TELEPHONE RATES AND VALUES TELEPHONE RATES AND VALUES By CHARLES W. McKAY, M.E. '1 CHIEF APPRAISAL ENGINEER, MCKAY & SHERMAN, CHICAGO AND NEW YORK THE CORNHILL PUBLISHING COMPANY BOSTON A] 3 Copyright, 1921, by THE CORNHILL PUBLISHING COMPANY Printed in the United States of America. CONTENTS PAGE Chapter I. Commission Form of Public Utility Regulation, ... 1 Chapter II. Appraisal Terms, ........ 8 Chapter III. Determination of Fair Value 17 Chapter IV. Direct Construction Costs, ...... 29 Chapter V. Collateral Construction Costs, ...... 35 Chapter VI. The Non-Physical Assets, 54 Chapter VII. Preliminary Steps of Inventory, ..... 67 Chapter VIII. The Inventory of Real Estate and Equipment, . . 73 Chapter IX. The Outside Plant Inventory, 81 Chapter X. Inventory of Miscellaneous Equipment, .... 101 Chapter XI. Preliminary Discussion of Unit Costs, . . . .105 Chapter XII. Unit Costs for Real Estate and Equipment, . . .108 Chapter XIII. Unit Costs for Pole Lines, . . . . . .114 Chapter XIV. Unit Costs for the Aerial Cable Plant, . . .122 Chapter XV. Outside Wire Costs 128 Chapter XVI. Conduit Costs, . . ... 135 Chapter XVII. Underground Cable Unit Costs, . ... 138 Chapter XVIII. Miscellaneous Unit Costs, . . .145 Chapter XIX. Depreciation, . . . .149 Chapter XX. The Function of the Appraisal in Rate-Making, . .186 Chapter XXI. Telephone Appraisement by Short Methods, . . . 222 445261 TELEPHONE RATES AND VALUES TELEPHONE EATES AND VALUES CHAPTER I COMMISSION FORM OF PUBLIC UTILITY REGULATION 1. Early Supervision Over Dispensation of Public Necessities. The subject of commission control of the corporations whose function is to supply the public with light, power, water, intercommunicating and trans- portation facilities is one that is deservedly gaining widespread notoriety. At the time of the inauguration of the commission form of utility regu- lation, a comparatively few years ago, there was a reasonable doubt in the public mind as to whether the large expenditures essential to the establish- ment and maintenance of public service commissions could, in the long run, be justified. That this doubt has been largely, if not entirely, dis- pelled will not be questioned by one who has had the good fortune to live in a community where public utilities are subservient to competent com- mission control. The regulation of business enterprises by local or general government is not by any means a new departure, although the present form of com- mission control originated with the establishment of the Massachusetts Board of Railway Commissioners in the early 60's. As early as the thirteenth century the English government exercised a more or less rigorous supervision over the dispensation of public necessi- ties. Naturally the commodities with which our present commissions are chiefly concerned i.e., gas, electric light, telephone and railway service were non-existent at that time, and the government confined its activi- ties principally to the regulation of private enterprises supplying the public with foodstuffs, tobacco, ale and kindred commodities. Curiously enough, these articles are exempt from commission control at present. This is due largely to the fact that the competitive system, perpetuated in this coun- try by the enactment of the anti-trust laws, insures moderate prices and reasonable service. 2. Forerunner of Modern Commission Control. One branch of the early English regulation, however, may be regarded as a forerunner of our modern commission control. An act of Parliament, establishing a uniform tariff for boatmen on the River Thames, stipulated that schedules of rates should be posted in public places, and that eight of the boatmen should be elected to serve as inspectors, reporting violations of the law to the mayor of London and board of aldermen, acting as a commission to settle complaints. RATES AND VALUES About the same time another act of Parliament provided for the estab- lishment of a schedule of wagon freight tariffs, relegating the necessary authority for the enforcement to the county judicial authorities. Later, in our own country during colonial times, prices of foodstuffs, liquors and tobacco were regulated by law. Some attempt at further utility supervision is evidenced in the enactment of colonial laws pre- scribing the adoption of "fair charges" for various classes of mechanical work. 3. Underlying Reasons for Abandonment of Early Regulative Attempts. It is interesting to follow the reasoning underlying the abandonment of these early attempts at government regulation and their reincarnation, after a lapse of many years, in the form of the modern utility commissions. In the early days business, in European cities at least, was limited to a comparatively small class, the tradesmen or small shop-keepers, upon whom the upper and lower classes were dependent for the necessities of life. The upper classes looked down upon business, while the lower classes had neither the means nor the education to permit their participation. As a result, the commercial class was not large, competition along the various lines of trade was not keen, and the tradespeople were inclined to make the most of the situation by boosting prices. This in time caused a retali- ation on the part of the upper or ruling classes in the form of legislation providing for the regulation of retail prices. As time went on, scientific discovery, as evidenced by the printing press, steam engine, telegraph and telephone, opened the way to larger oppor- tunities in the commercial world, and "trade" developed into "business." The opportunities presented attracted the brain and intellect of the upper classes, and increased educational facilities permitted an influx from the lower. Every line of business and manufacture felt the stimulus of competition, with the result that prices were more or less automatically regulated, and the need for strict governmental supervision of the retail prices of commod- ities, such as clothing and foodstuffs, diminished. 4. Later-day Demand for Governmental Regulation of So-called Public Utilities. In the meantime, however, the public had been becoming more and more dependent upon another class of utilities more or les.s monopolistic in their nature, which at first had been regarded as luxuries, railroads, electricity, gas, the telephone and the telegraph. If a man is dissatisfied with a pair of shoes he may easily change his dealer or obtain any one of a dozen or more other standard makes. If he receives poor service from, or is charged exorbitant rates by, the car com- pany that carries him from his house to his office he cannot change to another line, or at least not without considerable inconvenience to himself. PUBLIC UTILITY REGULATION 3 Hence the need for definite governmental or commission regulation of the class of utilities to which the street railway corporations belong, the so-called public utilities. 5. Function of Public Utility Commissions. In general, the function of the public utility commissions, as typified by the commissions in the States of New York, Wisconsin and Massachusetts, may be de- scribed as the supervision and regulation of the following classes of com- panies operating within the boundaries of their respective States: (a) Railroad, steam and electric. (6) Electric light, heat and power. (c) Gas. (d) Water. (e) Telephone and telegraph. (/) Express. (0) Warehouse, grain elevator and dock. 6. Scope of Commissions' Work. The scope of the work of such commissions may be summarized under the following headings: (a) Supervision and regulation of the service rendered by utility com- panies. (6) Regulation of the rates charged for service. (c) Supervision of the issuance of securities. (d) Establishment of uniform accounts and reports. (e) Regulation of capital expenses. 7. Supervision and Regulation of Service. The supervision and regulation of service is undoubtedly one of the most difficult tasks a com- mission has to face. The reasons for adequate standards of service are obvious. The so-called utilities have become such an important factor in our daily lives that the slightest deviation from the accustomed standards becomes not only a source of annoyance to the utility patrons, but in some cases a serious menace to the community at large. It therefore devolves upon the utility commission to determine the highest degree of efficiency which may reasonably be expected of the various utilities, and, having once determined adequate service standards, to insure their proper maintenance. The commission's work in this field includes the inspection and periodic testing of electric meters to insure the maintenance of pre-determined service standards; tests of the heating quality of gas; investigation of the quality .of service rendered by telephone companies, noting especially delays in completing subscribers' calls, errors on the part of the operators in giving wrong numbers, and deficiencies in transmission. In the case of water companies, pressure tests for insurance of proper fire protection; tests of meter accuracy; and the determination of the quality of the water supplied for domestic purposes. 8. The Regulation of Rates. The regulation of rates is probably 4 TELEPHONE RATES AND VALUES the most complicated problem encountered by commissions, and usually involves an appraisement of the property under consideration. Rates that are too high or that are unjustly discriminatory are obviously undesirable. On the other hand, rates that are too low may, and usually do, in the long run militate against the general welfare of the community. -When the rates are inadequate for the proper maintenance of the plant, poor service inevitably results. The function of the commission, therefore, is to collect all the available data as to cost of service, cost of maintaining the plant in proper condition for supplying adequate service, the cost of the physical plant, and the cost of establishing the plant as an operating entity. With all of this informa- tion at hand the commission may determine a proper return to the inves- tors for the use of their capital, and a rate scale that will insure such a return. 9. Supervision of the Issuance of Securities. Another duty of the utility commission consists of the supervision of the issuance of stocks and bonds by the various utility companies. The securities of well-regu- lated utilities have gamed widespread favor during the past decade as a field for popular investment. Such a condition is advantageous both to the utilities and to the public. It establishes a closer bond of sympathy between the companies and the general public, and at the same time provides a more lucrative field for the small investor. Obviously, then, the financial operations of the utility companies should and do have the careful supervision of the regulatory bodies. Overcapital- ization is not only a serious menace to the investor, but often results in an excuse for poor service. 10. Establishment of Uniform Accounts and Reports. Intelli- gent supervision of public utility activities by public service commissions is necessarily predicated upon a system of accounting that lends itself readily to analysis by the commission's experts. To this end most of the State commissions have devised uniform accounting systems for the vari- ous types of utilities falling under their jurisdiction. The initial step in this direction was, however, taken by the Interstate Commerce Commission, and the accounting instructions enforced by the various State commissions are of a necessity founded upon the extensive accounting systems prescribed by the Interstate Commission. 11. Regulation of Capital Expenditures. The regulation of capital expenditures is by no means the least important function of public service commissions. It will be readily seen that indiscriminate duplications of plant such, for instance, as the extension of an electric light company's plant into a territory already adequately cared for by a rival company will, in the long run, prove a burden upon the community and of ques- tionable benefit to companies involved. PUBLIC UTILITY REGULATION 5 To quote Halford Erickson, former chairman of the Wisconsin Railroad Commission: There is one more field in which the commission has an important function in promoting the highest efficiency and lowest cost of public utility service. This is in the prevention of duplication and waste in the establishment and extension of both railway and municipal utility plants. It is recognized by the railroad and public utility laws of Wisconsin that public service corporations are in their nature monopolies, and that the interests of the public are best conserved by protecting monopoly in these industries, and at the same time supervising and regulating them in the public interest. To carry out this purpose, competition among public service companies in the establishment of new lines and plants is prohibited except under such conditions as make its existence a benefit to the public. By keeping fairly close rein on the investment of capital where another invest- ment has already been made for the same purpose, and at the same time per- mitting such extensions and even duplication as will result in the greatest devel- opment of profitable business and the widest diffusion of needed services among the public, the commission's regulation of capital expenditures is capable of pro- ducing very beneficial results to investors and a permanent advantage to the consuming public. 12. Purposes of Determination of Value by Commissions. - From the foregoing synopsis of commission activities, the importance of uniform and dependable methods of ascertaining the value of public utili- ties will be apparent. In general, it may be said, that the object sought in the appraisement of such properties is the determination of " value" for purposes of (a) Rate regulation. (6) Sale or amalgamation of utility properties. (c) Capitalization in connection with proposed bond or stock issues. (d) Establishing proper basis for taxation. (e) Establishing uniform accounting systems at the instigation of utility commissions. 13. History and Scope of Activities of Some State Commissions. In view of the frequent reference to decisions rendered by several of the State commissions, the following brief synopsis is given of their history and the scope of their activities: The State of Massachusetts established a Board of Railway Commis- sioners nearly half a century ago, and in 1885 created a Gas and Electric Commission, with jurisdiction over the electric light and gas companies. Telephone and telegraph companies were under the supervision of the Massachusetts Highway Commission until 1913, when its powers were conferred upon the newly created Massachusetts Public Service Commis- sion. The various Massachusetts commissions concern themselves more particularly with matters pertaining to the regulation of service than with the regulation of rates. Since 1914 the Massachusetts Public Service Com- mission has been active in rates and service. 6 TELEPHONE RATES AND VALUES The Wisconsin Railroad Commission was created in 1905, with juris- diction over the railroads operating within the State of Wisconsin. Sub- sequently its duties have been enlarged to include supervision over electric light, power, heating, gas, water, water power, telephone, telegraph, elec- tric railway and express companies. The Wisconsin commission has made a specialty of rate problems, in- volving appraisement work, and its decisions on this subject are probably more widely quoted than those of any other commission. Next in importance, from the standpoint of rate investigations involving appraisement work, are the two commissions in New York State, estab- lished in 1907. One is the First District Commission, having jurisdiction over all public utilities in New York City except the telephone company; and the other is the Second District Commission, supervising all of the public utility companies in the State outside of New York City, and the telephone company in New York City. The Minnesota Railroad and Warehouse Commission, established in 1899, was given full jurisdiction over railroad, warehouse, grain elevator and express companies, but not until a later date over telephone, electric light and power companies. The commission is noted for its exhaustive study of express rate problems, and for its valuation of the railroads within the State. The Washington Railway Commission, created in 1905 (now called the Washington Public Service Commission), has jurisdiction over all public utilities, with the exception of municipally owned plants. In 1879 Georgia created a railway commission with jurisdiction over the railroads operating within the State, and subsequently, in 1907, increased its authority to include regulation of telephone, telegraph, gas, electric light, power, express and dock companies. The Georgia commission is better known for its regulation of stock and bond issues than for its work on matters involving appraisals. Nearly all of the other States in the Union have commissions with jurisdiction over all or a part of the utility corporations within their domain, or have legislation pending at present to provide such commis- sions. 14. Commission Control in Wisconsin. The success of the com- mission form of public utility control in Wisconsin, from the standpoint of the utilities themselves, is evident from the following recent statement of the Governor of Wisconsin: As evidence of prosperity under commission regulation, the last annual report of the Wisconsin commission shows that during the year the operating revenues of electric utilities increased 20 per cent, their net income 29 per cent, and new construction for the year 145 per cent. The operating revenues of water utilities meanwhile increased 7 per cent, their income 13 per cent, and new construction 24 per cent. Gas utilities increased their operating revenues 3 per cent, their net income 15 per cent, and new construction 24 per cent. PUBLIC UTILITY REGULATION 7 Telephone utilities increased their operating revenue 11 per cent, their net income 9 per cent, and construction for the year 14 per cent. Railway and traction lines, on the average, increased their operating revenues 13 per cent, their net income 8 per cent, and construction an equal amount. All utilities in Wisconsin are in a more flourishing condition now than ever before, and are planning to extend their operations far into the future. Public control, or regulation of public service corporations by permanent com- missions, has come, and come to stay. State control or regulation should be of such a character as to encourage the highest possible standards in plant, the ut- most extension of facilities, rigid economy in operation, rates that will warrant the highest wages for the best service, and such certainty of return on investment as will induce investors not only to retain their securities, but to supply at all times all the capital needed to meet the demands of the public. Such control and regulation can and should stop all abuses of capitalization, of extortion, of overcharge, or of unreasonable division of profits. CHAPTER II APPRAISAL TERMS 15. Fundamental Definitions. The science of appraisal of public utility properties is comparatively new. It is therefore natural that dis- crepancies should arise, not alone in the definition, but in the application of the numerous terms which have sprung into use during the development of the subject. The need for uniformity in definitions has been realized, and several efforts made to effect a standardization. While these efforts have not been entirely satisfactory, still, certain precedent has been established. This, together with the decisions of the courts and commissions, has resulted in the establishment of a glossary of appraisement terms, which is pretty generally accepted by both the engineering and legal professions. The short glossary of the fundamental terms used in appraisal work, which is presented in this chapter, may facilitate a clearer grasp of a sub- ject which at best is somewhat illusive. Other terms will be met with from time to time as the subject is developed, but rather than risk confusion by attempting too many definitions at the outset, an effort will be made to clearly explain the meaning of such other terms on the occasion of their first use. In compiling the following definitions, an attempt has been made to give only such definitions as have received the endorsement of recognized authorities. Certain definitions are essential at the outset of a study of appraisal work to facilitate an intelligent development of the subject. These defi- nitions include such fundamentals as utility, property, cost, value and appraisal. 16. Utility. Utility is defined by the Standard dictionary as "the quality, character or state of being useful or serviceable; fitness to supply the natural needs of man; that serviceableness which is the basis of the value of a thing." The keynote of the present application of the word "utility" is sounded by the phrase "character or state of being useful or serviceable." It sug- gests the dispensation of service rather than that of some tangible com- modity, such as sugar or coffee, which can be wrapped up in a paper bag and carried home by the purchasen It therefore follows that public utility corporations are those corpora- tions which supply the public with "service," whether it be transporta- tion, telephone, telegraph, light, power or express service. The com- APPRAISAL TERMS 9 modity sold to the public is service, and, in fact, the companies falling in this class are often known as " public service companies." 17. Property. Property may be denned as the " legal right to the possession, use, enjoyment and disposal of a thing." Property, as applied to public utilities, usually consists of two elements, physical property and non-physical property. The physical property of a utility corporation constitutes its material possessions, such as land, buildings, tracks, rolling stock, machinery, pole lines, subways, etc. The non-physical property sometimes called intangible property is made up of such items as good will, franchise privilege, going value, etc. 18. Value. The terms cost and value are so often erroneously used as synonyms that a special effort should be made, at the outset of a study of appraisal work, to obtain a clear understanding of their respective mean- ings and use. " Value is the Latin term corresponding to the Saxon "worth.' The fundamental idea which underlies worth is capacity to satisfy want. If we need a nail and find a broken one, we say that it is worth nothing, that it is valueless, or not valuable, for our purpose. Value or worth thus implies usefulness or utility. . . . "As a preliminary definition, then, we may say that the value of any- thing is the expression of our estimate of its utility, meaning by utility its capacity to satisfy human wants. Value . . . has a meaning only when attached to a definite quantity of an article. The value of iron means nothing; that value of a ton of iron means something." 1 This definition and accompanying illustration, while serving to illus- trate the meaning and use of the word "value," do not tell the whole story. Notwithstanding the fact that the broken nail is useless for ordinary pur- poses, it may, nevertheless under certain conditions have a value. If, for instance, it had been originally found in a junk pile, with other bits of scrap metal, there would be a certain scrap or disposal value if sold with the rest of the metal as junk. Value is unquestionably influenced by scientific development. Certain articles, which have a very definite value at present, were practically worth- less twenty to twenty-five years ago. Coal tar may be cited as an example. A few years ago coal tar was a practically useless by-product. The advance of science during the past decade has evolved a very large number of com- mercial and medicinal uses for this hitherto practically valueless substance. In the last analysis the measure of value is largely dependent upon bar- ter or sale, upon what can be obtained for the object under considera- tion in an open market, under normal conditions, if offered for sale or ex- change. 1 "Principles of Economics," by Edwin R. A. Seligman, pp. 173, 175, 189. 10 TELEPHONE RATES AND VALUES 19. Cost. "The word 'cost' is used in a variety of senses. To the consumer 'cost' means price. If a thing costs a dollar, he means that the price is a dollar. To the employer ' cost ' means total cash outlay expended in production. Here the cost is usually less than the price, the difference between cost and price being profit; a machine may cost the builder $10 - he may sell it for S12." 1 In appraisal work the cost of an article is the price paid at the time of its original purchase, or the price which would have to be paid to replace it under conditions existent at the time of the appraisal, plus such expend- itures for labor and incidentals as may be involved in preparing it for actual service. 20. Appraisal. The Standard dictionary defines appraisal as "The act of appraising; valuation; especially, official valuation, as of an estate, etc." The term is also used to designate the completed data, usually in report form, resulting from the valuation of a property. The terms "appraise- ment" and "valuation" are frequently used as synonyms for appraisal. 21. Reasons for making Appraisals. There are, generally speak- ing, five purposes for which appraisals of public utility properties are made : (a) As a basis for rate regulation. (6) In connection with the sale or amalgamation of utility properties. (c) In connection with proposed bond or stock issues. (d) As a basis for taxation. (e) As a basis for establishing uniform accounting systems. 22. Fair Value. Whatever the method used in making an appraisal, or whatever the ultimate use to which it is to be put, the prime object is always the same, the determination of a "fair value" for the property in question. Just what constitutes "fair value," what items should be included in its derivation, and what method followed in computing its physical component, has proved a bone of contention among appraisal experts since the subject first sprang into prominence. That these questions are far from settled is shown by the lack of uni- formity in the decisions of courts and commissions, and by the conflicting opinions expressed by experts. Nevertheless, the pioneer stage of the subject has passed, and sufficient authoritative data are available to render possible an intelligent analysis of specific appraisement problems, although no hard and fast rule can be laid down as to the best means of deriving "fair value." The method followed must, to a large extent, be dependent upon the exigencies of the case under consideration. The word "fair" suggests justice. Obviously, what may be a fair value under one set of conditions may be most unfair under another, due to i "Principles of Economics," by Edwin R. A. Seligman, p. 190. APPRAISAL TERMS 11 differences in material and labor markets, and to other variable factors which necessarily must have careful consideration in the determination of fair value. 23. Factors involved in Determination of Fair Value. In the case of Covington & Lexington Turnpike v. Sanford, 164 U. S. 578, the United States Supreme Court set forth the following factors for considera- tion in determining the fair value of a property: (a) Original cost. (6) Amount expended in permanent improvements. (c) Amount and market value of stocks and bonds. (d) Replacement cost. (e) Probable earning capacity. (/) Operating expenses. Again, in the case of the Manitowoc Water Company, the Wisconsin Railroad Commission rendered the following statement, which seems to express the general attitude of courts and commissions : In determining the value of the physical property of a public utility, several elements must be taken into consideration. The three elements of greatest im- portance in fixing the value of such plants are : the original cost ; the cost of repro- ducing the plant; and the present value. As to which of these elements shall be given the greatest consideration must depend upon the circumstances in each case, and must also depend upon the purpose for which the valuation is made, 24. Physical Value. As the name suggests, physical value is the value of the physical property, i.e., that portion of the property which can be "seen and felt," and which is " capable of being inventoried." Theo- retically, the foregoing definition is correct in limiting physical value to the purely physical assets. Current appraisal practice, however, sanctions the inclusion, under physical value, of a group of non-physical assets which, by nature, are almost inseparable from the purely physical property. As an illustration, a power transmission line may be located on private right of way. The company may not own the land upon which the poles are placed, but per- haps has paid the owners for the right to use it for an extended period of time, and has incurred certain incidental expenditures in acquiring such rights. Obviously, the value of the right of way, as represented by the actual cost of securing it, is closely allied to the value of the pole and wire plant, notwithstanding the fact that the company has not title to the land itself. Right of way, then, is one of the non-physical assets, the vaW of which is included with that of the physical property in the determination of the physical value of a property. 25. Collateral Construction Costs. Other items usually included with the value of the invehtoriable property in determining physical value 12 TELEPHONE RATES AND VALUES are the so-called " collateral construction costs." These, too, are so closely allied to the purely physical property as to render them practically insep- arable. The collateral construction costs generally include the following items : (a) General and legal expense during construction. (6) Engineering and general supervision during construction. (c) Taxes during construction. (d) Insurance during construction. 0) Interest during construction. 26. Original Cost. It is frequently argued that the fairest measure of the value of a utility company's property is to be obtained by determin- ing the original, or actual, cost of the property involved as derived from the company's books and records. Unfortunately, it is rarely possible to employ the original cost method. Public utilities are peculiarly susceptible to reorganization, consolida- tion and change of ownership. Records of original cost have frequently been lost sometimes intentionally during changes of this character. Fires and floods are also factors to be reckoned with in the preservation of adequate and reliable records of original cost. Again, antiquated methods of bookkeeping may be responsible for the segregation of portions of the original cost such, for example, as the labor and miscellaneous expenditures incidental to installation of machinery from the capital accounts. Some companies improperly include such items with mainte- nance or operating expenses. Granting that all of these objections may be overcome, there is still a question whether the original cost method of appraisement affords a fair value of the property, at least, for purposes of rate regulation. As an illus- tration, assume that a plant built some ten or fifteen years ago is being appraised at the present time. Labor and material costs were considerably lower at that time. A rate- base value determined by the original cost method would necessarily be much lower than one based upon present costs. Nevertheless, the com- pany's operating and maintenance forces are paid in accordance with pres- ent labor rates. Obviously, there is a grave question, in a case of this kind, as to the fairness of a plan which limits the earning capacity of the company by basing its service rates upon the original cost alone. 27. Cost to Replace New, Replacement Cost or Cost of Reproduc- tion. "These terms, so much in evidence nowadays and recognized by the courts, refer to an assumed value based on the estimated cost of repro- ducing the property new on the basis of prices current at the time of esti- mate, prices that fluctuate considerably are averaged for five years pre- ceding the date of the appraisal, and is made up to include everything that can be inventoried regardless of original cost, age, service value, or present condition as affected by depreciation. APPRAISAL TERMS 13 " Of course, a defect in the reproduction cost theory is that a utility cannot buy its materials, labor, property at average figures, but must make its expenditures when times and conditions or ordinances may require, often during periods of prosperity which, consequently, means during periods of inflated prices." 1 28. The Reproduction Method of Appraisement. The reproduc- tion method is probably the one most frequently used in the determination of the value of public utility properties, and, all things considered, the most satisfactory. It should be clearly borne in mind, however, that there are numerous factors involved in an appraisement aside from the actual price which has been paid for, or which would have to be paid to replace, the component items of plant. As an illustration, certain equipment in a power plant may have cost $100 f. o. b. point of purchase. If the freight amounted to $5, the cartage from depot to plant $1, and the cost of installation $10, then the total cost would be $116. If the appraisement was being made on the basis of original cost, all of these items would be determined from the books and records of the com- pany. However, in the event that cost records were incomplete or unre- liable, it would be necessary to resort to the reproduction cost method of appraisement. Having determined from dealers' quotations the current market price of a machine of the type in question, the appraiser would estimate that cost of installation, freight, etc., basing his estimate on material and labor prices which he considers fair for use at the time of the appraisal. 29. Unit Cost. The physical property of a utility company is neces- sarily composed of a number of elements of widely varying types. For instance, the component parts of a telephone plant include the central office equipment, subscribers' station equipment, underground subway system, underground and aerial cable systems, pole lines and wire plant. Each of these general classifications may be subdivided into smaller ho- mogeneous groups whose component parts are known as units. Thus, a pole plant may include several different types of poles, such as 35-foot, 7-inch top; 30-foot, 6-inch top; and 25-foot, 6-inch top poles. Each pole, then, constitutes a unit of the class to which it belongs. If the poles have been set under similar conditions, a cost per pole may be derived which is applicable to any pole in the class. Such a cost is known as a "unit cost." 30. Scrap Value. Henry Floy, in " Valuation of Public Utility Properties," says that "all physical property has a certain scrap or junk value, a minimum basis beyond which there is no depreciation; hence physical property can only deteriorate until it reaches a scrap value." i "Valuation of Public Utility Properties," by Henry Floy, pp. 18, 19. 14 TELEPHONE RATES AND VALUES This statement illustrates the meaning of the term " scrap value." A machine which originally cost $125 weighs 700 pounds. At the end of a useful life it can be sold for old material at 5 cents a pound. However, if the cost of breaking up and preparing it for junk amounts to $25, the scrap or junk value is the market value of the metal less the cost of junking, in this case $35 (700 pounds times $0.05) less $25, or $10. B. J. Arnold, in the Coney Island & Brooklyn Railroad rate case, defines scrap value as : " Scrap value is determined by allowing a fair market price for the material or scrap, less the cost of turning it over to the dealer." 