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Discovering Diverse Content Through
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establishment, nor should there be any difference in the basis of
valuation for taxation [exactly what Governor Pingree maintained] or
other purposes. There is common to both the value due to location,
good will, etc."
While the remainder of the address in question contains no specific
criticisms of methods of valuation, it does go into a discussion of
sundry legal decisions; and conclusions are drawn quite at variance
with those set forth elsewhere in this paper. The thing most
noticeable in the entire address is the lack of a proper spirit of
fairness, an apparent inability to state fully and fairly the position of
the men whose views are being opposed, and an undue emphasis in
quoting some public official whose views coincide for the time being
with the theories which are being advocated. The fact that Mr.
Williams quotes from an address of Hon. Robert H. Shields,
President of the Michigan Tax Commission, a statement criticising
the work of Professors Cooley and Adams, illustrates the latter point.
The statement is made again and again that the Michigan work was
a physical valuation; that no attempt was made to secure a "fair
value" (the language of the Courts), and that the value as a going
concern was not attempted to be given. In no case is the statement
made that Professor Cooley had charge of the physical valuation in
Michigan, and that Professor Adams took this physical valuation,
and, under his method, treated it as one element, and with it and
other data derived from a study of the reports and earnings of the
company, undertook to determine a "non-physical," "intangible,"
"franchise," or "going concern" value, which included all tangible
elements, and which, added to the physical value, was assumed by
Professor Adams to give the true value. Had such a statement been
fairly made, no possible objection could be raised to the making of
any number of points against the correctness of the methods used
by Professor Adams.
"Certainly it cannot be denied that a road between New York and
Chicago, 950 miles in length, passing through a manufacturing
district, is of greater value than a road 1,200 miles in length,
between the same cities, but passing through a hilly and
undeveloped territory a portion of the distance, and through a
farming section for a greater portion of the remaining distance; yet
the advocates of a physical valuation would have us believe that
there is no difference in the value of the two if they can be
reproduced to-day at the same cost."
This statement is entirely unfair to every man who has been in
responsible charge of valuation work in recent years in the United
States. No theory has ever been favored by any honest-thinking
advocate of a valuation. In the first place, no interstate valuations
have ever been made, and no parallel case to the one assumed is to
be found, except for very short sections of roads, a very marked
instance having been referred to elsewhere in this paper. Such a
condition as assumed would be reflected in the earnings of the
companies to such an extent as to cause the non-physical element
of Professor Adams as used in Michigan to correct largely or wholly
the inequality and inaccuracy of the physical valuation; such at least
was the theory, and, if carried to its logical end by the use of
negative non-physical values, such would be the result.
The final arguments of Mr. Williams' address are devoted to an
attack on the plan outlined by the Interstate Commerce Commission
for valuation, and on some of the accounting methods of the
Commission—points not proper to be discussed in this paper—but it
is difficult indeed to read them without noting the apparently studied
misrepresentation of the real attitude of Professor Adams and the
Commission, and the evident object of the entire address to create a
wrong impression regarding what has been done, and a prejudice
against the men who have been engaged on State appraisal work
and those who advocate the appraisal of properties as a proper step
in the way of securing such information as will enable an intelligent
consideration of the great corporation problems that must be solved.

12. Proceedings, Am. Water-Works Assoc., 1902.

13. Commencing with the issue of January 22d, 1909.

14. The Railroad Gazette, April 19th, 1901, Vol. XXXIII. No. 16. p.
271.

15. Railroad Age Gazette, April 2d, 1909, p. 761.

16. Railroad Age Gazette, January 29th, 1909, p. 219.

 The Determination of Elements of Value and Methods of
Valuation by the Courts.

The preceding narrative of methods of appraisal work logically leads

up to the question: Will these methods that have been adopted in
various appraisal undertakings stand the test of the Courts? After all,
the final seal of approval must be stamped on a method by the
highest Courts before it can be said to be a definitely fixed and
determined principle for general use in valuation.
In a careful perusal of many papers on this subject, quotations from
judicial decisions will be noted which are literally correct as far as
they go, but which are incomplete and often very misleading; and
often such incomplete quotations are presented as to convey an
entirely wrong impression of the full decision. In order that no such
charge may lie against this paper, the quotations given are full
enough to indicate clearly the intent of the Court, even at the
expense of undue length.
An examination of all Federal and Supreme Court cases which bear
on the subject of property valuation has been made, and quotations
at length from some of the older cases, establishing precedent,
together with citations to more recent decisions, are submitted. It is
believed that the points of principle and method, in so far as they
have been determined by the highest Courts, are quite fully set
forth.
