent- ly sustains an excessive bonded indebtedness. At the expiration of the franchise period the citizens of that city consider a pur- chase, and are asked to pay, among other things, for their own good Will. In view of the attitude Of the Federal Courts in the con- solidated Gas case and the language of the lower court in disallow- ing the item of "good will", which disallowance was sustained by the Supreme Court, it is very evident that any attempt to arbitrar- ily fix a value upon such an item in an appraisal is not likely tº O be successfully supported. 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 corpora- -220- tion, to use public property, to be free froin competition, and to enjoy many other privileges has some velue apart from tangible property. - Good Will can have no existence as apart from Or de- ached from the franchise conferring the necessary privileges. Such good will (by itself) is not capable of being cap- it alized and distributed smong Stockholdiers. - 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) be C&llSe they pay taxes among other things for that. The Court therefore finds that there is no good will value in connection With the see business in the city of New York, although it is elsewhere said in the finding that it is the best - and most favorably located and most prosperous business Of its kind in the country. . Judge Taylor, in the Cleveland Railway arbitration, said: "I allow nothing for good will. A street railway com- pany Which has a monopoly, and especially if it has a franchise, value remaining, can have no good will value." - In connection with a consideration of franchise values the following points are raised by the Federal Court in the Con- solidated Gas cases (157 Fed. 872-879), Vi Z: - *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 nor pay therefor any legal valuable consideration?" • *.*.*, *., - “... . . . . . . . . . . . .” The Court thinks not, because-- * -221- "Return can be expected only from investment , and he that invests Inust, 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 that it part Gºd 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 there of . 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 emolu- ments. - What is the value of a franchise to perform certain service, under which no money is invested and no service yet per- formed? What is it worth apart from performance under it? Unless it can be seen to possess inherent value entire- ly 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 be cause of the failure to distinguish between productive end non-productive property. Land, money, chattels, may, by industry and intelligence, be made productive Without a franchise; but no excellence in these desirable qual- ities can ultimately render a franchise productive without the use of money Chattels and land in connection ther ewith, and When the juncture is made, the earning capacity of the real and person- al property, plus the franchise and plus intelligence and in- dustry, is really no greater than it would be without the fran- chise, for the franchise has added no producing power to the real- ty or personality; it has but authorized their employment in a particular way and protected the owners While so employing them." 3 The Court emphasized the fact that the particular Way in which they were employed 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, viz: "I can imagine no more than three Ways in which the value of a franchise can be stated. It is valuable: (1) be- - cause it authorizes the gainful use of private property in a par- ticular 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 gº obviously illegitimate as to require no discussion. The second method of Statement, when carefully considered, asserts that bea. -222- cause 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 pro- curing franchises produces, and long has produced, a traffic in thern. 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 com— pel 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 there of , 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 attent; i. On to the fact, that the foregoing quotations are but argument advanced by the Court , and that he found a franchise value, follow- ing the reasoning of the Supreme Court in cases cited in another chapter 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 per- sisted 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 regula- tion the value of a franchise depends wholly upon what is earned under it and T believe the best Way of finding out how much a fran- chise, separately considered, is worth is to as certain 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 obvious-, ly 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, come -223e - Cº . pared 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 proportion- ally to the increase in tangible property; this he did, fixing the franchise value at over $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 (applic- able to this case, not general) to be bound to recognize the value agreed upon in 1884 as part of the property upon which a reason- able 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 in- crease in the value of the franchises. Real estate may have in- creased in value very largely, as also the personal property, with- out 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, uncer- tain, 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 in Crease. " - w The Court did not concur in the increase of the fran- chise value. The Court in dismissing this subject says: Aº "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 re- gard to the valuation of franchises generally where the facts are not similar to those in the case before us." 2. It appears from this, the latest case, then that : 1st . - The view of the lower court that & 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. 