31. Salvage Value for Re-use. It frequently happens that portions of a company's plant are retired from active service for reasons other than physical deterioration, and before the end of their useful life. This is especially true in the case of rapidly growing utilities, where con- stant changes of equipment are necessitated, both to provide for plant en- largements and keep pace with engineering and economic developments. In such instances it is often possible to find a market for the plant removed at a value considerably higher than the scrap or junk value by disposing of it to other concerns in the same business, or to dealers in second-hand equipment of the type involved. This value has been termed "salvage or disposal value." It may be defined as the market worth of the equipment in question, at the time of its removal from plant, less the cost of preparation for sale. 32. Wearing Value. The difference between the cost of physical property whether it be determined by the original cost or reproduction cost method and the scrap value is known as the wearing value. The wearing value entirely passes away during the useful life of the property, for reasons which will be discussed more in detail under the sub- ject of depreciation. As an illustration, if the original cost of a machine is $125 and the scrap value $10, the difference ($115) will have entirely disappeared at the end of the useful life of the machine. This amount of $115 represents the wearing value of the machine in question. 33. Service Value. It is evident that the various portions of an operating plant have a greater value when associated with the plant as a whole than they would if considered individually. In other words, each unit of plant forms a link in the production chain, and its value is neces- sarily greater as a part of the chain than as an isolated link. This value is known as "service value," and lies between the original cost or the reproduction cost and the salvage value. In the case of City of Appleton v. Appleton Waterworks Company, 5 W. R. C. R. 215, the Wisconsin commission says : In this connection (the determination of fair value) the service value of the plant cannot be ignored, for "each unit of the plant has a value because of its co-ordination and articulation with other units, thus forming with such units a complete mechanism capable of transmitting useful service." APPRAISAL TERMS 15 34. Depreciation. The Century dictionary defines depreciation as "a fall in value; reduction in worth/' and the Standard dictionary as a ''lowering in worth." In discussing the relation of depreciation to public utilities, Dr. R. H. Whitten says: "Depreciation can be denned as the lessened utility value caused by physical deterioration or lack of adaption to function." 35. Principal Causes of Depreciation. There are four principal causes of depreciation: (a) Wear and tear. (6) Age or physical decay. (c) Inadequacy. (d) Obsolescence. 36. Wear and Tear Depreciation. Depreciation from wear and tear, as the term suggests, is that resulting from use or service. Generally speaking, it is the most dominant factor in the depreciation of the mechan- ical portion of a utility corporation's plant. Machinery necessarily depreciates more rapidly when in use than when lying idle, assuming that reasonable precautions are taken for its proper preservation in the latter case. On the other hand-, outside plant, such as pole lines, cable and wire, is not appreciably affected by service, so that in this case depreciation from wear and tear is almost negligible. 37. Age or Physical Decay Depreciation. The age or physical decay class of depreciation is due to the deterioration of plant resulting from age. 38. Depreciation due to Inadequacy. In the operation of large utility companies it frequently becomes necessary to replace plant with plant of larger type, or of more economical design, to meet the requirements of rapid growth. As an illustration: in suburban New York the telephone company is frequently called upon to replace comparatively new aerial distributing plant with underground systems, to meet an unforeseen and extremely rapid subscriber growth. 39. Obsolescence Depreciation. " Obsolescence means the depre- ciation of property through the development of something newer and either more economical or more of a fad. Like inadequacy, it may necessitate the abandonment of property long before it is worn out, and in many cases arises largely from demands of the public. "What is obsolete in one place may not be affected by obsolescence in another. Note, for example, the recent introduction of P. A. Y. E. cars in the larger cities, or the use of open-bench cars in the Borough of the Bronx, where they are by many considered good practice, while at the same time they are by many considered obsolete for the Borough of Man- hattan, all within New York City." 1 40. Other Subdivisions of Depreciation. The subject of depre- i "Valuation of Public Utility Properties," by Henry Floy. 16 TELEPHONE RATES AND VALUES elation may also be subdivided under the classifications " physical depre- ciation" and "functional depreciation." Physical depreciation is that resulting from wear and tear and age, while functional depreciation is caused by inadequacy and obsolescence. 41. Depreciation Reserve. Obviously, some adequate provision must be made for the constant lessening in value caused by depreciation. This is ordinarily accomplished by the establishment of a fund, known as the "depreciation reserve/' of sufficient magnitude to finance the replace- ment of the various portions of plant at the expiration of their useful life. There are two universally recognized methods of building up the depre- ciation reserve fund, known, respectively, as the "straight line" method and the "sinking fund" method. 42. Straight Line Method of building up a Depreciation Reserve. - The straight line method of building up a depreciation reserve is based upon the assumption that the wearing value decreases at a uniform rate throughout the active life of the plant. If a unit of plant is valued at $100, has an estimated life of ten years, and a net scrap value at the end of that time of $20, then the wearing value would be $80, and one-tenth of this amount would be set aside each year for the depreciation reserve. 43. Sinking Fund Method of providing a Depreciation Reserve. - "The sinking fund method assumes that an amount is set aside each year, which, invested at compound interest, will equal the total wearing value at the end of the assumed life. The depreciation at any time is said to exactly equal the amount that is, as should be in a sinking fund, accumu- lated in this way. "Under the sinking fund method the existing depreciation fund is always less than it would be under the straight line method. The degree to which it varies will depend largely on the rate of interest at which the fund is assumed to accumulate. The higher the rate of interest assumed, the smaller will be the existing depreciation under the sinking fund method as compared with what it would be under the straight line method. "The difference between the two methods is not great for a unit with short life, but for a unit having a fifty-year life the excess of the existing depreciation, as shown by the straight line method over that shown by the sinking fund method, may be enormous. The sinking fund method may be justified as a simple accounting method of apportioning evenly a loss which will not actually accrue until the unit needs to be renewed." 1 44. Present Value. Present value may be defined as the "estimated value of the physical property as it exists at the period being considered." It is usually determined by deducting the accumulated depreciation, as of the date under consideration, from the original cost or from the repro- duction cost. i "Valuation of Public Utility Properties," by Dr. R. H. Whitten. CHAPTER III DETERMINATION OF FAIR VALUE 45. Demand for Competent Regulation. Until early in the pres- ent century comparatively little thought had been given to the subject of public utility regulation. Notwithstanding the fact that several of the States had already established public service commissions, the great ma- jority of the people and even many eminent political economists seemed to feel that the commission form of regulation was a useless finan- cial burden upon the community, and that the cheapest and most effective method of insuring reasonable rates was to provide plenty of competition. Gradually, with the development of the idea that many utilities are natural monopolies, came the demand for competent Federal, State or municipal regulation, not only of the rates charged for the commodities dispensed by the utilities, but likewise of the quality of the service ren- dered. 46. First Idea of Basis for Fair Rates. With the supersession of the competitive by the commission form of regulation came the need for an adequate basis of determining fair rates. At first thought, the problem may appear comparatively simple. To the casual student of rate matters there would seem but one answer, determine the actual investment as evidenced by the utilities' bond and stock issues, and establish rates adequate to provide a reasonable return on the investment. It soon developed, however, that things were not always what they seemed. Over-capitalization and methods of financing that were, to say the least, questionable were discovered at every turn. Discriminatory rates in the majority of cases would inevitably have resulted had this investment method been adopted. 47. Original Cost Method as Basis for Rates. Naturally the next plan that suggested itself was the determination of the actual, original cost of the properties involved. Here, again, apparently insurmountable diffi- culties were encountered. Public service corporations were at that time peculiarly susceptible to reorganizations and changes of administration. Books and records of orig- inal cost were frequently lost or destroyed, sometimes intentionally. For this and other reasons regulatory bodies found that in the majority of cases it was almost impossible to obtain a complete record of original cost. 48. Use of Book Values for a Rate-base Value. Another method of ascertaining rate-base values, which proved even less satisfactory, in- volved the use of the company's book values. The vagaries of accounting 18 TELEPHONE RATES AND VALUES systems usually rendered values so determined entirely unsuitable for rate base purposes, due partially to the intermingling of construction and maintenance expenditures. 49. Reproduction Cost Method. It was just such difficulties as these that led to the evolution of the so-called "reproduction" theory as a basis for determining the fair-rate base value of utility properties. The reproduction cost method, involving as it does the assumed repro- duction of the property under conditions existing at the time of the ap- praisal, forms a basis for determining rate-base values that at least has the advantage of being independent of inconclusive records and mislead- ing systems of accounting. Probably the most frequently used base for rate-making is cost of re- production new less depreciation, or present value, as it is more frequently called. Present value may be derived either from the original cost or from the reproduction cost by deducting the accrued depreciation as of the date of appraisal. The method may perhaps be better determined after reading the discussion in a subsequent chapter. 50. The Three Recognized Bases for Rate-making. There are, then, three recognized bases for rate-making now universally in vogue. These are : (a) Original cost. (6) Reproduction cost new. (c) Reproduction cost new less depreciation, or present value. All of the bases may be, and frequently are, factors in the determination of the rate-base value for a specific property. In fact, the United States Supreme Court and several of the State commissions have ruled that all three of these elements should be carefully considered in the determination of fair value for rate-making purposes. In the Manitowoc Water Company case the Wisconsin Railroad Com- mission made the following statement: The three elements of greatest importance in fixing the value of such plants (public utility plants) are: the original cost, the cost of reproducing the plant, and the present value. As to which of these elements shall be given the greatest consideration must depend upon the circumstances in each case, and must also depend upon the purpose for which the valuation is made. With this brief resume of the various bases used for determining fair value, a more detailed analysis of these "elements," as the Wisconsin com- mission terms them, may perhaps be more readily followed by one not already versed in appraisal matters. 51. Original Cost. Henry Floy, in "Valuation of Public Utility Properties," says that "original cost is usually taken to mean the actual expenditures made for physical properties, including original construction and usually all additions since that time. The term is taken to include DETERMINATION OF FAIR VALUE 19 those items which are classed as ' development expenses, ' and occasionally even the value of franchise, good will or going value." 52. Elements of Total Cost. It may be well to pause for a moment and consider the terms, development expenses, franchises and going value. Regardless of whether the ultimate object of an appraisal is to determine the original cost, the reproduction cost, or the present value of the prop- erty under consideration, there are certain elements that enter into the final result other than the appraisement of the tangible or inventoriable property. The following diagram (Fig. 1) may serve to illustrate the cor- relation of these various elements of total cost. Cost of inventoriable property, Incidentals, omissions and contingencies, Warehouse and purchasing expense during construction, Tools and tool expense during construction Contractor's profit, General and legal expense during construction, Engineering and general supervision during construction, . . . Taxes during construction, , Insurance during construction Interest during construction, Working capital, Construction in progress, Direct con- struction costs. Col- lateral con- struction costs. Cost of establishing business, or going value, Cost of financing Franchise value Good will Value of contracts or agreements, Total physical costs. Total non- physical assets. Total cost of prop- erty. FIG. 1. Correlation of various elements of total cost. It will be seen that there are two general classifications into which the component elements of total cost may be divided, the physical costs and the non-physical assets. To conform strictly to the generally accepted meaning of the term "physical," the physical costs should include only the first item, cost of inventoriable property. Current appraisal practice, however, sanctions the inclusion, under the general caption "Physical Costs," of a group of non-physical costs which by nature are almost inseparable from that of the purely physical property. Those most closely allied to the portion of the plant appraised by inventory are grouped together under the caption "Direct Construction Costs." The "development expenses" referred to by Mr. Floy are here termed "Collateral Costs." They include those additional elements of physical cost incurred immediately prior to and during the actual construction of a utility property. 53. Intangible Value or Non-physical Assets. In addition to the direct and collateral construction costs there is still another group of items component to the total cost. This group is frequently called the "intangi- ble value." The use of the word " intangible " in this connection is unfortunate. To most people it suggests something unreal and ethereal, and it is only natural 20 TELEPHONE RATES AND VALUES that courts and commissions should regard with suspicion elements of value, submitted for their consideration in determining a fair rate-base value, which bear such an unpromising name. Such factors as " going value" and "cost of financing" are no less real in the development of a going concern than the more readily appraised items of direct and collateral construction costs. For this reason the term "non-physical assets" has in the present case been substituted for intan- gible value. 54. Going Value. Going value has been variously denned as "the cost of establishing the business," "the cost of acquiring an income," and "the capitalization of early losses incurred in connection with the develop- ment of the business to where it is capable of producing a fair return on the investment." 55. Good Will. The meaning of the term "good will" is almost self-evident. It is "the probability that the old customers will continue to resort to the old place of business." Obviously, good will has no place in the valuation of a monopolistic utility. In the case of Bristol v. Bristol Waterworks (23 R. I. 278) the court said: - A monopoly has no good will, for its customers are retained by compulsion, not by their voluntary choice. 56. The Cost of Financing. The cost of financing may be defined as the cost of raising the money necessary to build the plant and establish the business. In other words, it is the cost of marketing a company's bonds and stocks. 57. Ascertainment of Cost of Physical Property. From the fore- going resume of the component elements of the total cost it will be appar- ent that the determination of the cost of the inventoriable portion of a utility plant by no means completes the task of the appraiser. If the investigation is being conducted along the line of original cost, then both physical and non-physical costs will be ascertained from a detailed inves- tigation of the history of the property. An inventory of the purely physical property should be made as of the date of appraisal, and used as a means of identifying the various portions of plant in the subsequent check against the cost records. As an illustra- tion, assume the case of a plant having 40,000 25-foot poles. After these poles have been carefully inventoried and identified in the field, an investigation shows that 50 per cent of the total number were placed at the time of the original plant construction, and the other 50 per cent placed piecemeal subsequently. By checking work orders and original estimates, it may be a compara- tively simple matter to ascertain the actual cost of the poles placed at the time of the original plant construction, but it would probably be much DETERMINATION OF FAIR VALUE 21 more difficult to find the cost of the 20,000 poles placed subsequently. Pos- sibly many of these latter poles were placed in connection with other work under conditions precluding the segregation of the cost of placing poles from that of placing cross arms and incidental equipment. It is here that the real difficulty of the investigator begins. At best he can only determine approximately the cost of placing poles, supple- menting whatever records of cost he is able to find with his own indi- vidual judgment. The result may not be a record of actual original cost, but it will be a cost derived from an analysis of actual conditions prevalent at the time the poles were placed. 58. Weakness of Original Cost Theory. It is such difficulties as those just mentioned which constitute the principal weakness of the origi- nal cost up to a certain point, but it has been the experience of appraisal experts that there are many items indeterminable by the original cost method, and which have to be estimated by some other method. Collateral costs and non-physical assets should be derived entirely from the records of the company. The substitution of separately derived costs of the inventoriable portion of the property may, in rare instances, such as the case cited, be permissible, but the adoption of such methods with reference to the so-called intangible elements negates the advantages usu- ally attributed to the original cost method. The general attitude of courts and commissions toward original cost has been favorable as to its value as a factor in the determination of rate-base values, but skeptical as to the feasibility in most cases of obtaining suffi- cient authoritative data to warrant their use. 59. Reproduction Cost. Referring to the definition given in Chap- ter II, "reproduction cost" may be defined as the cost of replacing the property under consideration as of conditions existent at the time of the appraisal, except when such conditions evidence a deviation from the nor- mal material and labor markets. In the latter case prices for the several years preceding the appraisal should be averaged. In determining the reproduction cost of a utility property, an inventory is taken of the physical plant as of the date of appraisal. Unit costs are then prepared and applied to the inventory to obtain the cost of the strictly physical property. 60. First Step in the Inventory. The preparation of the inventory of physical plant, at first thought, may seem a comparatively simple, though possibly rather tedious, task. The appraisement of the plant of a large utility corporation, such, for instance, as that of a telephone com- pany, involves so many items of comparatively small individual worth, but which collectively represent large plant investments, that the deter- mination of quick and efficient inventory methods has become a very im- portant factor in appraisal work. This phase of the subject will be con- sidered in more detail in a subsequent chapter. 22 TELEPHONE RATES AND VALUES The first step in the inventory of a property, under the reproduction cost plan, is the determination of the date of appraisement. Unless there are other governing factors, the date at which the inventory is started is that usually selected. The actual field work of the inventory may require several months. If the plant under consideration is a large one, it is quite probable that a certain amount of construction work will be in progress during the inventory period. 61. Construction Work in Progress and the Inventory. The plant in progress of construction on the date of the appraisal should not be included in the inventory, but should be separately appraised and carried under the caption "Construction in Progress." The reproduction cost of all construction in progress will, of course, be included in the determina- tion of the total cost of the property, but not as a part of the operating physical plant. Plant in progress of construction during the inventory period, but started subsequent to the date of appraisal, should be eliminated entirely from the inventory of operating plant. The material used in its construction may be included in the inventory of stores and supplies, however, if it is actually on hand at the appraisal date. The segregation of these two items plant in progress of construction at the date of appraisal, and plant construction undertaken subsequent to date of appraisal can, perhaps, be most readily effected by a check of the construction estimates and work orders for the period immediately prior to and subsequent to the date of appraisal. This check may be effec- tively supplemented by careful observation on the part of the field inspec- tors, noting plant of obvious recent construction. 62. Unit Costs. The unit costs used in determining the reproduc- tion cost should be representative of conditions existent at the time of the appraisal of the property. Representative costs may not be, and usually are not, those prevalent at the exact date when the appraisal is made. A careful analysis of the company's invoices for several years preceding the appraisal, and a study of labor rates and of the conditions encountered by the company in the performance of its actual construction work, should all have due weight in determining the unit costs. This is a task which should have the careful supervision of the engineer in charge of the ap- praisal, and each unit cost should have his approval before it is used in the actual determination of the reproduction cost of a property. The subject of the derivation of the unit costs is a most important one. No matter how carefully the inventory may be prepared, or how judi- ciously the collateral costs and intangible values determined, the appraisal is of little value unless the engineer can substantiate his unit costs under the fire of the cross examination he is almost sure to be subjected to by the commission's experts or by the representatives of opposing factions. There are various ways of checking unit costs and of determining their DETERMINATION OF FAIR VALUE 23 adequacy for use in specific cases. The whole subject is most important, and warrants a more careful consideration than can be given in this prelim- inary survey of the reproduction cost theory. It will be covered more thoroughly in subsequent chapters. 63. Collateral Costs and Non-physical Assets. Those closely allied elements of collateral cost engineering and general supervision during construction, general legal expense during construction, taxes and insurance during construction, and interest during construction which cannot be adequately provided for in the unit costs, should, under the re- production theory, be determined by assuming the conditions which in all probability would actually exist in the construction of a hypothetical plant exactly similar to the one under consideration and at the date chosen for appraisal. The elements of intangible value cost of financing, going value, etc. should be determined in a similar manner, i.e., by assuming what would probably happen if the plant under consideration was being constructed and prepared for operation as of the appraisal date, or if an exactly similar hypothetical plant was being constructed at the same location. 64. Present Value. Present value is usually only an element in the determination of fair value. Its computation is necessarily predicated either upon original cost or reproduction cost. Either the original cost or the reproduction cost and the accrued de- preciation as of the date of appraisal have first to be determined before present or depreciated values can be ascertained. Take, for instance, the case of a telephone pole. If we wish to know its value now, we must first find either how much it originally cost, or how much it would cost to replace it under conditions existent at the present time, and then make a deduction from the result for its present condition. There are several ways by which we could arrive at the present value of the pole, and perhaps the consideration of these possible methods may facilitate a clearer understanding of the subject of present value. 65. Physical Depreciation computed on the Straight Line Basis. Referring to the definitions in Chapter II, it will be remembered that there are two general classes of depreciation, physical and functional. Physical depreciation is that due to natural causes, age, wear and tear. Functional depreciation is that due to lack of adaptability to normal func- tion, either through inadequacy or obsolescence, such, for instance, as the premature removal of the pole due to the building of a subway on the same street. For our present purpose, however, we will consider only physical depreciation. Let us suppose that we know that poles of the size and type of the one under consideration cost $10 in place; that they usually last about ten years and have a certain salvage value say, for anchor logs at the end of their useful life. If we assume that the salvage value in this case is 24 TELEPHONE RATES AND VALUES $1, after deducting the cost of removal and cutting the usable portion to a suitable size for anchor logs the depreciated or wearing value will be $10 less $1, or $9. It will be remembered that by wearing value is meant that portion of the total cost which will actually pass out of existence during the useful life of the pole. We may further assume that the wear will be uniformly distributed over the ten years' life, and that the pole will depreciate in value one-tenth of $9, or 90 cents each year. If the pole is five years old at the date of ap- praisal, the present value will be $10 ($0.90 X 5) = $5.50. Theoretically an amount equal to the annual depreciation 90 cents in this case would be set aside each year from the earnings of the com- pany, and the fund thus accumulated, together with the salvage value, would give an amount sufficient to finance the replacement of the pole at the end of its ten years' useful life. In reality, at compound interest the amount thus set aside, together with the salvage value, will more than equal the reproduction cost. This is due to the accumulation of the interest. It is this fact that has been responsible for the development of what is known as the " sinking fund method of accumulating a depreciationxreserve." Instead of setting aside one-tenth of the depreciable or wearing value each year we would, under the sinking fund method, set aside annually an amount, predetermined from annuity tables, which with interest com- pounded would equal the wearing value at the end of the ten years' useful life. 66. Sinking Fund Method of determining Depreciation. Under the sinking fund method of accumulating a depreciation reserve it may be assumed that the accrued depreciation at any given time exactly equals the amount accumulated at that time in the depreciation reserve. There is an element of justice in this assumption. Especially is this true of the outside plant of a telephone company. The pole and wire plant, for instance, in a property that has not been properly maintained will hang together with remarkable tenacity for a certain length of time. Then it will, apparently, go to pieces all at once or in a comparatively short time. Then, again, up to the time that the plant actually fails there is a certain element of value in the very fact that it is standing and is giving service, "service value" it is called. The assumption that an accrued depreciation is always equal to the amount accumulated in the depreciation reserve is merely one of conven- ience. Depreciation may not, and probably does not, occur at the rate the reserve is accumulated. As a matter of fact, in the case of telephone plants, at least, it is practically impossible to determine the exact rate at which wearing value decreases. The fact that, where physical depreciation alone is considered, the DETERMINATION OF FAIR VALUE 25 rate of depreciation follows somewhat the same curve as that represent- ing the accumulation of the depreciation reserve, warrants the assump- tion that the accrued depreciation at any given time is exactly equal to the amount accumulated in the depreciation reserve. In this way a simple method of computing present value is afforded. From annuity tables the amount which should be in reserve may be com- puted. This, deducted from the original or reproduction cost, will give the present value. Present value, as determined by the sinking fund method, is always higher than if computed on the straight line basis. As suggested previously, this fact may be justified in view of the element of service value, and in view of the more rapid deterioration that usually takes place toward the end of the useful life of the telephone plant. 67. Present Value as determined by Inspection. There is still another method of determining the present value of utility properties. It is based largely upon the individual judgment of the field inspectors and appraisal engineer. This method is particularly adaptable to the appraisal of telephone properties. Men experienced in appraisement work can "size up" the condition of the various elements of plant, poles, cross arms, wire, etc., and deter- mine a " condition percentage" which may be applied directly to the reproduction cost to obtain the present value. The determination of this condition percentage by competent telephone experts is not a matter of guesswork. It represents the best judgment of the field inspectors and appraisal engineer supplemented by all of the available data as to the age and junk value of the various elements of the plant which is under consideration. Obviously it is out of the question to work out a present value for each pole, each cross arm and each pair of wires by either straight line or sinking fund methods of depreciation. The inspection method, then, presents a reasonably accurate mode of determining present value at a minimum ex- penditure of time. Present value, as a rule, is only one of the elements in fair value. As previously stated, its derivation is dependent upon a prior determination of either reproduction cost or original cost. 68. Elements to be carefully considered. In concluding this pre- liminary resume of the various factors which may enter into the determina- tion of fair value for rate purposes, attention is once again called to the following statement of the Wisconsin Railroad Commission, which seems to typify the attitude of courts and commissions in general : The three elements of greatest importance in fixing the value of such plants (public utility plants) are: the original cost, the cost of reproducing the plant and the present value. 26 TELEPHONE RATES AND VALUES One must remember, however, that, important as they are, these three elements, considered either individually or collectively, do not furnish sufficient data for the final determination of rate-base value. There are still other elements to be carefully considered, such as operating expenses, revenue and net income. These items may, perhaps, be studied in detail to better advantage at a later date. However, the accompanying chart (Fig. 2) presented in the case of the City of Columbus et al. v. Southern Bell Telephone & Telegraph Co., before the Railroad Commission of Georgia, will be found exceedingly interesting, and may pave the way for a better understand- ing of subsequent chapters. It shows graphically many of the various elements which enter into the determination of value for rate-making purposes. 69. Most frequently used Basis for Fair Value Determination. - Undoubtedly "Cost of Reproduction New" is the most frequently used basis for determining the fair value of public utility properties for rate- making purposes, perhaps not reproduction cost alone, but reproduction cost taken in conjunction with reproduction cost less depreciation, or present value. Before taking up the consideration of the ways and means which may be employed in the determination of the various elements of reproduction cost, it may be well to pause for a moment and consider a little more care- fully what is meant by fair value. 70. Fair Value and Rate-base Value. It sometimes happens that value for rate-making purposes or rate-base value, as it is often called and fair value, are not one and the same thing. Take, for instance, the case of a telephone company owning a valuable piece of property in the heart of a city, and using this property for a purpose entirely incommensur- ate with its present value let us say for a pole yard. Assume, further, that other less expensive property, so located as to render it equally desir- able for pole-yard purposes, is available for immediate use. Unless the company is holding the property for some ulterior purpose, closely connected with its function as a public servant, there is a grave question as to whether market value should in this case constitute rate- base value. The company is without a doubt entitled to carry the full market value of the property in its capital account, and to maintain that the market value represents the fair value for any purpose save rate-mak- ing, but it cannot, in justice to its patrons, include the full market value in an appraisal for rate adjustment purposes. Fair value and rate-base value in this case are two entirely different things. The rate-base value would in all probability be measured by the market value of the least expensive parcel of property, qualified by location and other pertinent considerations to furnish the company with pole-yard facilities equal to those afforded by the property under discussion. DETERMINATION OF FAIR VALUE 27 83 ,2 i.t! 2 . : a . a "*> fews-a*! H^ 2'- !S e3a> c '.:a> .ojg-^-c OH s *0 . > as -a >iJ5 r ^--; 28 TELEPHONE RATES AND VALUES On the other hand, if the company can show a real need for the property, within a reasonable length of time, for some purpose more nearly in keeping with its present market value, such, for instance, as a future central office site, there would seem to be ample justification for including the full market value in a rate-base appraisal. CHAPTER IV DIRECT CONSTRUCTION COSTS 71. Direct Construction Costs. Referring again to the total value diagram (Fig. 1, Chapter III), it will be seen that the direct construction costs consist of the cost of the inventoriable property, an allowance for omissions and contingencies, the cost of purchasing and storing material during construction, and, in some cases, an allowance for contractor's profit. 