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

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reflect light on, or even determine, the present value, as when it is
of very recent construction. But ordinarily it is of little assistance
in that regard, since many items of value may be donations by the
government or by individuals * * * or the road may have been
built long before the period of inquiry at greatly less or greatly higher
prices than those prevailing at the time of the inquiry. * * *
Therefore, while looking at all collateral matters reflecting light on
the subject, the court regards reproduction cost as the final test of
present value. * * *"

In the Knoxville decision it is stated that:

"The cost of reproduction is one way of ascertaining the present
value of a plant."

In this and practically all other cases in recent years, in which the
values of old properties were under consideration, the evidence re-
lating to cost which has served as a basis for determining value has
been the reproduction cost.

In the case of the Consolidated Gas Co. vs. City of New York (157
Fed. Rep., 849, December 20th, 1907), District Judge Hough says:

"The complainant demands a fair return upon the reproduction
value thereof, which is the same thing as the present value properly
considered. * * * Upon authority, I consider this method of valu-
ation correct. What the court should ascertain is the 'fair value of
the property being used'; what complainant 'employs for the public
convenience'; the 'present' as compared with 'original cost' (Smyth
vs. Ames, 169 U. S., at page 547 * * *) ; and it is also the 'value
of the property at the time it is being used' (San Diego Land Co. vs.
National City, 174 U. S., at page 757 * * *, and see also Stanislaus
Co. vs. San Joaquin Co., 192 U. S. 201 * * *). It is impossible to
observe this continued use of the present tense in these decisions of
the highest court without feeling that the actual or reproductive value
at the time of inquiry is the first and most important figure to be
ascertained."

In this decision value is used in two senses : one, value as the Com-
mittee has defined it; and two, as synonymous with cost.

In the Minnesota rate cases, it is stated that:

"The cost of reproduction method is of service in ascertaining the
present value of the plant when it is reasonably applied, and when the
cost of reproducing the property may be ascertained with a proper
degree of certainty. But it does not justify the acceptance of results
which depend upon mere conjecture."

This statement follows a discussion of the cost-of-reproduction
method as applied to the determination of the value of a right of



VALUATION OF PUBLIC UTILITIES 1361

way, whicli consisted largely of terminal property, in which it was
held that the cost of reproduction did not give proper results.

This case sounds a note of warning against the use of irrational,
or unsound, theories of reproduction, and the use of mere conjecture
in making a reproduction estimate.

The Supreme Court has held consistently, in the older cases, that
in determining value, original cost under original conditions, and re-
production cost under present conditions, were of the greatest im-
portance, though other considerations, such as selling (market) price
of the securities, worth of the service to the consumer, etc., were also
of significance. In these older cases the Courts seem to have said
that reproduction cost should be determined on the basis of present-
day conditions, whether or not the corporation years ago had to take
a series of steps involving expense which would not now have to be
talien, or whether or not the property was built by piecemeal construc-
tion at a necessarily higher cost than would prevail if all built at one
time; that "present-day conditions" means present-day prices, present-
day methods, and present-day facilities for doing work, and that these
should be applied imder existing physical conditions.

With the original cost and reproduction figures in hand, determined
as outlined above, and with such other information, historic and other-
wise, as was available, the Courts have held that valuation should be
summed up as a matter of judgment, giving due weight, not only to
the results obtained by the application of these different measures, but
incidentally to the degree to which the measures are equitably
applicable.

The more recent and authoritative decisions of the higher Courts,
though they still lean toward defining the cost of reproduction as the
cost under present conditions, thus following precedent, also give strong
support to the use of historic physical conditions, since, in determin-
ing the "fair value" of pipes originally laid in streets having no pave-
ments, but in which pavements were subsequently laid at the expense
of the city, they exclude from "fair value" the cost of taking up and
replacing the pavements which would be included if one were to base
"fair value" on the cost of reproduction under existing conditions. In
other words, the sums allowed by the Courts in determining "fair value"
are the sums which it would cost to lay the pipes under the physical
conditions which existed at the time the pipes were laid. The subject
seems to be in a developmental stage in the Courts.

In effect, the Courts in some instances appear to have recognized
that a split standard, so to speak, or one which might be defined as
reproduction cost under present-day material and labor prices, and
historic or past physical conditions, in certain particulars, would do
more substantial justice, or be more equitable in the results of its



1363 VALUATION OF PUBLIC UTILITIES

application, than either the original-cost theory under historic or
past conditions on the one hand, or the reproduction-cost theory under
present conditions on the other. Under such a standard the owner
enjoys the advance in general value standards indicated by the advance
in cost of labor and materials, or suffers from the decrease thereof,
if these have declined in value, and has recognition given to the con-
ditions under which he made his investment.

May not the question fairly be raised: Has the conception of re-
production, based on present conditions, been a proper conception?

In the opinion of the Committee, this subject is of sxifficient im-
portance to justify full discussion of the question : What is the proper
conception of cost of reproduction new? In this discussion the Com-
mittee will point out some of the difficulties to be met in formulating
a rational conception of the problem, will then try to answer four
questions, and finally draw its conclusion.