A study of the complete methods of the railroad valuation in
Michigan, in connection with these decisions, discloses the fact that
they comply with the requirements of the earlier cases, that all
matters affecting value be taken into consideration, and that in the
more recent decisions the detailed methods adopted in the Cooley
physical appraisal have been sustained as to very many points. In no
case have any of such methods been unfavorably criticized, and,
while at this date the Supreme Court has not squarely passed on the
propriety of any method for securing non-physical or intangible
values, it has fully sustained the general position of Professor Adams
in several important points. In addition to the complete examination
of Federal cases, certain very interesting and valuable State cases
have been examined, and some of them are quoted.
These cases involve both matters of taxation and rate-making. They
cover railroads, water-works, gas-works, and other classes of public
service corporations, and clearly demonstrate the fact that any
analysis of the subject of property valuations must include all classes
of corporations. Rate-making and taxation in themselves are entirely
separate and distinct from valuation, which is a necessary
preliminary step in either undertaking. For this reason all references
which are not of special interest in the valuation part of the problem
are omitted.
The case of Smyth vs. Ames (169 U. S., 466) was an action to
question the constitutionality of a statute of Nebraska establishing
rates. It is of great interest, and, based on the ruling of the Court in
this case, the appraiser in Washington and the appraisers in
Nebraska have undertaken to secure first cost as an element of
value. The decision holds that:
(1) A railroad corporation is a person within the meaning of
the fourteenth amendment.
(2) A State enactment establishing rates that will not admit
the carrier to earn such compensation as would be just
to it and to the public, would deprive such carrier of its
property and would be repugnant to the fourteenth
amendment.
(3) Rates established by a State cannot be so conclusively
determined by the legislature that they cannot become
 the subject of judicial inquiry.
The reasonableness of rates prescribed by a State for intra-state
business must be determined without reference to the interstate
business done by the carrier or the profits derived from that
business.
This paper is not concerned with the question of rates, which is
discussed at length in this decision. It is, however, of special interest
to note what the Court says in regard to the relation of the
corporations to the people, and to elements of value.
"A railroad is a public highway, and none the less so because
constructed and maintained through the agency of a corporation
deriving its existence and powers from the State. Such a
corporation was created for public purposes. It performs a
function of the State. Its authority to exercise the right of
eminent domain and to charge tolls was given primarily for the
benefit of the public. It is under governmental control, though
such control must be exercised with due regard to the
constitutional guaranties for the protection of its property.... It
cannot therefore be admitted that a railroad corporation
maintaining a highway under the authority of the State may fix
its rates with a view solely to its own interests and ignore the
rights of the public. But the rights of the public would be ignored
if rates for the transportation of persons or property on a railroad
are exacted without reference to the fair value of the property
used for the public, or the fair value of the services rendered,
but in order simply that the corporation may meet operating
expenses, pay the interest on its obligations, and declare a
dividend to stockholders.
"If a railroad corporation has bonded its property for an amount
that exceeds its fair value, or if its capitalization is largely
fictitious, it may not impose upon the public the burden of such
increased rates as may be required for the purpose of realizing
profits upon such excessive valuation or fictitious capitalization,
and the apparent value of the property and franchises used by a
 corporation, as represented by its stocks, bonds, and obligations,
is not alone to be considered when determining the rates that
may reasonably be charged."
(The Court here quotes 164 U. S., 578, Covington and Lexington
Turnpike vs. Sanford.)
"A corporation maintaining a public highway, although it owns
the property it employs for accomplishing public objects, must be
held to have accepted its rights, privileges, and franchises
subject to the condition that the government creating it, or the
government within whose limits it conducts its business, may by
legislation protect the people against unreasonable charges for
the services rendered by it. It cannot be assumed that any
railroad corporation, accepting franchises, rights, and privileges
at the hands of the public, ever supposed that it acquired, or
that it was intended to grant to it, the power to construct and
maintain a public highway simply for its benefit, without regard
to the rights of the public. But it is equally true that the
corporation performing such public services, and the people
interested in its financial affairs have rights that may not be
invaded by legislative enactment in disregard of the fundamental
guaranty for the protection of property. The corporation may not
be required to use its property for the benefit of the public
without receiving just compensation for the services rendered by
it. How such compensation may be ascertained, and what are
the necessary elements in such inquiry, will always be an
embarrassing question.