72. Appraisal of the Inventoriable Property. The appraisal of the inventoriable property will be treated in more detail in a subsequent chapter. For the present, suffice it to say that under this heading falls the bulk of the detail of the appraisal, the inventory, the preparation of the unit costs, and the clerical work of compiling, tabulating and sum- marizing the resultant data. 73. Duplication in taking Inventory. During the process of tak- ing inventory, the appraisal engineer is constantly harassed with the fear that his field inspectors may duplicate portions of the plant or leave out parts of it entirely. The danger of duplication may be largely, if not entirely,' eliminated by a proper system of checking and cross-checking the individual records of the inspectors as they are turned in. 74. Omission from Inventory. Omissions from inventory, how- ever, cannot be entirely guarded against, no matter how carefully the in- ventory may be taken. Especially is this true in the case of large and widely scattered plants where the records are inadequate. Given complete and accurate records, the taking of inventory becomes merely a process of identifying, checking and properly tabulating previously acquired data, and the chance for omissions is minimized. But even in this case it fre- quently happens that errors have crept into the records, or that a plant of recent construction has been omitted temporarily from the records pending the completion of whatever routine happens to be in vogue for the reporting of completed work. 75. Records as an Inventory Aid. In the case of many of the smaller telephone companies and even a few of the larger ones com- plete and accurate records are not always considered a necessity. The thorough familiarity of the men on the job with all of the ins and outs of the plant is frequently responsible for the impression among those higher up that records are an expensive nuisance, entirely unnecessary to the proper maintenance of the plant. The writer has even known of cases 30 TELEPHONE RATES AND VALUES where the contention "the less on paper the better " has been supported by the argument that complete and accurate records tend to make the men slipshod, that they constantly refer to records for information they should carry in their heads. In the writer's opinion this line of reasoning is radically wrong. While a good working knowledge of the plant is absolutely essential to the wire chief, plant chief and their immediate assistants, it is most unfair to expect these men to become walking plant record files. Not only are the faculties of the men themselves unduly overtaxed, but there is always the danger that at some critical time such, for instance, as a cable fail- ure somebody will make a serious mistake that will cost the company time, money and possibly a loss of public confidence. Good records are not hard to obtain, and if properly designed can be maintained at a surprisingly low cost. An expert familiar with telephone construction, maintenance and accounting problems can, from his experi- ence in meeting similar problems in the past, evolve a record system ade- quate to meet any company's requirements at a comparatively small cost. The initial expense will be offset many times over by the increased effi- ciency which will undoubtedly result if the system is properly maintained. 76. The Field Force and Omissions from Inventory. In the case of a plant with inadequate or unreliable records, the appraisal engineer is largely dependent upon the ability and integrity of his field inspectors for accurate results. No matter how conscientious these men may be, omissions from inventory are bound to occur. The reader can readily verify this statement by attempting to list all of the objects in a room and subsequently rechecking his inventory. He will doubtless be surprised at the number of perfectly obvious articles missed on the first count. In public utility inventory work it is, of course, out of the question to recheck every portion of the inventory; the cost would be prohibitive. It is possible, however, for the appraisal engineer to verify parts of the work of each of the field inspectors at frequent intervals. In every large appraisal the work should be so apportioned that the ap- praisal engineer, or one of his immediate assistants, can give a large part of his time to general supervision of this nature, especially during the in- ventory period. In this way he not only can remedy defects in the methods of the individual inspectors before they become chronic, but he can get a very good idea as to what allowance should be made for the item of omis- sions. 77. Contingency Provisions in Appraisal Work. The item "omissions" consists of a monetary allowance for things accidentally omitted from the inventory. The word "contingencies," as used in ap- praisal parlance, may be defined as the amount in dollars added to the ap- praisal of the inventoriable property to compensate for omissions from the unit costs. It has been the experience of constructing engineers that unless some DIRECT CONSTRUCTION COSTS 31 definite provision is made for the accidents, delays and other unforeseen contingencies that inevitably occur in construction work, their estimated costs are always far less than the actual cost of construction. Similarly in appraisal work, in developing the unit costs we may include every tangible item of expected cost, and still, nine times out of ten, the re- sultant units will be lower than the probable actual cost of reproduc- tion. As an illustration, consider the appraisal of an underground conduit system. In deriving the unit costs, all of the available actual performance data are reviewed. Records are searched for evidence of unusual subsurface conditions which tend to increase construction costs. The resultant unit costs should, it would seem, be ample to give the reproduction cost of the property. Yet if the actual history of the subway could be ascertained, it would undoubtedly develop that an uncharted outcropping of rock was encountered, or an exceptionally intricate tangle of the pipes and conduits of other utilities was found at some cross street, necessitating the change or abandonment of the original plans, and in- volving a veiy much greater cost than could possibly have been foreseen in compiling the unit costs. It is just such contingencies as these which cannot consistently be provided for in the unit costs, but which inevitably form a part of the con- struction cost of a large utility property that are provided for under the caption "Contingencies." 78. Specific Allowance for Inventory Omissions. Courts and commissions are almost universally agreed as to the propriety of making a specific allowance for omissions. Such allowance is made on a percent- age basis, a percentage of the reproduction cost of the inventorial prop- erty, usually in conjunction with an allowance for contingencies. Allowances for omissions and contingencies vary. In a case where the records are known to be accurate, the field work carefully done, and the history of the company's construction period sufficiently conclusive to warrant the inclusion of a liberal allowance for contingencies in the unit costs, the percentage allowed for omissions and contingencies should, of course, be smaller than in the case of a company having inaccurate records and little or no knowledge of the obstacles encountered in the process of construction. The usual allowance for omissions and contingencies ranges from 4 to 8 per cent of the total cost of reproduction of the inventoriable portion of the plant. 79. Warehouse and Purchasing Expense during Construction. Warehouse and purchasing expense may be computed on a percentage basis, or may be determined, perhaps a little more accurately, by assuming the conditions that would probably exist in a plant of the size and type of the one under consideration, estimating in detail the cost of purchasing, sorting and storing the material to be used in plant construction. 32 TELEPHONE RATES AND VALUES If determined on a percentage basis, the amount allowable for ware- house and purchasing expense usually varies from 3 to 5 per cent of the reproduction cost of the inventoriable property, depending upon the exi- gencies of the case in question. The appraisal engineer will be governed, primarily, by the allowances made in previous similar cases by the commission in the State in which the property is located, and secondly, by his own experience in evaluating plants analogous to the one under consideration. 80. Estimation Method of determining Warehouse and Purchas- ing Expense. The other method of determining warehouse and pur- chasing expense involves an estimate of the actual expenditures which would probably be incurred in purchasing, sorting and storing the material used in plant construction. In building up this estimate the appraisal en- gineer is governed largely by his previous experience in constructing plants of a similar type, modified to meet the individual requirements of the case in hand. He must first determine how long it will take to build the plant, and then ascertain the probable periods of greatest purchasing activity. Other factors to be considered are : the most desirable location for main and branch storehouses; pole yards so situated as to be accessible by rail and at the same time provide short hauls in distributing the poles for erec- tion; and the provision of a clerical and stenographic force for handling the routine incidental to the purchasing and distribution of the material. All data as to salaries and rentals must, of course, be determined as accurately as possible by reviewing conditions in the locality at the date of appraisal. The following estimate is for a plant of about 5,000 subscribers scattered over a rather large area, with exchanges located in several small towns. The period of actual construction has been assumed to be one and one-half years. One purchasing agent who will have charge of the purchasing and the handling of all material and supplies, 1 years at $1,200, . . . $1,800 One storekeeper in charge of the receipt and distribution of stock, 1 years at $900, . 1,350 One stenographer, 1| years at $900, . . 1,350 One clerk, 1 i years at $600, ... 900 Three assistant storekeepers, 1 1 years at $720 each, . . 3,240 One permanent warehouse, l years at $300, . . , 450 Two permanent pole yards, 1J years at $120, 360 Five temporary pole yards, j year at $120 each, . 300 Five temporary warehouses, year at $120 each, . 300 Four temporary sheds in pole yards for use in fitting cross arms, storing hardware, etc., 1 year at $100 each, 400 One team for sorting poles, 100 days at $5, . 500 One automobile for use of purchasing agent and storekeeper, . 400 Miscellaneous, expenses, car fare, stationery, telegrams, etc., . 350 Total warehouse and purchasing expense during construction, . . $11,700 DIRECT CONSTRUCTION COSTS 33 81. Tools and Tool Expense during Construction. The tools used in the construction of a telephone plant are constantly in need of repair, and frequently several complete sets are worn out in the construc- tion of a single plant. All of the expense involved in the repair and replace- ment of the tool equipment during construction is necessarily a part of the cost of the property, but one which for obvious reasons cannot readily be allocated to the units. In a reproduction cost appraisal, the cost of the tools, and tool expense during construction, should be estimated by the appraisal engineer, basing his estimate upon previous experience in the construction of plants of the size and nature of the one under consideration. 82. Example of Tools and Tool Expense. The following is an ex- ample of tools and tool expense as computed for a plant serving about 50,000 subscribers located in a city of 400,000 inhabitants : The inventory of tools and tool equipment, as of the date of appraisal, showed that about $50,000 (reproduction cost) of tools were required to maintain the plant and make such periodic extensions as might be neces- sary to carry on the company's business. It was estimated that the plant construction would be completed in about four and one-half years, requiring a complement of tools similar to the one at hand at the date of appraisal, and that the entire original tool equipment would be used before the end of the construction period. It was further estimated that the annual cost of repairing tools would amount to about 10 per cent of their reproduction cost. At the end of the construction period it is probable that a portion of the second complete equipment would be in a condition warranting its use as a nucleus for the tool equipment of the operating plant. The sal- vage value of this residue should, of course, be deducted from the reproduc- tion cost of the tools and tool equipment during construction, for the obvious reason that the tool equipment of the operating plant has already been included in the appraisal of inventoriable property. On this basis the estimate of tools and tool expense becomes: Reproduction cost of tools and tool equipment included in inventory, . $50,000 Reproduction cost of tools and tool equipment used in plant construction, 100,000 Maintenance of tools and tool equipment during construction period, 10 per cent for 4| years, . . . . . . . . . 45,000 Total, . ... $145,000 Salvage value of tools and tool equipment in hand at end of construction period, 25,000 Total tools and tool equipment during construction, . . . $120,000 83. Contractors' Profit. It sometimes happens that a part or all of a utility corporation's plant can be more economically constructed by 34 TELEPHONE RATES AND VALUES subletting the work to a general contractor than if the company attempted to do the work itself. In the telephone field, however, operating compa- nies usually prefer to do their own construction work, although many of the older independent plants were originally built on a contract basis. In making a reproduction cost appraisal, the appraisal engineer should constantly bear in mind the viewpoint of the prospective builders of a similar plant under conditions existent at the date of appraisal. In some instances it may develop that parts of the plant can be more economically built by a local contractor than by the company itself. Take, for instance, the case of underground conduit, where comparatively small amounts are involved. It frequently happens that a local contractor familiar with electric light construction can, under the supervision of the company's engineer, do the work much cheaper than it could possibly be done by the company. In cases of this kind the unit costs should be built up in exactly the man- ner they would be if the company itself were equipped to do the work on an economical basis, including only the material and direct labor of construction, and a separate allowance made for the contractor's profit. Contractor's profit is usually estimated at 10 per cent of the reproduc- tion cost of the portion of the plant involved when the company assumes the responsibility for contingencies, and at from 10 to 50 per cent when the contractor assumes all responsibility. The former basis is probably the more prevalent. The reproduction cost to which the 10 per cent is applied should include an allowance for omissions, contingencies, ware- house and purchasing expense during construction. CHAPTER V COLLATERAL CONSTRUCTION COSTS 84. Relation of Collateral Construction Costs to Cost of Phys- ical Property. The collateral construction costs, it will be remembered, are so closely allied to the direct construction costs as to warrant their inclusion with the latter under the heading "Cost of physical property." They are really part and parcel of the cost of physical property, and it is only for convenience that they are not included in the unit costs. Obviously, such items as general and legal expense, engineering and general supervision, referring as they do to practically the entire property, can be more readily determined by considering the problem as a whole rather than by trying to allocate these items to the various unit costs of pole line, aerial cable, etc., construction. In many of the more recent appraisals, however, no attempt has been made to segregate the direct and collateral construction costs. Items of collateral cost in these cases are given in the proper order after the items of direct cost, without the introduction of the distinctive headings of " Direct construction costs" and "Collateral construction costs." In this way the close bond between these two subdivisions of total physical cost is emphasized. 85. Steps in the Construction of a Public Utility Property. Before taking up the discussion of the various elements of collateral costs, let us consider for a moment just what happens prior to, and during the early stages of, the construction of a utility property. First comes the conception of the idea. If the plant under consideration is a telephone plant, some practical telephone man usually first sees the opportunity for a new company. Or it may be that a group of prominent citizens, dissatisfied with the service of the existing company, conceives the idea of starting a competitive enterprise financed by local capital. In either case the next step will be the discussion of the project with others who may be usefully interested, especially those who may be of direct financial assistance. If, after conferences, the project still seems feasible, engineers will be employed to make rough estimates of costs, and to outline, in a general way, the scope of a property adequate to give the desired service. The consideration of the engineer's report will probably necessitate a number of conferences, and possibly several inspection trips. If the financial backers are favorably impressed with the findings of the engineering staff, the next step will be the employment of legal counsel to take the preliminary measures toward obtaining the consent of the State public service commission, the securing of municipal franchises, and for general advice in whatever other organization problems may arise. 36 TELEPHONE RATES AND VALUES In some States a "certificate of public convenience and necessity" is required before a new utility can enter the field. In other words, the pro- moters have to prove to the State public utility commission that there is a real need for a new utility corporation before the commission will consent to its establishment. After the consent of the State commission has been obtained, the work of securing a municipal franchise is taken up in earnest. This, as a rule, is a rather serious problem, involving many conferences and a considerable loss of time. Factions of the city government may have to be conciliated, for political or other reasons. Next comes the organization of a corporation to take over the franchise and build the plant, the acquisition of the necessary real estate, and the preparation of specific engineering and architectural plans for the construc- tion of the plant. From the foregoing it will be seen that very appreciable expenditures have to be made before a single item of the inventoriable portion of the plant is brought into existence. No fair-minded person can for a minute question that these expenditures are just as much a part of the cost of the property as the cost of placing poles or stringing wire. All of these expenditures, with the exception of the cost of securing franchise (other than legal costs), and the cost of raising money for plant construction, fall under the collateral costs. 86. General and Legal Expense during Construction. Taking up the items of collateral cost in the order in which they would naturally occur, we have, first, the general and legal expense during construction. This item includes salaries of general executives, such as the chief ex- ecutive, treasurer, auditor, etc., general office expenses, and retainer for legal counsel. These should be estimated by the appraisal engineer from his general experience in similar cases. 87. Estimate of General and Legal Expense. An estimate of the general and legal expense incurred in the construction of a property de- signed to serve between 50,000 and 60,000 subscribers is presented which shows what is included under this heading. It was assumed that the con- struction of the plant would take about five years. The first six months of the construction period will be required for the preliminary negotiations, and the remaining four and one-half years for actual construction. Office rent (2,000 square feet) 5 years at $1,000, . . $5,000 Salary, chief executive, 5 years at $10,000, . . . 50,000 Salary of auditor-treasurer, 5 years at $4,000, . . 20,000 Retainer for legal counsel, 5 years at $6,000, . 30,000 Cashier paymaster, 4 years at $2,000, . . 9,000 Bookkeeper, 5 years at $1,500, . 7,500 Average of ten clerks and stenographers, 5 years at $900 each, . . 45,000 Office expenses, supplies, stationery, telephone, telegraph, etc., 5 years at $1,500, ... . 7.500 Total general and legal expense during construction, . . . $174,000 COLLATERAL CONSTRUCTION COSTS 37 88. Engineering and General Supervision during Construction. - The cost of engineering is usually estimated as a percentage of the cost of the inventoriable property. The allowance ranges from 3 to 6 per cent, depending mainly upon the size of the plant. In very small installations one man may handle both engineering and general supervision. In cases of this kind an allowance of 5 or 6 per cent is usually sufficient to care for both of these items. In the construction of large plants a separate organization is required for the general supervision. The unit costs include only cost of direct supervision, that of the gang foremen in charge of the various jobs. All supervision between the gang foremen and the executive staff is cared for under the heading "General supervision/' not only the salaries of the general superintendent, general foremen and their assistants, but all of the miscellaneous expenditures incidental to their work which may be incurred in the construction of a large utility property. 89. Illustration of Cost of General Supervision. The estimate which follows, of the cost of general supervision, is for the plant referred to under general and legal expense, serving between 50,000 and 60,000 subscribers. The construction period is assumed to extend over five years, the first six months of which will be largely devoted to preparatory work. It will, however, be necessary to have the general superintendent, his chief clerk and certain others of the supervisory staff on hand throughout the entire period, as indicated in the following schedule : Salary of general superintendent of construction, 5 years at $4,000, . $20,000 Salary of chief clerk, 5 years at $1,800, 9,000 Salary of chief stenographer, 5 years at $1,000, ..... 5,000 Additional stenographers, an average of 3 for 4 years at $600 each (these stenographers will be required for typing orders and attending to routine correspondence), ........ 7,200 Pay-roll clerk, 4 years at $900, . 4,050 File clerk, 4i years at $600, 2,700, General foreman of aerial construction, 4 years at $2,100, . . . 9,450 General foreman of underground construction, 4 years at $2,100, . 9,450 General foreman of cable installation, 4 years at $2,100, . . . 8,400 General foreman of cable splicing, 4 years at $2,100, . . . . 8,400 General foreman of equipment, 4 years at $2,400, . . . . ' 9,600 Assistant foreman of equipment (in charge of station installation), 3 years at $2,100, 6,300 Rent of office space (1,500 square feet), 5 years at 60 cents a square foot per annum, ........... 4,500 Office supplies, stationery, telephone and telegraph, car fare, automo- bile usage, etc., . 14,950 Total general supervision during construction, .... $119,000 38 TELEPHONE RATES AND VALUES 90. Computation of Taxes, Insurance and Interest during Con- struction. Both taxes and insurance during the construction period form a very real part of the total cost of building a utility property. How- ever, in computing these elements of cost there is one point which must be clearly borne in mind : as soon as any portion of the plant is put into actual service, both taxes and insurance for that portion cease to be a construction expense. They must be cared for in exactly the same way that they would be in the case of any regularly operating plant, as a de- duction from gross earnings. The same thing may be said of interest during construction. In computing these three items taxes, interest and insurance it is necessary to first approximate as closely as possible the construction schedule that would probably be followed in the building of the plant, and then to determine the momentary equivalent, in terms of reproduction cost, of the plant constructed, or in process of construction, and of the plant in service, during each subdivision of the construction period. These subdivisions are usually taken as of six months' duration (in the case of a small plant, a three months' period may prove more suitable). A five-year construction period would therefore be subdivided into ten periods of six months each, and the exact status of construction in progress ascertained for each of these subperiods. 91. The Construction Schedule. The determination of the sched- ule of construction expenditures is not as difficult a problem as it may at first appear. The appraisal engineer, from his familiarity with the condi- tions actually existing during the construction of other similar plants, can make a pretty accurate guess at the probable progress of construction in the case in hand. During the first six months little or no construction work will be under- taken in the building of a telephone plant large enough to require five years for completion. During the second six months pole work will be actually undertaken, and in the third and fourth periods carried on at a rapid rate. As soon as a reasonable number of poles have been erected, wire and aerial cable crews will start work. Subway work should be started early in the construction period so as to insure its completion long enough before that of the aerial plant to enable underground cable crews to finish their work on schedule time. In a multi-office exchange, work on the main office the office in the city's commercial center will, of course, be expedited as much as possible so as to give the company a foothold in the community at the earliest possible moment. Work of installing subscribers' stations and drop wire will not be started until rather late in the construction period. It will probably overlap well into the period of actual operation. With these points in mind, the appraisal engineer can lay out a plausible construction schedule, and decide what proportion of the total of each type COLLATERAL CONSTRUCTION COSTS 39 of plant (poles, cable, wire, etc.) will be installed during each of the six months' periods. He can estimate the corresponding proportion of the total reproduction cost that will be expended during each period, and the propor- tion of the total contemplated plant put into service during each period. 92. Computation of Taxes during the Construction Period. In computing the taxes, the prevalent tax rates for each tj^pe of plant should be ascertained from an examination of the company's tax statement for the several years preceding the appraisal, and also the ratio of assessed to book values. The tax rates so determined will be applied to the reproduc- tion cost of the taxable property during each six months' period. The reproduction cost of the taxable property for each period will, of course, be the total reproduction cost of plant installed to date including that placed during the period under consideration less the reproduction cost of the plant already giving service at that date. The rate to be applied for each six months' period will be half of the annual rate, or, more properly, taxes may be computed for the entire year, using the full cost, and pro-rated over the six months' periods. As an illustration, the tax rate for a certain property was found, from an exam- ination of past records, to be $3.03 for every $100 of plant value. It was further found that for the several years preceding the appraisal the assessed value of the property was only 34.2 per cent of the book value. The actual tax rate applicable to the reproduction cost is, then, 34.2 per cent of $3.03, or $1.036 per $100 of reproduction cost. The computa- tion of taxes is given in Fig. 3. Repro- PERIOD. duction Cost of Plant Repro- duction Repro- duction Cost of Amount for Taxes for Taxes to during Con- Cost to Date. Plant in Service. Taxes. Period. Date. struction. First year : First half $101,808 $101,808 _ $101,808 $527 $527 Second half, .... 653,323 755,131 - 755,131 3,912 4,439 Second year: First half, 700,336 1,455,467 _ 1,455,467 7,539 11,978 Second half 960,321 2,415,788 - 2,415,788 12,514 24,492 Third year : First half 1 076*143 3,491,931 _ 3,491,931 18,088 42,580 Second half, .... 988,101 4,480,032 - 4,480,032 23,207 65,787 Fourth year: First half, 1,033,927 5,513,959 $4,390,253 1,123,706 5,821 71,608 Second half, .... 808,367 6,322,326 5,399,113 923,213 4,782 76,390 Fifth year: First half, 594,379 6,916,705 6,111,573 805,132 4,171 80,561 Second half, .... 627,648 7,544,353 6,789,686 754,667 3,909 84,470 Total taxes during construction, - - - - - $84,470 FIG. 3. Illustration of the computation of taxes during construction. 40 TELEPHONE RATES AND VALUES 93. Details of Tax Computations. That the method of derivation of the taxes as part of the reproduction cost may be clearly understood, the computations for one period the first half of the fourth year are given in detail: Reproduction cost of plant installed during period, .... $1,033,927 Reproduction cost of plant previously installed, .... 4,480,032 Total reproduction cost of plant installed to date, . . . $5,513,959 Reproduction cost of plant giving service at date, .... 4,390,253 Amount on which taxes are to be based, $5,513,959 less $4,390,253, or, 1,123,706 Tax rate for six months' period equals : Annual rate $1.036 = - = $0.518 per each $100 of valuation. Taxes for period = $U23 ' 706 X 0.518 = $5,821. 100 In the case under consideration the State taxed public utilities only on non-operating property and real estate. However, in many States utility corporations are subject to other taxes, such as taxes on franchises and capital stock. 94. Computation of Taxes direct from Cost of Inventoriable Property. Taxes are sometimes computed directly from the cost of the inventoriable property without assuming a construction schedule. In the opinion disapproving the plan of reorganizing the Third Avenue Railway Company, dated July 29, 1910, the Public Service Commission of New York, First District, ruled as follows : Mr. Floy estimates taxes at one-half of 1 per cent. This amount includes, apparently, every kind of tax from capital stock tax to franchise tax. It does not seem to be unreasonable, and, except so far as it includes taxes in connection with the corporate organization of the old company, it should be allowed. The former method, however, seems the more logical, and is much more likely to meet with favor in the eyes of courts and commissions in general. 95. Insurance Expense during Construction. There are three sources of insurance expense ordinarily encountered during the construc- tion of a telephone property: fire insurance, buildings, central office equipment, furniture and fixtures, tools and that portion of the construc- tion material carried in the storeroom during each of the construction periods; employers' liability insurance; and insurance against injuries to- the general public. Insurance, like taxes, should be estimated on a periodic basis the periods are usually assumed to be six months each and the reproduction cost of plant installed less the reproduction cost of plant in service ascer- COLLATERAL CONSTRUCTION COSTS 41 tained for each period and used as a basis for computing the cost of insur- ance. 96. Estimation of Fire Insurance Expense. In estimating fire insurance prevalent rates for similar risks, and rates paid for the several years preceding the appraisal on the property under consideration, should be reviewed in determining a fair insurance rate for appraisal purposes. It should also be remembered that insurance rates are rarely applied to the full value of the property insured. An examination of the company's insurance records for the several years preceding the appraisal should give the ratio of insured value to book value. This ratio may be applied to the reproduction -cost of the insurable property to get a proper insurance base. An illustration of the method followed in computing fire insurance for a comparatively large telephone plant is given in Fig. 4. 42 TELEPHONE RATES AND VALUES too os to -to mo *-oc SS2 ? oe co2 O CO 00 OS -^ t C^l CO CO ^H CO *-H ^/-* CCO 0^*0 l^-'Tt' Ott > gf<8 0S^ r^^H ^1 S9 is c?S; ??ss 5 s; >CO 1OCO t >0 05H j-^ -J< ^H IM -H ' tCrjT co'co IM'CO" s ^ i .3 a S3 P 3 i i "1 y *i -W3 -ii '-S j^S COLLATERAL CONSTRUCTION COSTS 43 97. Liability Insurance in the Actual Construction Work. Liability insurance in actual construction work is based upon the pay roll of the construction forces. Hence, in computing the cost of "liability insurance during construction," we have, first, to determine the proportion of the total reproduction cost involving labor items only, and then to ap- portion this amount over the construction period. A review of the unit costs for the various types of plant will render pos- sible a reasonably accurate estimate of the ratio of labor costs to total costs. This ratio applied to the construction schedule will give a proper base for use in determining liability insurance during each period. The illustration which follows is taken from a recent appraisal of a tele- phone property. It will be noted that liability insurance was not allowed on subscriber's station installations, as there is practically no danger of injuring life or property in installing a telephone on private property; for that matter, there is very little danger of injury to the installer himself. But the additional cost involved is comparatively small, and most com- panies feel that it is better to be on the safe side in the matter of employees' insurance. 98. Example of Computation of Liability Insurance. An illus- tration of the method used in computing liability insurance is given in Fig. 5. In this table liability insurance was calculated on the basis of the working force involved in the construction of the plant, exclusive of gen- eral supervision. The rate for outside employees is $5.25 per $100 of pay roll. The rate for the general public is $2.04 per $100 of pay roll. The cost of liability insurance for employees and general public (Fig. 5) was estimated on this basis. PERIOD. Outside Employees. Substation Installers. Insurance Cost. First year: Second half $38,874 - $2,834 Second year : First half, Second half, 110,093 144,602 - 8,026 10,541 Third year: First half, . Second half 157,180 150,667 47,259 11,458 13,465 Fourth year: First half Second half, 172,378 142 178 41,806 26 856 14,761 11 775 Fifth year: First half 102 947 31 408 9 154 Second half, 100,178 19,128 8,307 Total liability insurance during 'construction, - - $90,321 FIG. 5. The method used in computation of liability insurance 44 TELEPHONE RATES AND VALUES Liability insurance is sometimes estimated on a flat basis, as a percentage of the labor cost of the insurable items. On this basis an allowance of three-fourths of 1 per cent of the estimated labor cost for employees' in- surance, and three-fourths of 1 per cent for public insurance, or a total of 1| per cent for liability insurance, is not an unusual allowance. 