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and careful consideration of the vitally important potentialities that add to or detract from that value can merely be conjectured.
Decisions of the United States Supreme Court have not been a source of enlightenment, nor have they been sufficiently broad to determine a basis that can be employed in the ascertainment of an actual value.
Theories innumerable have been advanced, some of them tested, but the fact still remains that sufficient light has not been turned upon it, and groping in the dark will not materialize into anything substantial until general thought be given to a subject matter that can and eventually will bring forth order out of chaos and right the wrongs of half a century of gradual oppression of the masses.
Still the groundwork of physical valuation is tangible, its foundation concrete, and its structure of material benefit to carrier, consumer, and investor.
Deterrent influences argue that it is impractical, as it disregards the fundamental principles of justice, and while it may benefit certain transportation interests it would work a rank injustice upon others.
This is not credited as in the past, however, and its impracticability can only be determined upon the result of an actual finding of fact. The probability is that it would be found practical and fraught with manifold good, not only for the investor, as an assurance of the value of his holdings, but would provide a more substantial basis for determining a reasonable return for a service rendered, based upon an actual value rather than upon an illegitimate indebtedness.
It would protect the public by the prevention of the payment of a high dividend rate of interest upon watered stock.
It would insure a reasonable return to the carrier, commensurate with the services rendered, thereby enabling it to meet the requirements upon its property.
It would provide for the maintenance of a property at a very high point of efficiency by permitting substantial provisions for betterments and improvements, as the rate of return would be materially increased by the increased efficiency and decreased fixeu charges that would result by the capitalization of an actual value.
It would enable a property to realize a substantial profit for its stockholders after providing for sufficient surplus to meet requirements during lean years.
It would elevate to a plane unforeseen the credit of securities issued by a carrier and prevent their further depreciation in the markets of the world, as their value would then be determined by something substantial rather than by a mere fixed paper value.
It would sound the death knell of stock watering and the absorption of enormous surplu-es by the creation of heavy fixed charges, policies that have bled an American public of millions of dollar3.
It would not check the triumphal march of progress of the vast transportation interests, but in a mea zure would most ably assist them toward an economic management of their properties, thereby enabling them to more efficiently conduct them ior the best interests of the public, the shipper, and the investor.
Such an array of facts whereby physical valuation benefits, facts that are indisputable evidence of good in themselves, leaves consideration only for those features that are essential to the actual finding of fact upon a basis of equity.
In an address before the Minnesota Academy of Social Science in December, 1907: the Hon. Robert H. Shields, chairman of the Michigan tax commission, said in part,
“No hard and fast rule or theory can be employed in the valuation of corporate property. In determining the true cash value of a railroad property it is proper to take into consideration the cost of reproduction, its value after allowing for depreciation, its location, its gross and net earnings, or the fact that it is not earning a fair profit, the permanency and general character of its business, the par and market value of its stocks and bonds, its connections and terminals, and, in short, every element and condition that adds to or detracts from its supposed value.
“But each railroad stands alone. And no theory yet advanced can be arbitrarily employed in fixing the value of each and every road without working the rankest kind of injustice on some of them."
However, actual value can not be ascertained by considering either first cost, cost of reproduction, or cost of reproduction minus normal depreciation, without a broad conception of the potential elements that tend to increase or decrease the value of a transporter's property:
An important consideration in fixing value, that applies principally to the lines west of the Mississippi River, is how to apply a value upon a right of way, the principal part of which came into possession by a grant from the Government. Not that they should not have a value placed upon them, as they have increased in value many times and adjacent lands became enhanced in value also by the development of arid land into a territory of progressive development through the agency of the carriers. But the right of way of some of these lines are several hundred feet wide, and the fact of their being single track and without the possibility of their utilizing this
property entirely for a number of years, it would not, without injustice, be fair to determine a value upon such property as could not be utilized within a fixed time.
The State of Washington, in their findings, used this basis in determining an actual value of the property adjoining the right of way of the lines in the State, and a basis of computing value such as this should receive marked attention should an actual value of a property be determined.
Also, where millions have been spent in improving a property, improvements that are conrevenue bearing should also receive full consideration, as it enhances value and should be subject to capitalization. Elevations of lines to eliminate grade crossings, terminal facilities, etc., are among the most important of these. But, too, especial consideration must also be given permanent improvements of this character that have been paid for out of income. What a public has paid for in the past they should not be charged for again in the future by a succession of payments, by way of dividend requirements, that would become essential if these improvements are to be given a permanent value, minus depreciation, and capitalized. Then a carrier serving a densely populated territory, the density of its traffic enormous, and favorably situated as to enable its traffic and revenue to appreciate from year to year, when industrial conditions are not depressed, but constructed and maintained at a lesser cost, would possess a greater actual value than another not so favorably situated and endowed, though the cost of its reproduction would exceed or even equal, either entire or per unit.
