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Transactions of the American Society of Civil Engineers (Volume 81) online

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point possible under present circumstances. The company is fairly
entitled to a reserve of land of this character at this location * * *.

"At East Ferry Street there are 5^ acres of land. The only use it
has in the public service is that of a holder station; 5^ acres for this
purpose is not shown by any evidence in the case to be warranted. As
a matter of fact, but a portion of this land is used for that purpose;
and there is no evidence showing that more will be required for public
use within a reasonable time in the future or in fact at any time. An
allowance of one-half of this land as being in the public service is
liberal to the company.

"At Forest Avenue there are two parcels of land separated by the
tracks of the New York Central railroad. The smaller tract is rented
for and used as a coal yard, and has no connection whatever with the
public service. A considerable portion of the larger tract next to the
water is not in fact used in the public service at the present time. The
holder and engine-house are situated at one end of the lot, and some
small cheap buildings at the other end which are not used for gas pur-
poses. Owing to connection with the street, location of piping, etc.,
it is believed that it may not be unreasonable to treat the whole tract
as being in the public service."

Although the Committee believes that the law relating to used and
unused property should be interpreted liberally, as above indicated, it
recognizes that, were it the policy to value all land which the owners
of a public utility might purchase, on the ground that it would be
needed for future use, such policy might lead to speculation in land to
be held for a time at the expense of the public and subsequently sold
at a profit, without having served it.

A very narrow view is sometimes taken on the area of land to be
included in a valuation for rate regulation, as for instance in the case
of a recent railroad rate investigation where it was claimed that there
should be excluded from the valuation (a) all lands owned in terminals
and large cities not actually in present use and covered with tracks,



VALUATION OF PUBLIC UTILITIES 1343

buildings, or company materials, and (6) all portions of the right of
way not actually included within the slopes of cuts or fills.

The width of a railroad right of way is determined by the depth
of excavations or embankments, the necessity of securing materials for
forming the banlts, the need of providing room for the operations
of contractors, as well as by consideration of the necessities of oper-
ation.

Another case called to the attention of the Committee is an objec-
tion to the inclusion of lots in a city making a right of way 225 ft.
in width, while the present use of the property is to support a double-
track bridge 65 ft. from the top of rail to ground surface, the present
structure covering the central 50 ft. In this case the entire strip
was amply justified on three grounds: (1) that it was all needed for
the construction and maintenance of the present large timber struc-
tures and that any less would give insufficient room; (2) that the
land owned was barely sufficient to support an earth embankment
if that form of permanent structure should finally be determined
upon; and (3) that the land was necessary for the protection of its
existing structure from encroachment of buildings which would create
a fire hazard.

It is the opinion of the Committee that, in a valuation for the
purpose of rate regulation, there should be included, not only the
lands actively in use and covered by the construction, but such addi-
tional area as is necessary to permit the economical construction of
the works, to safeguard the property and protect it from such en-
croachments as might interfere with its operation or create an extra
hazard and to provide for permanent in place of temporary construc-
tion. Good business judgment in the acquisition of land frequently
requires the purchase of a whole parcel of land where the greater part
of the parcel is required for the purposes of the utility. All the land
thus acquired should be included in a valuation.

If a 100-ft. strip of land constituted a proper width for con-
structing a certain single-track railroad and permitted the construc-
tion operations to be handled economically and properly, no part of
that right of way should be excluded on the ground that the embank-
ments only occupied space equivalent to .41 ft. average width.

Equally important is the question of inclusion or exclusion in
valuation for rate regulation of lands held in reserve for future
extensions.

In very many, if not most, cases where this question is raised
it will be found that a tract of land has been acquired sufficient to
provide a suitable site for the proposed plant and to provide for
such extensions as are reasonably likely to be made in the near
future. It is poor business judgment to build a gas plant, an



13-4:4: VALUATION OF PUBLIC UTILITIES

electric plant, a railroad shop yard, or other like property, on land
just sufficient to hold the buildings and other improvements imme-
diately necessary, without reasonable provision for expansion. The
history of all properties that have been built in response to reasonable
demand for their services has been a history of growth, development,
and expansion. Good business policy would provide for this expan-
sion so far as it can be reasonably anticipated, and all property should
be included which is not in excess of a reasonable amount for devel-
opment of the business over a reasonable period of time in advance
of the valuation. Such a determination is not a matter of pure
speculation. An investigation into the history of the growth, expan-
sion of business, and expansion of physical property of the company,
together with a consideration of existing conditions at each site,
should easily determine the reasonableness or unreasonableness of the
inclusion.