99. Interest during Construction. Courts and commissions are generally agreed that the interest on the capital used in constructing a utility property is an allowable element of the total reproduction cost during the period that the capital is lying idle. As soon, however, as any portion of the plant is put into active service, interest on the capital in- vested in that portion of the plant ceases to be an element of cost, and becomes a part of the company's operating expenses. In the case of Pioneer Telephone & Telegraph Co. v. Westhaven (118 Pac. 354) the Supreme Court of Oklahoma rendered the following opinion: The commission refused to allow it (interest during construction) because it did not consider it a proper element of reproductive value. Counsel for the commission, however, at the oral argument before this court conceded, and we think properly, that there is no ground for refusing its allowance; ... no case has been cited, and in our investigation we found no case involving this question, where a reasonable amount has not been considered and allowed for loss of interest during construction as part of the cost of construction. 100. The Rate of Interest. The amount allowable for interest dur- ing construction will, of course, depend upon the rate at which interest is computed, and upon the length of time during which the accrued interest is considered a capital rather than an operating expenditure. Rate of in- terest will be governed by the prevalent cost of money in the locality of the property under consideration, and by the general attitude of the courts and commissions having jurisdiction over the territory involved, as evi- denced by their decisions in similar cases in the past. There is one point in this connection which should be clearly borne in mind: it sometimes happens that capital, held in readiness for use in actual construction, temporarily earns an increment during the period of inac- tion. As an illustration, the promoters of a property may deem it advisa- ble to borrow in advance sufficient funds to finance several years' con- struction. Such action may be warranted because of anticipated future tightness in the money market, expected advance in rates, or other perti- nent reasons. Until the money was actually required it would probably be deposited in a business bank or with a trust company, and there earn interest at a somewhat less rate than that charged by the original lenders. In cases of this kind only the net rate should be used in computing in- terest during construction. If the money costs 6 per cent and earns 3 per COLLATERAL CONSTRUCTION COSTS 45 cent, the difference, 3 per cent, should be used in determining the interest on the portion of the total capital earning a temporary partial return. 101. Computation of Interest during Construction. The proper length of time during which interest may be considered as a charge against the capital account should be readily determinable from the as- sumed schedule of progress of construction. Interest should be computed on the total of the direct construction cost plus those elements of collateral construction cost which we have already considered; i.e., general and legal expense, engineering and general supervision, taxes and insurance. 46 TELEPHONE RATES AND VALUES oot~-oi~- i <*< 10 o oo 1 I CO M T-l <* *~ ~ co" cooo coOi *oio GO 009 fa co 3.S COCO-H ooaoo 000 ^ tC co'-^'oo-^'oo'^'oo COO5iOOt- I 1 ^OO COOt^-QOQO OOiOO siSSSSS i e COM CO OO CD 10 <> M OO 'CO I 10 I I 1 I i-l I >o q ss ) CO CO ^f >r* T-> 00 I M O O 00 ...3..- i i=^2i-w.i^i2 ;3CO -3-3 - 33 _- 1 tj&ilg 1 Jflia Is a 5.^0' _.S C5 83 ^ S C & n o .-T3 5 c S, 'a .. - Sprfs.pi '! - ^|^^-5ggc3 -2T3-g ^ ,3'S.S'S.H 8 i 1 H" E- 1 COLLATERAL CONSTRUCTION COSTS 47 CO CO CO 3*,^ OOTj*iO^t< OOGOt^-CO OO i t OiO^^COC^T^OOCCOOO lOiCi-li-H i-tCii-l ^ C^l 1-1 i-H i-H (M ^ T-t ^H 1 1 1 1 1 O ; C 1 1 1 1 1 M 1 1 IM CO COO <1 i I - ifl >^t*OC 1 OOCOO^OCD I I C^OOT^^ *iOO 1 1>- ^H t^. I-H t^. c* m ^ ooo5 1>. i HO i-i ^H rt 00 o . fc fc K gig II- J H 02 CQ ll I I I I 30 i i I I I oo I rtio m o ts "O . II o ill (M N OO51OOO IOO t^ O f^ O - Ol IC^I O ^H -H C ' e | ' e ' il-IMi -s >S^T3s55 :; M:3 ^ ^-2-5 aca fPillll Jil|L^!ifllS iPIl 111 -sfi ^ i - i1 i 2if,,*|&S*l'g^al.s3!j 1 il| - ;n 2"? Sl s 2 iiliiiiiiiiijilli!l||iil!ili^i COLLATERAL CONSTRUCTION COSTS 49 38 oc o on co r O OS CO .. "l* - -^ OC l ^ (NCC SS sS ill ft S I I II 1 . 88 SJ l ^ -a ll'N ^H OO i 1 ^ ooo O Oi-* OO"C C^TcO ""tC OCI OS CO COCO i OO CO 1C . B 1 - cj t; - o3 . . - i- rflg > s >>+- s j . rH cfc 50 TELEPHONE RATES AND VALUES Taxes and insurance for the various six months' periods can, of course, be readily obtained from the detailed computations. Engineering, legal expenses, etc., will have to be pro-rated over the entire construction period, using the ratio of the other direct and collateral costs for each six months' period to their total cost, or distributed in accordance with the best judg- ment of the appraisal engineer. 102. Illustration of Method of computing Interest during Con- struction. In Figs. 6, 7 and 8 is presented an illustration of the method of computing interest during construction. Interest during construction has been calculated on the average invest- ment for each six months during the construction period, at the rate of 6 per cent per annum, compounded semi-annually. Interest has been charged as a construction expense only during the non-operative period of each portion of the property. As soon as the various portions of the prop- erty were placed in operation, interest ceased as an item of construction cost. A schedule of the amounts spent on each of the various items of construc- tion during each of the ten semi-annual periods of the five-year construc- tion period is contained in Fig. 6. This schedule is also continued through the six semi-annual periods of the sixth, seventh and eighth years, so as to show those plant expenditures which are necessarily deferred until the business is actually secured. The plant costs during this latter three-year period have not, however, been included in the calculations of interest during construction, because the items involved are conceived to have been put into service as soon as constructed. Fig. 7 shows the value of the plant put into operation during the various periods. The calculation of interest during construction, based on the first five years of the construction schedule, of Fig. 6, is shown in Fig. 8. 103. Construction in Progress. As suggested in section 61, it often happens that a portion of a plant is in progress of construction at the date of appraisal. In cases of this kind the task of ascertaining the exact status of such work at the appraisal date devolves upon the appraisal engineer. Plant in process of construction should not be included in the appraisal of the inventoriable property, but should be separately appraised and included with the collateral construction costs under the caption " Con- struction in Progress." When the date of appraisal is practically coincident with the date of inventory, the task is not a difficult one. By reviewing the daily comple- tion reports for estimates and job orders under way at the date of ap- praisal, and subsequently checking the status of the work by a personal field inspection, it is a comparatively simple matter to determine the reproduction cost of plant in process of construction at the appraisal date. COLLATERAL CONSTRUCTION COSTS 51 104. Reproduction Cost of Construction in Progress. This re- production cost may be ascertained either by determining the cost of plant in process of construction as it will be when completed, and subsequently reducing this cost to correspond to the status of the work at the appraisal date, or by estimating in detail the exact expenditures actually made to date. In either case the result should be the same. Where a large amount of plant is under construction at the appraisal date, it may be well to use both methods in determining the proper allow- ance for construction in progress. It occasionally happens that the time at which the reproduction cost of the property is sought antedates the inventory date by several years. In a case of this kind construction in progress must, of course, be determined entirely by the historical method, by reviewing plant and accounting records and ascertaining as accurately as possible what work was under way at the time of appraisal, and the exact status of the various estimates and work orders as of the appraisal date. Under certain conditions it may be desirable to gauge the cost of con- struction in progress by the portion of the total cost that has been actually added to the company's capital account as of the appraisal date. As an illustration, a plant which will eventually cost $100,000 may be in process of construction, and the actual cash expenditure at the date of appraisal may amount to only $50,000. The prevalent mode of recording completed work may cause consider- able delay in transferring costs to the capital account, so that only $10,000 may have found its way into the books at the appraisal date. In this case $10,000 would represent the appraised cost of construction in progress. 105. Working Capital. An operating utility corporation or for that matter, any other business concern requires a certain amount of ready cash, or working capital, to transact its everyday business. The company must be in a position to take advantage of discounts offered for prompt payment of bills, and to advance to district managers and com- mercial agents, periodically, sufficient cash to facilitate the proper han- dling of the business of their respective departments. Courts and commissions are in general agreed as to the propriety of in- cluding an allowance for working capital in an appraisal for rate-base pur- poses. The amount required will, of course, depend on the size of the utility and the nature of its business. The determination of a proper allowance for working capital may either be made on a percentage basis a percentage of the direct construction costs or, perhaps somewhat more accurately, by ascertaining the capital required to operate the company for the several years preceding the ap- praisal, and using this as a gauge of the amount of the working capital which may properly be included in the appraisal. 106. Computation of Working Capital. An illustration of the 52 TELEPHONE RATES AND VALUES method of computing working capital, taken from an appraisal of a tele- phone property, is presented in Fig. 9. Working capital, in this appraisal, DATE. Average Number of Stations. Average Working Cap- ital. Average per Station. 1912. First 6 months, . Second 6 months, 47,894 52,401 $151,011 04 202,756 11 $3 15 3 87 1913. First 6 months Second 6 months, 61,462 228,136 39 3 71 1914. First 6 months Average 2H years, 65,115 56,818 194,088 47 187,342 39 2 98 3 30 Number of stations in service June 30, 1914 67,125 67,125 stations at $3.30, $221,513 Total working capital . $221,513 FIG. 9. Computation of working capital. has been taken as those funds necessary to provide for a reasonable cash balance to permit the proper conduct of the business; to provide em- ployees' working funds, and to cover amounts due from subscribers and agents. It is based on the experience of the company for the two and one-half years prior to the date of the appraisal, and has been calculated on the basis of the average per subscriber's station during this period, applied to the number of subscribers' stations in service at the date of the appraisal. 107. Relation of Collateral Costs to Other Costs. In summing up the collateral construction costs it may be said that each of the compo- nent items, with the exception of construction in progress and working capital, represents elements of cost which are just as real and just as essential to the construction of a utility property as those embodied in the unit costs. It is unfortunate that the collateral costs cannot be included in the unit costs. Their segregation sometimes creates the erroneous impression that they are something entirely apart from the direct construction cost, something that has been added for good measure. Several cases might be cited where counsel representing municipalities or civic organizations in rate cases, either through ignorance of the subject in hand or through a wilful attempt at misrepresentation, have tried to prove that the collateral costs or "Overhead," as they are sometimes called are not a real element of cost, but an imaginary value added for the sole purpose of padding the total value of the plant. Fortunately, most of the State commissions, and many of the courts, have had a wide and COLLATERAL CONSTRUCTION COSTS 53 varied experience in appraisement problems, and are disposed to be abso- lutely fair in their allowances for collateral construction costs. 108. Percentage Values of Elements of Collateral Costs. If computed on the basis of a percentage of the direct construction costs, the usual range of values assigned to the various elements of collateral costs is as follows: Per Cent General and legal expense during construction, ... . . 2 to 6 Engineering and general supervision during construction . . 5 to 9 Taxes and insurance during construction, . . . . . 3 to 5 Interest during construction, . . . . . . . 5 to 8 Total collateral, or overhead, expense, . . . . . . 15 to 28 It is customary to determine the present value of the collateral construc- tion costs by depreciating them at the same rate as the direct construction costs. In other words, the ratio of the present value of the direct construc- tion costs to their reproduction cost, when applied to the various elements of collateral cost, will give their respective present values. Working capi- tal and plant in process of construction should not be depreciated, for obvious reasons. CHAPTER VI THE NON-PHYSICAL ASSETS 109. Elements of Non-physical Assets. In arriving at the total reproduction cost there still remains, after all of the component elements of the cost of the physical property have been considered, the "non-physi- cal assets," sometimes referred to collectively as the " intangible value." Courts and commissions are quite generally agreed as to the propriety of including, in a rate-base appraisal, all of the elements of direct and col- lateral cost. They may, however, and frequently do qualify the monetary values assigned to the various items by appraisal engineers. But when it comes to the non-physical assets the best that can be said is that many of the commissions have given this subject much time and thought. As a result the utilities are now receiving more favorable decisions than would have been possible five or six years ago. With the possible exception of good will and contract value, there is nothing unreal or ethereal about the non-physical assets. They are not, as so many people seem to think, added to the appraisal merely for the pur- pose of obtaining a maximum plant valuation to the ultimate end of squeezing the highest possible rates from the service subscribers. Such items as cost of establishing business, franchise cost and cost of financing are real elements of the cost of building up any going utility business. They represent appreciable expenditures. In the writer's opinion the difficulty in the past of obtaining favorable rulings as to the non-physical assets has been due, not so much to doubt in the minds of commissioners regarding the existence of an intangible value, as to the difficulty in allocating the expenditures involved, and to the lack of clear- cut, readily analyzed methods of estimating such expenditures. The non-physical assets, it will be remembered, are: good will, franchise value, cost of establishing business, cost of financing, and value of con- tracts and agreements. 110. Good Will. It is commonly conceded that good will can have no place in the valuation, for rate purposes, of a monopolistic utility. Lord Elden, in discussing good will, says : Good will is nothing more than the probability that the old customers will resort to the old place, that it involves an element of personal choice, and is inappro- priate where there can be no choice, and therefore should be given no value. In the telephone field, however, we are constantly confronted with cases where, apparently, at least, there is an element of choice. Two THE NON-PHYSICAL ASSETS 55 telephone companies operating in the same town may have a large number of subscribers in common. But, even in this case, it is obviously out of the question to capitalize good will in the appraisal of the property of either company for rate adjustment purposes. Circumstances might arise, however, where one of the companies would be willing to pay considerably in excess of the actual value of its competi- tor's property to eliminate its rival from the field. In such a case it is probable that the purchase price would include an allowance for good will, but undoubtedly such an allowance would take the form of a maximum valuation of the various elements of direct and collateral construction cost, rather than as a specific allowance set aside in the appraisal for good will. Changes of ownership of utility properties are subject to approval of the State commissions, and it is highly improbable that any commission would ratify a sale where the element of good will was distinctly set forth in the purchase price. A liberal-minded commission might, however, recognize that the property had a competitive value over and above the actual value of the plant, and therefore allow the use of somewhat higher appraisal units than would otherwise be justified. But cases of this kind are exceed- ingly rare. For all practical purposes, good will is not to be considered a factor in public utility appraisal work. 111. Value of Contracts or Agreements. It frequently happens that operating utility corporations have exceedingly profitable contracts or agreements with other utilities. A telephone company, for instance, may have an agreement with the local electric light company providing for the free use of the latter's poles throughout an entire section of a town. Usually an arrangement of this kind is reciprocal, the electric light com- pany, in return for its concession, being granted the privilege of the free use of an equal number of telephone poles. Undoubtedly agreements of this nature are exceedingly profitable to the beneficiaries, obviating, as they do, appreciable outlays for pole plant. Attempts to assign a value to contracts and agreements in rate-base appraisals have met with the almost universal disapproval of courts and commissions, except in cases where the utility corporation can show that the securing or carrying out of such contracts involved actual cash ex- penditures. One notable exception to this rule is found in the case of the Union Electric Light and Power Company of St. Louis. This company was permitted by the Public Service Commission of St. Louis to capitalize at 8 per cent the rentals saved through an agreement with the local tele- phone company involving the free use of the latter's poles. The total contract value assigned was $80,000. 56 TELEPHONE RATES AND VALUES Where actual costs are involved in the securing or carrying out of an agreement, as a rule, there is a little difficulty in convincing public utility commissions as to the propriety of including such costs in a rate-base appraisal. In the case of a telephone company these costs usually consist of the salaries, car fare and incidental expenditures of the special agents employed in securing the agreement, and any payments the telephone company may make to the foreign company to cover the expense of re- arranging the latter 's interests to provide room for the telephone company on the poles that are to be jointly used. The cost of rearranging an electric light company's wires and cables to facilitate joint pole use has been found to average from 50 cents to $1 a pole. The latter figure has been used in several recent appraisals. 112. Relation of Franchise to Value of Utility Property. The valuation of franchises has long been a bone of contention between utilities and regulatory bodies. Looking at the matter solely from the standpoint of the utility, there would seem ample justification for contending that franchises have an appreciable monetary value. The franchise is the foundation upon which the whole utility structure is built. Take away the franchise, and the most prosperous of properties becomes a mere mass of second-hand material worth only what the junk dealer can be induced to pay for it. Indeed, many items of plant, such as underground conduit, involving large initial expenditures and of great value to the company throughout its life as an operating utility, become absolutely worthless the moment the franchise is revoked. It would seem, then, that the franchise must be one of the most valuable assets of a utility corporation, inasmuch as the very life of the company is dependent upon its preservations. On the other hand, from the standpoint of the commissions, and from that of the public they represent, there is an equally good argument for debarring from a rate-base appraisal all franchise values except those representing actual costs incurred in securing the franchises. 113. Valuation of Franchise in Rate-base Appraisal. Franchises are in the nature of a gift from the people. It is obviously most unfair, therefore, to ask the people, or those of them who are utility patrons, to pay rates based upon a capitalization of their own gift. This represents the general attitude of courts and commissions on the subject of franchise valuation; i.e., the value assigned to franchises in a rate-base appraisal shall be limited to the actual expenditures incurred in securing such franchises. The question of franchise value affords an excellent illustration of the difference which may exist between value, or fair value, and value for rate- making purposes. In acquiescing to a commission's ruling that only actual costs shall be included in a rate-base appraisal as the value of its franchise, the company may contend and very properly so that the THE NON-PHYSICAL ASSETS 57 actual fair value of the franchise is far greater than any possible cost in- curred in securing it, and the value thus assigned is a rate-base, rather than a fair, value. The equity of this method of evaluating franchises cannot be ques- tioned. It would seem, however, that in return for waiving any claim for greater values, utility corporations should receive the maximum of pro- tection at the hands of municipal and State regulatory bodies in the matter of franchise renewals, so long as the companies conduct themselves in such a manner as to warrant public confidence. The legal cost involved in securing franchises has already been discussed. There remains, therefore, only the consideration of such other expenses as may legitimately be involved in securing the franchise. These are usu- ally of a minor nature, excepting in the municipalities where it is custom- ary to require prospective utility corporations to bid for their franchise privileges. 114. Cost of Establishing Business or Going Value. Going value has been variously defined as "the cost of establishing the business," "the cost of acquiring an income," and "the capitalization of early losses incurred in connection with the development of the business to where it is capable of producing a fair return on the investment." This phase of the subject of public utility appraisals is one that has always proven a thorn in the side of the appraisal engineer, and one that is usually rather difficult for the beginner in appraisal work to grasp. There are several prevalent methods of deriving going value, and many explanations of the underlying theories have been advanced by eminent authorities. The following extract from the testimony of Kempster B. Miller, in a recent rate case, presents the clearest explanation of going value which, in the writer's opinion, has yet been advanced: "It is self-evident that a physical plant with a well-established business is worth more than the same physical plant without any business. This element of value, over and above the bare value of the physical plant, I have included under the heading of cost of establishing business. It is sometimes called going value. That such a value exists is indisputable, and, besides being a self-evident fact, has been upheld by courts of highest resort. 115. Analogy to illustrate Theory of Cost to reproduce Physical Property. "In appraising the physical property, we proceeded upon the basis that the best measure of its value was what it would cost to reproduce it. I have followed this same procedure in appraising the value of the business attached to the physical plant by calculating as closely as possible what it would cost to reproduce the business that existed on the date of appraisal. "I may, perhaps, make the theory upon which I proceeded clearer by a simple analogy. A man who desired to invest his money in a large 58 TELEPHONE RATES AND VALUES office building might enter into an agreement with a contractor to construct the building and turn it over to him at a given date for a fixed sum. "In this case the amount so paid would constitute the cost of the physical property. This amount, however, would be only a part of what the owner would have to pay in order to produce a building filled with tenants and established on a going basis. In order to fill his building with tenants and place it on an income-producing basis, it will be necessary for him to organize his operating force and sell his space, meanwhile operating the building, keeping it warm, running the elevators, and supplying the attendant janitor and other operating services. "Instead of contracting for the bare building, the owner might include as a part of his agreement with the contractor the turning over of the building full of tenants and completely organized as a going concern. In this case it is perfectly obvious that the contractor could not deliver the building at as early a date nor for the same amount of money as when his task was confined to the production of the bare building alone. "As the building approached completion he would be required to have agents at work securing leases from prospective tenants. He would be required to secure an adequate operating force for the building, consisting of a competent building superintendent and his office force, a building engineer and his subordinates, including elevator men, a suitable janitors' force, and, in fact, a complete organization necessary to keep the building warm and clean, and to carry out all of the other functions required. All this would have to be done before the tenants actually began to occupy the building. "After the actual opening of the building, and until such time as the number of tenants required by the contract were secured, the contractor would be forced to pay all operating expenses, which at the beginning would be largely in excess of the rents received. As tenants were secured, the revenue would begin to grow, but it is probable that the contractor would be forced to give a certain amount of rent free during the early stages of the occupancy of the building. Such revenues as were received would, of course, flow to the contractor as an offset against the expenses. It is inevitable, however, that the sum total of the financial results during the business development period would be a loss, and, together with the interest thereon, would become a part of the cost to- the contractor. "This total cost to the contractor, plus the contractor's profit, would be added to the investment of the owner at the time he took over the building. In this case the difference between this larger cost of the build- ing full of tenants, and of the cost of the physical property alone, would constitute the cost of establishing business, and would, in my judgment, be a good measure of the going value. 116. Division of Cost of Establishing Business. "In my ap- praisal of the telephone property under consideration, I have endeavored THE NON-PHYSICAL ASSETS 59 to estimate as accurately as possible what it would cost the company to reproduce the business and organization that were attached to the plant on the appraisal date in much the same way as in the case of the contractor just outlined, except that the company would act as its own contractor, without profit. It is believed that money would cost the company, under these circumstances, at least 8 per cent, and therefore that rate of interest has been included in the cost of establishing business. "The cost of establishing business, as derived in the present appraisal, has been divided into three items : "(a) Organization and development. "(b) Selling service. "(c) Net interest and operating expenditures during development. 117. Organization and Development. "It is self-evident that an organization, from executives down to operators and laborers, could not be gathered together in the assumed reproduction of the plant and business without an expenditure of money. "The expense incurred in training and schooling operators before they can become proficient enough to do useful work at the switchboards is one of many examples that might be cited, and no one at all familiar with the telephone business can deny that a skilled force of operators is a valuable asset. Again, at the beginning of service in a new plant it always occurs that until a certain number of subscribers has been secured no charge can be made, and the money spent during this period is a part of the cost of building up the organization. "We have placed the cost of organization and development at $33,000, this being less than 2.5 per cent of the reproduction cost of the physical property. There is ample precedent for an allowance of this percentage, or a larger one, in computing this item. 118. Selling Service. "It has been generally recognized by courts and commissions that a certain amount of cost is involved in securing new subscribers. This cost resides in the salaries and expenses of solicitors, in advertising, and in the actual clerical expense of proper enrollment. "This cost per station in the reproduction of a plant has been placed by various authorities in the neighborhood of $4, usually that amount or more. But after a careful study of the present situation we arrived at the conclusion that under favorable circumstances we might be able to sell service at a cost of $3.50 per station, and have used that figure. This, for the total of 12,786 telephone stations at the date of this appraisal, places the total cost of selling service at $44,751. 119. Net Interest and Operating Expenditures during Develop- ment. "It has been assumed that the total time required for repro- ducing the plant and the business would be seven and one-half years. I chose this period because it seemed to be the most economical one, and would bear the test of reason. It will be noted, however, from the schedule 60 TELEPHONE RATES AND VALUES of expenditures, that the bulk of the plant expenditures was incurred during the first four years, and that the remaining three and one-half years were spent in a gradual rounding out of the property. The bulk of the plant expenditures during this later period was principally in the nature of minor extensions necessary to connect the subscribers as they were secured. "This is the way that a plant would be built. To attempt to force matters by adopting a shorter construction and business-building period would be more likely to result in a greater rather than a smaller total investment. "It was further assumed that the plant actually began to give service and to charge therefor in the fourth quarter of the third year, or two years and nine months after the beginning of construction. By this means it has been possible, by applying common experience in the telephone business, to determine with reasonable accuracy what the investment would be in the plant at any time during the development period; and again, by applying common experience, to compute what the operating and other expenditures would be, what the revenue would be, and, finally, at the end of the period, what the net cost of all these operations would be at the time that the plant was a fully organized and going concern. "In a tabulated statement we have shown the investment, the operat- ing and other expenditures, and also the revenue, if any, during each quarter. This gives the basis for determining the deficit or profit for each quarter, thus making it possible to compute the net amount of money required for each quarter, the cumulative amount up to each quarter, and the interest thereon throughout the entire period. "This total interest, thus computed, amounts to $586,051, but inasmuch as interest during construction, amounting to $78,018, has already been allocated to the cost of the physical property, this amount is deducted from the amount involved in the cost of establishing business. Again, during the entire period the total revenue of $1,128,743 exceeded the total operating expenditures of $743,694 by $385,049. This operates as a credit against operating expenditures, and therefore as a second deduction from the total interest account. "These two deductions amount to $463,057, which, deducted from the total interest of $586,051, leaves a balance of $122,984 as the amount of net interest and operating expenditures during development. 120. Summary of Theory of Cost of Establishing Business. - "To summarize, the theory upon which I have proceeded in estimating the cost of establishing business was to assume, as is the case, that the town presented an average opportunity for a telephone enterprise; that the development of the property there in its hypothetical reproduction was carried out with ordinary care; and that a period of three years would be required to reproduce the bulk of the property, and a total of THE NON-PHYSICAL ASSETS 61 seven and one-half years would be required to reproduce all of the business and make the gross and net incomes equal to what tney were on June 30, 1915. " Under these circumstances, the deficit for the first year would neces- sarily, with reasonable interest, be required to be carried over to the next year. The deficit at the end of that year would necessarily be added to the previous one, and, with interest thereon, carried to the next year, and so on from year to year, the deficiency decreasing each year until finally the current income would be more than sufficient to balance the current liabilities, and at the end of the period would be as they were at the date of appraisal. In this state of equilibrium the deficiency account would seem to be a fair measure of the value of the mature going business. 121. Total Cost of Establishing Business. "The three items in the total cost of establishing business $33,000 for organization and development, $44,751 for selling service, and $122,984 for net interest and operating expenditures during development amount to $200,735. This is slightly less than 15 per cent of the total reproduction cost of the physical property, which, measured by all standards of comparison that I have been able to secure, is conservative. "Of the many methods that have been proposed for calculating going value, or cost of establishing business, I have applied all that seem in any wise reasonable to the facts in this case, and they have almost uni- versally produced a larger value than the one herein presented. For instance, in the recent case before the Board of Public Utilities Com- missioners of New Jersey, involving the telephone rates at Camden, the method advanced by the commission, when applied to the present case, results in a figure of $211,342, which is 5 per cent higher than the figure set up in my appraisal." 