"We hold, however, that the basis of all calculations as to the
reasonableness of rates to be charged by a corporation
maintaining a highway under legislative sanction must be the fair
value of the property being used by it for the convenience of the
public. And in order to ascertain that value the original cost of
construction, the amount expended in permanent improvements,
the amount and market value of its bonds and stocks, the
present as compared with the original cost of construction, the
 probable earning capacity of the property under particular rates
established by the statute, the sum required to meet operating
expenses, are all matters for consideration, and are to be given
such weight as may be just and right in each case. We do not
say that there may not be other matters to be regarded in
estimating the value of the property. What the company is
entitled to ask is a fair return upon the value of that which it
employs for the public convenience. On the other hand, what the
public is entitled to demand is that no more be exacted from it
for the use of a public highway than the services rendered by it
are reasonably worth."
The body of this decision is quoted at length to show:
First. That the Court reiterates the relation of the people to
the corporation, as defined by Covington and Lexington
Turnpike Road vs. Sanford (164 U. S., 578) and by Stone
vs. Farmers' Loan and Trust Company (116 U. S., 307).
Second. That the basis for computing a fair rate is the fair
value of the property, which must be arrived at by a
computation or series of computations taking into
account many different factors.
Third. That while the Court mentions certain things that may
serve as indices of value, which are to be taken into
account and given due weight, the Court does not outline
or define any method of arriving at a value, but does
recognize it as an embarrassing question.
Fourth. That no such stress has been laid by the Court on
original cost as has been construed by some appraisers.
The principles enunciated in Smyth vs. Ames are reiterated by the
Court in San Diego Land Company vs. National City (174 U. S., 739),
with the further ruling:
"The contention of the appellant in the present case is that, in
ascertaining what are just rates, the Court should take into
consideration the cost of its plant; the cost per annum of
 operating the plant, including interest paid on money borrowed
and reasonably necessary to be used in constructing the same;
the annual depreciation of the plant from natural causes
resulting from its use; and a fair profit to the Company over and
above such charges for its services in supplying the water to
consumers, either by way of interest on the money it has
expended for the public use, or upon some other fair and
equitable basis. Undoubtedly, all these matters ought to be taken
into consideration and such weight given them, when rates are
being fixed, as under all the circumstances will be just to the
company and to the public. The basis of calculation suggested by
the appellant is, however, defective in not requiring the real
value of the property and the fair value in themselves of the
services rendered to be taken into consideration. What the
company is entitled to demand, in order that it may have just
compensation, is a fair return upon the reasonable value of the
property at the time it is being used for the public. The property
may have cost more than it ought to have cost, and its
outstanding bonds for money borrowed, and which went into the
plant, may be in excess of the real value of the property. So that
it cannot be said that the amount of such bonds should in every
case control the question of rates, although it may be an
element in the inquiry as to what is, all the circumstances
considered, just to both the company and the public."
In the case of Columbus Southern Railway vs. Wright (151 U. S.,
479), the Court quotes approvingly from Franklin Company vs.
Railroad (12 Lea (Tenn.), 521-537-538-539), and shows that the
doctrine quoted had already been enunciated by the Supreme Court
in the State Railroad Tax Cases (92 U. S., 575-607). The Court
quotes as follows:
"The property of a railroad company for purposes of taxation
consists of its realty, its local personalty, its rolling stock, its
choses in action, and its franchises. The franchise is a privilege
conferred by the charter of incorporation, namely the right to
exercise all the powers granted in the mode prescribed for the
 purpose of profit. It is a unit not confined to any one county in
which it may be exercised.

"Obviously, after ascertaining the value of the entire franchise in

the State as a unit, no more approximate or just division of this
value can be made for purposes of taxation than to allot it
among the counties through which the track runs in proportion
of the entire length of track in the county to the entire length of
track in the State....
"The roadway itself of a railroad depends for its value upon the
traffic of the company and not merely upon the narrow strip of
land appropriated for the use of the road, and the bars and
cross-ties thereon. The value of a roadway at any given time is
not the original cost, nor, a fortiori, its ultimate cost after years
of expenditure in repairs and improvements. On the other hand,
its value cannot be determined by ascertaining the value of the
land included in the roadway assessed at the market price of
adjacent lands, and adding the value of the cross-ties, rails, and
spikes. The value of land depends largely upon the use to which
it is put and the character of the improvements upon it."