2nd. — That the arbitrary increase of franchise value, loy the lower court, proportional to the normal increase of the physical property is not concurred in. 3d. – 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, 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 Mr. Geo. H. Benzenberg, in discussing water Works franchises, is as fol- lowVS : "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 repre- sents 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 -225- placed on the franchise by the appraisers. * In the paragraph just quoted it is evident that the term franchise is used in a restrict, ed sense and refers to the ordinance or contract from a municipal corporation granting the right to op- erate on specific terms rather than the broad use of the word as indicating all rights derived from general laws or special con- - tracts 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 ele- ments that enter into the intangible value of a property is a very risky proceeding on the part of appraisers, and to further Sup- port the contention that, as a business proposition, the value of any property depends upon its earnings; that the franchise simply pro- - tects the owners of the property in their enjoyment of those earn- ings; that the value of the franchise merges in the "fair value" of the property, and that the franchise can have no special value of it- self 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 re-adjustment of rates, any restriction of op- erations or other form of legislative control Which Would unfavor- ably and violently affect earnings is bound to hold down fran- ChiSe or non-physical values; as it, would not seen possible to read ~226e 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 author thereforc reaches the following conclu- Sions 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 so located as to se- cure either a monopoly of business in a congested territory, or whose construction, location, strategic position or economic ex- cellence of design is such that upon a schedule of rates that is fair and reasonable for competitors less advantageously situated, an earning is secured that is in excess of usual returns, a non- physical value of considerable magnitude may very properly be as- Signed. - 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. 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 -227- ! and reasonable. His plan should be extended so as to cover sub- tract; iv e V&lues Or the case of properties showing a deficit . This method has the merit of being based upon the act- ual earnings and expenses of the company under investigation and upon the value of the physical property as already computed. It does not introduce a mass of purely Suppositious figures, nor de- pend upon hypothesis. The proposition is simply this: If a property earns only its operating expenses, includ- ing therein proper depreciation reserves, taxes and such a per cent on its actual invested capital as could be earned by that capi- tal if invested in good, non-taxable bonds or other like securi- ty, it is Worth no more than its physical property is worth. If it earns more than that, , it is due to the franchise, going con- cern, or other intangible elements of value, and to determine that Value, capitalize the surplus • It takes several years for a property to reach its nor- - / - - mal 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 uni- form 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 Expense S • (b) Expenses of Ilaintenance and Running Repair. (c) Taxes. (d) A Sinking Fund from Earnings to Cover Depreciation and Obsoles Cence . - (e) A Reasonable Profit on the Fair Walue of the Property. An investigation of non-physical values should then in- clude 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 commencement of operation of any property, such a sum should be annually set aside out of earnings, as should, when invested S 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 that was 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 feilure 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 in- come 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 addit; ion to other operating expenses and taxes, there is any non-physical value. Professor Adams covered the depreciation in the Hichigan work in the 4% annuity, which was deducted before non-physical val- ues were computed. The author is inclined to go a step farther than Professor Adams did, and hold that before any intangible val- ues can be attached to the property, it should earn not only all operating expenses, taxes and reserve for depreciation, but also interest upon 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 upon franchise or intangible values. Upon this basis, then, a rule would be formulated, being Professor Adams' rule with some modifications: 1.- Deduct from gross earnings from operation the aggre- gate 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 in- vestment, 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 -230- appraisal) and improvements chargeable to income. The remainder represents the income after all charges against operation Of prop- erty and maintenance of the integrity of the capital investment have been cared for. - - 4. – From this remainder (3) deduct such a per cent 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 rete, would equal the value of in- t; Engible or non-physical properties, which is to be added to the appraised value of the Physical Property. - . . - 5.- If, instead of e surplus, a deficit O G GurS, a care- ful 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, the deri- eit should be capitalized at a proper rate and as a negative in- tangible value deducted from the value of the physical property. c.- In the determination of rates to be used in con- puting 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. CHAPTER XXII, CONCLUSION. The subject of valuation is so eppallingly great that , notwithstanding the length this thesis has reached, many points have not been Govered. A discussion of the method of valuation by capitaliza- tion and net earnings, which is practically that adopted by Pro- fe SS Or Adams in his Commercial Valuation, has been quite fully described. No attempt has been made to discuss the stock and bond method. Neither method is adaptable to the requirements of any public appreisal. 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 prop- er 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 OI). the aste of the appraisal, and it would be equally fallacious to either include non-existent and long perished facilities or to assume a hypothetical and never- existing property. * x - - - • * There are many intricate problems in connection with a valuation for rate making or taxation, that really belong to these undertakings, not to valuation, which are usually brought into the . - s: . . . . . . *4 - - i. - ... . . . . . - * ... sº #: .. Aº. - * * : * : " . . - ... . . . . . . . . . . , , ‘...." ^** discussion of valuation, but which have been here excluded. Among these are the separation of interstate from intra State business, and others, of great interest, it is true, lout foreign to the sub- ject of valuation. The question of the fair return upon money invested is not referred to, for the reason that it has no direct bearing OI). valuation, and for the further reason that it has been quite ex- haustively discussed in papers that are indexed. The author de- sires to make clear the fact that he is not advocating low rates per se. The rate must be determined to meet the special require- ments of each investigation. The Supreme Court of Maine says in f 97 IHaine : "The reasonableness of the rate may for a time be afe fected 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 invest- ment, 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 Will- cox vs. Consolidated Gas (212 U. S. 12) fixed a rate of 5% 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 local- ity. 