122. General Attitude of Courts and Commissions relative to Going Value. The following opinion of the California Supreme Court in the Contra Costa Water Co. v. City of Oakland, 113 Pac. 668, decided Jan. 19, 1911, typifies the general attitude of courts and commissions on the subject of going value: Both of these witnesses also included in their totals an item of $500,000 as the value of the going business of plaintiff. Their theory in regard to this item was, as stated by learned counsel for plaintiff, that the property and business of the plaintiff had a value as being the property and business of a concern which, in the legal and commercial sense, is a "going concern," and which has a thoroughly established business over and above and in addition to the mere cost or cost of reproduction of its property and plant, and what the value of said property would be at the time when its works were just completed. . . . It may be conceded that the fact that the works of plaintiff are in actual use as part of a going concern gives them a greater value to the stockholders than they would otherwise have. It supplies the capacity to earn returns which would otherwise be wanting. 62 TELEPHONE RATES AND VALUES Purely for the purposes of this decision we may assume it to be true, as was said by Judge Farrington in Spring Valley Water Co. v. City and County of San Fran- cisco, supra, that the value of the going business and franchise depends upon their earning power. Where, as here, that earning power depends on the rates to be fixed annually by the city council in such a way as to give only a fair return on the property in use, and the franchise is neither exclusive nor defined by any special contract with the city, these elements would appear to play a very small part, if any, in the matter of valuation. However this may be, it is plain that none of the witnesses furnished any evidence upon which any value could be added on account of either of these items. The theory of both Mr. Adams and Mr. Schuyler was, as stated by plaintiff's counsel, that this value was measured by the losses sustained and the deficiencies of income accruing to it, in the early period of its operations, and up to the time that it had been brought to a paying basis. Mr. Kiersted, the only other witness on this subject, measured the value of this element of "going concern" in practically the same way. Mr. Adams in one of his estimates concluded, as a matter of indi- vidual judgment, that in an enterprise having the characteristics and magnitude of the old Contra Costa Water Company, there must have been in the inception of the concern losses or deficiencies in income to the extent of $500,000. In his other estimate he made a computation of the early losses, treating them as the difference between the return of 5.63 per cent, which the company had actually received, as computed by him from its annual statements, and the return of 7 per cent, which he believed it should have received. Mr. Schuyler and Mr. Kiersted followed the same general lines. This was all the evidence supporting this item. We think it very clear that it had no relation to the question of present value, and afforded no basis for any valuation by the trial court of either of these elements, franchise or going concern. . . . It is unnecessary to say that the burden was on the plaintiff to furnish data showing that these elements had a distinct, independent productive value, before any such value could be included. See, in regard to value of franchise, Willcox v. Consolidated Gas Co., supra. In what we have said we do not desire to be understood as deciding that in the matter of fixing water rates, anything at all should be added to the value on account of the element of "going concern." It will be noted that the court, while admitting the existence of going concern value, holds that the plaintiff has not been able to furnish suffi- ciently conclusive evidence to warrant the inclusion of this item in a rate- base appraisal. This opinion clearly shows the need for clear-cut, readily assimilated methods of determining going value. The more complex methods, what- ever their value from an engineering and accounting standpoint, only tend to befog the issue, and have very little chance of securing the favorable consideration of either courts or public utility commissions. 123. Cost of Financing. In financing utility properties it is usually necessary to offer some inducement to obtain capital over and above the interest paid on the borrowed moneys. The reason for this will be obvious. People are not prone to hazard their money in a new undertaking unless the opportunity for gain is 'more alluring than in other firmly established THE NON-PHYSICAL ASSETS 63 and equally remunerative as far as the fixed rate of interest is concerned fields. This cost financing, or cost of enticing capital, as it might well be called, may be divided into two general classifications, cost of securing preliminary capital and cost of securing permanent capital. 124. Cost of Securing Preliminary Capital. At the beginning of the construction period there is, of course, no tangible property to mortgage. The backers of an enterprise must be men of sufficient credit to borrow on short-term notes enough money to start the enterprise. To obtain such capital it is necessary to pay high rates of interest. In one of the western States it is customary to pay 6 per cent for capital secured on first mortgage bonds and nearly 7 per cent for mone3 r s borrowed on short-term notes. The difference between these two rates 1 per cent is an element of the cost of financing. 125. Cost of Securing Permanent Capital. Toward the end of the construction period, when the utility corporation has been brought into being and endowed with a tangible and marketable property, these short-term notes are retired by the sale of permanent securities, but even at this time it is necessary to offer an inducement to secure capital. In the first place, to insure the speedy disposal of permanent securities, it is necessary to call upon a reputable firm of financial agents, a banking or brokerage house. This involves expense for investigations on the part of the fiscal agents, for no firm will assume the responsibility of financing a property until it is thoroughly satisfied as to the soundness of the enterprise. Next comes the expense of marketing the securities, and the profit to the financial agents, and lastly some inducement in the way of an under par price must be offered to attract the investing public. As a result, securities having a redeemable or par value of $100 per share often do not net the utility more than $90. 126. Attitude of Courts and Commission on Financing Cost. - It will be seen that the cost of financing is a very real element in the total cost of producing a utility property, and one that is certainly entitled to consideration in ascertaining the reproduction cost. The attitude of courts and commissions on the subject of financing cost is evidenced by the following quotation : The plant in question here, for instance, was built by borrowed money or by the sale of securities which not only bear interest at 6 per cent from the time they were issued, but which also had to be discounted at no less than 8 per cent besides. In other words, they brought 8 per cent less than par value in the money markets. If the plant was needed and these were the best terms upon which the capital for its construction could be obtained, it is certainly difficult to see what other dis- position can be made of these charges than to include them in the cost of the plant, at least until they can be written off from earnings, if this course should be found 64 TELEPHONE RATES AND VALUES to be advisable, for it is clear that no private party would enter a business of this kind if they had to foot such losses out of their own pockets. Such interests and discounts, therefore, often constitute a part of the price upon which the consumers must pay interest if they desire the conveniences that are offered by the utilities, because these are usually the best terms upon which such utilities can be had. These facts indicate quite clearly that the amount of interest or discount that it may become necessary to include in the construction account is a question that depends upon the facts in each particular case, and that it is a matter that cannot always be determined in advance. 127. Cost of Financing during the Construction Period. In the following illustration of the method of computing the cost of financing, taken from a recent appraisal, the cost of financing during the construc- tion period is first considered. Under cost of financing has been included the extra cost of raising money during the construction period over and above the ordinary invest- ment interest, and also the cost of the permanent financing of the enter- prise after it has become an operating concern. The plan of financing adopted for the purpose of this appraisal has been that the moneys required during the construction period would be raised by short-term notes, which would be retired, as the various portions of the plant were put into service, by the selling of permanent securities in the form of stock and bonds. Interest during construction has been figured at the rate of 6 per cent, and has been included under that caption. It seems certain, however, that the rate of 6 per cent is not sufficient to provide funds during the construction period for the establishment of a new enterprise. A study of the notes authorized by the California Railroad Commission on light, power, gas, water and telephone companies during 1913 and 1914 shows that the average rate of interest on notes was 6.992 per cent, or practically 7 per cent. Since stock or bonds could not be sold during the construction period, except at an enormous sacrifice, it has been .assumed that the parties building the plant were men with sufficient credit to borrow, by short- term notes, on a new enterprise at practically the same rate as the average rate paid in this State on more or less seasoned enterprises. This computation is shown in Fig. 10. THE NON-PHYSICAL ASSETS 65 {2 S_ o s s 00 i-l W O CO CO e>q -H OO 05 o oo t>. eo 10 oo co !> CO O US eo g 8 ^8 sl I 1 r fi S a -3 .2 fe 13 3 S S 1 g 3' 2 -I 3 1 H struct! uding i 66 TELEPHONE RATES AND VALUES 128. The Computation of the Permanent Financing. The plan of permanent financing contemplates the issuance of permanent securities as an evidence of the total investment in the property. Whether these securities would be in stock, in bonds, or partly in each, is immaterial. A study of the bonds authorized by the railroad commission of this State, covering light, power, gas, water and telephone properties during 1913 and 1914, shows that the 5 per cent bonds, aggregating $21,468,000, were sold to net 88.25 per cent of their par value, and that the 6 per cent bonds, aggregating $8,359,200, were sold to net 91.25 of their par value. Based on this showing, we have assumed that the securities covering this property could be sold to net 90 per cent of their par value. The cost of permanent financing will be as follows : Total value of plant, consisting of all items down to and including construction in process (Fig. 6.), ...... $8,592,475 Cost of establishing the business, 2,292,954 Working capital, . . . . 221,513 Cost of financing during construction, ...... 190,888 Total amount to be financed at 9 per cent of par value, . . $11,297,830 Discount, or cost of permanent financing, ..... 1,255,314 Total securities issued, ........ $12,553,144 Cost of permanent financing, . . . $1,255,314 This means that, in order to raise the total amount invested in the property at the time of its permanent financing, $11,297,830, it would be necessary to issue $12,553,144 worth of securities, representing a cost of permanent financing of $1,255,314. 129. The Total Cost of Financing. The total cost of financing, therefore, will be made up of Cost of financing during construction, . . . $190,888 Cost of permanent financing, ....... 1,255,314 Total cost of financing, ... . $1,446,202 In a very general way all of the elements component to the total repro- duction cost of a telephone property have been discussed. Many of the illustrations of methods of computing the items of collateral cost and the tangible values have been taken from actual appraisals. Rather than complicate the text by an attempt to outline all of the possible methods which might be, or have been, used, the writer has, in each case, selected for consideration what seemed to him the clearest and most plausible method, and the one which has had the most favorable considera- tion at the hands of courts and commissions. CHAPTER VII PRELIMINARY STEPS OF INVENTORY 130. Preliminary Steps of the Inventory. In considering the various steps involved in the actual preparation of an appraisal, it is well to imagine one's self in the position of an engineer about to undertake an appraisement problem. There is such a vast amount of detail involved in the appraisal of even the smallest telephone property, and so many different angles from which the problem may be viewed, that too much stress cannot be laid upon the importance of thinking out each step most carefully in advance. As a matter of fact, it is impossible to lay down any specific set of rules adequate to meet the individual requirements of every appraisement problem. In the last analysis, success inevitably depends upon the expe- rience, good judgment and integrity of the men in charge. Appraisals cannot be made by novices, no matter how capable they may be or how carefully they may have studied up on the subject in hand. Problems are constantly arising, both in the taking of the inventory and in the appraisement, that require the experienced supervision of men who are familiar with every angle of the appraisement game. In sketching a general plan of procedure, therefore, an effort will be made to treat the subject broadly and to obviate confusing detail. There are certain preliminary steps which have to be gone through in advance of the actual appraisement of almost any telephone property, and these may be summarized as follows : 1. Determination of purpose of appraisement whether for rate adjustment, financing or accounting purposes. 2. Survey of conditions by engineer in charge. 3. Investigation of company's records by engineer in charge. 4. Review of State or local commission instructions governing the preparation of appraisals. 5. Preparation of field forms determination of types of construction involved, etc. 6. Selection of field inspectors, office help, etc. 131. Determination of Purpose of Appraisal. There are several purposes for which^telephone appraisals may be required, and the method of appraisement at least in so far as refinement of detail is concerned is necessarily dependent upon the ultimate use to which the appraisal is to be put. The various uses may be summarized as follows: 68 TELEPHONE RATES AND VALUES 1. Appraisals for presentation before regulatory bodies in rate adjust- ment cases. 2. Appraisals for the purpose of determining the fair value for use in financing. 3. Appraisals for use as a basis of tax adjustment. 4. Appraisals for accounting purposes. The first question that confronts the appraisal engineer, therefore, is: " What are they going to use this appraisal for?" If it is for any of the last three purposes, much of the detail necessary for a commission appraisal may be eliminated. The reason for this is obvious. The various State commissions must of a necessity insist upon a strict adherence to carefully formulated rules as to form of appraisal, classification of materials, grouping of summaries, etc.; otherwise they would continually be overwhelmed with a heterogeneous assortment of data difficult to assimilate and of practically no use to any one except the people who prepared it. 132. Survey of Conditions. Having ascertained the use to which the prospective appraisal will be put, the engineer can start the pre- paratory work in earnest. First will come a general inspection of the property in the company of some official or employee who is thoroughly familiar, not only with the geographical layout of the plant, but also with the construction history of the various portions. If the property is a large one the inspection will necessarily be limited to a small proportion of the total. In this event a special effort should be made to cover sections that are typical of the various kinds of con- struction used throughout the plant as a whole. The importance of this preliminary inspection trip cannot be exag- gerated. It gives the engineer an idea invaluable in his later work of the correlation of the various parts of the property. It furnishes an index to the present plant conditions, and this alone is worth the time involved. It paves the way for an intelligent unit cost study by affording an opportunity to observe general topographical and soil conditions as well as railroad shipping facilities. Last but not least, a preliminary inspection trip affords a basis for an intelligent estimate of the cost of appraisement. 133. Investigation of Company's Records. After the preliminary inspection trip comes the review of the company's records and map files. It is most important at the outset to ascertain the exact condition of the records, and find out just how far they can be relied upon as an aid to the preparation of the inventory. If the records are reasonably accurate, they can often be used as a general check on the field work. Of course, it is unwise for a disinterested engineer to put too much faith in the company's records, if the appraisal is being made for commission purposes, and he is to be required to sub- PRELIMINARY STEPS OF INVENTORY 69 stantiate the inventory on the witness stand, but a comparison of the company's records with the field notes may be invaluable in pointing out doubtful items which should be rechecked in the field. Maps of the outside plant layout should be gone over carefully, with a view to determining their possible usefulness in connection with the field work. Nothing helps so much in an inventory of the outside plant of a telephone company as a good set of plans showing the location of the pole, aerial cable and underground systems. The use of such maps will obviate loss of time on the part of the field men in finding and identifying the company's property. 134. Review of State or Local Commission Instructions. If the appraisal is for presentation before a commission, or if there is the slightest possibility of its ever being put to that use, the greatest care should be taken to see that the appraisal conforms to commission require- ments in every detail. A careful study by the appraisal engineer of all available instructive literature issued by the commission may obviate subsequent needless expenditures of time and money in rearranging the data. Of course, if the appraisal is not to be used for commission purposes, the engineer may use his judgment as to form of presentation. Even in this case, though, it is best to adhere strictly to the accounting instructions of the Interstate Commerce Commission. 135. Preparation of Field Forms. The subject of the preparation of the field forms will be discussed more in detail later. For the present, suffice it to say that the expenditure of time and thought in the drafting of suitable forms for recording the data will undoubtedly appreciably lessen the cost, and greatly increase the efficiency, of the appraisal. The forms should be comprehensive enough to cover all possible needs and yet provide for the elimination of detail not absolutely essential to the success of the appraisal. 136. Field Inspectors and Office Help. The next problem con- fronting the appraisal engineer involves the selection of field and office help. The selection of suitable men for taking the inventory in the field is extremely important, especially in the appraisal of the large property, where a very close supervision by the engineer in charge is out of the question. The two essential qualifications for field inspectors are knowledge of outside telephone plant, and the ability to record observations neatly and accurately. It has been the writer's experience that the more intelligent class of telephone linemen and troublemen make the best inspectors. It is often possible to pick up men who are thoroughly familiar with outside telephone construction, and who have had sufficient previous experience, either as assistant foremen or timekeepers, to enable them to satisfactorily record the data. 70 TELEPHONE RATES AND VALUES It is interesting to note that there is a large class of telephone "floaters" who make the very best kind of inventory men. As a rule, these men are intelligent, have had a good deal of telephone experience, and are capable of hard and conscientious work for months at a time, although they may lack the staying power to make them successful employees of an operating company. 137. Selection of Inventory Help. In selecting field inspectors, the following plan is suggested: pick out a typical pole line carrying one or more aerial cables and several arms of wire, if possible, both copper and iron of various gauges, and having the usual equipment of anchors, guys, side-arm braces, etc. First, make a careful inventory of this line. Then send each of the applicants out, provided with suitable forms, without of course advising them that an inventory has already been taken of the line in question. A comparison of the results obtained by the applicants with the original inventory will afford an excellent means of ascertaining the general fitness of the men in question. In a previous installment reference was made to the necessity of careful supervision of the work of the outside men. The work should be so arranged that the appraisal engineer, or one of his immediate assistants, will be able to spend at least half of each day in reviewing in the field the completed work of the field inspectors. Of course, as the appraisal pro- gresses and the men become more proficient, the amount of supervision may be reduced. In selecting office help the prime requisites are neatness and accuracy. A knowledge of telephone work, while helpful, is not absolutely necessary, especially as all of the office work will be done under the direct supervision of the appraisal engineer or one of his immediate assistants. 138. Utilization of Company Employees on Appraisal Work. At first thought it may seem that a real economy may be effected by utilizing company employees on appraisal work, especially during dull times, when the men may be assigned to the appraisal job during clear weather and allowed to clean up their own routine work when the weather is unfavorable for inventory work in the field. Experience has proven, however, that the best results cannot be secured in this way. In the first place, the men are apt to slight, perhaps un- consciously, temporary inventory work in favor of the permanent job in which they are naturally more interested. Again, men permanently employed by the company are likely to be too optimistic in judging present condition of the plant and in ascertaining the ownership of jointly occupied poles. A stranger to the property is much more likely to probe a questionable point to the bottom than to decide, perhaps unconsciously, in favor of the company whose plant he is appraising. A still further objection to the carrying on of the inventory PRELIMINARY STEPS OF INVENTORY 71 work by company employees is found in the fact that appraisals made in this manner almost invariably require a longer time for completion, and necessarily become a sort of side issue to the regular business of the com- pany. Unquestionably the best results in the inventory and appraisement of a telephone property can only be obtained through intensive methods, by giving the problem in hand undivided attention until it is completed. 139. Interstate Commerce Commission's Classification of Tele- phone companies. Having completed the preliminary steps as have been outlined, the actual work of the inventory should progress rapidly. Unless it is found necessary to conform with special rules laid down by local or State regulatory bodies, it will be advantageous to adhere as closely as possible to the accounting system of the Interstate Commerce Commission. It will be remembered that the instructions for telephone accounting provide for the classification of telephone companies according to the amount of annual operating revenue, as follows : Class A. Companies having average annual operating revenues exceeding $250,000. Class B. Companies having average annual operating revenues ex- ceeding $50,000 but not more than $250,000. Class C. Companies having average annual operating revenues exceeding $10,000 but not more than $50,000. Class D. Companies having average annual operating revenues of $10,000 or less. 140. Accounting Instructions of the Interstate Commerce Commission. Detailed accounting instructions have been issued for Class A, B and C companies, but up to the present time no specific pro- vision has been made for Class D companies. The instructions which follow, for inventorying a telephone property, have been based upon the system of accounts prescribed for Class A and B companies. Having once gained a thorough understanding of the method of procedure for the larger companies, the reader can readily make such changes as may be necessary to adapt this suggested method of procedure to meet the needs of the smaller companies falling under Classes C and D. Referring to the summary of the inventoriable property, Fig. 11, the inventory of the various portions of plant will be considered in the order which would naturally be taken. The discussion of each phase of the inventory will be prefaced with a review of the instructions issued by the Interstate Commerce Commission. 72 TELEPHONE RATES AND VALUES Total inventoriable property. Land and buildings, I. C. C. account 210 Land, I. C. S. sub-account 211. Buildings, I. C. S. sub-account 212. Central office equipment, / Central office telephone equipment, sub-account 212. I. C. C. account 220. I Other equipment of central offices, sub-account 222. f Station apparatus, sub-account 231. Q. . . T r* r~i I Station installations, sub-account 232. arronnt Q 2$ m ' Interior block wires, sub-account 233. Private branch exchanges, sub-account 234. [ Booths and special fittings, sub-account 235. PIT f Exchange, I. C. C. account 241. Pole lines | Toll) L c c account 251 i ,, f Exchange, I. C. C. account 242. Aerial cable j Tollj L c c account 352. . . , f Exchange, I. C. C. account 243. Aerial wire | Tollj L c c account 253 . Underground conduits { fxchang^, L C. C^ccount 244. Exchange, I. C. C. account 245. Toll, I. C. C. account 255. Underground cable Exchange, I. C. C. account 246. Submarine cable Toll, I. C. C. account 256. f Office furniture and fixtures, I. C. C. sub-account 261. General shop equipment, I. C. C. sub-account 262. General equipment, I. J General store equipment, I. C. C. sub-account 263. C. C. account 260. 1 General stable and garage equipment, I. C. C. sub-ac- \ count 264. [ General tools and implements, I. C. C. sub-account 265. Material and supplies, I. C. C. account 122. Right of way, I. C. C. account 207. FIG. 11. Summary of inventoriable property of a telephone plant. CHAPTER VIII THE INVENTORY OF REAL ESTATE AND EQUIPMENT 141. Land, Interstate Commerce Commission, Account 211. "This account should include the cost of all land and interests in land, other than right of way, acquired for use in the operation of the telephone plant, such as land occupied by general and central offices, shops, stables, garages, storehouses, etc. It includes the cost of examination and regis- tration of title conveyancer's and notary's fees, purchasing agent's com- missions or proportion of purchasing agent's salary, taxes accrued to date of transfer of title, and all liens upon the title, when such costs are assumed or paid by the purchaser in his own behalf; cost of assessments for public improvements which add to the value of the lands but which are not the property of the accounting company; cost of grading land when not done in connection with buildings; and costs of obtaining con- sents and payments for abutting damages and expenses of condemnation proceedings." This account should also include the first cost of acquiring leaseholds of land, other than for right of way, the terms of which are more than one year each, whether acquired through direct lease, assignment or otherwise (but not including the rents paid periodically in consideration of rights obtained under such leases). If any such leasehold is acquired by assign- ment the charge to this account must not exceed the amount actually paid therefor by the accounting company to the assignor. Courts and commissions have almost universally ruled that the appraisal of land should be made by a qualified real estate expert, and not either by the company submitting the appraisal or a consulting engineer. It is well, therefore, to retain a local real estate man who is thoroughly familiar with real estate values in the community in question, and have him submit a detailed description and valuation of all land to be included in the appraisal. The appraisal of the land as submitted by the real estate man should, of course, be carefully checked by the appraisal engineer as to general reasonableness. As a rule, this may be easily accomplished by a com- parison with adjoining land values, especially if property in the immediate vicinity of the appraisal under consideration has changed hands at or near the date of appraisal. 142. Evaluation and Description of Land. In reviewing the two methods of evaluating real estate the expert method and the compara- 74 TELEPHONE RATES AND VALUES tive method Henry Floy, in " Valuation of Public Utility Properties," page 73, says: Some argument has been advanced that the proper basis of valuation is the assessed value, but as such value is usually a conservative and "hard times" value, below the price at which property can be purchased under ordinary conditions, it is not a proper basis of valuation, except for taxation purposes, where the real estate of corporations should be placed on the same basis as other real estate. An appraised value of real estate, which depends upon the opinion of experts, will usually be found to be a variable quantity. While the best experts base their opinions on some knowledge of actual transfers, a large element of personal judg- ment usually enters into their conclusions. Probably the safest method to pursue in determining the perplexing question of land value is based on a study and comparison of bona fide sales of land adjoining or near the property being valued. In many instances, however, such a method cannot be used in that property which may have been held for years, in large tracts, without change of ownership. Under such circumstances the judgment of the real estate expert is probably as fair a guide as can be used in determining values. The following is an illustration of the method of describing land as adopted in a recent telephone appraisement : Main Central Office. Location: Corner Eighth and Cedar streets. Description: Lot No. 3, block No. 13, and portion of lot No. 2, block No. 13, lying westerly of the easterly line of lot No. 3, extended to Ninth Street, of Roberts & Randall's addition, extension to city of . 143. Buildings, Interstate Commerce Commission, Account 212. "This account should include the cost of all buildings, such as general and central offices, shops, stables, garages, storehouses, etc., devoted to the general purposes of the company; also of all permanent fixtures, such as water, steam and gas pipes and fixtures; electric wiring and fixtures for lighting, signaling, etc.; elevators and the engines and motors specially provided for operating them; furnaces, boiler and other apparatus provided for producing steam for such engines and for heating; electric generators specially provided for producing current for lighting such buildings, etc. "This account includes such piers and other foundations for machinery and apparatus as are designed to be as permanent as the buildings in (or in connection with) which they are constructed, and to outlast the first machinery or apparatus mounted thereon. It also includes the cost of real estate brokers' commissions, examinations and registrations of titles and other expenses, such as architects' fees, supervision, etc., incident to the construction or purchase of buildings, and the cost of grading and of sidewalks, fences, hedges, etc., on grounds used in connection with such buildings. "It does not include any telephone equipment, wiring or apparatus for generating or controlling electricity for operation of the telephone system." INVENTORY OF REAL ESTATE AND EQUIPMENT 75 Many of the State commissions have held that the appraisal of build- ings should not fall within the jurisdiction of the engineer in charge of a public utility appraisal. Most engineers are perfectly competent to make accurate valuations of telephone buildings, but, to be on the safe side, it is better to call in either an architect or a building contractor, and obtain a detailed description of the building, together with cost of repro- duction new and present value. As in the case of the land, building valuations so determined should be carefully checked by the appraisal engineer. 144. The Selection of the Building Appraiser. In selecting the architect or contractor who is to appraise the buildings, it should be remembered that telephone buildings are in a class by themselves, and that the ordinary building contractor, unless he has had previous ex- perience in telephone work, may not be competent to make a valuation of this nature. Whenever possible the architect or the contractor, who was connected with the construction of the building under consideration, should be retained. In this connection there is one point that deserves most careful con- sideration. The line of demarcation between the central office manhole, or vault, and the building proper is often difficult to determine. In many instances the vault runs into the cellar of the building. Wherever possible in cases of this kind the history of the building should be reviewed. If the cable vault was built by the general building contractor and charged to the building account it should, of course, be included as a part of the building. If, however, the manhole or vault was built after the building itself, or was charged to the underground conduit account, it should be inventoried as a part of the conduit system. 145. Description of Buildings. The description of the buildings, as incorporated into the completed appraisal, should take somewhat the following form : North Central Office Building. Location: No. 2010 and 2012 Third Street, N. Size: (Original) 38 feet by 68 feet, (Addition) 40 feet by 50 feet. Description: (Original) One story and basement, brick walls, wooden joist floors, wooden lath ceiling. (Addition) One story and basement, brick walls with tile furring, 8 feet tile and 5 feet reinforced concrete beam floors, metal lath ceiling, 5 feet tile and 5 feet reinforced beam roof. 146. Inside and Outside Plant. In the consideration of the central office and subscribers' equipment, the apparatus and wiring inside the buildings is treated. This, however, does not include what is known as " house cable." Block wiring and pole line equipment will be considered as part of a separate chapter in order to segregate the inside plant from the outside plant. 