A very mooted question as to the inclusion of land is found in the
case of a company which has bought such property, disconnected from
existing works, for future use and development. Often many large
holdings are acquired some time in advance of development, at prices
much lower than would prevail if bought when the need was pressing
and the transaction forced. The general policy of the Courts appears
to have been to exclude such holdings in cases relating to rate regu-
lation, unless it was apparent that the property was to be used in
the near future.

While the rulings of the Court in regard to the exclusion of such
reserve properties, or properties which have not yet come into use,
may be justified on the ground that the company may defer its pur-
chase unless it is willing to take the risk that the advance in value
will furnish sufficient compensation for holding the property, and
while it is true that there are cases in which to include all such
properties would lead to abuse, the Committee is of the opinion that
there are other cases in which it is very desirable, in the interests
of economy and efficiency, that corporations should anticipate the
future needs of the service, and that the reserve i}roperties held to
meet such future needs should be included in valuation. Instances
might be: a distributing reservoir site on the top of a hill, purchased
before the hill property is sub-divided into streets and house lots;
a dock site on a deep-water harbor for the future use of a railroad;
and water rights acquired when they can be obtained at small cost,
lest by reason of later developments the company may have to pay
heavy consequential damages or substantially monopoly prices for
them, or even be unable to obtain them if they have been appropriated
by others, the last instance being particularly applicable to the semi-
arid and arid regions in the Western and Southwestern United States.



VALUATION OF PUBLIC UTILITIES 1345

The foregoing views may be less applicable when the valuation of
the land purchased for future use is based on the reproduction cost,
than when based on original cost, because, if the public is required
to pay an increased rate on account of the inclusion of land which
is not used, and the increase in the value of land as shown by the
difference between reproduction and original cost inures to the com-
pany, an inequitable result may be reached.

In the actual work of making a valuation, there are many cases in
which there would be no difficulty in reaching a decision as to whether
or not a given property should be classed as a part of that used for the
convenience of the public. For instance, property used for the com-
mercial mining of coal, although owned by a railroad company, obvi-
ously should not be included in a valuation of the property of that
company devoted to the public use, but there are other cases in which
it is more difficult to decide. Among these may be mentioned office
buildings owned by public service companies, which are rented wholly
or in part to the public, property temporarily leased to others, pending
its active use in the service of the public, and hotels and parka owned
by railroad companies. Matters of this kind generally have to be
settled by a consideration of the specific cases, on the basis that prop-
erties which are a part of the operating plant of the company or are
being used for the convenience or benefit of the public should be
included. When so included, the income arising from the operation
of these properties should be duly credited.

Retired or Discarded Property.

Closely allied with, and in fact a part of, the unused property is
that which has been used by a public service company and has been
retired or discarded prior to the time of the valuation.

Under the rulings of the Supreme Court, and in accordance with
many rulings of other Courts and of commissions, such property
would be excluded from a valuation. There are cases in which such
rulings seem to be opposed to fair dealing to the owner of the prop-
erty abandoned. Instances of this kind may be found where a tele-
phone or electric light company is suddenly ordered to remove all
overhead wires and place them underground, before the company has
had an opportunity to charge off the cost of the overhead wires.

Under public regulation at the present time, due account is some-
times taken of that part of the cost of the discarded property which
has not been charged off, and the public service company, instead of
being required to charge the remaining cost of the discarded property
at once to operating expense, is permitted to charge it to a suspense
account for the purpose of distributing the loss to the operating ex-
pense of a succeeding period of years.



1346 VALUATION OF PUBLIC UTILITIES

The Interstate Commerce Commission, in its uniform system of
accounts for telephone companies, referring to such losses, states
("Uniform System of Accounts for Telephone Companies", First
Issue, effective January 1st, 1913, page 68) :

"Losses of this sort may be due to the requirement by lawful au-
thority or public necessity of improvements involving the abandon-
ment of a considerable portion of plant and equipment before it has
attained its normal life in service, or to an extraordinary casualty
entirely unforeseen and unprovided for. The original cost of the
property so abandoned or destroyed should be credited to the fixed
capital accounts in which it was carried, and such portion of the cost
as may be authorized by the Commission may be charged to the sus-
pense account, the remainder of the cost, less any salvage, being
charged out as elsewhere provided in case of retirements of property.
The suspense account so raised should be credited and account No. 609,
'Extraordinary Depreciation', debited monthly with such an amount
as will, through its regular application, amortize the amount of the
loss at the end of the period designated."

Similar provisions occur in the systems of accounts for other car-
riers.

In a few instances public service commissions have permitted the
inclusion of discarded property in the valuation for a term of years.
As an instance, a decision by the California Railroad Commission in
a rate case is quoted (Solari v. Tuolixmne County Electric Power
and Light Co., 3 Cal. E. C. R., July 29th, 1913, pages 1051-1052).
The valuation was that of an electric plant.