The mileage basis of apportionment is sustained in the following and
other cases:
State Railroad Tax Cases 92 U. S.,
608
Delaware Railroad Tax Case 18 Wall.,
206
Erie Railway vs. Pennsylvania 21 Wall.,
492
Western Union Telegraph Company vs. Mass 125 U. S.,
530
Pullman Palace Car Company vs. Pennsylvania 141 U. S.,
18
Maine vs. Grand Trunk Railway 142 U. S.,
217
Pittsburg, Cincinnati, Chicago, and St. Louis Railway 154 U. S.,
vs. Backus 430
Therefore this basis of division of values between territorial units
appears to be well established by precedent. This is in a measure
unfortunate, as certain classes of property cannot be apportioned
equitably in this way, unless the value of a railroad be determined,
and then that value allocated between different territorial units in
proportion to mileage, without any regard to the location of any
structure or series of structures in any State or county, the track-
mileage basis must be looked upon as a method of apportionment
which is subject to modification or which will lead to error.
In an Indiana tax case, Cleveland, Cincinnati, Chicago, and St. Louis
Railway vs. Backus (154 U. S., 444), the late Justice Brewer, of the
Supreme Court, in handing down the judgment, said:
"The true value of a line of railroad is something more than an
aggregation of the values of the separate parts of it, operated
separately. It is the aggregate of those values plus that arising
from a connected operation of the whole, and each part of the
road contributes not merely the value arising from its
independent operation, but its mileage proportion of that flowing
from a continuous and connected operation of the whole.... The
value of property results from the use to which it is put, and
varies with the profitableness of that use, past, present and
prospective, actual and anticipated. There is no pecuniary value
outside that which results from such use....
"In the nature of things it is practically impossible, at least in
respect to railroad property, to divide its value and determine
how much is caused by one use to which it is put and how much
by another. Take the case before us, it is impossible to
disintegrate the value of that portion of the road within the State
of Indiana and determine how much of that value springs from
its use in doing interstate business and how much from its use in
 doing business wholly within the State. An attempt to do so
would be entering upon a mere field of uncertainty and
speculation."
In the Michigan cases, the principal one being Michigan Central
Railroad vs. Powers (201 U. S., 245), the question of method of
valuation was not passed on by the Courts for the reason that, after
the evidence was in, and during the argument, counsel for the
railroad admitted that the Cooley valuation was as correct a figure as
it was possible to secure under then existing conditions, methods
and rates of taxation being the issue.
It is thus seen that the Supreme Court of the United States was not,
in any of the earlier cases, required to pass squarely on the propriety
of any method of arriving at a "fair value," and consequently had
not, prior to 1909, defined any hard-and-fast rules of procedure in
determining such value. The Circuit Courts have passed on kindred
questions in a few cases, among which San Diego Land and Town
Company vs. National City (74 Fed., 83), and San Diego Land and
Town Company vs. Jasper (110 Fed., 714) hold as above, and cite
most of the cases referred to. In the latter case the Court says:
"The actual value of such property obviously depends upon a
variety of considerations—among them the actual and
prospective number of consumers—and is no more
unchangeable than the value of any other kind of property."
As an illustration, there is cited the effect of a year's drouth on an
irrigation plant as temporarily affecting the value of property.
In the case of Cotting vs. Kansas City Stock Yards (82 Fed., 839) the
Circuit Court touches on one very interesting argument, in the light
of some of the methods of valuation advocated by railway managers
and some of the criticisms of recent valuation work.
"Different methods of estimating the value of property may
properly be employed when it is valued for different purposes.
When a valuation is placed on property which has become
affected by a public use, for the purpose of ascertaining whether
 the maximum rate of compensation fixed by law for its use is
reasonable or otherwise, it is obvious that the income derived
therefrom by the owner before it was subjected to legislative
control cannot always be accepted as a proper test of value
because the compensation which the owner charged for its use
may have been excessive and unreasonable. Again, when
property has been capitalized by issuing stock, neither the
market value nor the par value of the stock can be accepted in
all cases as a proper criterion of value, because the stock may
not represent the money actually invested, and furthermore
because the property may have been capitalized mainly with
reference to its income producing capacity, on the assumption
that it is ordinary private property which the owner may use as
he thinks proper without being subject to legislative control. On
the other hand, however, when property is valued for the
purpose last stated, it is clear that the owner thereof is entitled
to the benefit of any appreciation in value above the original cost
and the cost of improvements, which is due to what may be
termed natural causes. If improvements made in the vicinity of
the property, the growth of city or town where it is located, the
building of railroads, the development of the surrounding country
and other like causes, give property an increased value, the
owner cannot be deprived of such income by legislative action
which prevents him from realizing an income commensurate with
the enhanced value of his property."