76 TELEPHONE RATES AND VALUES 147. Central Office, Telephone Equipment, Account 221. "This account should include the cost of local and toll switchboards, chief operators', monitors' and supervisors' desks and tables, wire chiefs' test- ing outfits, main and intermediate frames, cables and jumper wires, call registers or meters, relay racks and coil racks, and power plants, including rectifiers, generators, engines, motors, batteries, power switchboards, meters and fuse boards; telephone and telegraph instruments and other electrical instruments and apparatus in the central office devoted to the operation of the telephone plant." The inventory of the central office telephone equipment is necessarily a rather complicated problem. Naturally, the method followed will be largely dependent upon the size of the office and the type of equipment involved. 148. General Classification of Central Office Equipment and Inventory Detail. The following extract from a recent appraisal will give an idea of the general classification of the central office equipment and of the amount of detail necessary in the inventory : Switchboard. Type: Kellogg common battery; full multiple lamp signal, 3-position, 6-panel sections. Capacity: Two thousand four hundred multiple subscribers' lines, 600 answering jacks (per section). Equipment: (1) Toll section equipped with 1,100 subscribers' multiple jacks, 40 rural multiple jacks, 20 L. D. multiple jacks, 10 special multiple jacks, 16 L. D. answering jacks, 1 calculagraph and 2 toll operators' positions. Each toll operator's position is equipped with 8 pairs toll cord circuits. Rural and location section equipped with 1,100 subscribers' multiple jacks, 10 rural multiple jacks, 50 special multiple trunk jacks, 60 rural answering jacks, 170 local answering jacks, and 2 rural and local operators' positions. Each of the rural operators' positions is equipped with 15 pairs rural cord circuits, and the local position is equipped with 15 pairs local cord circuits. (2) Local sections each equipped with 1,100 subscribers' multiple jacks and 50 special multiple trunk jacks. These two sections are also equipped with 950 local answering jacks, 4 regular operators' positions, and 1 special operator's position. Each of the regulator operators' positions is equipped with 15 pairs local cord cir- cuits, and the special operator's position with 9 pairs local cord circuits and 1 test cord circuit. Description. Frames and Racks: One wall type main frame equipped with 2,800 7-D fuses and mountings, 28 50-pair terminal strips. One combination main and intermediate distributing frame. Capacity: 1,600 pairs protectors, 2,000 pairs cable terminals, 1,600 pairs jack terminals. Equip- ment: 1,300 pairs protectors, 2,025 pairs cable terminals, 1,320 pairs answering jack terminals. Desks: One one-position wire chief's desk; one one-position chief operator's desk. Power Plant: One storage battery (chloride accumulator), consisting of 11 F-9 elements and 11 F-17 lead-lined wood tanks; one 50-ampere mercury arc rectifier, INVENTORY OF REAL ESTATE AND EQUIPMENT 77 one power switchboard with necessary switches and instruments; one main fuse board ; one service fuse board ; one Holtzer-Cabot harmonic ringer converter (four frequency); four harmonic test bells; one fuse panel, capacity 360 fuses, equipped with 260 fuses and mountings. There is such a marked difference between the various types of central office equipment that it is almost impossible to prescribe standard inven- tory forms. In many cases forms will not be necessary. The description of the boards, racks and auxiliary equipment may be made in list form, as suggested in the foregoing paragraphs. It is always well, however, to make a detailed diagram of the front of the board, showing relative loca- tion of answering jacks, multiple jacks, etc. 149. Other Equipment of Central Offices, Account 222.- "This account should include the cost of furniture and equipment (other than telephone equipment) in central offices for the operating forces. This account includes the furniture and equipment in operators' rest and lunchrooms, and in operators' schools." The foregoing quotation from the accounting instructions of the Inter- state Commerce Commission clearly defines the character of the equip- ment which should be included under the heading, " Other Equipment of Central Offices." All equipment should be summarized in list form, leaving space at the right-hand side of each sheet for unit costs and total costs. 150. Station Apparatus, Account 231. "This account should include the cost of station apparatus, such as telephone sets, intercom- municating sets, bells, backboards, desk stands, coin boxes, protectors, battery boxes, initial batteries and cords, special station switching de- vices not otherwise classified, and telephone and telegraph instruments or parts thereof when owned by the company and installed for service." It is obviously out of the question to inspect all of the equipment falling under the heading of station apparatus. A house to house canvass of the subscribers' instruments would be very expensive and the resulting slight increase in accuracy of appraisement negligible. Many companies maintain reliable records as to type of equipment, and the use of these records supplemented by a field check of, say, 5 or 10 per cent of the total number of instruments involved should give sufficient data for the appraisement of the station apparatus. How- ever, if there are no records, or if the existing records are found to be unreliable, a larger percentage of the total should be checked in the field, 10 or 15 per cent. This check is merely for the purpose of gaining an idea of the proportion of the various types and makes of instruments existent throughout the plant. The Interstate Commerce Commission's accounting requirements are stringent enough to insure a reasonable degree of accuracy in the total number of subscribers' stations carried on the company's books, and the 78 TELEPHONE RATES AND VALUES auditor's record of the number of stations can usually be accepted without question. 151. Field Form for Subscriber Station Data. A field form similar to Form No. 1 will be found helpful in gathering the data relating to the subscribers' stations. It will be noted that this form also provides for the tabulation of data relating to interior wiring Station Installa- tions, Account 232 and drop wiring. The drop wiring is really a part of Exchange Aerial Wire, Account 243, and should be included under this head in the inventory. For purposes of convenience, however, data relating to these two latter items subscribers' installations and drop wiring can be most effectively compiled by the field man who inspects the subscribers' in- struments. Provision has therefore been made in Fig. 12 for recording these data, together with those for the subscribers' instruments. AT 5r/(T/O/V SHEET A/0. Off NO NO W rr rr Ht MHO HELD WOAK BY COMP/LZD a* FIG. 12. Data sheet for tabulating the inventory of subscriber's station equipment. 152. Inspection of Subscribers' Equipment and Wiring. In making the inspection of the subscribers' equipment and wiring, the following points should be carefully noted by the field inspector: Instruments. Make of instrument Stromberg-Carlson, Kellogg, etc. Manufacturer's code number, if any. Type of instrument long back wall hotel type, wall or desk. Condition of instrument. INVENTORY OF REAL ESTATE AND EQUIPMENT 79 Interior Wiring. Gauge and type of wire used. Length of wire. Kind of ground wire used. Length of ground wire. Size and type of ground rod. Amount and kind of miscellaneous material used, such as protectors, knobs, staples, connecting block, etc. Condition of interior wiring. Drop Wiring. Type of wire used, whether No. 12 bare wire, No. 14 copper twisted-pair, No. 14 weatherproof single wire or No. 17 copper-clad steel twisted-pair. Length of drop, from subscriber's house to nearest point of attachment on pole line. Amount and kind of miscellaneous material, such as knobs, wood brackets, Philadelphia brackets, etc. Condition of drop wiring. The purpose of these data, it will be remembered, is merely for use in ascertaining the average conditions existent throughout the plant, as an aid in the subsequent compilation of the unit costs. The total number of instruments and installations will be determined entirely from the records and the total number of drops, either from the records or in connection with the inventory of exchange aerial wire. 153. Station Installations, Account 232. "This account should include the cost of installing apparatus and the cost of inside wire, that is, the wires (or cables) from the instruments to the point of entrance to the building, where the drop wires or interior block wires terminate; or to the junction boxes, where the house cable or other cable terminates, including wires on the same premises to connect main and extension stations; or to connect the private branch exchange distributing frames with their terminal stations." The method of appraisement of the equipment falling under the heading of "Station Installations" has been previously outlined in detail under the head of "Station Apparatus, Account 231." 154. Private Branch Exchanges, Account 234. "This account should include the cost of private branch exchange switchboards, their distributing frames, the cables connecting such switchboards and distrib- uting frames, and the cost of installation." All of the private branch exchanges should be actually inspected by a man thoroughly familiar with this type of equipment, and sufficient data collected to facilitate an accurate description of the individual boards. In this connection it should be noted that the cable extending from the P. B. X. board to the nearest terminal should be inventoried and appraised as a part of the P. B. X. equipment, and not as a part of the house or block-cable plant. 80 TELEPHONE RATES AND VALUES It is hardly necessary to go into further detail on the subject of P. B. X/s, as nearly all of the boards used are of standard type and may readily be identified. 155. Booths and Special Fittings, Account 235. "This account should include the cost of booths and special fittings, such as desks, chairs, fans and cash registers, and the cost of installation." If the company's records are reasonably accurate, it is usually unneces- sary to make a detailed inspection of the equipment filed under the classi- fication, "Booths and Special Fittings." An inspection should be made of a large enough proportion of this equipment to furnish a check on the records, and to afford sufficient data as to type of equipment for use in the preparation of unit costs. CHAPTER IX THE OUTSIDE PLANT INVENTORY 156. Classification of Interior Block Wires. Referring again to the summary of the inventoriable property, Fig. 11, it will be seen that general account 230, Station Equipment, includes not only the station equipment proper with its wiring, but also the so-called Interior Block Wires, Account 233. The interior block wires are really a portion of the outside plant. In fact, they are merely a substitute for drop wires used in connection with block cable a part of exchange underground cable, account 245 placed along building walls and rear fences in the more congested portions of the larger towns and cities. For this reason the discussion of interior block wires is given in the present chapter rather than in the foregoing chapter, which treated all of the other items included under the general caption Station Equipment, Account 230. 157. Interior Block Wires, Account 233. "This account should include the cost of interior block wires (or cables) from the point of en- trance to the building, where connection is made with the inside wires, to the point of connection with the permanent circuits at the terminals (block cable boxes) of the subsidiary underground cable or subsidiary aerial cable." The relative number of interior block wires is usually small, except perhaps in very large cities. In the towns and smaller cities the interior block distribution system is used only throughout the more congested district. The accounting instructions on the subject of block wires are slightly confusing in that they define interior block wires as the "wires (or cables) from the point of entrance to the building, where connection is made with the inside wires, to the point of connection with the permanent circuits at the terminals (block cable boxes) of the subsidiary underground cable or subsidiary aerial cable." 158. Cable and Block Wires. The writer believes that the question of including cable as block wire should be left to the discretion of the appraisal engineer. If the amount of cable involved is small and the cable is used merely as a substitute for an equivalent amount of block wiring, then unquestionably it should be inventoried under the 233 account as block wiring. As an illustration, suppose that the interior wiring for ten subscribers in an apartment house is terminated on connector blocks in the basement 82 TELEPHONE RATES AND VALUES of the building, and that the nearest terminal of the underground cable system is located on an adjoining building wall several hundred feet distant. If, instead of running ten block wires between the connector blocks in the basement and the terminal, the company sees fit to place a piece of 10-pair Okonite or switchboard cable, then the cable may be properly classed as block wiring, inasmuch as it is used in lieu of an equiva- lent amount of twisted pair. On the other hand, under a strict interpretation of the accounting instructions, a larger cable, say a 200-pair, running between terminal strips in the basement of the building and a loop, or cross connecting, underground cable terminal might, with equal propriety, be classed as interior block wiring and inventoried under the 233 account. It is the writer's opinion, however, that while through some oversight the instruc- tions are perhaps a little loosely worded, it was not the intention of the commission to have these larger cables classed as block wiring, but rather as subsidiary underground cable under account 245. Questions of this nature are constantly arising during the inventory period, and can only be satisfactorily settled by one with previous ex- perience in meeting similar problems. 159. Inventorying the Interior Block Wiring. It is possible, of course, to make an actual inspection of all of the interior block wiring, and to inventory this portion of the plant in detail. There is a question, however, as to whether the value of the block wire warrants the expense involved in a detailed inventory. For all practical purposes sufficiently accurate results may be obtained by ascertaining the total number of subscribers' stations located within the district fed by the interior block cables, and actually inspecting only a large enough number to furnish data as to average conditions, gauge of wire used, spacing of bridle rings on walls, etc. Usually an inspection of 5 or 10 per cent of the total number of stations fed by interior block wiring will suffice. 160. Distinction between Inside Exchange and Toll Plant. The accounting system of the Interstate Commerce Commission does not provide for a segregation between exchange and toll of the elements of plant treated in the preceding chapter. The reason for this will be ap- parent when one remembers that it is almost impossible to allocate such items as subscribers' station equipment and interior wiring to exchange and toll. In a recent case before a State public utilities commission the counsel for the city tried to force the telephone company to segregate that portion of its central office equipment used for toll service. The stand taken by the counsel for the city was that the case in question involved a readjust- ment of the telephone rates for exchange service in the city, and that it was THE OUTSIDE PLANT INVENTORY 83 therefore unfair to include any portion of the property used for toll pur- poses. It was found, however, that it was practically impossible to effect a separation of the toll central office equipment, inasmuch as the major portion of the apparatus used in any way for toll purposes was also used for exchange purposes. This is especially true in the case of small ex- changes where the toll board is really part and parcel of the exchange board, one or more positions, perhaps, being set aside for toll use. The Interstate Commerce Commission has furthermore clearly recog- nized the fact that such items as central office equipment and subscribers' station equipment cannot be allocated to the general exchange and toll accounts in that it has made no provision for such allocation in its system of accounts. 161. Outside Toll and Exchange Plant. In the case of the outside plant of a telephone company, however, conditions are such that it is possible to effect a definite separation of the toll property. For instance, certain of the pole lines are used entirely for exchange purposes, and others connecting various exchanges are used exclusively for toll purposes. Circumstances may arise, however, where it is found advantageous to use the same pole line for both exchange and toll wires. In a case of this kind the Interstate Commerce Commission has stipu- lated that "if plant is used both for exchange and toll service, the principal use of such plant shall determine its classification." In other words, poles carrying both exchange and toll wires should be inventoried as exchange plant if the number of exchange circuits exceeds the number of toll cir- cuits, and vice versa. The same rule will apply to cross arms. With the possible exception of composite cables used for both exchange and toll service, the wire and cable plant can be readily classified between exchange and toll. As a general rule, wires or cables that are used for exchange purposes are not used for toll, and vice versa. In the case of composite cables, however, instead of classifying the cable as toll or exchange, according to principal use, it is customary to pro-rate the total cost of the cable to the corresponding exchange and toll accounts. A very satisfactory method of effecting this separation is as follows : Assume the case of a composite cable containing 200 pairs of No. 22- gauge wire for exchange purposes, and say 25 pairs of No. 13-gauge wire for toll purposes. Determine the respective reproduction cost in place of the composite cable and of a 200-pair No. 22-gauge cable. The reproduction cost of the 200-pair No. 22-gauge cable may be taken as the portion of the total cost to be allocated to the exchange cable ac- count, and the difference between the reproduction cost of the composite 84 TELEPHONE RATES AND VALUES cable and that of the 22 gauge may be taken as the amount to be charged to toll. Occasionally circumstances may warrant a deviation from the Inter- state Commerce Commission's "principal use" rule in determining whether a pole, or group of poles, shall be charged to exchange or toll accounts. As an illustration, assume the case of a pole line carrying several arms of toll wire and used primarily throughout its entire length for toll purposes. It may be that as the line nears the exchange some of the poles will carry a larger number of exchange than toll circuits, due to the fact that they are used to facilitate local distribution of the exchange plant. If these poles are few in number, and their use for exchange purpose is obviously merely incidental to their toll use, they should still be classed as toll property. The rules laid down for inventory of exchange plant will apply equally well to the toll plant, but, of course, great care should be taken to provide for the segregation of the poles, cross arms, etc., which may be properly classed as exchange from those which may be classed as toll. 162. Pole Lines. "Exchange Account 241 should include the cost of poles, towers, cross arms, pins, brackets, braces, guy wire, guy stubs and other materials used in the construction of exchange-service pole lines; also the cost of first clearing right of way. "Toll Account 251 should include the cost of poles, towers, cross arms, pins, brackets, braces, guy wire, guy stubs and other materials used in the construction of toll-service pole lines; also the cost of first clearing right of way. "If plant is used both for exchange and toll service, the principal use of such plant should determine its classification." With the inventory of the pole and wire plant the real work of the appraisal engineer begins. Not that the elements of plant considered in the foregoing paragraphs are less important, but their inventory may be effected under more favorable conditions. The pole plant is necessarily scattered over a wide area, and is often- times hard to identify, especially in localities where there is a competing telephone company and possibly several electric light companies, to say nothing of the Western Union and Postal Telegraph companies. Usually many of the poles are jointly occupied by two or more of the utility com- panies. Then, too, there is the weather to be considered. To record the mass of data involved in the pole and wire plant inventory neatly and accurately is a difficult problem under the most favorable weather conditions. But when hampered by snow or rain the ingenuity of the field inspector is often severely taxed to preserve an orderly record of his findings. During very bad weather it is, of course, advisable to abandon outside work entirely, and utilize the men in the inventory of the central office equipment, stock, tools or some other inside work. THE OUTSIDE PLANT INVENTORY 85 163. The Field Map and Field Form. As to the actual method employed in the inventory of the pole plant of a telephone company, maps suitable for field work preferably blue line prints of a scale of about 500 or 600 feet to the inch should be secured. If the company in question has a reliable pole record, pole locations should be plotted on the map. If no records are available, or if the existing records prove unre- liable, the field maps should be checked over by some employee familiar with the location of the plant and pole line streets indicated in pencil on the map. The field maps should be divided into sections of convenient size, each containing approximately the same number of poles. A form, somewhat of the type shown in Fig. 13, should be provided for the recording of the fffJ.0 NOTES fO/f ffAJ&H Of TH . I FIG. 13. Example of form used for the recording of field inventory data. data. This form, it will be noted, provides for the inventory not only of the poles but of the auxiliary equipment, such as cross arms, anchors, guys, etc., and of all the wire and cable attachments. The notation of the cable equipment, however, is merely for the purpose of checking a separate inventory of the cable plant, and may be omitted entirely from the form if desired. This matter will be discussed more in detail under the heading, " Aerial Cable." Before distribution to the field inspectors, each field map should be assigned an identification number, this number to be noted by the inspector in the space provided therefor in the upper left-hand corner of the data sheet. 164. Instructions for using Field Maps and Data Sheets. The following instructions may be found helpful in understanding the relation between the data sheet, Fig. 13, and the field map, Fig. 14. 1. Spot poles on the field map, Fig. 14, locating each as accurately as possible in relation to street and alley intersections. Spot only those poles belonging to other companies with which the wires of the telephone company make contact. If poles are already shown on the map, check 86 TELEPHONE RATES AND VALUES locations making corrections where necessary. Before leaving any block, check back to make certain that the number of poles spotted in the block is correct. 2. Number the poles consecutively as they are spotted or checked, beginning the series with " 1" on each map. GUY 100 c* /6 f (30 f 13 /* IS -2 2 1 FIG. 14. Portion of a field map showing method of use. 3. Use a separate line on the data sheet for each pole spotted on the map, whether the pole is owned by the telephone company or by others, checking the corresponding ownership column on the data sheet. List only the wires and equipment owned by the telephone company, ignoring wires and equipment owned by others. 4. In the columns marked "Kind," use the letter C for cedar, Ch for chestnut and T for tamarack, etc. F/ELD HOTZ5 FOR AS>f"/f/U3Ai Of TM 5. In the column marked "Setting," use D for dirt, R for rock, P for pavement and C for concrete reinforcement. 6. In the column marked "Tree Trimming," use L for light trimming, H for heavy trimming, M for medium trimming and C for trees cut down. 7. Anchors should be divided into two general classifications, long anchors and patent anchors. Each of these should be again subdivided THE OUTSIDE PLANT INVENTORY 87 into heavy, medium and light anchors, as indicated on data sheet (Fig. 13). Just what shall constitute a heavy, medium or light anchor should be decided by the appraisal engineer prior to the beginning of field work, and definite instructions issued to the field force. 8. Under the column marked "Cable Plant " merely indicate the number of cables, terminals, pole seats, etc., without regard to size or kind. 9. Under the column marked " Condition," use E for excellent, G for good, F for fair and P for poor. 10. Place name and date on each section of field map and on each inventory sheet. Where more than one sheet is used in connection with one field map, sheets should be numbered consecutively. 11. Where pole lines extend beyond the limit of the map, mark the last pole taken with red chalk. An arrowhead inside a circle should be used for this designation mark. The method of determining the condition of the poles, cross arms and auxiliary equipment will be discussed in detail in a subsequent installment under the general subject of condition of outside plant. 165. Exchange Aerial Wire, Account 243. "This account should include the cost of exchange service wires, including insulators, sleeves and other materials used in attaching such wires to the insulators. The exchange wire includes the drop wire leading from the overhead plant to the point of entrance to the building." 166. Toll Aerial Wire, Account 253. "This account should include the cost of toll service wires, including insulators, sleeves and other ma- terials used in attaching such wires to the insulators." 167. Inventory of the Aerial Wire. As already explained, the inventory of the aerial wire will be made in conjunction with that of the pole and pole equipment, and the data recorded on the same sheets. In order to avoid confusion and possible duplication of the wire inven- tory, a definite plan should be adopted in recording the number of wires found between each pair of poles. One way of doing this is to always associate the wire between two goles with the pole bearing the highest number, viz., wires between poles Nos. 7 and 8 should be recorded on the same line as pole No. 8. ; wire between poles Nos. 8 and 9 should be associated with pole No. 9, etc. In carrying out this plan it will sometimes happen that an extra span of wire is encountered. For instance, suppose in inventorying pole lines (Fig. 14) marked 13 to 15 and 16 to 18, respectively, it was found that both of these lines continued farther than indicated in the sketch. JM The inspector, in covering these lines, would probably find it to his advantage to continue west and north from pole No. 15, and subsequently cover poles Nos. 18, 17 and 16 on his return trip southward. In this case the latter poles would be assigned higher numbers, say 29, 30 and 31, the pole marked No. 16 becoming pole No. 31. 88 TELEPHONE RATES AND VALUES The wire between poles Nos. 12 and 13 would, of course, be inventoried in connection with pole No. 13, and the wires between poles Nos. 30 and 31 in connection with pole No. 31. There still remains, however, the wire between poles Nos. 31 and 12, and between poles Nos. 31 and 13. In cases of this kind the data for these extra spans of wire should be recorded (Fig. 13) on the two lines immediately following the line used for pole No. 31, with notations in the margin: "wire between poles Nos. 31 and 12," and, "wire between poles Nos. 31 and 13." The columns for pole and cross-arm data will, of course, be left blank. Having carefully inventoried the number of wires of each type between each set of poles, there remains but to determine the distances between poles to ascertain the amounts of wire involved. Obviously it is out of the question to measure the distance between each set of poles. Repre- sentative measurements should, however, be taken at frequent intervals and recorded so that an average span length may be computed for each map section. This span length multiplied by the total number of spans of wire will give the quantity of wire. 168. Segregation of Toll from Exchange Plant. Fig. 13 is adapted for use in inventorying both exchange and toll plant within the local service area. The segregation may be effected by the use of separate sheets in the field for exchange and toll, or, if the amount of toll plant involved is comparatively small, it may be recorded on the exchange sheet and subsequently taken off on separate summaries in the office. If this latter plan is followed great care should be taken to plainly mark toll data so as to distinguish it from exchange data. 169. Rural Pole and Wire Plant. It is obviously out of the question to inventory the rural plant with the same attention to detail as must KUHA L L/A s3 4.** _.j 'crw *T/s sr 1 i ""'i -jar I I & \ \ 77f X) KT=t 1 -r- *? | 5 ^ I I k ij -5//V sic I . ooua \ $ L . * I * S s 9t H N H u I 1 ro **L -~'l FIG. 15. Sheet used to record pole and wire data of rural lines. necessarily be observed in the appraisement of the city plant. An exchange having 2,000 city poles may have 50,000 rural poles. Fortunately the rural plant is usually of nearly uniform construction, so that the inventory can be made at a fairly rapid rate without materially affecting its accuracy. A sheet somewhat of the type of Fig. 15 should be used for recording THE OUTSIDE PLANT INVENTORY 89 the rural pole and wire data. County maps, or United States topographical survey maps, may be used as a guide in locating the property, and runs of poles sometimes a mile or two in length may be recorded at one time. A farm line built of poles of the same type and size, say 25 or 30 feet, may carry two arms of wire for the first mile or two out of town, one arm for the next mile or two, and perhaps two or three circuits on brackets for the remainder of its length. By placing the numeral 1 at the point where the line leaves the city limits, the numeral 2 where the first arm drops off, the numeral 3 where the bracket lead begins, and the numeral 4 at the end of the line, the equip- ment for this whole pole line may be recorded on three lines of the data sheet. In inventorying the rural plant it will be found advantageous to make use of several pole counters, one for counting poles of one size, a second for counting another size, and a third for counting the total number of cross arms, etc. The lengths of wire can usually be ob- tained with sufficient accuracy by scaling the county maps, but it is a good plan, if the lines are covered by automobile, to make frequent checks with the aid of the tachom- eter. 170. Aerial Cable, Exchange Account 242 and Toll Account 252. " These accounts should in- clude the cost of cables, including the cost of suspension wire, cable clips and rings, cable boxes and fittings, pole seats and platforms,? loading coils, potheads, protectors, sleeves and other material used in hanging such cables." Before beginning the inventory of the aerial cable plant all of the avail- able data as to location, size and gauge of cables, size of terminals, etc., should be reviewed. If these data have not already been assembled in .2 90 TELEPHONE RATES AND VALUES map form, maps should be made showing, at least, the size and gauge of cables and the location of terminals. A form somewhat of the type of Fig. 16 may be used for recording the aerial cable data. It has been the writer's experience that the inventory of the aerial cable plant may be considerably expedited by recording all of the data directly on the field maps, and using Fig. 16 as a summary or interme- diate transfer sheet. If this latter plan is adopted, all of the data called for on the form should be neatly recorded by the field in- spector on the map, and transferred to the form sheet at the close of each day's work before the notations become indistinct. If there is the slightest doubt as to the size or gauge of cables, the diameter of all cables should be carefully measured in the field, and measurements recorded for subsequent check with manufacturers' records. It will usually be found that the diameters of cables of a given make, size, gauge and capacity are practically constant. This rule for determining the size of cables, however^ is not infallible, and a very careful check of all available office records as to number of pairs terminated, etc., should be made where there is any doubt as to size or gauge of cable. 171. Points to be noted by Field Inspectors of the Aerial Cable Plant. The following points should be noted by the field inspectors in the inventory of the aerial cable plant : 1. Size (number of pairs), gauge and length of each cable. The length should be determined by actual measurement with a surveyor's chain. It is usually best to record the length between each pair of terminals. 2. Diameter, tensile strength and material of messenger strands. 3. Type and size of cable hangers; note specifically whether the marlin, ring or Metropolitan type of hanger is used. 4. Type and size of terminals, and whether protected or unprotected. If pro- tected, note the number of pairs equipped with protectors. 5. Condition of cable, strands and terminals. 172. Underground Conduits, Exchange Account 244 and Toll Account 254. "This account should include the cost of service con- duits, including the cost of pipe, cement, handholes, manhole furnishings and other materials used, the cost of connections to poles and buildings, repaving and other costs incident to the installation of such conduits." The inventory of the underground plant for a small exchange is usually a comparatively simple problem. In all probability the subway will be found to extend only a few blocks from the office, the cables few in num- ber, and the manholes readily accessible for inventory purposes. When it comes to the underground plant feeding the congested section of a large city, however, the problem becomes more complicated, and unless the utmost care is observed in the taking and recording of the data, the inventory will result in a hopeless tangle. THE OUTSIDE PLANT INVENTORY 91 173. First Requisites for inventorying the Conduit System. The first requisite for the inventory of the conduit system is a skeleton map showing the location of conduit, manholes, and, if the records afford the necessary information, of all lateral conduit to poles and buildings. Most companies have maps of this character on file. If the manholes are not already identified by number or letter, they should be numbered serially, beginning with the manhole nearest the office. A skeleton map of the form described is shown in Fig. 17. A form of the general character of Fig. 18 should be provided for recording the conduit, manhole and underground cable data. In the N 4 OUCT3 ro/vo.S FIG. 17. Skeleton map for the inventory of conduit systems. upper right-hand corner a manhole diagram is provided, the four walls of the manhole being folded down to the plane of the floor. In using this form the inspector should always associate with each manhole the section of conduit between that manhole and the next manhole toward the central office. 