"It seems fair, however, to permit the defendant during each of
the ensuing ten years to collect rates high enough to permit it to
charge off such sum on its books that by the end of the ten years the
principal so charged off, together with the interest, shall have
amounted to the entire value of the line at the present time. I be-
lieve that it will be very liberal on the part of the rate-fixing authori-
ties to permit this to be done."

Where plant units have been worn out in service and definitely
abandoned, or by reason of the reconstruction of property, parts have
been abandoned, and are not only unused but not likely again to be
used, such units and parts should appear either in a separate schedule
of retired or discarded property, or such full statement of the condi-
tions should be made as will definitely fix the status of the units or
parts.

There is another class of property which, even though out of use,
should not be excluded from a valuation on the ground that it is
retired or discarded property. This includes the temporary works re-
quired for the construction of the permanent items of physical prop-
erty, as, for instance, the temporary falseworks used to support a
bridge during its construction, the coffer-dam required to keep the



VALUATION OF PUBLIC UTILITIES 1347

site of a dam or a bridge pier free from water, or material and labor
of preliminary track surfacing required for the protection of rails
from injury under construction traffic prior to the commencement
and completion of permanent ballasting. Although such temporary
works are discarded after the completion of the permanent works,
their cost is clearly a part of the cost of the permanent works, and
is properly includible when determining unit prices.

Similarly, the cost of temporary works which are necessarily built
in connection with the construction of permanent works, as, for in-
stance, the cost of a pile bridge built in advance of the completion of
a permanent bridge for the purpose of expeditious and economic con-
struction, should be included in the cost of the permanent bridge.

In accordance with the same general principle, it seems proper to
include in a valuation the cost of temporary works built to furnish
service to the public at an earlier date than it could be furnished by
the permanent works. For instance, a temporary water-works pump-
ing station is sometimes provided for use during the construction of
a permanent pumping station. Such works may be advantageous to
the public as well as to the owner of the public utility, and their cost
may be regarded as a part of the cost of construction, although due
allowance should be made for receipts from operation.

Excessive Size or Capacity.

Somewhat allied to the question of used and unused property is
that of excessive size or capacity. It is sometimes claimed that the
public should not be required to pay rates on works having a size or
capacity in excess of that required for the purposes of the community
served. Rulings on this feature of valuation have been made by the
Courts and commissions in several instances.

Judge Savage of the Maine Supreme Court used this illustration
(Brunswick and Topsham Water District v. Maine Water Co., 99
Maine, 371, Dec. 14th, 1904) :

"Suppose that a five-hundred horse-power engine was used for
pumping when a one-hundred horse-power engine would do as well.
As property to be fairly valued, the larger engine might be more valu-
able than the smaller one, yet it could not be said that it would be
reasonable to compel the public to pay rates based upon the value of
the unnecessarily expensive engine."

Judge Pitney, of the New Jersey Chancery Court, diminished the
valuation of a water plant by nearly $130 000 out of a total of
$1 400 000, on the ground that a 36-in. main was used where a 30-in.
main would have been sufficient, and because a dam was made of exces-
sive width for present purposes in order that it might be raised subse-
quently. (Long Branch Commission v. Tintem Manor Water Co., 70
N. J. Eq., 71, November, 1905.)



1348 VALUATIOK OF PUBLIC UTILITIES

In most of the commission decisions stress is laid on the necessity
of providing adequately for future needs in order that satisfactory
service may be furnished continuously, and it is stated that it is not
desirable in the general interest of consumers to discourage a reason-
ably liberal provision for the future.

The Canada Board of Railway Commissioners, in the application
of the City of Montreal for the reduction of telephone rates, made
the following statement, October 28th, 1912 :

"There is no question that preparation for future needs is one of
the incidents of the proper management of a public utility corpora-
tion. If it is to allow demands for service to pile up and then make
an expansion only after the urgency is sufficiently great, the public
will be subjected to the disadvantage of delay in obtaining service, and
at the same time the piecemeal method of construction this will neces-
sitate will imdoubtedly add to the cost of the plant. A comprehensive
system of preparation for future needs must be followed if there is to
be proper expansion. Undoubtedly this will normally lessen the cost
of construction to the company. It is also of advantage to the public
using telephone service because it gives a decreased basis on which
earnings are to be obtained."

In the case of the Des Moines Water Co. v. City of Des Moines,
the Master, in his report of September 16th, 1910, says:

"* * * the company has the right to anticipate the growth of
its business and to be allowed a proper return on a plant of sufficient
capacity for such growth."