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 work, the less right to any unusual return upon the in- vestment." . . . . . . . . . . . . . . . . . . . . . . . In view of these dicta it is needless to argue whether -233- a rate of 6%, or 10%, or 15% or more, be reasonable. The author has herein endeavored to narrate the story of the Michigan. Appraisal in some detail, to review briefly subse- quent similar work, to present the main points in the legal de- cisions bearing on appraisal practice, and to present his own in- dividual 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 hes 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 deter- mined by the courts. When so determined, it will be done with Wisdom and with justice. It is impossible to study the cases re- ferred to without being impressed with the absolute fairness of this great Tribunal. Quotations from decisions have been included at considerable length to obviate the criticism that the references do not convey the exact meaning. ACKNOWLEDGMENT: The author acknowledges the valuable suggestions, crit- icisms, and information furnished him by Professor Henry G. Adams; Professor M. E. Cooley; Professor W. D. Pence; Mr. Henry L. Gray, • g . . A. P. P. L. N. D. I X - "A". Professional Record of the Engineering Staff of the Michigan Railroad Appreisals. …” EXECUTIVE. MORTIMER E. COOLEY. U. S. Naval Academy, Annapolis, 1878. From l878 to 1881, Cadet Engineer and As- Appraiser. sistant Engineer U. S. Navy. 1881 to 1885, detailed by Navy Department to teach Steam Engineering and Iron Ship Building, at Uni- versity of Michigan. 1885 to 1904, Profes- sor of Mechanical Engineering, University of Michigan. From April to December, 1898, Chief Engineer U. S. N. attached to U. S. S. Yosemite. From December, 1898, to February 1899, Chief Engineer U. S. N. attached to League Island Navy Yards. From 1895 to 1900, Passed Assistant Engineer, Michigan State Naval Brigade. - From 1904 to 1910, Dean of the School of Engineering of the University of Michi- gèn. - - Member American Society Mechanical Engineers. Fellow and Past Vice President American Association for the advancement of Science. Member and Past President Michigan Engineering Society. Member De- troit Engineering Society, &c., &c. Member Committee Michigan Exhibit, World's Fair. Member Committee on Naval Engineering, World's Fair; &c., &c. HENRY E. RIGGS. University of Kansas, 1886. From l886 to March 1890, with Burlington System Chief Inspector and Atchison, Topeka & Santa Fe R. R. , con- . struction and Maintenance of Way; during in charge of the last year, Engineer of Maintenance of Wiay, Southern Texas Division, Atchison, Civil Engineering. Topeka & Santa Fe. From March, 1890, to - January 1, 1896, Chief Engineer, Toledo, Ann Arbor & North Michigan Railway, in charge of reconstruction of entire line, construction of terminals at Toledo and - Frankfort. 1896 to date, in private prac - tice, Toledo, Ohio. . . . . . º & -I- Henry E. Riggs, (Continued) T. H. HINCHMAN, JR. Chief Inspector in charge of Mechanical Engi- neering. HERBERT C. §ADLER. Chief Inspector Wessel Properties. D. FARRAND HENRY. Chief Inspector Plank Roads and River Improvement companies. Company. From 1896 to 1910 in charge of construction of several hundred miles of Steam and Electric Railway, and a number of water works plants, systems of sewerage and Sewage disposal, and other public works. Also retained in several cases of valuation and as expert witness in litigation. - Member American Society of Civil Engi- neers. Member and Past President Michigan Engineering Society. Member Toledo Engi- neering Society, &c., &c., &c. University of Michigan, 1891. 1891–2, Draftsman for M. C. R. R. and Leland, Fal- coner, Norton & Company. 1893 to 1894, As- sistant Engineer with M. E. Cooley. 1894 to 1903, Member of firm Field & Hinchman. 1903 to 1910, Member of firm Smith, Hinch- man & Grylls, Engineers and Architects. Has acted as Consulting Engineer for many cities and villages in waterworks and electric lighting. Has designed and built many large office and manufacturing plants. Chief Machinist, Michigan Naval Bri– gade, during Spanish war; held rank Chief Machinist U. S. N. Member Tetroit Public Lighting Commis- sion. Member American Society of Mechani- cal Engineers. Member Detroit Engineering Society, &c., &c. University of Glasgow, Scotland, l893. From 1893 to 1900, Ship Building and Engi- neering, Glasgow. 1896 to 1900, Assistant Professor of Naval Architecture and Marine Engineering, Glasgow University. Septem- ther, 1900, appointed Professor of Naval Architecture, University of Michigan. - Member Inst. Naval Architects, London. Member Inst. Naval Architects and Marine Engineers, New York. Member Inst. Engi- neers and Shipbuilders, Scotland. Graduate of Yale, 1853. From 1854 to 1859, United States Assistant Engineer, Lake Surveys. 1859 to 1867, United States Engineer, Coast and Geodetic Survey. 1867 to 1870, in charge of measurement of out- flow of Lakes. 1870 to 1873, private prac-, tice in Chicago. 1873 to 1881, Chief Engi- neer, Detroit Water Works. 18; 3.1397, D. Farrand Henry, (Continued) WM. S. CONANT . Chief Inspect or Telegraphs. W.M. J. RICE. Chief Inspect or Telephones. invented the telegraphic current meter row used in all current determination. Author of several books on "Hydraulic Engineering". - Member American Society of Civil En gineers. Member Detroit Engineering Society. Died May 13th, 1907. Graduate of Princeton, 1890. With Westinghouse Electric Company, 1890 to 1895. In shop and field work. Engineer in charge switchboards, Electric Light Plant, World's Fair, Chicago. • . 1895 to date, Consulting Electrical Engineer, member of firm Smith & Conant. In general practice embrae ing large variety of work. Engineer D. Y. & A. Railway, De- troit & Birmingham Railway, Rapid Railway, Wyandotte & Detroit River Railway, Saginaw Union Street Railway, Detroit & Pontiac Railway, &c., &c. - Member American Society of Mechanical Engineers. : - Graduate Massachusetts Institute of Technology. From 1896 to 1898, with Am- erican Telegraph & Telephone Company, New York City. From June, 1898, to October, 1900, with New York & New Jersey Telephone Company. - Member of New York Telephone Society. -III- INSEECTORS - CIVIL ENGINEERING DEPARTMENT. WM. DUNBA.R JEWEINS. Received Engineering education in France, 1864-1868. From 1874 to 1884, general practice of engineering, railroad construction on levees. From 1884 to 1886, Assistant Engi- neer B. & O. R. R. , in charge of construc- tion Susquehanna River bridge, at Havre de Grace, Maryland. 1886, Assistant Engineer B. & O. Railroad, in charge of Schuylkill River bridge, Philadelphia, and of tunnels under City. From 1886 to l887, Engineer C. Mi. & St. P. Railroad, Kansas City exten- sion, in charge of Missouri River bridge at Randolph, and of Kansas City Terminals. From 1887 to 1888, surveys for C. M. & St. P. Railroad, in South Dakota. 