174. Preliminary Work of inventorying Conduit System. To facilitate a clearer understanding of the method herein suggested for inventorying the underground plant, the various steps taken by the inspector in inventorying a typical manhole say No. 2, Fig. 17 will be briefly considered. Assuming that he has just completed a record of manhole No. 1, the inspector will first note the location of the subway, the central office district and the manhole number on a fresh sheet, in the spaces provided therefor at the top of the form. He will next measure the distance (using a 100-foot steel tape) between the center of the cover of manhole No. 1 and the center of the cover of manhole No. 2. This measurement, 310 feet in the present case, will be recorded in a convenient place for subsequent use in determining the duct length between manholes Nos. 1 and 2. En route from manhole No. 1 to manhole No. 2 the inspector will carefully watch for changes 92 TELEPHONE RATES AND VALUES 0. 0. CABLE AHD 3UBWAT RBCORP STREET LET. uanhola No. CONDUIT Sactlon to next aanhola towards C.O. 3'O ' Dlstanoa JO5^ a !(?_ " '' Paving bstwaan manhole oavlng around maaholaa spAatf 1OKHOL katarlal o walls Uatarlai e floor UatarUl Of root o_ Kind of covar ro^r Cabla raate 42' Condition Oooaf , t 1 ' rr>w<* Opf / /y Uat. 16 /O (// to N ^ Con,p a.*i 3'0 gg - \ MiCC c**s 6 ^l J > \ b [ - - % !L- ^ i to MB. 10. 1 // To Mfl. Ho . 3 ar Cond. 1 *- sr- ^ oa . (roe * s'-o' MA IB CABLES Lgth Cabla Oa. Bl*a o. Q. CABLE TSRMOIALS RoT iMalu I Kind I Loo. I Cap. I 9)ulp.| Saat 0. 0. CABLE & SOBffAT RECORD TELEPHONE CO. Bacordad by Chootod ty Traaaf'd by Kna a*i_ FIG. 18. Sheet for recording conduit, manhole and underground cable data. THE OUTSIDE PLANT INVENTORY 93 in the character of the pavement, and, if several varieties of paving are found, he will keep accurate memoranda of the lengths involved. The importance of accurate measurements of the subway plant will be readily appreciated when it is realized that the cost of the main con- duit may run as high as $5 per lineal foot of trench, and the cost of pave- ment as high as $1 per lineal foot. Unless surveyor's pins are used in measuring, it is a very easy matter to make an error of 100 or more feet in measuring long manhole sections. As a precaution, both the inspector and his helper should keep track of the measurements, even when pins are used, comparing notes before the lengths are finally recorded. Arriving at manhole No. 2, the inspector will record the measurements and pavement data, and make a rapid survey of any data he may have at hand as to the conditions he is likely to encounter in the manhole about to be inventoried. This preliminary work may be done while the assistant is opening the manhole, in some cases rather a lengthy task. 175. Necessity of System in Inventorying. A word here as to the necessity of carrying out the work of inventorying the underground plant in a systematic manner. The value of the plant involved, and the fact that it is usually rather complicated, necessitates the employment of higher-priced men on this portion of the inventory than is usually necessary in the case of the aerial plant. Hence the importance of the utmost efficiency to keep down appraisal costs. A thoroughly experienced inspector, by making every move count, can accurately inventory from 50 to 75 manholes in an eight-hour day, whereas a novice probably could not cover 15 manholes in the same length of time. In cold weather, when the manhole covers are frozen, or if the covers are hard to open for any other reason, it will be found advantageous to send along an extra man, who can devote himself exclusively to the work of opening and preparing the manholes for inventory while the inspector and helper are checking up lateral measurements. In this way lost time may be minimized. 176. Safeguarding the Manhole. As soon as the manhole is open, the inspector will enter, leaving his helper on guard outside. Pre- cautionary measures for safeguarding the man in the hole are most im- portant. Many municipalities have strict ordinances as to the opening of man- holes. Some cities require that open manholes be temporarily covered with a heavy metal screen; others that the man on guard carry a red flag, while still others stipulate the guarding of open manholes with a portable gas pipe railing. The existence of such ordinances should be carefully checked by the appraisal engineer before the men are sent into the field. 94 TELEPHONE RATES AND VALUES 177. Taking and Recording Data. In some instances it will be found that manholes are so dirty as to render the recording of the data by the man in the hole practically out of the question. In cases of this kind the inspector should call off the data for his helper to record, always having the helper call back the measurements, or descriptive data, as he records them. If this plan is adopted, the data should always be taken in the same order, to obviate confusion in recording. With the aid of a small tape line, or flexible 6-foot extension rule, the inspector will take the dimensions of the manhole, length, breadth and depth from the street level to the floor, and these measurements will be recorded in the spaces provided therefor on the diagram (Fig. 18). If the manhole is found to be irregular in shape, a separate sketch should be made giving sufficient information to enable the unit cost man in the office to gain a reasonably accurate idea of the conditions encountered. Assuming that the covers on both manholes Nos. 1 and 2 are located in the center of the holes, longitudinally, one-half of the sum of the combined lengths of the manholes, deducted from the center to center measurement, will give the conduit length, which should be recorded in the space pro- vided (Fig. 18), under the heading "Conduit." The inspector will next indicate on the form the arrangement of the ducts entering the hole, in the spaces provided therefor on the manhole diagram. The size and material of the conduit between manhole No. 1 and manhole No. 2 will then be recorded as indicated. Conduit entering the manhole from the east and south should be noted on the diagram, though of course the actual inventory will be effected in connection with manholes Nos. 3 and 5, respectively. A cross through the diagram of the northerly wall indicates that no ducts enter the manhole from this direction. The approximate location of lateral ducts will be noted as at A and B and the description of the manhole recorded as indicated on Fig. 18 under the heading "Man- hole." 178. Underground Exchange Cable, Account 245. "This account should include the cost of exchange service underground cables, including cable boxes and fittings, loading coils, and other materials used in the work of installing such cables, and other costs incident thereto. "It should include, in addition to the main exchange underground cable, the subsidiary cables through laterals to pole for building terminals; the subsidiary cables to the interior of city blocks for connection with interior block wires; and the subsidiary cables entering vertically as house cables into buildings for connection there with the inside wires. "House cables are considered to be vertical extensions of underground cables or plant similar thereto. They do not include the inside wires extending from terminal boxes of house cables to subscribers' stations, THE OUTSIDE PLANT INVENTORY 95 nor the cables for subscribers' private branch exchange switchboards, which are included in Account 232, Station Installations." 179. Underground Toll Cable, Account 255. "This account should include the cost of toll service underground cables, including cable boxes and fittings, loading coils, and other materials used in the work of installing such cables, and other costs incident thereto." 180. Classes of Exchange Underground Cable. The exchange underground cable may be divided into the following four classes : Main Cable : The cable in main conduit. Lateral Cable: The cable in lateral conduit. Block Cable: The cable along rear building walls, or fences, within city blocks. House Cable: Cable used for local distribution in large buildings, such as hotels and office buildings. The inventory of the main cable and lateral cable is provided for on Fig. 18. Block and house cables will be inventoried separately in accordance with the plan outlined in a subsequent portion of this chapter. 181. Measurements of Underground Cable Lengths. After completing the manhole data, the inspector will measure the cable length from the point of entrance of the cable on the westerly manhole wall to the center of the splice on the northerly manhole wall. This measure- ment, together with the corresponding measurement in manhole No. 1, when added to the length of cable in conduit, 305 feet, will give the main cable length between manholes Nos. 1 and 2, a total of 312 feet. This length, together with the data as to gauge, size, diameter and condition of the cable, will be noted in the space provided therefor, under the heading "Main Cable." The diameter may be determined either by the use of calipers or with a strap diameter gauge. A small tape, or a flexible 6-foot extension rule, may be used for measuring cable lengths. Other cable measurements in the manhole should be taken as indicated on the diagram (Fig. 18) for subsequent use in determining the cable lengths to manhole No. 3, manhole No. 5 and lateral A, respectively. 182. Materials of Lateral Conduits. There still remains the in- ventory of laterals A and B and of the lateral cable in duct A. The ma- terial of the laterals may be determined by inspection at the point where they enter the manhole wall. A small electrical flashlight will prove a material aid in exploring the dark recesses of handholes, where the laterals are usually to be found. The laterals may be composed of any one of seven different materials, iron pipe, creosoted wood duct, fiber duct, paper duct, American stone duct (concrete), vitrified clay duct or sewer tile. These materials repre- sent a rather wide range of costs, and the importance of accurately de- termining the duct material used in lateral construction will be obvious. 96 TELEPHONE RATES AND VALUES Often the point of entrance of the lateral ducts to the manhole will be found covered with mud, or partially obscured by mortar, rendering a view of the duct material exceedingly difficult, even with the aid of a pocket flashlight. One familiar with the various duct materials can readily identify them by sense of touch. Iron pipe is, of course, very hard, and usually rather smooth to the touch. Creosoted wood is comparatively soft, and the fibrous nature of the wood can readily be distinguished with the bare hand. Fiber and paper duct look and feel very much alike, but if a small piece is broken off or cut away with a knife, and the cross section carefully examined, it will be found that the fiber presents a homogenous appearance, while the paper can be easily separated into annular rings or layers. American stone duct has the familiar feeling of stone on concrete. Vitrified clay presents a smooth and glassy interior surface. Sewer tile lacks the glazed finish of the vitrified clay, and, while rough to the touch, is smoother grained than the American stone duct. Before leaving the manhole the inspector will make a notation of the material and diameter of both laterals A and B, in the column headed "Material," under the general classification, "Laterals" (Fig. 18). The size, gauge and diameter of lateral cable A may be determined either within the manhole or at the pole. As a safeguard, it is better to take this data at both locations. 183. Main Conduit and Lateral Conduit Lengths. The de- termination of the length of lateral ducts and cables comes next. This is not always as simple a problem as it may at first appear. The course of the main conduit between two manholes is nearly always readily deter- minable. In the first place, conduit between two manholes is always laid as nearly in a straight line as possible. If subsurface obstructions are en- countered in the course of construction, necessitating a sharp bend, an intermediate manhole will usually be found at the bend. In the second place, if the conduit was laid subsequent to paving, the line of the trench can usually be traced on the surface of the pavement. When it comes to the laterals, however, the conditions are entirely different. The lateral poles may be so located as to necessitate the follow- ing of a circuitous route in laying the conduit between manhole and pole, and a large proportion of the total length of the lateral may be under a dirt or sod surface, so that it is well-nigh impossible to locate the trench by external appearances. Then, again, city ordinances may have restricted the location of the trench. In some cities telephone companies are compelled by ordinance to lay all conduit either parallel or at right angles to curb lines. This question of ordinance can, of course, be readily checked by the appraisal engineer, THE OUTSIDE PLANT INVENTORY 97 and the inspector can often determine the general direction of a lateral from the angle at which it leaves the manhole wall. With these aids, one familiar with underground construction methods can usually determine a lateral course with sufficient accuracy for ordinary purposes. 184. Method of Measuring Lateral Conduits. The method of measuring laterals is illustrated in Fig. 19. The lateral duct measurement should be taken from a point on the pavement directly over the manhole wall to a point on the pavement immediately over the junction of the lateral conduit and riser-bend. The first point may be determined by measuring the distance, inside the manhole, from the edge of the hole FIG. 19. Illustration of method of measuring laterals. cover to the wall, and subsequently laying off this measurement on the surface, marking the location of the manhole wall with a chalk line on the pavement. The point of junction between the conduit and the riser-bend is usually readily determinable. Riser-bends come in standard lengths and bends for a given size of pipe and have a standard radius. A riser-bend 3 inches in diameter is generally 90 degrees (quarter circle), bent on a 3-foot radius, and has a total length of approximately 5 feet. The distance from the pole to the junction, then, will equal the radius of the bend, 3 feet in this case. Lateral B entering a building will, of course, have no riser, and the lateral measurement will be taken to the building wall. 185. Determination of Length of Lateral Cables. Having recorded the measurements, paving data and the description of riser, in this case (Fig. 19) a 15-foot, 3-inch iron pipe riser made up of a 10-foot standpipe and a 5-foot bend, the inspector will next determine the length of the lateral cable. 98 TELEPHONE RATES AND VALUES Lateral cables usually terminate in a loop (cross-connection) box, or are spliced directly to the aerial cable at the underground pole. In cases of this kind the lateral cable length will be the total distance from the manhole splice to the splice at the underground pole (pothead splice to loop box or aerial cable splice, as the case may be) . Occasionally it will be found that the lateral cable extends without a splice to the second or third pole from the manhole. In this event the lateral cable will be considered as terminating at the point where the cable is attached to the messenger strand, and all cable beyond this point will be inventoried as aerial cable. The length of cable from the top of the riser to the splice or to the aerial cable strand, if there is no splice can usually be determined quite accurately by counting the number of pole steps, providing, of course, that the steps are placed in accordance with standard specifica- tions on a 3-foot center. In the case under consideration (Fig. 19), the total lateral cable length is as follows : 2 feet in manhole + 150 feet in lateral ducts + 15 feet in riser + 10 feet on pole, a total of 177 feet. 186. Inventory of Underground Terminal Equipment. In inventorying the underground terminal equipment, the inspector should note the make and manufacturers' code number of the terminal, the ultimate pair capacity, the present pair equipment, whether the terminal is protected or unprotected, and the size and make of the pole seat. In this connection it may be said that a terminal located on the under- ground pole is considered a part of the underground cable plant only when the lateral cable actually ends in the terminal. A terminal tapped off from a splice between underground and aerial cables is considered as part of the aerial cable equipment, and, together with its pole seat, should be so inventoried. 187. Determination of Size and Gauge of Underground Cable. - As in the case of the aerial cable, the determination of the size and gauge of the underground cable is necessarily a difficult problem. It is obviously out of the question to open working cables for the purpose of counting pairs or determining wire gauges. However, given the make of the cable and its capacity, it is possible to make a reasonably accurate guess as to the size and gauge by ascertaining the diameter. The importance of checking results so obtained by every other possible means cannot be exaggerated. The appraisal engineer should review the invoices in an effort to determine the size and gauge of all cable purchased during the various installation periods. He should also thoroughly investigate all available cable records and compare them with the results obtained in the field. A still further check may be effected by totaling up the pairs terminated in each cable, and, after making allowances for THE OUTSIDE PLANT INVENTORY 99 multiple repairs and for unterminated pairs, comparing the sizes ascer- tained in this way with those derived in the field. In some cases pieces of defective cable, removed from plant in clearing trouble, may be found in the scrap heap. If these pieces can be identified as to their previous location in the plant, they will serve a real purpose toward the solution of the problem, for it will be, of course, possible to accurately gauge the wire, count the pairs and measure the diameters. In Fig. 20 is shown the classification of the various major subdivisions of the outside plant under the Interstate Commerce Commission's stand- ard system of accounts. 188. Block and House Cable. The accurate inventory of the block and house-cable plant is one of the most difficult problems confront- ing the appraisal engineer. Fortunately, however, except in the case of the larger cities, a comparatively small amount of this type of construction is encountered. Due to the fact that block and house cables are often located in in- accessible places, such as basements and shafts, it is obviously out of the question to measure all of the cable. Usually, however, companies main- tain reasonably accurate records, in the form of blueprints and house diagrams made up from the original construction plans, of this portion of the plant. Probably the most satisfactory way to effect the inventory of the block and house-cable plant is to take copies of these plans into the field and check them wherever cable is found accessible, thus gaining sufficient data to warrant an estimate of the inaccessible portions. Terminals are usually located in readily accessible places, and should be carefully checked. 189. Submarine Cable, Exchange Account 246, Toll Account 256. "This account should include the cost of submarine cable, cable towers, loading coils, cable boxes and fittings, and other materials used in the installation of such cables, and other costs Incident thereto." For obvious reasons it is impossible to measure submarine cables in the field. There are several ways, however, by which the necessary data can usually be obtained. In most plants submarine cables are rather uncommon, and it will usually be found that a record of the length of the cable, as installed, is available somewhere in the records. If not, it is probable that some employee will remember the time that the cable was placed and from whom it was purchased, and then by writing to the manu- facturer the necessary information can be obtained. If neither of these methods proves practicable, the length of the sub- marine cable can be computed theoretically by ascertaining the total resistance between the terminal points and the resistance per lineal foot. Other data as to cable terminals, cable towers, anchorage, etc., should be obtained and recorded in sufficient detail to facilitate the appraisal. 100 TELEPHONE RATES AND VALUES CHAPTER X INVENTORY OF MISCELLANEOUS EQUIPMENT 190 . Items of Miscellaneous Equipment. The consideration of the inventory of the land, buildings, subscribers' station equipment, central office equipment and the outside plant has been completed. There still remains, however, a group of items usually of comparatively small monetary value which, nevertheless, are most important to the success- ful operation of any telephone property. These miscellaneous items include General Equipment, Account 260, Material and Supplies, Account 122, and Right of Way, Account 207. 191. General Equipment, Account 260. "This account should include the cost of the equipment classified in the sub-accounts hereunder. Items of small value or short life, such as portable tools liable to be lost or stolen, temporary shelving, waste baskets, gloves, whips and the like, should not be included in this account or the sub-accounts hereunder, but should be charged direct to the operating expense accounts or to the clearing accounts." Under this heading should be inventoried office furniture and fixtures, general shop equipment, general store equipment, general stable and garage equipment, and all of the miscellaneous tools and implements used in maintaining the plant. It is hardly necessary to give a detailed outline of the method of proce- dure for inventorying the equipment falling under account 260 and sub- accounts 261-265, inclusive. The instructions quoted in the following paragraphs clearly specify the nature of the equipment to be included under each of these accounts and these, together with the suggested pre- cautions, should be sufficient. The inventory resolves itself into a process of accurately counting and summarizing the equipment involved. 192. Office Furniture and Fixtures, Account 261. "This account should include the cost of desks, tables, chairs, carpets, cases, movable partitions, railings, shelves, typewriters, addressing machines, adding machines and other office devices; stoves, portable gas and electric fixtures, and other office fittings (except fittings considered a part of the building as provided for in Account 212, Buildings, and telephone equip- ment provided for under Account 220, Central Office Equipment)." The inventory of the office furniture and fixtures is a comparatively simple matter. It is usually advisable to subdivide this portion of the inventory according to the location of the equipment involved, i.e., IrKLBPHONE RATES AND VALUES make a complete separate inventory of the furniture and fixtures in the manager's office, in the general office, in the storeroom, etc. In this connection attention is called to the portion of the Interstate Commerce Commission's accounting instructions enclosed within paren- theses. Special fittings which are a part of the buildings should be inven- toried under Buildings, Account 212, and not under furniture and fixtures. Movable partitions, counters, railings and shelves should be inventoried under furniture and fixtures, while stationary railings and counters, which are obviously a part of the building itself, should be inventoried under the heading " Buildings." 193. General Shop Equipment, Account 262. "This account should include the cost of all equipment specially provided for general shops, such as engines, gas producers, electric generators and other power apparatus used in operating machinery in such shops; machine tools, shafting, belts and like shop equipment; also such smithing equipment in general shops as is used principally for general purposes other than shoeing horses and repairing vehicles. "Hand and other small portable tools liable to be lost or stolen should not be included herein, but portable tools and apparatus of special value may be charged to this account and remain herein so long as record is kept of such tools and apparatus." In connection with the inventory of the general shop equipment, special attention is called to the last paragraph of the foregoing Interstate Com- merce Commission's accounting system instructions. All of the small portable tools, which frequently have to be replaced, should be omitted entirely from the inventory. The cost of these items is obviously a part of the operating expense. 194. General Store Equipment, Account 263. "This account should include the cost of all equipment of general store structures, such as movable counters, movable shelving and other movable equipment of like nature; carts, barrows, trucks, tools, etc., and other apparatus and appliances used in handling, storing, or packing materials and supplies. "Counters, shelving and the like which ..are permanently attached to the structure should be charged to Account 212, Buildings, and not to this account." In inventorying the general store equipment, it is most important that permanent counters, shelving and fixtures which are obviously a part of the building should be included with the cost of the building and not listed under the heading "General Store Equipment." 195. General Stable and Garage Equipment, Account 264. - "This account should include the cost of all equipment of general stables, including horses, harness, drays, wagons, automobiles and other vehicles; equipment of shoeing shops, harness-repair shops, vehicle-repair shops, etc." INVENTORY OF MISCELLANEOUS EQUIPMENT 103 It frequently happens that a large portion of the stable and garage equipment of a telephone company consists of second-hand automobiles, motorcycles, wagons, trucks, etc. It is most important that the repro- duction cost assigned to this portion of the equipment should be repro- duction new, and not actual cost to the company. Many appraisers make the mistake of appraising second-hand material at the cost to the owner. This is obviously wrong and entirely inconsistent with the re- production cost theory. To facilitate a clearer understanding of this matter of the appraisement of second-hand equipment the following illustration is given: A telephone company possessed of a number of second-hand Ford cars desires a 1-ton truck for material distribution purposes. It finds that by utilizing various automobile parts at hand it can build up a truck of the desired capacity at a comparatively small cost. Assuming that the 1-ton truck resulting from this makeshift perfectly meets the requirements for which it was designed, the reproduction cost of the truck would be the prevalent market price of a standard truck of the same horsepower and capacity of the one in question. The fact that the truck under consideration is a makeshift, and not the exact equivalent of a new truck of standard make, can be cared for in the determination of the present, or depreciated, value. 196. General Tools and Implements, Account 265. "This account should include the cost of portable testing apparatus and valuable tools and implements devoted to the maintenance or construction of the telephone plant, and not provided for in the equipment accounts. This does not include tools not yet in use carried as supplies unissued." In inventorying general tools and implements it is important that the precaution outlined under general shop equipment, section 193, should be carefully observed, i.e., "Hand and other small tools liable to be lost or stolen should not be included herein, but portable tools and apparatus of special value may be charged to this account and remain herein so long as record is kept of such tools and apparatus." 197. Material and Supplies, Account 122. "This account should include the cost of unapplied material, including the value of material temporarily in use and not charged out in the company's accounts; articles in process of manufacture by the company; tools ? fuel, stationery and other supplies. Freight and express charges paid on the material included in this account should be included in the value of such material." There is little that can be said regarding the inventory of material and supplies, except that the equipment involved should be described in sufficient detail to properly effect its subsequent identification and appraise- ment. It will usually be found that the company has a reasonably accurate inventory, and the use of this inventory will probably considerably ex- pedite the work. 104 TELEPHONE RATES AND VALUES 198. Right of Way, Account 207. "This account should include the cost of all land and interests in land acquired for the location of tele- phone wires, cables, pole lines and conduits; salaries and expenses of right-of-way agents; expenses of appraisals and of juries, commissioners or arbitrators in condemnation cases; real-estate brokers' commissions; cost of plats, abstracts, notarial fees, examination of title, recording deeds, etc. "This account should also include the first cost of acquiring leaseholds of land for right of way, the terms of which are more than one year each, whether acquired through direct lease, assignment or otherwise (but not including the rents paid periodically in consideration of rights obtained under such leases). If any such leasehold is acquired by assignment, the charge to this account must not exceed the amount actually paid therefor by the accounting company to the assignor." The inventory of the right of way may be divided into three general classifications : 1. Right of way for poles located on public highways. 2. Right of way for poles located on private property. 3. Right of way for telephone cables, wires and cross arms placed on the poles of foreign utility companies. It will be remembered that the field form for pole line equipment pro- vides a space for tabulating poles located on private property. The total of these poles subtracted from the grand total of all the poles in- ventoried will give the number of poles located on public highways. By reviewing the field data it will be possible to Ascertain accurately the number of the telephone company's attachments on foreign poles. The resulting data, together with the inventory of poles on private property and public highways, should be supplemented by a careful check of the company's records. 199. Next Step in Appraisement. In a very general way all of the elements involved in the inventory of a telephone property have been discussed. It must be realized that the method of procedure outlined is merely intended as a guide, and that the individual requirements of specific cases may necessitate the adoption of radical modifications of the plan suggested. The next step in the appraisement of the inventoriable property is the preparation of the unit costs, and this problem will be considered in detail in the following chapter. CHAPTER XI PRELIMINARY DISCUSSION OF UNIT COSTS 200. Importance of Unit Costs. It is hard to say which phase of the appraisement problem is more important, the inventory of the physical property or the preparation of the unit costs. One thing we do know, however, and that is, assuming honesty of purpose and a reasonable degree of efficiency on the part of the field inspectors, most of the inventory errors will be found compensating. For instance, errors of omission in inventorying the wire plant will probably be nearly offset by errors of commission. Experience has proven, however, that plant is more frequently left out entirely than duplicated; hence the almost universal practice of adding a specific allowance to the reproduction cost of the inventoriable property to cover omissions. However, if an erroneous assumption is made as to the labor or material costs when building up the wire unit costs, and if these unit costs are used as a basis for appraising all of the wire plant, it will be readily seen that a serious error may result. Then, again, a regulatory body is much more likely to make a detailed analysis of the unit costs than of the inventory of physical property. A few errors in the unit costs even if they are of a minor nature may tend to cast suspicion on the entire appraisal, including inventory, collateral costs and intangible values. It will therefore be seen that the preparation of the unit costs is a most important feature in the appraisal of telephone properties. This portion of the work should be carried on under the direct supervision of the appraisal engineer, and every unit cost, before it is applied to the inventory, should be subjected to the most careful analysis by the ap- praisal engineer, and should be checked by every available means. For obvious reasons the unit costs, if determined by a disinterested appraisal engineer, will carry more weight before reviewing bodies than if prepared by an engineer who is an employee of the company submitting the ap- praisal. 201. Unit Costs and the Inventory. Long before the completion of the field work the unit cost study should be well under way, and every effort made to complete each set of unit costs by the time the corre- sponding portion of the inventory is finished. In this way the confusion, so often noticeable during the last stages of a public utility appraisal, may be entirely avoided. 106 TELEPHONE RATES AND VALUES The pole and wire inventory is usually the first to be completed in the field. By having the pole and wire unit costs ready for use immediately upon completion of the inventory, this portion of the appraisal may be disposed of in a comparatively short time. 202. Material Prices at Time of Appraisal. The first step in the preparation of the unit costs consists in the determination of material prices as of date of appraisal. Quotations should be secured from dealers in, and manufacturers of, every class of equipment found in the plant. For equipment usually purchased on a competitive basis poles, cross arms, wire, cable and conduit quotations should be secured from a number of concerns. Highly specialized equipment, such as telephone switchboards, private exchanges and subscribers' instruments, can, as a rule, be exactly reproduced only by the original manufacturers, and every effort should be made to ascertain prevalent market prices of various apparatus and material as of the appraisal date. 203. Determination of Material Prices for Period preceding Appraisal. Having obtained all possible data relative to fair prices, as of the date of appraisal, the next step involves the determination of corresponding prices for the several years preceding the appraisal. Usually the best way to accomplish this end is to assign one or more men, accord- ing to the individual requirements of the case in hand, to the task of reviewing the company's invoices for the several years preceding the appraisal. For each class of material the following data should be noted: date of purchase, quantity purchased, name of manufacturer or dealer, the total cost and the unit cost. Prices that seem abnormally high or abnormally low should be care- fully investigated before they are accepted for use in the final determina- tion of the unit costs. 