The Massachusetts Gas and Electric Light Commission, in the
Haverhill gas rate case, decided December 31st, 1912, made this state-
ment :

"The Board can not, in the general interest of consumers, dis-
courage the reasonably liberal provision for the future which this
company seems to have made."

It is the judgment of the Committee that there should not be a
reduction in the valuation on account of excessive size or capacity,
except when the excess is so great as to be clearly unreasonable and is
the result of not using proper foresight. The opinions of engineers
and others engaged in building public service property differ materially
as to the length of time for which it is economical and proper to make
provision under the different circumstances, and property built with
reasonable foresight should not have its value diminished because
expectations have not been fulfilled by subsequent developments.

If the opposite course is pursued, corporations may be deterred
from making wise provision for the future, thereby increasing the
hazard of the investor, probably increasing the ultimate cost by reason
of premature retirement, duplication, or piecemeal construction, and
hence ultimately increasing the cost of service to the public.



valuation of public utilities 1349

Donated Property.

The Committee believes that land or other property which has been
voluntarily donated by the public or by private parties to a railroad or
other public utility should be included when determining the repro-
duction cost, on the same basis as land and property otherwise acquired.

It is especially true that property donated many years ago should
be so included, because the company which has held such property for
a long term of years, with the acquiescence of the public, has acquired
full rights therein, even if it did not have them originally. Such
donations were generally made because companies could not profitably
furnish a demanded service without such assistance. The donations
were necessary to prevent the proposed project from becoming a
"losing venture".

There are some instances in which a company has the title to a
given property which should not be included in the reproduction cost,
and, conversely, other instances in which a company has no title to a
given property which should be included in such cost. This subject
is discussed on subsequent pages of this chapter, under the heading
"Title to Property not Conclusive".

Leased Property.

In the case of leased property, either the property itself or the
lease should be valued, as circumstances may dictate.

When a valuation is made for the purpose of rate regulation, it is
usually customary and proper to include in it property owned or leased
for long-term periods and used for the convenience of the public,
although the valuations of the ovsmed and leased property should be
kept separate for the information of the Court or commission. Short-
term leases may be given a positive or negative value, according to
whether they represent prospective profit or loss.

When a valuation is made for the purpose of capitalization, prop-
erty leased to and not owned by the corporation whose property is
being valued should be excluded, although there may be exceptions
to this rule in the case of leases which for any reason are practically
equivalent to ownership.

When a valuation is made as a basis for selling the property of the
operating company, the value assigned to leaseholds should depend
on the duration, character of control, and advantages or disadvantages
accruing to the lessee by reason thereof.

The foregoing statements are chiefly applicable to leases made
between public service corporations, and may not apply to the many
instances in which minor leases are made between a public service
corporation and private parties.



1350 valuation of public utilities

Title to Property Not Conclusive.

When a valuation of a public service property is made, it is fre-
quently necessary, in order to be fair to all parties interested, to depart
from the usual rules relating to ordinary private property, and to
include in the valuation more or less property situated on land to which
the owner of the public utility has no title, and, on the other hand, to
exclude property situated on land to which he has a title.

The proper general rule, subject to exceptions, appears to be that
the owner of a public utility is entitled to have included in the valua-
tion of his property all those works for which he has been required by
law or necessity to pay the cost, including in this class also property
voluntarily donated, and that there should be excluded all those works
for which other public service companies, the public or the users
have been required by law or necessity to pay the cost.

For instance, it would be unfair to require a railroad company, as
a part of the work of abolishing grade crossings, to raise highways in
order to furnish suitable approaches to an overhead bridge, and to
exclude the embankments thus formed from a schedule of the com-
pany property to be valued, on the ground that the company did not
have the title to the land on which they were located, or for the same
reason to exclude from the schedule in the valuation of street railway
property the pavements which the company may have been required to
lay in connection with its tracks.

Similarly, in valuing a water or gas property, it would be unfair
to include in the schedule those service pipes from the mains to the
street line that have been paid for and are maintained by the consumers
of the water or gas, unless contractual obligations shall determine
otherwise.

The pavements over the mains laid by gas and water companies
furnish further instances of property to which the companies have no
title, but it is generally conceded that the companies are entitled to have
included in an estimated cost of reproduction the cost of removing
and replacing such pavements as were actually removed and replaced
by them when laying the mains.

The propriety of the inclusion or exclusion of the cost of removing
and replacing the paving over mains not actually removed and re-
placed, is discussed in the chapter on reproduction cost. There is,
however, a difference of opinion as to whether the cost of removing
and replacing pavements laid at the expense of the public after the
mains were in place should be so included. In accordance with the
rule above stated, they should not be included, though upon a strict
interpretation of reproduction under present conditions, the pave-



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