Difficulties to he Met in Formulating a Theory. — The original con-
ception of reproduction undoubtedly grew out of simple conditions,
such as would be met in estimating the cost of reproducing a building
or a single structure. In this case, the difference between the original
cost of the building or structure and the reproduction estimate would
be due wholly to changes in prices of labor and materials and the
change in methods of doing work. This simplicity of condition does
not obtain in the case of a great property, the actual construction of
which has extended over many years, many of the plant units of which
have been renewed or replaced by larger ones than were originally in-
stalled, which has undergone changes and alterations, and the history
and records of which have not been kept fully and completely. In such
a case the making of a complete estimate of the cost of replacement or
reproduction is a very involved undertaking.

When there are added the complexities due to the effect of works
built by other companies than the one under investigation, or by
municipalities, or to the growth of a community or rearrangement of
transportation facilities of a community or section of country, elements
are introduced, the proper treatment of which is vital to a reasonable
estimate of the cost.

To obtain the reproduction cost of the property, shall it be assumed
that all those things must be done that are or were necessary to create
a new property in the same location as that of the existing one? It
is usually assumed that all other existing properties or conditions
affording facilities for, or offering difficulties to, the reconstruction
of the property under consideration continue to exist as at present,
in so far as they affect the cost of reconstruction; but one cannot
forget that the property in question was not built in a day — nor
during one construction period.



VALUATION OF PUBLIC UTILITIES 1363

Nearly all the second, third, and fourth tracks, and side tracks,
of steam railroads have actually been built years after the original
construction, with certain disadvantages arising from maintaining
traffic but with the advantages to be derived from the existence of
a well-organized railroad over the entire route. The same thing is
true of the construction of many existing structures, such as large
buildings, bridges, signal and interlocking systems, and other more
recent and modern adjuncts of the railroad systems of to-day.

The actual historic development of railroads has seldom been the
springing to life of a new .complete up-to-date property, but a growth
over a long period of years, each company adding to its track and
facilities as the needs of its territory and its business demanded. The
same thing is true of water-works, gas, or electric properties, and other
utilities in large cities. Under these conditions, it is clear that great
care must be exercised in outlining the basis for estimates.

The four main questions to be asked and discussed are:

1. — Shall present or original physical conditions govern?
2. — Shall present or original prices govern?
3. — Shall identical or substitute plant be considered?
4. — What is meant by the word "new' , as frequently used in con-
nection with reproduction?

1. — Shall Present or Original Physical Conditions Govern? — A
few examples of actual conditions encountered in connection with
construction are presented.

Wachusett Reservoir. — This reservoir was built to supply water to
the Metropolitan District of Massachusetts. To construct it, it was
necessary to acquire land on which there were many buildings, and
mills with their water powers. Included in the reservoir site there
were also many highways and two railroads. As a substitute for the
highways obliterated, others had to be built around the margin of the
reservoir, and some were raised above the water level. One of the
railroads was relocated for many miles at one side of the reservoir,
and another was raised. To make the reservoir a better receptacle for
water, the surface soil was stripped from its whole area. One main
dam and two subsidiary dams were necessary for holding the water.
Incidentally, under special laws, damages had to be paid for real
estate which was not acquired, but which was said to be damaged in-
directly by the construction of the reservoir.

Kensico Dam. — This dam, of the New York Water- Works, was
necessarily located within the limits of an existing reservoir, the
water of which could not be drawn down until two new temporary
reservoirs had been created farther up stream to maintain the water
supply. After these had been completed, the old Kensico Reservoir
was drained and the old dam removed. After the completion of the



1364 VALUATION OF PUBLIC UTILITIES

new Kensico Reservoir, the two temporary dams and reservoirs will
be useless.

The AuSable Dams.— By building three dams on the AuSable
River in Michigan, the Commonwealth Power Company flooded hun-
dreds of acres to a depth of 40 ft. There was not a house, not a mile
of road, no railroads, no damage to property of any kind such as was
encountered in the other reservoirs. It was only necessary to acquire
the needed lands and flowage and build the dams, without property
damages in any appreciable amount.

There are now no buildings, roads, or railroads in the basins of
any of these reservoirs, nor does the connection of the Kensico
auxiliary reservoirs with the construction of the main dam appear.
Therefore, in these three cases, presently existing conditions are not
indicative of work done or difficulties encountered in actual construc-
tion in the past, nor of what it is fair to assume would be the con-
ditions to be found had the reservoirs not been built. Conditions
may be now essentially similar, immediately about these reservoir
sites, but it would seem to be unfair for this reason to assume like
conditions to govern the estimate of reproduction cost to be used
as a basis of "fair value".

The theory of reproduction cost under existing conditions evidently
was based on the reproduction of property units which now exist, such
as, for instance, buildings, bridges, and other structures and works, and
did not take into account that, in creating public service property,
there may be much destruction as well as construction. The destroyed
property obviously does not exist, and therefore would not be included
in the inventory of property to be valued if the theory of determining
the cost of property under existing conditions were followed strictly.