1888 to 1889 in partnership with J. A. L. Waddell, Kan- sas City. 1889 to 1891, Chief Engineer, New Orleans & North Western Railroad. From 1892 to 1893, Receiver, New Orleans & North Western Railroad. 1894–5, General Manager, New Orleans & North Western. From 1895 to 1898, Chief Engineer, Arensas Harbor Termi- nal Railway. 1898 to 1899, Major of Engi- neers, U. S. W. Chief Engineer Officer 2nd Division, 3rd Army Corp. Since appraisal of 1900 engaged constantly on important work. Now Chief Engineer Chattanooga Union Station and Terminal. Member American Society Civil Engi- neers. Member National Geographical Society. Member American Forestry Association, &c., &c. WM. H. JENNINGS. Educated Marietta College. wº - 1864 to 1867, with Marietta & Cincin- nati R. R. In 1867, entered service of the Hocking Valley Railroad; with this Com- pany for twenty-two years, in all capaci- ties, for many years as Chief Engineer. • 1898-1905, was with the Federal Coal Co., Pittsburg & Lake Erie, and acted as Chief Engineer of several small properties. He was thoroughly familiar with the Coal measures of Ohio and published many papers and maps. - . Member American Society of Civil Engi- . neers. Past President Ohio Society of . . Civil Engineers. Past President Ohio Insti- . tute of Civil Engineers. . Pied March 16, 1995: ...Twº JOHN J. H.U.B.B.E.LL. E. D. MILLER. BioFX w. MUEischPR. C. A. SHACKFORD. Chicago & C 1860 to 1864, private, Ohio Volun- teer Infantry. 1869 to 1871, land sur- veys in Missouri. 1872 to 1885, private engineering practice, railway and topo- graphical surveys. 1887 to 1910, Chief Engineer, Manistee & North Eastern Rail- road, and of the Buckley & Douglas Lum- ber properties. President Michigan Forestry Commis– Sion. Author of numerous papers on For- estry. - - Member Michigan Engineering Society. President, 1899–1900. º - 1860 to 1864, with 16th Ohio Volun- teer Infantry. l864 to 1868, apprentice in machine shop and attending School. 1869 to 1900, in continuous practice civil engineering on railway construction and maintenance, commencing as rodman. Served with Habash Railroad, The Chicago, Milwau- kee & St. Paul Railroad, The Atchison, To- peka & Santa Fe Railroad, The Mexican Cen- tral, and The Chicago & Alton Railroad. Held position as Chief Engineer and Gener- al Superintendent, Rio Grande & Pecos; AS- sistant Engineer, Chicago & Alton Rail- road; Chief Engineer, Fort Worth & Rio Grande Railway; and Principal Assistant Engineer, Copper Range Railroad. Graduate of Yale, 1850, and Uniora (C. E. ) 1856. * From 1856 to 1900, in continuous en- gineering service with various reilroads. City Engineer of Grand Rapids seven years. Chief Engineer of Grand Rapids & Lansing, The Kalkaska, St. Elmo & Southern Rail- ways, and The Chicago, St. Louis & Padu- cah. City Engineer, Manistee, 1885 to 1900. Chief Engineer, Manistee & Grand Rapids Railroad, 1889 to date. Member American Society of Civil En- gineers. Past President Michigan Society of Engineers. . Rodman, California Pacific, 1866. Leveler, Memphis, Elpaso & Pacific, 1868. Assistant City Engineer of Oakland, Cali- fornia, 1869 to 1872. Resident Engineer, anada Southern, 1872–3. As- tº –W- C. A. Shackford, (Continued). JOHN McCALMA.N. ELLIOTT F. MOORE. GEORGE W. T.ONSON. sistant Engineer, Wheeling & Lake Erie, 1874 to 1893. Engineer, Maintenance of #ay, Wheeling & Lake Erie, 1893 to 1896. Assistant Engineer, firm of Riggs & Sher- man, Toledo, O. , 1898 to date of death, in 1904. Glasgow University, Scotland. From 1861 to 1867, subordinate posi- tions, engineering department of Canadian and Wisconsin railways. 1867 to l871, En- gineer, Maintenance of Way, and Resident Engineer of Construction, Wiest, Wisconsin Railway. 1872 to 1874, Great Western Railway, Engineer in charge of construc- tion double track. 1875 and l876, Locat- ing Engineer, Kingston & Pembroke. 1878, surveys for D. G. H. & M. Railway. 1879 and 1882, Chief Engineer, Chicago & West Michigan. 1883 and 1884, Principal As- sistant Engineer, Michigan Air Line Di- vision, Grand Trunk Railway. 1885, 1886 and 1887, location and construction, Union Pacific Railway. 1888 and 1889, Superin- tendent Roadway, Louisville & Nashville Railroad. 1890 to 1896, Assistant Engi- neer, Grand Trunk Lines, west of St. Clair Tunnel. 1897 to 1899, on location surveys in Michigan, Virginia and West Virginia. 1900, Locating Engineer in Arizona and Mexico. . United States Army, l862 to 1865. From 1865 to 1870, lumbering in Northern Michigan. 1870 to 1893, Locomotive De- partment, Flint & Pere Marquette Railroad. From 1893 to 1899, Mechanical Engineer, Board of Railroad Commissioners, state of Michigan, in charge of inspection of in- terlockers, switches and signals. From 1899 to date of his death, in 1902, with Locomotive Department, Pere Marquette R. R. Continuous engineering Service, 1868 to 1900, with the Erie & Pittsburg Rail- road, The Canada Southern Railroad, The Wis- consin Central Railroad, and The St. Paul, Minneapolis & Manitoba Railroad. From 1877 to 1880, Engineer of Maintenance of Way, T. P. & W.' Fröm issl to iss4, Assistant Chief. -WI • George W. Tons on, (Čontinued) A. K. NASH. G. H. HUTCHINSON. FRANK H. A.J.F.R.E.D. Engineer and Chief Engineer, St. Paul, Minneapolis & Manitoba Railroad. From 1885 to 1888, Superintendent Wisconsin Central Railway. From 1888 to 1889, Prin- cipal Assistant Engineer, C. L. & M. Rail- way. From 1890 to 1900, in general prac- tice and railway construction. From 1900 to 1910, City Engineer, Toledo, Ohio, Di- rector of Public Service, Toledo, Ohio, and |President Board of Public Service. Member Toledo Society of Engineers. Graduate of Western Reserve College in Engineering. From 1865 to 1900, in railway service continuously, with The Illinois Central, The Union Pacific, The Chicago, Milwaukee & St. Paul, The Grand Rapids & Ionia, and other roads. Held position as Assistant Engineer, Indiana Pacific ; Chief Engineer Dakota Southern; Chief Engineer, Indiana & Lake Michigan; Engineer in charge of Construction of Akron and Chicago Junction Division, B. & O. Railroad. Graduate Dartmouth College, 1881. Thayer School Civil Engineering, 1884. From 1881 to 1900, in continuous ser- vice civil engineering work – railway and structural iron design and construction of docks, wharves and coal handling machinery. 1890 to 1893, Assistant Chief Engineer, Carnegie Steel Company (Bridge Department). 1893 to 1895, General Manager and Superin- tendent, South West Bridge & Iron Company, 1895 to 1897, Chief Engineer, Brown Hoist- ing Company and Conveying Machinery Company. 1897 to 1900, Chief Engineer, Pittsburg & Conne aut Dock Company º Steel Com- pany), in charge of designing and con- structing ore docks, terminal works and - mechanical equipment. 