The language of the late Judge Brewer, sitting as one of the circuit
judges in the case of National Water-Works Company vs. Kansas City
(62 Fed., 853), is definite as to the necessity of taking into account
some elements of intangible value, and is here quoted as giving the
views of this eminent jurist:
"The difficult question, however, still remains; and that is, what
is the 'fair and equitable value,' which by the statute and
ordinance the city is to pay for the water-works? * * * We are
not satisfied that either method, by itself, will show that which
 under all the circumstances can be adjudged the 'fair and
equitable value.'
"Capitalization of earnings will not, because that implies
continuance of earnings, and a continuance of earnings rests
upon a franchise to operate the water-works. The original cost of
construction cannot control, for original cost and present value
are not equivalent terms. Nor would the mere cost of
reproducing the water-works plant be a fair test, because that
does not take into account the value which flows from the
established connections between the pipes and buildings of the
city. * * * A complete system of water-works, such as the
company has, without a single connection between the pipes in
the streets and the buildings of the city would be a property of
much less value than the system connected as it is with so many
buildings and earning, in consequence thereof, the money which
it does earn. The fact that it is a system in operation, not only
with a capacity to supply the city but actually supplying many
buildings, in the city—not only with a capacity to earn but
actually earning—make it true that the 'fair and equitable value'
is something in excess of the cost of reproduction."
The foregoing authorities cover practically all the older cases in the
Federal Courts. These cases have been examined, and such of the
subject matter has been quoted as would show the conclusions of
the Courts as to what constitute the various elements of true value.
The latest Federal decision bearing on the subject, and in many
ways the most replete with argument, is the case of Consolidated
Gas Company vs. City of New York (157 Fed., p. 849), which was
decided in December, 1907.
In this case the valuation was determined by the master:
1.—A valuation of tangible assets, consisting of real estate,
plant, mains, services, meters and miscellaneous
equipment, and the property of subsidiary companies,
the whole aggregating $63,357,000. Of this an allowance
of $3,616,000 was made by the master for working
 capital, and this entire amount was treated as tangible
property.
2.—Finally, an intangible value of 0,000,000 was assigned by
him to the franchise and good will.
Objections were raised, as follows:
(A) Land values represent no original investment by the
Company, do not indicate land especially appropriate for
the manufacture of gas, and increase the apparent
assets without increasing the earning power.
(B) The values of physical property are not original cost, but
are cost of reproduction less depreciation.
(C) Some of the property cost more than new articles of the
same kind at the time of inquiry. Some are of designs not
now favored by the scientific and manufacturing world.
The disputed questions involved, as far as tangible property is
concerned, were:
1.—Whether the values ascribed to the several enumerated
items are based on competent and persuasive evidence.
2.—Whether the method of valuation pursued by the master
is in accordance with law.
3.—Whether the items of property are "employed" (in the
legal signification of the word) in the production of gas.
The first, a question of fact, is found affirmatively, and the evidence
was found to be competent.
The second question is one of law, and, quoting from the cases cited
in this paper, the Court holds as follows:
"This method of valuation correct * * * upon reason it seems
clear that in solving this equation the plus and minus quantities
should be equally considered and appreciation and depreciation
treated alike.... The value of the investment of any manufacturer,
in plant, factory, or goods, or all three, is what his possessions
would sell for upon a fair transfer from a willing vendor to a
willing buyer, and it can make no difference that such a value is
affected by the efforts of himself or others, by whim or fashion,
or (what is really the same thing) by the advance of land values
in the opinion of the buying public. It is equally immaterial that
such value is affected by difficulties of reproduction. If it be true
that a pipe line under the New York of 1907 is worth more than
was a pipe line under the city of 1827, then the owner thereof
owns that value, and that such advance arose wholly or partly
from difficulties of duplication created by the city itself is a
matter of no moment. Indeed, the causes of either appreciation
or depreciation are alike unimportant if the fact of value be
conceded or proved; but that ultimate inquiry is oftentimes so
difficult that original cost, and reasons for changes in value,
become legitimate subjects of investigation as checks upon
expert estimates, or bookkeeping, inaccurate and perhaps
intentionally misleading. * * *
"The so-called money value of real or personal property is but a
conveniently short method of expressing present potential
usefulness, and 'investment' becomes meaningless if construed
to mean what the thing invested in cost generations ago.
Property, whether real or personal, is only valuable when useful.