204. Fair Material Prices for Appraisal Use. With this data- the market prices for the various types of equipment as of the appraisal date and for the several years preceding the appraisal tabulated in proper form, the determination of fair material prices for use in the ap- praisal under consideration is a comparatively simple problem. It is possible that the reader may gain the impression from the fore- going discussion that average prices for the several years preceding the appraisal should be used in all cases. This is not necessarily true. Take, for instance, the present material market. It is undoubtedly true that the conditions resulting from the present war will continue to affect the material markets for some years to come, even if peace is declared within the next few months. Obviously, the appraisal engineer in deriving fair material prices as of the present date must take into consideration the fact that although prices are higher now than they have been for PRELIMINARY DISCUSSION OF UNIT COSTS 107 some years past, there is every reason to suppose that present market conditions will prevail for some years to come. In the last analysis a determination of fair material prices, as of the appraisal date, is dependent not only upon the prevailing prices for the several years preceding the appraisal, but also upon the possible market trend during the several years following the appraisal. The appraisal engineer must take into account: first, past market conditions; second, market conditions as of the appraisal date; and third, the probable trend of the future material market. In other words, having all of the available facts in his possession bearing on the problem under consideration, the appraisal engineer must use his best judgment in determining fair material prices for the appraisal in hand. 205. Unit Labor Costs. The labor cost study is considered after the fair material prices have been determined. Work orders and com- pleted estimates for the several years preceding the appraisal should be carefully reviewed, and all possible data pertaining to the cost of setting poles, placing cross arms, stringing wire and cable, building conduit, etc., should be tabulated in such a form as to render possible a careful analysis of past and present labor conditions. The utmost care should be exercised in selecting records of completed work that represent average conditions, conditions that approximate as nearly as possible those that would probably be encountered in repro- ducing the plant as of the appraisal date. Obviously, unit costs derived from job orders covering small installa- tions cannot be considered as representative for the purpose under dis- cussion. Unit labor costs are necessarily much higher for piecemeal than for wholesale construction. Another and a very practical source of unit cost data will be found in the foremen in charge of the various construction and installation gangs. Many telephone foremen, for their own information, keep a detailed record of the time spent on the various kinds of work falling under their jurisdiction. It is also true that men who have been in the employ of a company for a long period of time are apt to be well posted as to soil and subsurface conditions encountered in the original plant construction. 206. Use of Curves to show Fluctuations of Prices. When all of the available sources of information have been properly tabulated, the resultant data should be a great help in the determination of fair unit costs. In this connection, curves showing graphically the fluctuation of material and labor prices over the period of years preceding an appraisal will be found a material help to the appraisal engineer. CHAPTER XII UNIT COSTS FOR REAL ESTATE AND EQUIPMENT 207. Land Appraising and Purposes. As has been previously stated in the discussion of land in Chapter VII, courts and commissions have usually ruled that the appraisal of a utility corporation's land should not be made by a consulting engineer, but rather by a real estate expert. Nevertheless, even if a competent expert is employed for this portion of the work, it is always well for the appraisal engineer to carefully verify the findings of the expert. It frequently happens that appraisals are made for other purposes than as a basis for rate making. The writer has just completed an ap- praisal of the property of a small telephone company located in a State where public utility corporations are not at the present time subject to the dictates of a public service commission. This company merely desired to gain as accurate a knowledge as possible of its tangible and intangible assets, so that it would be in a position to properly administer its financial affairs. Cases of this kind are numerous, and with the thought that the em- ployment of a separate real estate expert for land appraisal is a rather expensive proposition, it is proposed to consider this subject of land unit costs and land appraisals more specifically than was done in the foregoing treatment of the subject of land inventories. 208. Differing Opinions as to Theory to be used in Land Ap- praising. The proper method of appraising the land of a public utility corporation is a subject upon which there is a marked difference of opinion between experts. It has been argued that there is no logical reason why land or right of way belonging to a utility company should be considered on a different basis from that of similar property owned by an individual. On the other hand, it is unquestionably true that the development of utility properties has often increased the value of the adjoining land. This is especially true in the case of railroads. Land along a railroad right of way is obviously much more valuable after the railroad has been built than before. Some experts argue that in evaluating the land or right of way of a railroad company this fact of increased values of adjoining properties should be given due weight, and the railroad allowed to benefit by the general increase in prices. If this theory is conceded to be a reasonable one, then it, of course, follows that the utility corporation must suffer the consequences if the UNIT COSTS FOR REAL ESTATE AND EQUIPMENT 109 use made by it of certain parts of its plant has caused a decrease in the value of the surrounding property. It will be readily seen that the use of land for car barns, storage yards, etc., may be considered objectionable in a residential district, and may cause a decrease in surrounding property values. The attitude of the courts on this subject is evidenced by the following quotation from the Columbus Southern Railway v. Wright, 151 U. S. 481:- The value of the land depends largely upon the use to which it can be put, and the character of the improvements upon it. 209. Methods of appraising Land. There are two generally accepted methods of determining the value of land, first, the expert method; and second, the sales method. Each of these methods has been subjected to a good deal of criticism. Hence in appraising the land of a telephone company, as already suggested, it is usually advisable to employ both of these methods, so that if one of them is objected to by the court or commission in question the other may be substituted. 210. Expert Method of Land Appraisal. The expert method, as already stated, consists of the appraisal and description of the land by competent local real estate experts. If the land under consideration is valuable, and if its value forms an appreciable portion of the total value of the plant, it is advisable to employ two or more experts to work upon the problem independently. In a case of this kind a fair value of the land in question may often be obtained by averaging the respective values submitted by the experts. This latter plan, however, has the disadvantage of disqualifying the experts for testimony before the commission. Of course, no expert will be willing to take the stand and testify to a modification of his original estimate. If this averaging plan is employed in determining the value of a telephone company's land, it should be accompanied by a careful and detailed ex- planation of just how the final value of the land, as submitted in the appraisal, was obtained. Then if the court agrees to the propriety of averaging the land valuations submitted by a number of experts, the experts may be subsequently called to verify their individual estimates. 211. Sales Method of valuing Real Estate. In a decision, March 8, 1910, the Wisconsin Railroad Commission, in the case of the State Journal Printing Co. v. Madison Gas & Electric Co., discusses the sales method of valuing real estate. It says : The sales method of valuing real estate was used partially in the Michigan rail- way appraisals of 1900-01, and in the light of the experience gained in that work the method was adopted in the Wisconsin steam road valuation made under the 110 TELEPHONE RATES AND VALUES provisions of the ad valorem assessment law of 1903. It has since been extensively used in Wisconsin and elsewhere in connection with important valuations of public- service properties for both rate-making and taxation purposes, and is generally accepted as a valuable aid to the judgment by experts engaged in such valuation work on a large scale. The sales method may be denned as a plan or process for the systematic collec- tion and comparison of data relating to real estate transfers for the purpose of estimating true market realty values. It consists in a study of the transfers of neighboring property having conditions or characteristics similar to the land whose value is to be determined, and is intended to duplicate, as nearly as may be, the mental or judicial processes ordinarily employed by the so-called "local real estate expert," with a view to arriving at results approximating those which would be reached by such local expert acting without bias or suggestion. The sales method is capable of application in a variety of ways; in fact, is as flexible in its possible applications as are the varied methods employed by individual local experts. Two interpretations of the sales method have been most commonly employed. In one of these the area and consideration in each sale of similarly situated land is found, and the average unit price per square foot, per foot frontage, per lot, per acre, etc., ascertained, and this unit applied to the tract under investigation. The other application of the method introduces what, in many cases, is believed to be an additional safeguard, consisting of the use of the average assessed value of adjacent or similarly situated lands in combination with an average ratio or percentage representing the relationship of the assessed value of transferred lands to the total consideration paid for such transferred lands in the district or locality under consideration, all of these figures being based on the "ground values" exclusive of the improvements thereon. Such use of assessment figures is designed to introduce, as far as may be, the results of the judicial processes of the assessor, who, at least in theory, serves on behalf of the public as an unbiased expert in the matter of relative valuations, and who attempts to make allowance for the peculiar attributes or characteristics of individual parcels of real estate in any given locality or neighborhood of a city. In the broader and more flexible applications of the sales method, the expert adopts one or the other of the processes just outlined, or blends the two together in such fashion as to yield the most consistent and trustworthy final result. In the process of valuing a tract of land involving conflicting data, as in the case under consideration, the expert user of the sales method on this flexible basis derives a series of tentative results similar to the results representing the' judgments of individual local experts. The judicial function involved in the discriminating selection of data and in the derivation of final results is exercised along essentially parallel lines with the two classes of experts here compared. The further act of the judgment in selecting a final preferred valuation figure in the light of a group of preliminary or tentative results is idenitcal in the two cases. In the particular valuations here considered, the similarity of the basis is further emphasized by the fact that the results by the sales method represent the composite judgment of four members of the commission's expert staff, as against an equal number of local real estate experts employed by the company. Although it is frankly conceded that the tentative land valuation figures first reported were derived by a comparatively restricted application of the sales method, issue is here taken with certain claims made in the argument by counsel for company. In view of the repeated favorable reference by counsel to the judgment of the assessor with respect to relative values (argument on behalf of company, pp. 30, 31, 32, 37, UNIT COSTS FOR REAL ESTATE AND EQUIPMENT 111 39), the criticism of a similar use of the assessor's judgment by the commission's experts need scarcely be considered, except with respect to the misapprehension by counsel (argument, p. 43) as regards the fluctuation of the assessment ratio in Madison. Entirely aside from the claim that assessment ratios should not be depended upon in making land valuations, counsel contends that, in any event, a general assessment ratio should not be used in the case under consideration, chiefly because of a supposed "radical difference as between different sections or localities" in the city of Madison. 212. Appraisement of Buildings, Account 212. The appraise- ment of the buildings, like that of the land, is usually relegated by courts and commissions to specialists, as has been previously stated. Most of the State commissions take the stand that the appraisement of the build- ings can be much better effected by architects or building contractors than by the appraisal engineer. With all due respect to the regulatory bodies which have established this precedent for building appraisals, it is rather unfair to the appraisal engineer. Most engineers interested in telephone utility appraisement problems are thoroughly familiar with the telephone business from a purely engineer- ing standpoint, and are perfectly competent to estimate the cost of build- ings used for telephone purposes; in fact, it is part of the job of the tele- phone engineer to be thoroughly posted on building matters. In most cases he is better able to estimate the cost of the special type of buildings usually required for telephone purposes than are most of the general contractors and architects. There are so many variable factors entering into the appraisement of a telephone building that it is almost impossible to give accurate unit costs which may be used in building appraisement. Suffice it to say, it is possible to appraise a telephone building by estimating the cubic con- tents and applying a unit cost per cubic foot, this cost being dependent upon the type of building under consideration. Buildings may also be appraised by applying a unit cost per square foot to each floor of the building. In the latter case this unit cost per square foot would vary according to the general use to which the iloor in question is put. 213. Appraisement of Central Office Telephone Equipment, Account 221. The unit costs used in central office equipment are so largely dependent upon the exigencies of individual cases that it is practi- cally out of the question to give any specific data. As a general rule it may be said that the appraisement of telephone switchboards, frames and racks can be best effected by ascertaining the manufacturers' name, and the type, ultimate capacity and present equip- ment of the apparatus in question, referring directly to the manufacturer for prices as of the appraisal date. These prices may subsequently be 112 TELEPHONE RATES AND VALUES modified if, in the appraiser's judgment, they are unduly high due to some peculiar condition in the material or labor markets at the time of the appraisal. 214. Other Equipment of Central Offices, Account 222. This account, it will be remembered, includes all furniture and equipment, other than telephone equipment, in the central office operating, retiring and lunch rooms, etc. A large part of this equipment consists simply of ordinary furniture, such as chairs, tables, etc., and prices can be readily obtained from the appraiser's files, or from local dealers in equipment of the type under consideration. 215. Appraisal of Station Apparatus, Account 231. The ap- praisal of the station apparatus, or subscribers' station instruments, should be prefaced by a careful review of telephone instrument prices as of the date of appraisal and for the several years preceding the appraisal. To conform with the Interstate Commerce Commission's accounting in- structions, only the price of the instrument should be included under the 231 account. All additional material and labor costs incurred in the installation of the instrument will be appraised under Station Installations, Account 232. In cases where it is impossible to segregate various types of instru- ments i.e. wall, desk, etc., in the process of taking inventory, an allowance should be made in building up the unit cost per instrument for the fact that the instruments are probably not of one type. For instance, if after consultation with the plant authorities it is found reasonable to assume that 75 per cent of the instruments are of the hotel wall type, 15 per cent of the desk type, and 10 per cent of the long-back wall type, the unit cost should be correspondingly weighted. 216. Station Installations, Account 232. The Station Installa- tion Account, it will be recalled, covers the cost of all material and labor used in placing the telephone instrument on the subscriber's premises. To quote the Interstate Commerce Commission : This account should include the cost of installing station apparatus and the cost of inside wires; that is, the wires (or cables) from the instruments to the point of entrance to the building, where the drop wires or interior block wires terminate; or to the junction boxes, where the house cable or other cable terminates, including wires on the same premises to connect main and extension stations; or to connect the private branch exchange distributing frames with their terminal stations. The following is an illustration of the computation of an installation unit cost as taken from a recent telephone appraisal: UNIT COSTS FOR REAL ESTATE AND EQUIPMENT 113 1 fuse, at $0.086, $0 0860 16 feet inside wire, at $0.01735 a foot, 2780 10 feet duplex bridle wire, at $0.0088 a foot, 0880 2 porcelain knobs, at $0.00975 each * . . . 0195 6 Perfection nails, at $0.00085 each, . . 0051 8 screws, at $0.00373 each, 0298 Total material, $0 5064 Total material plus 2 per cent for waste and loss, .... 5165 Labor of installing, . 2 0000 Total installation cost per station, . . . . . . $2 5165 217. Interior Block Wires, Account 233. The determination of the unit costs for interior block wiring is rather a difficult problem. It may be effected either by arriving at a cost per foot placed of wiring along rear building walls and fences, or by estimating a cost per station fed by interior block wiring. In either case the unit costs should be derived by going over a number of work orders and determining the average span length of block wire and the average number of .rings, etc., used in installation. In the same way an estimate may be made of the length of time necessary for installing a block wire of average length. The unit costs should be derived in a manner similar to the one outlined in the preceding paragraph, under the heading " Station Installations." 218. Private Branch Exchanges, Account 234. The private branch exchange account, it will be remembered, includes the cost of the switchboards, their distributing frames, the cables connecting such switchboards and distributing frames, and the cost of installation. Unit costs for this type of equipment can best be arrived at by ascer- taining from the manufacturer of the equipment in question the prices prevalent as of the appraisal date, and making suitable additions for cost of installation. 219. Booths and Special Fittings, Account 235. The Interstate Commerce Commission's accounting instructions specify that under account 235 shall be included the cost of booths and special fittings, such as desks, chairs, fans, cash registers, together with their respective installation costs. It is hardly necessary to outline a specific method for arriving at the unit costs of equipment of this nature. It is only necessary to refer to manufacturer's catalogues and obtain reasonable material prices, and make suitable additions to cover the probable installation costs. CHAPTER XIII UNIT COSTS FOR POLE LINES 220. The Pole Line Appraisal. The pole account, it will be remem- bered, includes poles, cross arms, steps, brackets, anchors and guys. Needless to say, it is necessary to derive separate unit costs for each of these items. With the exception of the poles themselves and the cross arms, it is usually a comparatively simple matter to determine the unit costs as used for appraising the property falling under accounts 241 and 251. The unit costs will usually be about the same for both exchange and toll equipment, with the possible exception that the toll units will run a little higher than the exchange units, due to the increased costs of doing work at a distance from the base of supplies. In other words, due to the fact that the major portion of a toll line is necessarily located on rural highways, the cost of hauling material to the job will be greater than in the case of exchange pole line construction. The fact that it is frequently necessary for the company to board the men increases the labor item. 221. Pole Unit Costs. The first step in preparing the pole unit costs is the determination of material prices, not only as of the appraisal date, but also for a period of several years preceding the appraisal. These prices should be determined by getting quotations from a number of competent concerns and tabulating the results somewhat in the manner shown in Fig. 21. This table is taken from a recent appraisal, and it happens that all of the prices were taken from the same source, the quotations of the Western Electric Company. UNIT COSTS FOR POLE LINES 115 HEIGHT (FEET). Top (Inches). Quotation 8-28-14, f. o. b. Indian- apolis. Quotation 12-16-14, f. 0. b. Kokomo. Quotation 6-28-15, f. o. b. De Kalb. Average 8-28-14, 12-16-14, 6-28-15. Quotation 10-24-16, f. o. b. Decatur. 20 4 $0 70 $0 64 $0 63 $0 66 $0 76 5 85 74 80 80 1 12 6 1 14 1 03 1 05 1 07 1 50 25 4 98 92 94 95 1 22 5 1 15 99 1 10 1 08 1 72 6 2 15 2 15 2 00 2 10 2 55 7 3 05 - 3 00 3 03 3 75 8 3 90 - 3 90 3 90 5 95 30 4 - - 1 25 1 25 1 72 5 3 40 3 40 3 10 3 30 3 35 6 4 05 4 05 3 70 3 93 4 75 7 5 70 5 70 5 50 5 63 5 95 8 6 40 - 6 30 6 35 7 00 9 10 25 - 10 45 10 35 10 80 35 5 - 5 00 5 05 5 03 4 75i 6 6 70 6 70 6 25 6 55 6 2Qi 7 8 90 8 90 9 05 8 95 7 OQi 8 10 25 10 25 10 45 10 32 8 70i 9 13 15 - - 13 15 9 9Qi 40,i 6 - - - 7 92 8 55 7 8 15 - - 8 15 8 80 8 9 55 - - 9 55 9 90 9 - - - 11 50 12 00 45,i . 6 _ 10 55 11 00 7 10 95 - - 10 95 11 50 8 12 25 - - 12 25 12 75 50,i . . .. . 7 13 25 - - 13 25 13 55 8 14 40 '- - . 14 40 14 80 9 - - - 16 64 17 10 55,i 8 16 80 - - .16 80 - 60,i 7 _ 17 03 17 50 8 - - - 18 88 19 40 9 - - - 22 39 23 00 15, 4 - - - 50 - 5 - - - 57 - 10 2x4 - - - 40 - FIG. 21. 1 Western or red cedar. Material prices for western and northern cedar poles. 116 TELEPHONE RATES AND VALUES The next step involves the determination of proper labor units. Fig. 22 shows a rather comprehensive analysis of the various labor costs of poles entering into the preparation for use in a telephone property. INCHES. 4 4^ 5 5M 6 VA 7 8 20-foot: Unloading, .... $0 056 $0 066 $0 075 $0 085 $0 095 $0 110 $0 120 $0 147 Roofing, 021 025 028 031 036 038 045 055 Hauling, .... 151 178 205 231 258 290 325 398 Digging, .... 250 292 338 381 429 482 540 660 Setting, .... 163 190 219 248 278 312 350 428 Supervision, 15 per cent, . 096 113 130 146 164 185 207 253 Total, .... $0 737 $0 864 $0 995 $1 122 SI 260 SI 417 $1 587 $1 941 25-foot: Unloading, .... $0 081 $0 094 $0 109 SO 123 $0 138 $0 153 SO 170 $0 206 Roofing, .... 024 028 032 036 041 046 050 061 Hauling, .... 201 236 272 309 346 381 425 515 Digging, .... 336 395 454 516 578 644 710 860 Setting 222 262 301 343 382 426 470 569 Supervision, 15 per cent, . 130 152 175 199 223 248 274 332 Total, .... $1 004 $1 167 11 343 SI 526 $1 708 SI 898 $2 100 $2 543 30-foot: Unloading, .... $0 113 $0 130 $0 149 $0 168 $0 190 $0 210 $0 230 $0 275 Roofing, .... 027 031 036 040 045 050 055 066 Hauling, .... 270 313 356 403 453 500 550 659 Digging, .... 437 507 577 655 733 812 890 1 066 Setting 305 353 402 457 511 566 620 742 Supervision, 15 per cent, . 173 200 228 258 290 321 352 421 Total, .... $1 325 SI 534 $1 748 $1 981 $2 222 $2 459 S2 697 $3 229 35-foot: Unloading, .... $0 155 $0 178 $0 200 $0 226 $0 250 $0 274 SO 300 SO 352 Roofing, .... 031 035 040 045 050 055 060 066 Hauling, .... 360 413 466 525 585 642 700 776 Digging, . . . 556 636 716 809 902 991 1 080 1 196 Setting, .... 412 473 534 601 668 734 800 886 Supervision, 15 per cent, . 227 260 293 331 368 405 441 491 Total $1 741 $1 995 $2 249 $2 537 $2 823 S3 102 S3 381 $3 766 FIG. 22. Labor costs of cedar poles in city, exclusive of painting, stepping, shaving and gaining. UNIT COSTS FOR POLE LINES 117 It will be noted that in Fig. 22 only direct supervision is provided for. Direct supervision, in this case, consists of a proportionate allowance of the wages of the construction foreman, who directs, and who sometimes actually participates in, the work. All of the general supervision, or overhead charges, as they are sometimes called, is cared for under the collateral construction costs, as we have already seen in Chapter V. Preliminary to the preparation of Fig. 22, it is necessary, of course, to ascertain the prevalent labor rates in the community in which the plant under consideration is located, and to further ascertain whether or not the scale of wages in force at the date of appraisal is of average conditions. City. HEIGHT (FEET). Top (Inches). Pole Cost. 2 Per Cent Waste and Loss. Total Material. Total Labor. Cost Each. 15, 5 $0 57 SO 01 $0 58 $0 75 $1 33 20, . . . 4 66 01 67 77 1 44 5 80 02 82 1 03 1 85 6 1 07 02 1 09 1 31 2 40 25, 4 95 02 97 1 04 2 01 5 1 08 02 1 10 1 40 2 50 6 2 10 04 2 14 1 78 3 92 7 3 03 06 3 09 2 19 5 28 8 3 90 08 3 98 2 65 6 63 30, 5 3 30 07 3 37 1 83 5 20 6 3 93 08 4 01 2 33 6 34 7 5 63 11 5 74 2 82 8 56 8 6 35 13 6 48 3 38 9 86 35 5 5 03 10 5 13 2 38 7 51 6 6 55 13 6 68 2 98 9 66 7 8 95 18 9 13 3 57 12 70 8 10 32 21 10 53 3 95 14 48 40,i 6 7 92 16 8 08 3 68 11 76 7 8 15 16 8 31 4 41 12 72 8 9 55 19 9 74 5 14 14 88 45,i . . '. . 7 10 95 22 11 17 5 36 16 53 8 12 25 25 12 50 6 29 18 79 50, i 7 13 25 27 13 52 6 41 19 93 8 14 40 29 14 69 7 51 22 20 55, l . 8 16 80 34 ' 17 14 8 73 25 87 60,i 8 18 88 38 19 26 10 11 29 37 Rural ar.d Toll. 15, 4 $0 50 SO 01 $0 51 $0 75 $1 26 20, 4 66 01 67 89 1 56 5 80 02 82 1 20 2 02 25 5 1 08 02 1 10 1 62 2 72 6 2 10 04 2 14 , 2 06 4 20 7 3 03 06 3 09 2 53 5 62 30 6 3 93 08 4 01 2 68 6 69 35 6 6 55 13 ' 6 68 3 42 10 10 7 8 95 18 9 13 4 09 13 22 8 10 32 21 10 53 4 83 15 36 40,i . 7 8 15 16 8 31 5 04 13 35 10, 2x4 40 01 41 50 91 1 Western cedar. FIG. 23. Summary of material and labor costs for cedar poles. 118 TELEPHONE RATES AND VALUES Fig. 23 is in the nature of a summary for the material and labor units determined in Figs. 21 and 22. It will be noted that in the fourth column of Fig. 23, an allowance of 2 per cent of the cost of the pole is made for waste and loss. This allowance is customary for all of the material used in outside plant construction. Its purpose will be apparent when it is remembered that a certain proportion of the material received on the job for construction purposes is always found to be defective, and, in the case of smaller articles, a certain proportion is usually lost or stolen. Experience has proven that 2 per cent is a fair average allowance for this item of loss and waste. The last column of Fig. 23 shows the unit costs in completed form, ready for use in the appraisement. In this connection it should be noted that the labor figures as given in Fig. 23 do not agree with those quoted in Fig. 22. The tables are merely for illustration purposes and not for use in actual appraisal work. 222. Cost of painting Poles. In Fig. 24 is presented an analysis of the cost of painting poles. Of course this cost for poles of a given height will vary somewhat according to the diameter. The costs given in the table are average prices, and based largely upon the sizes of poles most frequently used, 5-inch, 20-foot; 5-inch, 25-foot; 6-inch, 30-foot, etc. SIZE (FEET). Material. Labor. Total Cost. 20, $0 23 $0 19 $0 42 25 35 22 57 30, 49 24 73 35, 57 30 87 40, 65 37 1 02 45, 74 45 1 19 50, 84 53 1 37 55 96 62 1 58 60, 1 07 70 1 77 FIG. 24. Cost of painting poles. 223. Cross Arm Unit Costs. The first step in the determination of the cross arm unit costs is to tabulate all of the data as to cross arm prices at the date of the appraisal and for the several years preceding the appraisal, in much the same form as that suggested for poles in Fig. 21. Having determined the material prices, the unit costs will be built up in somewhat the following manner: UNIT COSTS FOR POLE LINES 119 1 ten-pin standard 120-inch fir cross arm at $0.63, 10 U-inch by 8-inch locust pins at $0.0123, 10 16-d. nails at $0.0001, . 2 22-inch cross arm braces at $0.051, . 2 f-inch by 4-inch carriage bolts at $0.015, 1 ^-inch by 4-inch fetter-drive screw at $0.025, . 2 U-inch washers at $0.003, 1 |-inch by 12-inch machine bolt at $0.077, 2 21-inch washers at $0.013, Total material, ...... Waste and loss at 2 per cent, Total material, including waste and loss, Cost of placing cross arm, . Unit cost, ...... $0 630 123 001 102 030 025 006 077 026 $1 020 020 $1 040 496 $1 54 As previously suggested, the labor item will be raised slightly for use in the appraisal of the toll and rural plant. 224. Cost of Stepping. In many plants only the terminal poles i.e., poles on which aerial or underground cable terminals are located are stepped. It is, therefore, usually advisable to determine a separate unit cost for stepping poles, and not to include the cost of stepping as a part of the pole unit costs. Fig. 25 shows the derivation of the unit cost for stepping poles of various sizes. [Galvanized iron steps, $0.026 each; wood steps, $0.0083 each.] Height of pole (feet), . 25 30 35 40 45 50 55 60 70 Number of iron steps, 8 11 14 17 20 23 26 29 35 Number of wood steps, 5 5 5 5 5 5 5 5 5 Material: Iron steps, $0 208 $0 286 $0 364 $0 442 $0 520 $0 598 $0 676 $0 754 $0 910 Wood steps, 042 042 042 042 042 042 042 042 042 Nails for wood steps, 020 020 020 020 020 020 020 020 020 Waste and breakage, 005 007 009 010 Oil 013 015 016 019 Total material, $0 275 $0 355 $0 435 $0 514 $0 593 $0 673 $0 753 $0 832 $0 991 Labor: Boring for steps, $0 10 $0 11 $0 14 $0 20 $0 28 $0 37 SO 48 $0 60 $0 75 Attaching steps, 09 12 15 18 21 24 27 30 35 Supervision, 15 per cent, 03 03 04 06 07 09 11 14 17 Total labor, . $0 22 $0 26 $0 33 $0 44 $0 56 $0 70 $0 86 $1 04 $1 27 Total cost, . $0 495 $0 615 $0 765 $0 954 $1 153 $1 373 $1 613 $1 872 $2 261 FIG. 25. Cost of stepping poles. 120 TELEPHONE RATES AND VALUES 225. Unit Costs for Anchors and Guys. In the discussion of the unit costs for the poles and cross arms, emphasis was laid upon the fact that all material and labor costs, as of the appraisal date and for the several years preceding the appraisal, should be carefully reviewed before the adoption of final figures for use in building up the unit costs. This is equally necessary in the case of the unit costs for the anchors and guys, and for all of the unit costs for outside plant construction treated here- inafter. If the reader will bear this suggestion in mind, it will not be necessary to refer to it specifically in the case of the individual unit costs. All of the unit cost calculations given in the ensuing paragraphs are based on the premises that all material and labor costs used in building up the units have been subjected to careful analysis by the appraisal engineer. Figs. 26 and 27 show the method of building up unit costs for anchors and guys, respectively. 1 Patent anchor, 5-inch at $0.8500, ... $0 850 2 guy hooks at $0.0590 118 1 Crosby clip at $0.1550, . 1 2-bolt clamp at $0.1760, ... 176 10 pole shims at $0.0230 230 1 |-inch thimble at $0.0345, .... 035 2 fetter-drive screws, Hnch by 4-inch, at $0.0250, . 050 20-foot |-inch S. & M. strand at $0.0110, . . 220 20-foot No. 6 B. B. iron wire at $0.0039, 078 Total, .... . $1 912 Add 2 per cent loss and waste, . Total material, .... $1 950 Labor, placing rod, . Labor, placing guy, . . . Field supervision and teaming, . Total labor, . $2 588 Unit cost, . . $4 54 FIG. 26. Unit cost of light patent anchor (rural). UNIT COSTS FOR POLE LINES 121 75-foot ^-mch S. & M. strand at $0.0132 $0 990 50-foot f-irich S. & M. strand at $0.0110, 550 2 guy hooks at $0.0590, 118 2 fetter-drive screws, -inch by 4-inch at $0.0250, .... 050 10 pole shims at $0.0230, 230 2 Crosby clips at $0.1550, ... 310 2 2-bolt clamps at $0.1760 352 Total, . . . . ... $2 600 Add 2 per cent loss and waste, ........ 052 Total material, ... . $2 652 Labor, placing guy, . . . . . . . . $2 500 Field supervision and teaming, ...... 300 Total labor, . . . ... $2 800 Unit cost, $5 45 FIG. 27. Unit cost of head guys (city and rural). CHAPTER XIV UNIT COSTS FOR THE AERIAL CABLE PLANT 226. Aerial Cable Plant, Unit Costs. The aerial cable account, as has been previously stated, includes cost of cables, suspension strand wire, cable clips and rings, cable boxes and fittings, pole seats or platforms, loading coils, potheads, protectors, sleeves, and all other material used in connection with the installation of aerial cable. The cost of Exchange Aerial Cable, Account 242, will necessarily be slightly lower than the cost of Toll Aerial Cable, Account 252. This is due to the fact that the installation of exchange plant, as already suggested, can usually be effected more economically than the installation of the toll plant because of lower labor and cartage costs, and lower material prices. The determination of the unit costs for use in the appraisal of a telephone aerial cable plant should be prefaced by a careful review of material and labor prices for the several years preceding the appraisal. Given repre- sentative material prices, it is a comparatively easy matter to build up the unit costs for each of the various types of equipment falling under the aerial cable accounts. 227. Unit Cost per Foot of Aerial Cable in Place. Fig. 28 shows an analysis of the total cost per foot of placing aerial cable in metal hangers, exclusive of the messenger strand from which the cable itself is suspended. It will be noted that the costs per foot in place, as given in this table, are computed by first estimating what it would cost to place a 1,000-foot section of each of the various sizes of cable under consideration, and sub- sequently reducing these costs per 1,000-foot section to a cost per foot basis. 228. Basis of Prices for Unit Costs. There is one point which merits the most careful consideration in the preparation of unit costs for cable, or for any other type of equipment composed largely of copper, lead and the other higher-priced metals: it is that the present material prices are far above anything that has been experienced during the brief history of public utility appraisement work. The costs given in Fig. 28 were built up several years ago, and ob- viously they are far below present costs. Up to a comparatively short time ago the majority of appraisal engineers considered present-day metal prices abnormal, and therefore unfair for use in the determination of the reproduction cost of utility properties. UNIT COSTS FOR THE AERIAL CABLE PLANT 123 3*1 i -2 II S3 n SSSSSSS5S OO lCOO' tc^OOCO isgsg^iiss . ^ ^H oo -* 10 ifl I I I I ~H ^^ CO 00 iop(MpTj;ffqocodsai-^-^>fStn/^oc^f^^i ' -CtO T-I | CO^IMCO ' <_; o ut r- c^ = CM csi LO <=<=<= I | M^-H^pt^toooosspinpppp ^pppcopp^s p p p^ p p p^ pop poop p pppco op pco pop p poop p p op p-* op p p c<> 10 1-^ o co oo 10 o o "5 ooo J o toco 006 e M P 2 -* 3 --' * f . 3 ilillB-i^i illll ilSZ-l ;; 1 J| li 111 .ftftfi.RS.8*)5,- l ,- ss a SSSSSSSgSgSSSSSS ' ' ' g> I I I 8 ' ' ,- l-il 1 ! CC~ 5 5 g 5 111! I-H ~H ^ e ,-, rt r-i rt e CM oo co o -^ ro t^ c J frefan/ Jf ^ ^ /S/ fi^ ^ ,r frlSOTl JV * ,<; 0eron sr gve ^/ ftalsey