1900 to date, Chief Engineer, Northwestern Fuel Company Oper- ating Docks on the Great Lakes. Member American Society of Civil En- gineers. - From 1887 to 1890, on construction Columbus, Lima & Milwaukee Railroad. From 1890 to 1894, Assistant Engineer, Norfolk . -VII- Frank H. Alfred, (Continued) RICHARD B. WICK. ANDREW J. W.E.N.Z.E.LL. ROSCOE. C. YOUNG. & Western Railroad, in charge of field work on construction Columbus Terminal. 1894 to 1896, Chief Clerk to Chief Engi- neer, Hocking Valley Railroad. From 1896 to 1899, Engineer, Maintenance of Way, - Cleveland, Akron & Columbus Railway, in- cluding both the work of Chief Engineer and Maintenance. From 1899 to 1900, En- gineer, Maintenance of Way, Wheeling & Lake Erie Railroad. 1900–1910, Assistant Chief Engineer and Chief Engineer, Pere Marquette Railroad, and General Manager Canadian White Company, Ltd. Assistant to the President B. & O. Railroad, in charge of engineering on the C. H. & D. Division. Member American Society of Civil En- girleers. Graduate Cornell, 1881. In continuous engineering practice from 1881 to date, mainly on United States government work and railway construction. l886 to 1899, Division Engineer, C. R. I. & P. , in Kansas and INebraska. 1890 to 1892, Division Engineer, B. & O. 1892, United States Assistant, in charge of Ohio River improvement. 1895, Chief Engi- neer, Fort Plain & Richfield Springs. 1899 to 1900, Chief Engineer Belington & Beaver Creek Railway. Graduate Michigan University, 1878. Continuous railway service, 1878 to 1900, with C. M. & St. P. Railroad, The Michigan Central, The G. R. & I, and The C. & N. W. Assistant Engineer of G. R. & I. Chief Engineer, L. S. & I. , and Chief Engineer, Detroit & Mackinac. 1900 to 1910, in continuous practice railroad construction. Now Assistant Engineer, C. H. & D. Railway. - Member American Society of Civil En- gineers. - 1883 to 1895, Engineering Department of Chicago & North Western, commencing as rodman and rising to Assistant Division Engineer in charge of lines in Upper peri- insuls, 1895 to 1898, Chief Engineer and -VII+ . Roscoe C. Young, Superintendent of Construction, Munsing (Continued) Railroad. August 1895, to August 1900, Chief Engineer, Munsing Railroad. August 15, to September 18, 1900, Assistant Chief Engineer, Algoma Central, in Ontario. 1900–1903, Chief Engineer, Des Moines, Iowa Falls & Northern. 1904-1910, Chief Engi- neer, Lake Superior & Ishpeming Railroad. Member American Society of Civil En- gineers. LOUIS SHAW. Graduate University of Vermont, 1874. From 1875 to 1878, with contraeting firm. From 1879 to 1880, Division Engineer M. I. & N. Railroad. In l881, Principal Assistant Engineer, Des Moines & N. W. 1882, Division Engineer, I. I. & I. From 1883 to 1884, Division Engineer, Michigan Central Railroad. From 1885 to 1891, En- gineer Maintenance of Way, Chicago, Burling- ton & Northern. From 1892 to 1898, U. S. Asst. Engineer. From 1899 to 1900, Assist- ant Engineer, Copper Range Railroad. 1901– 2, Locating Engineer, Choctaw, Oklahoma & Gulf. 1903-4, with Wisconsin Railway Ap- praisal. F. E. BISSEl...I. Graduate Cornell University, 1878. From l879 to 1890, with the Gould Sys- tem, as Resident Engineer, Missouri Pacif- ic ; Chief Engineer and Superintendent of Construction on Fort Worth & Denver City Railroad; Chief Engineer, Texas Pan Handle Railroad; General Superintendent, Fort Worth & Denver City Railroad. From April l, 1890, to December 1, 1891, Superinten- dent, Union Pacific Railroad. From 1891 to 1894, General Superintendent, Fort - Worth Iron Works. From 1894 to 1897, Chief Engineer, U. P. D. & G. Railroad. From 1897 to 1900, Chief Engineer, Wheeling & Lake Erie Railroad. January 1901 – October 1907, Principal Assistant Engineer, Lake Shore & Michigan Southern Railway. October 1907 to date, Consulting Engineer. .* Member American Society of Civil Engi- neers. Member American Railway Engineers and Maintenance of Way Association. -IX- FRANK T. OAKLEY. Graduate University of Kansas, 1886. In continuous practice from 1886 to 1900, With the Burlington and Missouri Railroad, The Oregon and Tashington R&ilroad and The Ann Arbor Railroad. Assistant Engineer on 200 miles construction Oregon and Washington Rail- road, from 1891 to 1893. From 1893 to l894, Draftsman Keystone Bridge Company (Carnegie Steel Co., Pittsburg, Pa.) From 1894 to 1895, Assistant, Chief Engineer Ann Arbor Railroad. l895 to 1899, First Assistant Engineer, Tole- do, Ohio, vihere was in charge of construction of bridges over Maumee River. From March, 1899, to 1904, in private practice making reconnoissances, estimates, Surveys &nd Sup- erintending construction of electric rail- ways in Ohio and Indiana, and in general con- Sulting practice. 1904, to 1907, Assistant Engineer Oakland Cal., Water Works. 1907 to ate, Bridge Engineer San Francisco and North- western Ry. WM. B. EWING. Graduate Cornell University, 1883. From - 1886 to 1888, Engineering Department, Chica- go and Northwestern Railroad. From 1888 to 1889, Chief Engineer Union Transit Company, Chicago. From 1889 to 1891, Assistant En- gineer Chicago and Northwestern Railway Com- pany. From 1892 to 1895, Chief Engineer of Chicago Heights Land Association. 1895 to 1910, general consulting practice of engi- neering, during which time he located and constructed several railway lines. Member American Society of Civil Engi- Ile eI’S • - * - OWEN C. LeSUER. Graduate University of Kansas, 1886. From -- – l886 to l900, in continuous engineering prac- tice, all of which was on railway location and & construction, excepting one year in Govern- ment Survey, in Minnesota. Ilocated line of Denver and Rio Grande across the Continental Divide. As Sistant Engineer in charge of con- struction on The Atchis on and Santa Fe. Chief Engineer Chippewa Valley and Northern Rail- road. 1901 to 1906, with Pere Marquette Ry. . as Assistant Engineer. 1906 to date, Super- intendent of Construction, University of Kan- S&S • . . . . . . . . . . -X- G. B. DRAW. J. C. OIIPHANT . ALBERT J. HIMES. Michigan Agricultural College. From 1885 to 1890, with California Southern Rail- road. From 1890 to 1891, with the Michigan Central Railroad. From 1891 to 1892, with Lake Superior and Ishpeming Railroad. From 1892 to 1895, with Saginaw and Mackinac Di- vision, Michigan Central Railroad. From 1895 to 1896, Assistant Engineer Detroit and Mackinac Railroad. From 1897 to 1899, Chief Engineer South Haven and Eastern Railroad. 1901 to l907, Assistant Engineer Pere Mar- quette Ry. 1907 to 1910, contracting. From 1866 to 1868, rodman and clerk Philadelphia and Reading Railroad. 1868 to 1872, topographer and clerk P. W. and C. - Railroad. 1872 to l874, levelman and drafts — man Penna. Railroad. 1874 to 1877, Assistant Engineer South West Penna. R. R. 1877 to 1879 Assistant Engineer Pittsburg and Lake Erie. 1879 to 1881, Assistant Engineer Mexican Na- tional. 1881 to 1885, Chief Engineer Wir- ginia Coal and Iron Company. 