Its usefulness commonly depends on the business purposes to
which it is or may be applied. Such business is a living thing, and
may flourish or wither, appreciate or depreciate; but, whatever
happens, its present usefulness, expressed in financial terms,
must be its value. * * * It is not to be inferred that any American
government intended when granting a franchise, not only to
regulate the business transacted thereunder, and reasonably to
limit the profits thereof, but to prevent the valuation of purely
private property in the ordinary economic manner, and the
property now under consideration is as much private property as
are the belongings of any private citizen. Nor can it be inferred
that such government intended to deny the application of
economic laws to valuation of increments earned or unearned,
 while insisting on the usual results thereof in the case of equally
unearned and possibly unmerited depreciation.
"I think the method of valuation applied by the report to land,
plant, mains, services, and meters lawful. To 'working capital,
Coke and Coal Company, and Astoria' the above considerations
are not applicable, and these items will be treated separately."
The Court's review of the third question raises no points of special
interest as to valuation.
The question as to amount of "working capital" is taken up, and that
term is defined as:
"The amount of cash necessary for the safe and convenient
transaction of a business, having regard to the owner's ordinary
outstandings both payable and receivable, the ordinary condition
of his stock, or supplies in hand, the natural risk of his business,
and the condition of his credit; and unless these matters, and
perhaps others, be looked into, no comparison can be drawn
between one business and another, or even between those of
the same general nature."
In this instance it is of interest to note that the Court reduced the
"working capital" from $3,616,000 to $1,616,000.
Perhaps the most novel and interesting part of this decision is that
dealing with the intangible elements of value. The master was
unable to separate the two elements, good will and franchise value,
but gave their combined value.
"From the testimony I think it apparent that what is here meant
by good will is the organization of complainant, long established,
and doubtless well manned and equipped. Such organization is
clearly of value, because without it neither tangible nor
intangible property can be profitably managed. Yet the
organization itself is but a method of utilizing that which is
invested, it is really dependent for its existence and continuance
upon the franchise, without which there can be no useful
organization. Tangible property has a certain value entirely apart
 from franchise or right to continue business, but good will in the
sense of the organization for the business of furnishing gas, can
have no existence whatever apart or detached from the franchise
conferring the necessary privilege. Would any one think of
capitalizing good will of this kind and distributing its assumed
value in the shape of new shares among stockholders new or
old? I think the most ingenious financier could not imagine such
a proceeding, and, if this good will be not property capable of
such capitalization and distribution, I do not think it property
capable of capitalization as against the State.
"Finally, this claim of good will seems to forget that for many
years the price and distribution of complainant's gas has been
regulated by law. A citizen is entitled to have a clean street
before his house because he pays taxes, inter alia, for that
purpose. He is much more plainly entitled to have complainant's
gas in his house because the company must give it to him if he
pays for it. I think it apparent that the conceivable good will of a
gas company in this city is about equal to that of the street-
cleaning department of the municipal government."
Is a public service corporation entitled to add the value of its
franchise to the assets from which a fair return may lawfully be
demanded? This question is taken up and discussed exhaustively by
the Court (157 Fed., 872 to 879), and while it is clear in reading his
judgment that he does not believe it sound doctrine to invest a
franchise with value, yet, after citing a large number of cases, he
reaches the conclusion that he is "compelled" to consider franchises,
not only as property, but as productive and inherently valuable
property, and to add their value, if ascertainable, to complainant's
capital account before declaring the rate of return.
This case went to the Supreme Court of the United States, where,
under the title Willcox vs. Consolidated Gas Company (212 U. S.,
19), citation is made to many cases in connection with the matter of
franchise value. The decision of the Court is:
 "The value of real estate and plant is to a considerable extent a
matter of opinion, and the same may be said of personal estate
when not based upon the actual cost of material and
construction. Deterioration of the value of the plant, mains, and
pipes is also to some extent based upon opinion. All these
matters make questions of value somewhat uncertain."
The Supreme Court permitted the tangible values found by the lower
Court to stand. It concurred with the lower Court in that it was not a
case for a valuation of good will. It concurred with the lower Court in
holding that the company was entitled to the benefit of any increase
in tangible values, and that such increases should appear in the
appraisal. It did not agree with the Court in the increase of franchise
value above that which was capitalized in 1884, with the consent of
the State of New York, and reduced the franchise value figure to
$7,781,000. On this basis, the estimated return, under the new rate
on the valuation of $55,612,435, was 5½%, which rate, in view of
all the circumstances, is held to be not confiscatory and to be a not
unreasonable return on the investment. The franchise value, as
commented on in these cases, is referred to at considerable length
in the following pages.