Again, the carrier serving a territory contiguous to another with the probability of handling as great a volume of traffic, but who carries the burden of a heavy fixed charge, entailed by the incurring of enormous liabilities, that it be unable to protect the dividend interests of its stockholders in a substantially reasonable manner, can not be as valuable, from any standpoint, as is a property free from such a burden.
Real-estate holdings having no direct influence upon the value of the property of a transporter-that is, holdings that do not add to or detract from its value as an agency of transportation, regardless of their extent or value-are not material in determining an actual value to provide for a structure of rates based upon the return upon an actual value.
Actual value must consider only those elements that contribute to the worth of the property directly bearing upon services rendered through the medium of transportation.
Investments in real estate that are not required for this purpose must thereby be excluded, providing such holdings are not a medium of protection to that part of a property that has a direct influence upon its value as a transporter.
Texas, the pioneer of the States in an appraisal of the railroads within its jurisdiction, can not offer other than an example of misapplication of the theory of actual value. Primarily the appraisal was made to regulate the issuing of stocks and bonds, thus preventing stock waterings. Later, when endeavoring to apply this valuation as a basis for determining a reasonable return and fixing rates accordingly, the Supreme Court declared it invalid.
Michigan, in 1900, and Wisconsin, in 1903, made elaborate appraisals, especially the former, at great cost. These for the purpose of taxation; but while the cost of reproduction, less depreciation for wear and tear, was the basis upon which the value was to be determined, it was finally a comparatively small factor in the determining of taxable values upon railroad properties.
Minnesota, South Dakota, and Washington have also made a physical value.of the carriers operating in their Commonwealths, endeavoring to ascertain the investment upon which the carrier was entitled to earn a return, to be considered in the determination of reasonable, equitable rates.
Washington in utilizing the unit system of fixing a value has possibly provided a practical basis upon which to determine a value that can reasonably withstand a test.
Elaborate and at great cost was this appraisal, and its advantages are already manifest, though but completed a few years ago.
Cooperation between the carriers and the Government is essential and most desirable if physical valuation is to materialize, as it will facilitate the work, thereby rendering the task of engineers less burdensome and permit the final determination of the method of application to be more readily adjudicated.
Some idea of the gigantic task may be conceived when one familiarizes himself with the vast amount of capital invested in railroad properties.
On June 30, 1909, the total combined issued and outstanding capital stock and funded debt of the railways in the United States, exclusive of termínal companies, was $17,487,868,935, approximately $73,000 per mile. Of this, $13,914,302,363 is held by the public; and if the capital assigned to other than railway properties is excluded the equivalent will average $59,259 per mile of line.
HEARINGS BEFORE COMMITTEE ON INTERSTATE COMMERCE.
This has materially increased, and at the present time, if the capital assigned to terminal companies is included, will approximate $20,000,000,000.
It is beyond questionable doubt that the actual value of the properties of the carriers exceeds this. However, many of these properties are capitalized in excess of their actual value, becoming thereby detrimental to the interests of the public and the investor.
A marked illustration of the latter presents itself in the Erie as compared to the Pennsylvania.
The par value of the total capital liabilities of the Pennsylvania Railroad Co. June 30, 1909, aggregated $689,303,680, an average of $326,672 per mile, whereas that of the Erie was $401,036,587, or an average of $330,343 per mile.
There can be no comparison between the properties in so far as physical advantages are concerned; but the character of the roadway, the equipment, and terminal facilities of the Pennsylvania are more valuable and more extensive, nevertheless the capitalization per mile is exceeded by that of the Erie by $3,671. This is due, principally, to the notorious stock jobbing in the Erie property for a long period of years.
A recent appraisal of the New York, New Haven & Hartford by the State of Massachusetts presents the other side, sustaining the fact wherein an actual value exceeds the capitalization.
The findings in this case by the New Haven Commission valued the property at $496,280,081, and the “validated" liabilities are fixed at $394,147,563.
Results such as this eventuate in the gathering of valuable data, create precedents that simplify adjudication, and bear the fruit that advocates of physical valuation contend that it does not seek to underestimate the value of a carrier by way of compelling regulation of rates and charges; but it enables the final determination of reasonable or unreasonable rates based upon the return upon an actual value to become adjusted by the most practical means in the most equitable manner.
The CHAIRMAN. Unless it is objected to by the committee, the committee will take a recess until January 5, 1912, at 10.30 a. m.
(Thereupon, at 11 o'clock and 15 minutes, the committee took a recess until Friday, January 5, 1912, at 10.30 o'clock a. m.)
1195, 1346, 1420
1, 24, 26, 109, 181, 241,
1146, 1162, 1221
1153, 1198, 1206
634, 955, 1213
1, 24, 26, 109, 181, 424, 486, 498, 693, 752, 768,
811, 912, 956, 1024, 1088, 1146, 1194, 1265, 1329, 1410