1885 to 1887, Assistant Engineer Atchison, Topeka and San- ta Fe. 1887 to 1892, Chief Engineer Mexican Pacific. 1892 to 1894, in private practice. 1894 to 1897, Engineer Ohio Division Pitts- burg and Lake Erie Ship Canal Surveys. 1897 to 1910, Assistant City Engineer, Toledo, 0. Graduate Cornell, 1887. From June, 1887, to November, 1889, With Geo. S. Morison, as Assistant Engineer Missouri River bridges, at Rulo and Nebraska City. 1890-1, Assist- ant Engineer, Maintenance of Way and Con- - struction, Falls Brook Railway. 1891 to 1893, City Engineer, Corning, New York, and Engineer of Tiadaghton and Fahnestock Railroad. 1892 to 1894, Contractor; built branch of Falls . Brook Railway. 1894 to 1897, Assistant En- - gineer, New York State Canal. 1897 to 1899, . Assistant Engineer Deep Water Ways Commission. 1901 to 1910, Bridge Engineer N. Y. C. & St. L. Ry. - Member American Society Civil Engineers. -XI- EDWIN L, TROWBRIDGE . From 1888 to 1893, rodman, Toledo - City Engineer's Office, and with Toledo, Ann Arbor and North Michigan Railroad. 1893, Instrument Mari and Assistant Engineer Ann Arbor Railroad. January to April, 1896, Acting Chief Engineer Ann Arbor Railroad. April to December, 1896, Assistant Engi- neer Ann Arbor Railroad. 1897 to 1900, Assistant Engineer C. L. and W. Railroad. During summer of 1898, Transit man Deep Water Ways Commission. 1901 to 1910, Assistant Engineer Louisville and Nash- ville Ry. - CHARLES A. GORDCN. From 1869 to 1874, Chainman and Rodman, New York Midland. 1874 to l881, Inspector of masonry for 0. Chanute. 1881 to 1883, Resident Engineer Erie Railroad. 1884 to 1885, Locating Engineer, Lehigh and Hudson. 1886 to 1887, Principal Assistant Engineer, C. J. and M. From 1888 to 1889, Chief En- gineer, T. S. and M. From 1891 to 1895, Locating Engineer C. and W. M. 1896 to 1898, Chief Engineer Grand Rapids, Kalkaska and South Eastern; 1899, Division Engineer Union Påcific • - - - - *... < . . . . . . . . . ; . . . . . . . . . . * : . ‘. . . . . . . . . . . .” . . . . - - - - - - . . . . - 4. ‘. . - , , ... • . . . . . . . .'; , º, - - . - - . . . . . . . . . . . . . . . .” -- . . . . . . . ; . * .. - • , . - sº ...'....: ...?. . . . . * - .*.** XI I - * . . . * *- - - • * > . . . . . . . . . . . . . . . . . -- - :. . . . . . . . . . . . . . . . . . º. is . . . . . ... : * : . . , - - - . * > → * ... . . . . . • * . . . . . . . . . . . . . . - ... . . . . ' - “....: '...' ... ‘’’r:... . . . . . . . ; , " .. º. ºx, - - ºf | . . * . . . . . . . . . . . - - . , - ...” . . . . . . . º-s, ...º.º.º. *... . . . *:::::::: . - . * - _ " ' * - . . . . . . . . . . . . ' - - - - - “ . . . ‘.... j. ...º.º. . . . . . . º. OFFICE COMPUTERS - CIWIT, ENGINEERING DEPARTMENT . W. F. DOW. 1861 to 1871, Leveler, Rodman and Tran- Sitman Mac on and Brunswick Railroad. 1872 to 1883, Clerk United States Engineer's Of- fice. From 1883 to 1897, Clerk State De- partment, Ian Sing, Mich. RALPH. C. SMITH. 1889, Rodman, F. and P. M. 1890, LeV- eler, F. and P. M. 1891, Transit man. From 1892 to 1894, Resident Engineer Construction of Logging Road for F. and P. M. From 1894 to 1895, Draftsman F. and P. M. From 1896 to 1899, Assistant Engineer F. and P. M. 1899 and 1900, Chief Engineer Algoma Central. 1901 to 1910, in private engineering prac- tice, Pueblo, Col. JAMES WALKER. Graduate Sheffield Scientific School, Yale, 1894. From 1894 to 1898, with A. E. Hill, New Haven, in general practice. From 1898 to 1900, with H. B. Gorham, New York City, General practice Engineering. PAUL CHIPMAN . - Graduate University of Illinois, 1894. From 1894 to Sept. 1895, with P. R. Fletcher, on general practice Municipal Engineering. From 1895 to 1897, Instructor Municipal En- gineering, University of Illinois. From 1897 to 1899, Instrument Man Stadia work, U. S. Engineer Corp. From March to December, 1899, Instrument Man C. and N. W. From December, 1899, to August, l'900, Resident Engineer C. and N. W. 1901 to 1907, Assistant Engineer Pere Marquette R. R. Associate Member American Society of Civil Engineers. * EI)WIN M. SMITH. Graduate University of Michigan, 1892. From 1892 to 1894, Chainman and Rodman Mich- igan Central Railroad. 1894 and 1895, As- sistant Instrument Man, Chicago Sanitary . District. 1896 and 1897, Assistant Engineer Street Department, City of Chicago. 1898, , -XIII- EEWTN II. SMITH. (Continued) JOHN C. SESSER. DONALD S. McCALWLAN. HOMER J. GAULT . ALFRED E. LINDAU. F. T. BARCROFT • General Manager Cleveland branch Luxifer Prism Company. 1899 to January, 1900, Gen- eral Manager Cleveland Electric Company. January to September, 1900, Levelman, C. and T. W. Railroad. At present, General Manager W. H. Warner Coal CO . Graduate Lehigh, l896. From 1896 to 1897, Draftsman C. and N. W. From 1897 to 1898, Assistant Engineer in charge of second track C. and N. W. From 1898 to January, 1900, Division Engineer Union Pacific Rail- road, in charge of heavy construction. 1900, Ingineer Olla Sugar Company, Hilo, Hawaii. 1898, Clerk and Timekeeper. 1899, Lev- elman, C. and E. I. Railroad. 1900, Road Master's Clerk, C. and E. I. Railroad. l90l to 1905, with P. M. R. R. 1905 to date, with E. Holbrook, Kansas City, as Office Engineer . Ohio Normal college, 1889. From 1889 to 1892, Clerk, IXraftsman and Topographer, Great Northern Railroad. From July to Decem- ber, 1892, Resident Engineer Great Northern. 1893-4, Transit man, Great Northern, Railway. From 1894 to 1897, Assistant Engineer Cleve- land Frog and Crossing Company. From 1897 to 1900, Assistant Engineer, East Cleveland, Ohio. - - Graduate University of Liichigan, 1900. From 1890 to 1892, Draftsman Heidenréich Construction Company. From 1892 to 1896, Draft. Sman Illinois Steel Company. Summers of 1897, 1898 and 1899, in charge of field Work, Chicago Edison Company. At present Engineer Expanded Metal & Bar Co. Associate Member American Society of Civil Engineers. - 1889 to 1891, Draftsman Grand Trunk Railway. From 1891 to 1897, Assistant En- gineer Grand Trunk Railway. From 1897 to 1900, member of firm of Joy and Bar croft, Architect S. ; F. T. BARCROFT. (Continued.) T P. A. COURTRIGHT . LESLIE MCHARG . HARRY v. GIFFORD. M. C. PARSHALT . FRANK S. WHITMLAN. WALTER B. MAURICE. Member Western Society Civil Engineers; member Detroit Engineering Society. Member American Society of Civil En- gineers . - iſichigan Agricultural College, 1892. From 1892 to 1897, general practice, land surveying and drainage. 1897, to date, City Engineer, Marshall, Michigan, and County Surveyor, Calhoun County. 1898–99–1900, Superint endent Construction for Riggs & Sherman, sewers at Owosso and Marshall, iiichigan. Graduate Cornell, l899. AS Sistant in Civil Engineering, Columbia University, 1899–1900. From May to August, 1900, En- gineer Rockaway Walley Railway Company. Junior Member American Society of Civ- il Engineers. - * Graduate of Yale, 1900. With Riggs & Sherman, summer of 1899. With H. C. Frick Coke Company, July to September, 1900. Graduate Yale, 1900. From July to Octo- loer, 1900, with Parshall and Sill, General Agents, Warren, Pennsylvania • University of Michigan, 1896. From 1896 to 1898, Draftsman, Grand Rapids, Kal- kaska and South Eastern. From 1898 to 1899, Resident Engineer C. and N. W. Railway. 