On January 4th, 1909, the case of Knoxville vs. Water Company (212
U. S., 1) was decided. This, in some respects, is of greater value to
the engineer than any others cited, in its determination of methods.
In this the appraisement of the tangible property was made in
minute detail, the sum of $10,000 was added for "organization,
promotion, etc.," and $60,000 for "going concern."
"The latter sum we understand to be an expression of the added
value of the plant as a whole over the sum of the values of its
component parts, which is attached to it because it is in active
and successful operation and earning a return. We express no
opinion as to the propriety of these two items in the valuation of
the plant for the purpose for which it was valued in this case, but
leave that question to be considered when it necessarily arises.
We assume without deciding, that these items were properly
added in this case. This valuation was determined by the master
by ascertaining what it would cost to reproduce the existing
plant as a new plant. The cost of reproduction is one way of
ascertaining the present value of a plant like that of a water
company, but that test would lead to obviously incorrect results
if the cost of reproduction is not diminished by the depreciation
which has come from age and use.... The cost of reproduction is
not always a fair measure of the present value of a plant which
has been in use for many years. The items composing the plant
depreciate in value from year to year in a varying degree. Some
pieces of property, like real estate for instance, depreciate not at
all, and sometimes, on the other hand, appreciate. But the
reservoirs, the mains, the service pipes, structures upon real
estate, stand-pipes, pumps, boilers, meters, tools, and
appliances of every kind begin to depreciate with more or less
rapidity from the moment of their first use. It is not easy to fix at
any given time the amount of depreciation of a plant whose
component parts are of different ages with different expectations
of life. But it is clear that some substantial allowance for
depreciation ought to have been made in this case.
"The company's original case was based upon an elaborate
analysis of the cost of construction. To arrive at the present
value of the plant large deductions were made on account of the
depreciation. This depreciation was divided into complete
depreciation and incomplete depreciation. The complete
depreciation represented that part of the original plant which
through destruction or obsolescence had actually perished as
useful property. The incomplete depreciation represented the
impairment in value of the parts of the plant which remained in
existence and were continued in use. It was urgently contended
that in fixing upon the value of the plant upon which the
company was entitled to earn a reasonable return, the amounts
of complete and incomplete depreciation should be added to the
present value of the surviving parts. The Court refused to
approve this method, and we think properly refused. A water
 plant with all its additions begins to depreciate in value from the
moment of its use. Before coming to the question of profit at all
the company is entitled to earn a sufficient sum annually to
provide not only for current repairs but for making good the
depreciation and replacing the parts of the property when they
come to the end of their life. The company is not bound to see
its property gradually waste, without making provision out of
earnings for its replacement. It is entitled to see that from
earnings the value of the property invested is kept unimpaired,
so that at the end of any given term of years the original
investment remains as it was at the beginning. It is not only the
right of the company to make such a provision but it is its duty
to its bond and stockholders, and, in the case of a public service
corporation at least, its plain duty to the public. If a different
course were pursued the only method of providing for
replacement of property which has ceased to be useful would be
the investment of new capital and the issue of new bonds or
stock.... If, however, a company fails to perform this plain duty
and to exact sufficient returns to keep the investment
unimpaired, whether this is the result of unwarranted dividends
upon over issues of securities, or of omission to exact proper
prices for the output, the fault is its own. When, therefore, a
public regulation of its prices comes under question, the true
value of the property then employed for the purpose of earning
a return cannot be enhanced by a consideration of the errors of
the management which have been committed in the past."
The Court holds that there was error in only considering the
operations of the company for a period of one year, and that this
should have extended to enough time to remove danger of abnormal
business conditions and observe the effects of certain ordinances.
The decision of the Supreme Court, in the Omaha Water-Works case,
decided on May 31st, 1910 (Supreme Court Reporter, July 1st,
1910), is of general interest in its discussion of the procedure of
appraisers in making a water-works appraisal, and in the distinction
drawn between appraisals and arbitrations; but it does not touch on
appraisal methods or elements of value, except to discuss "going
values." The language of Judge Lurton on this point is as follows:
"The option to purchase excluded any value on account of
unexpired franchise, but it did not limit the value to the bare
bones of the plant, its physical properties, such as its lands, its
machinery, its water-pipes or settling reservoirs, nor to what it
would take to reproduce each of its physical features. The value,
in equity and justice, must include whatever is contributed by
the fact of the connection of the items making a complete and
operating plant.