1900, Surveys for Right of Way work, Michi- gan Central Railroad. - Graduate University of Michigan, 1900. 1901 to 1906, Draftsman, Detroit Water Board. 1906 to 1910, Engineer Detroit Park Depart- ment . -XW- CHARTIES 0. LASTEY. GEORGE H. BROWN. Draftsman of Appraisal Staff. University of Karnsas. 1893 to l895, draftsman Ann Ar- bor Railroad. 1895 to 1898, draftsman Pope Bicycle Co. 1898 to 1902, Chief Draftsman Riggs & Sherman. 1902 to 1910, Engineer . . . Lake Shore Electric Ry. , City Engineer, Fre- . mont, Ohio, and Engineer The A. Bentley & Sons Co., Concrete Construction. : Associate Member American Society of Civil Engineers. - Draftsman of Appraisal Staff. 1886 to 1893, Draftsman City of Toledo. 1893 to 1895, Draftsman Ann Arbor Railroad. 1896 to 1898, Draftsman Riggs & Sherman. 1898 to 1910, - Draftsman and Chief Draftsman City of Toledo, Engineering Department . - -XVI- INSPECTORS - MECHANICAT, DEPARTMENT . • - H. C. ANDERSON. Chief Inspector Locomotive S. II. R. HARVEY. In Spect Or Loco- motive S. Joseph A. Davis. In §pect or Locomo- tives • FRANK M. DUNLAP. Chief Inspect ore Freight Equipment. erintending construction and erection ma- i Kentucky State College, 1897. From July, 1897, to October, 1899, with Cincinnati South- ern Railroad, as draftsman, machinist, test – ing locomotives, etc. From October, 1899, to Sept. 1910, Instructor and Assistant Pro- fessor in Mechanical Engineering, at Uni- versity of Michigan. From 1872 to 1876, on Michigan Central Railroad, as fireman. From 1876 to 1887, on Michigan, Central Road, as Locomotive Engi- neer. From 1887 to 1889, on Atchison, Tope- ka and Santa Fe Railroad, as Locomotive En- gineer. From 1889 to 1898, on Mexican Rail- roads, as Locomotive Engineer and Foreman of Construction. - . From 1873 to 1876, with Iondon and North- Western Railroad, as wiper, boiler washer and fireman. With Louisiana Western Railroad, as Engineer. With Mexican Central one year; With At; Chison, Topeka &nd Santa Fe Railroad eight years; with Sonora Railroad 3 years. Foreman of Detroit Heating and Lighting Com- pany 2 years. With U. S. Navy on U. S. S. Puritan, monitor first class, as electri- Cian. On U. S. S. Yantic One year. : “... .-ºt.º University of Michigan, 1883. From 1883 to 1884, Iron Bay Manufacturing Co., Marquette. From 1886 to 1887, with Middle- brook and Son, Detroit, designing elevator machinery. From 1887 to 1889, Superintend- ent of Detroit Gas Light Works. From 1889 to 1890, Draftsman with F. W. Wheeler, Bay City. From 1890 to l896, designing and sup– Chinery St. Marys Falls canal, Mich. , under direction of Gen. O. M. Poe. From 1896 to . . 1898, private engineering practice. From 1898 to 1900, Inspect or för the Osborn En- gineering Company, Cleveland, Ohio. . . . . . ; –XVII- CHESTER G. KAYNER. Inspect or Freight Equipment . JOSEPH PERRIEN. Inspect or Freight Equipment. M. W. CAMPAU. Inspect or Freight Equipment . W. P. MOORE. Inspector Freight Equipment. JOHN F. WALLACE. Inspect or Freight Equipment . From 1891 to 1893, worked as carpenter and joiner, at Adrian, Michigan. From 1893 to 1895, with Lake Shore and Michigan South- erri Railroad, in coach department. From 1895 to 1898, with Lake Shore and Michigan Southern Railroad, in freight department. University of Michigan, 1897. With the Osborn Engineering Company, Cleveland, Ohio, inspecting cars during process of building. During spring of 1900, at Buffalo, in in- terests of Osborn Engineering Company. With F. i.i. Dunlap designing machinery. University of Michigan, 1897. From Aug. 1897, to February, 1898, With Detroit Tree Press, Writing and illustrating. From February, 1898, to April, 1898, with Detroit Dry Dock Engineering Works, as Draftsman. April, 1898, to August, 1898, with U. S. S. Yosemite, Water Tender, Engineer Corps. From Sept. 1898, to Nov. 1898, in machine shops of Detroit Dry Dock Eng. Works. 1898, With F.M. Lunlap, Consulting Engineer, Detroit, , Mich. 1899, Assistant in Gilbert Wilkes' Engineer- ing Office. Draftsman Detroit Shipbuilding Company, 1900. Member Detroit Engineering Society. From December, 1894, to April, 1900, With The Ann Arbor Agricultural Company, Ann Arbor, Michigan, as mā Chine designer, and experimenter; had charge of manufac- turing department in absence of Superin- tendent. | From September 3d, 1889, to 1894, with the Grend Trunk Railroad, as car repairer. From 1894 to 1899 (December 4th) with Grand Trunk System, as Car Inspect or on both pas- Senger and freight cars. - - -XVIII- J. S. THOTTPSON . Inspect or Passen- ger Equipment. Wºl. WANTIESS - Inspect or Passen- ger Equipment . CEORGE L. LDWIS. Chief Inspect or Shovels, Dredges and Special Machinery. Joseph A. SLACK. Chief Inspector Shop Machinery Stores and Sup- - plies. to 1897, Master Mechanic G. T. Railroad, D. Graduate Cornell, 1888. From 1888 to 1891, steam shovel and dredge Work designing and erecting Ohio and Mexico. From 1891 to 1893, with Ilexican National Railway, design- ing and building cars. From 1893 to 1895, Southern Pacific Railway, designing and build- ing cars. From 1895 to 1898, with Ann Arbor Railroad, designing and building cars. From 1898 to 1899, Engineering Corps, U. S. Army. From 1899 to 1900, with Ann Arbor Railroad. From 1853 to 1857, with D. McNever, learn- ing carpenter trade. From 1857 to 1859, with Galena and Chicago Railway, as car builder in Chicago. From 1859 to 1861, with Memphis and Charlest on Railway, at Memphis, Tenn. From º 1861 to 1876, with Capt. E. Fitzgerald, as ship builder. From 1876 to 1897, with Chi- * cago and Grand Trunk Railway, as car builder and car for eman. . . . IPrior to 1883, running stationary en- . . . gines. 1883, passed examination as Station- ary Engineer, Detroit, Ilichigan. 1884, with Daniel Scotten and Company, Detroit. 1886, Mechanical Engineer. 1891, Steam Shovel En- gineer for Drake and Stratton. 1892, with Marion Steam Shovel Works. 1893-4-5, in charge of steam shovel Work (A Shovels) on Ann Arbor R. R. 1896–1900, with Marion S.S. Co., erecting, shovels and dredges. Built and operated a dredge at St. Petersburg, Rus— Sia, and remained for Some time with the Rus- sian Government, in capacity of dredge ex- 4 pert. 1900-1910, With Marion Steam Shovel Co., Marion, Ohio, erecting in Central Amer- ica. , Russia &nd South America. From 1867 to 1876, apprentice, machin- 2. # iSt , draft, Sman, etc., in machine shops of Grand Trunk Railroad. From 1876 to 1877, Master Mechanic T. G. and B. Ry. at Toron- 3 to. From 1877 to 1879, Commercial business : in Montreal. From 1879 to 1880, Mechanical Supt. North Shore Railway, Quebec. From 1880; *. - - - , - * - '. - * - . . . . . . . . . .” . §§ . . . . sº Gºs - - - … . . . . . .” -- . .”. ºrº, º, .*.*.*.*.*ś - - 2 . - - - . . . . . . . . . .º.º.º.º. ### JOSEPH. A. SLACK. G. H. and M. Ry. The T. S. and M. and the (Continued.) C. S. and M. Ry. From 1897 to 1900, Master Mechanic in charge of Smelting Works of the Calumet and Hecla Mining Company. JAMES BEAMER. ISRAEL W. WATERMAN. WILLETT A. WOOD. WILLIAM B. FLYNTſ. WM © R. MacGREGOR. INSEECTORS OF TELEPHONES. From 1867 to 1881, I.ineman and For emën Western Union Telegraph Company. From 1881 to 1899, Foreman and Super intendent Con- struction Michigan Telephone Company. 1900, Pole Inspect or Michigan Telephone Company • From 1861 to 1864, With llth Pennsyl- vania Reserve Vol. Corps. From 1864 to date, continuously in electrical construction Work. From July 5th, 1864, to September 20th, 1883, With Western Union Telegraph Company. From Sept. 1883, to Jan. 1st, 1897, Superintend— ent Construction Postal Telegraph Cable Com- pany. From Feb. 27, 1897, to Oct. 1st, 1900, Superint endent Construction New State Tele- phone Company. . - Graduate Massachusetts Institute Tech- nology, 1896. With Westinghouse, Church, Kerr and Company; The letroit Singer Fire Alarm Company, Detroit, Michigan; The Pub- lic Ilighting Commission, City of Detroit; The Detroit Rapid Railway Company; The Auto- matic Electric Clock Company, Chicago, Ill., and The National Telephone Equipment Com- pany, as Electrical Engineer . Graduate Massachusetts Institute Tech- nology, 1899. From 1899 to 1900, Engineer, New York and New Jersey Telephone Company, Brooklyn, New York, in Materials and Supplies I)epartment, 1900, in Department of Switch- looards and Exchanges, New York and New Jer- sey Telephone Company. From 1880 to 1893, Operator various Telephone Companies. From 1893 to 1895, Manager, Michigan Automatic Telephone Com- pany. From 1895 to l896, Superintendent - Construction Buffalo Telephone Company. From 1897 to 1900, Exchange Manager New State Telephone Company. VIII.I.ARD T. GUY. From 1877 to 1881, Brush Electric Com- pany. 1887 to 1894, Superint endent Elec- tric Light Company. 1894 to 1897, Superin- tendent, Construction J. P. Mart in Construc- tion Company. 1897 to 1900, American Car and Foundry Company, Detroit, Mich. PAUL J. ROSSEAU. 1871 to 1875, with Gray and Barton Elec- tric Company. From 1875 to 1882, with C. II. Pond and Company, Electrician. 1882 to 1892, |For eman Jet;roit, Electric Works . From 1892 to 1894, Inspector Detroit Electric Works. From 1894 to 1900, with Michigan Telephone Company. - f -XXII- THOMAS McGRAIL. J TRANK. J. McDANIET. INSPECTORS - TELEGRAPH. MARK. B. BEAT TIE. D. C. MATHESON: From 1885 to 1887, Lineman for Wander- pool Electric Light Company. From July, 1887, to December, 1888, Lineman for Postal Tele- graph Cable Company. December, 1888, to March, 1890, Foreman Chicago Telephone Com- pany. March, 1890, to February, 1891, Fore- man Western Union Telegraph Company. Feb- ruary, 1891, to July, 1894, For eman, General Electric Company, Salt Lake City, Utah. Aug- ust , 1894, to date, Chief Lineman, Ann Arbor Railroad. From 1881 to 1887, Telegraph Operator various roads. 1887 to 1895, Chief Dis- patcher Ann Arbor Railroad. From 1895 to 1898, Manager Postal Telegraph Cable Com- pany, Owosso, Michigan. From 1898 to 1899, Train Master, Copper Range Railroad. Graduate University of Michigan, 1900. Summer of 1900, drafting and designing at Michigan Asylum, Kalamazoo, Michigan. Since 1901 in Electrical work, with Western Electric Co., General Electric Co., and Fairbanks, Morse & Co. From 1869 to 1888, with Great Western Railway of Canada, as operator, agent, train despatcher, office manager, etc. From 1888 to 1890, with Chicago and Grand Trunk Rail- way, as telegraph lineman. From 1890 to 1897, electrician and general overseer of Telegraph Department for all the Grand Trunk Railway system in the United States. -XXIII- A P. P. E. N. D. I. X. "B". BIBLIOGRAPHY. The Appraisal of Plants for Public Services. A review of the principles on which a property is valued when purchased by private parties or by municipalities. Paper by Nicholas S. Hill, Jr. The Determination of Physical Values. - Presents a mathematical formula for fixing depreciation upon articles based upon age with quite a complete demonstration of the theory presented. Paper by Clint on S. Burns. Railroad Taxes and Plans for Ascertaining Fair Valuation of Railroad Property. Record presented at National Asso- Giation of R. R. Commissioners meeting at Deadwood, B. D. -T- lºngineering Record, June 8, 1901. Engineering Record. Sept. 16, 1905. Railway Age, Sept. 8, 1905. Valuation of Railroad Property. A brief review of several methods. Serial Paper by Henry Tink. 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Abstract of a report by Professor Harold i. Bowman briefly explains the sys- terms of valuation provided for by the la WS of the several states with a critical re- view of the systems and administrative re- ports. -III- Bulletin ºl, Dept. of Census. Railroad Gazette, Wol. XXXIX— No. 9. Railroad Gazette, Vol. XXIX— No. 10. Valuation of Street Railway Properties. A general discussion. The Valuation in Michigan Methods of Appraisal. A descriptive paper by E. E. R. Tratman. The Valuation of Railway Property in Lichigan: Discussion by Prof. M. E. Cooley and Prof. H. C. Adams. What is the Value of a Railroad for Purposes of Taxation. A discussion of the work of Prof. M. E. Cooley and of valuation in gen- eral. By Charles Hansel. -TV- Electric Railway Journal. June 19, 1909. Engineering News, Dec. 20, 1900. Bullet in 21— Dept. Commerce & Labor. Pg. 76-82. Railroad Gazette , Apr. 19, 1901. The Minnesota. Appraisal. Valuation of Railways in Minnesota. Descriptive article. 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Water Works Valuation and fair rates in the light of the Maine Supreme Court; Tecisions. A valuable paper. By Leonard Metcalf. Valuation of Water Works Property. By Wynkoop Kiersted, M. Am. Soc. C. E. Const; ruing Certain Clauses in Municipal C. Franchises. - By . John W. Hill, M. Am. Soc. C. E. - W I I I - Pamphlet Public Document 79 pp. Railroad Gazette, Aug. 29, 1903. Trans. Am. Soc. C. E. Dec. 2, 1908. Tràns. Am. So G. C. E. Vol. XXXVIII. p. 115, 1897. Proceedings, Ameri- can W. W. Association 1899, p. 223. The Arbitration or Appraisal of the Values of Public Utilities. By D. W. Mead, MI. Am. So G.C.E. Financial Questions in Water Works Valuations. By J. W. Alvord, M. Am. Soc. C. E. Resume of Report on Water Works Rates and Valuation at San Antonio, Texas. By C. B. Davis, M. Am. Soc - C - E - A Water Works Appraisal at Mobile, Ala - (Abstract of Report of Commission) Awards to the Tondon Water Companies • By R. Price Williams. -IX- Proceedings Am. J. W. Association, 1902, p. 132. 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Municipal Engineer, 1907, p. –XI- 1899. Journal and September 11, 302. |NMERSITY OF MICHIGAN º º º º tº º º º . ºº º . - - - - - - - - -- º