"The difference between a dead plant and a live one is a real
value, and is independent of any franchise to go on, or any mere
good will as between such a plant and its customers. That kind
of good will, as suggested in Willcox vs. Consolidated Gas
Company (212 U. S., 19), is of little or no commercial value when
the business is, as here, a natural monopoly, with which the
customer must deal, whether he will or not. That there is a
difference between even the cost of duplication, less
depreciation, of the elements making up the water company
plant and the commercial value of the business as a going
concern is evident. Such an allowance was upheld in National
Water Works Company vs. Kansas City (62 Fed., 853), where the
opinion was by Mr. Justice Brewer. [This decision is quoted in the
foregoing pages.] We can add nothing to the reasoning of the
learned Justice, and shall not try to. That case has been
approved and followed in Gloucester Water Supply Company vs.
Gloucester (179 Mass., 365, and 60 N. E., 977), and Norwich Gas
and Electric Company vs. Norwich (76 Conn., 565). No such
question was considered in Knoxville Water Company (212 U. S.,
1) or in Willcox vs. Consolidated Gas Company (212 U. S., 19).
Both cases were rate cases and did not concern the
ascertainment of value under contracts of sale."
The writer does not read into the language of this decision an
approval of a separate element of value to be called "going concern
value" or "going value" in addition to other non-physical values, but
rather a recognition of the fact that certain non-physical elements of
value, by whatever name they may be called, must be taken into
account in arriving at the fair and equitable final figure of value of a
live and operating concern for the purpose of carrying out a contract
of sale.
It appears to be doubtful whether the Court can be construed as
approving such an element of value in rate cases.
It thus appears that the United States Courts have laid down a few
rules, which may be regarded as fixed and definite and must be
followed, but that many important questions have not yet been
decided. The value to be determined must be a "fair value" of the
property being used for the convenience of the public. The par value
of stocks and bonds may not alone be considered (although it may
be considered), the market value of stocks and bonds, original cost
plus cost of additions, the probable earning capacity, the cost of
reproduction, depreciation, appreciation, all these, and any others
that will throw light on the "fair value" must be taken into account
and given the weight to which they are entitled. Any fictitious book
values due to over-issues of stock and bonds are to be given no
weight, but the appraisal must give the fair value, in the light of all
the facts, of the property in actual use at the time of the appraisal.
There are several decisions of the State Supreme Courts which
discuss these subjects, but an examination of a number of these
gives practically nothing more, in the way of definite conclusions as
to method, than has been cited. Perhaps the most complete and
painstaking consideration of appraisal problems by any Court was
that given by Judge Savage of the Supreme Court of Maine (97
Maine, 185, and 99 Maine, 371). These were neither rate cases nor
taxation cases, but proceedings under statute to require from the
Court instructions to a board of appraisers appointed to value the
plants. In the later or Brunswick case, Judge Savage elucidates a
number of points left not altogether clear in the Waterville case. The
Brunswick decision contains some interesting views on "going
value," and the Court's remarks on the general difficulties in making
rules for an appraisement are exactly to the point:
"There are many difficulties, if not dangers, in attempting to
formulate rules which are to be applied to facts not yet
ascertained. While it may be easy enough to state rules in the
abstract, it is much more satisfactory in an opinion of the court,
to express them in terms which are applicable to the facts in the
precise case in hand.... It must be always understood that our
answers to these questions are intended to be given only in the
most general and comprehensive terms, which may, or may not,
be found to be fitted to the facts which may subsequently be
developed. No other course would be wise or safe.... A public
service property may or may not have a value independent of
the amount of rates, which for the time being may be changed.
A public service company may, under some circumstances, be
required to perform its services at rates prohibitive of a fair
return to its stockholders, considering their property as an
investment merely....
"Now, what is the property which the district has taken by power
of eminent domain? In the first place it is a structure, pure and
simple, consisting of pipes, pumps, engines, land rights, and
water rights. As a structure, it has value independent of any use,
or right to use, where it is, a value probably much less than it
cost, unless it can be used where it is, that is, unless there is a
right to use it. Nevertheless, it has value as a structure. But,
more than this, it is a structure in actual use, a use remunerative
to some extent. It has customers, it is actually engaged in
business, it is a going concern. The value of the structure is
enhanced by the fact that it is used in, and in fact is essential to,
a going concern business. We speak sometimes of a going
concern value as if it is, or could be, separate and distinct from
structure value—so much for structure and so much for going
concern. But this is not an accurate statement. The going
concern part of it has no existence except as a characteristic of
the structure. If no structure, no going concern. If a structure in
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