In addition to the destruction of physical property, cited in the fore-
going, there may be the destruction of business and resulting damage
to surrounding property, all of which may prove to be a large element
of cost.

On account of the destruction of business, it became necessary in
the case of the Wachusett Reservoir to pay for the resulting loss, not
only to those owning the business, but to the workmen who were
thrown out of employment, and to the owners of surrounding property
not acquired for the reservoir but affected in value by the destruction
of the manufacturing and other business in a well-populated valley.
It is clear that such business will not exist at the time a reproduction
cost is being ascertained, and therefore will not be an element of cost
imder existing conditions rigidly interpreted. The destruction of the
business was properly an important element of cost in the creation of
a reservoir at this site, would be reasonably certain to be an element
of cost in the production of a reservoir at this site at any date of



VALUATION OF PUBLIC UTILITIES 1365

estimate, if the existing reservoir had not been built, and therefore
should be included as an element of cost of reproducing the reservoir.

Your Committee is of the opinion that all such items of cost, due
to damages, destruction of property, purchase of rights, and temporary
works, as cited in these illustrations, are clearly proper items to be
included in the reproduction estimate when capable of historic proof.
It would seem that, in such cases as these, fairness to the owners of
the property and to the public would necessitate the use of historic
conditions, at least to determine the extent, magnitude, and character
of property units created, destroyed, or removed, physical evidence of
which passed with the construction of the property itself, and which it
may reasonably be assumed it would still be necessary to create, destroy,
or remove were the property to be built new at the date of valuation.

Another series of examples may be found in the conditions which
existed at the time of construction of certain great railway terminals.

The Pennsylvania Eailroad Terminal, New York City. — This struc-
ture was pioneer construction. Land was purchased extending in a
strip across the greatest city in the country. The property was built
up solid with buildings, which were not only purchased, b\it wrecked,
and the entire value thereof thrown away. There was no steam rail-
road traffic to maintain, but there was consequently no benefit to be
derived from the existence of tracks for the removal of earth and
construction debris.

The New York Central Terminal, New York City. — This terminal
replaced an old structure, which in turn had succeeded others on the
same site. The existing plant covers an extensive area, the larger
portion of which was originally, with respect to the present under-
taking, covered with buildings of all kinds and intersected with streets
requiring treatment in various ways, as in the case of the Pennsylvania
terminal, but in building this terminal, the company maintained a for-
merly created traffic without interruption, and though thereby the ex-
pense of construction was increased by the cost of temporary structures
to provide facilities for its patrons, longer time of construction, and cost
due to the hampering of operations by not having the entire site avail-
able for working purposes, it is probable that these elements of addi-
tional cost were largely offset by the savings that resulted from the
utilization of the existing accessorial tracks for the handling of con-
struction materials and the disposition of excavated materials in four-
tracking the Hudson and Harlem Divisions.

Except with respect to the value of near-by lands, the present con-
ditions about these two properties are much alike, and, for anything
that appears, a reconstruction programme for one would be much like
that for the other, under present surrounding conditions, and the
offsetting effect of the revenue earned by the New York Central Rail-
road, against its increased cost due to maintenance of traffic, gives



3 36G VALUATION OF PUBLIC UTILITIES

color to the propriety of making like assumptions for both properties.
But it should be remembered that only a part of the property of the
New York Central Terminal had to be acquired in modern times.
Much of it was acquired years ago, when it was not covered by valuable
buildings, and it would seem to be unfair to assume, in a reproduction
estimate which is to serve as a basis for "fair value", that all of it
would be covered with valuable improvements, to be purchased and
wrecked simply because surroimding land is now so covered, or because
the property acquired by the Pennsylvania Company was so covered.
Without the existence of the railroad, the City would not be the city
that it is; it is what it is, partly as the result of the existence of the
railroad, therefore it cannot be said that if the railroad had not been
built, the surrounding lands, and presumably the site of the terminal,
would be covered with the valuable improvements now in evidence.
Here again it would seem to be fair to refer to history to determine
what was done, and would reasonably be supposed still to be necessary
to do, to construct the property new.

One illustration brought to the attention of the Committee is a
case of a highway which originally crossed a steam railroad at a very
acute angle, making a dangerous crossing to both railroad and public.
At its own expense, the railroad acquired land parallel with its own,
changed the course of the road for several hundred feet and made a
right-angled crossing. It was argued that, "in case of reproduction,
all other property remaining as at present", the highway would be in
its new location and would not have to be reproduced. On this basis,
many items which the owner of a railroad or other public utility was
compelled to pay for might be cut out of an appraisal. But the high-
way would be in its original place were it not for the act of the railroad,
and would have to be moved by any railroad, building presently, if
the existing road had not been built; the evidence of the necessity,
however, having been destroyed in the doing. The cost was a proper
cost, capable of historic proof; and the Committee believes that it
should be included as a cost in the estimate of reproduction.

A certain railroad was built through a heavily forested section of
country, largely to develop the lumber industry in that section. The
land was worth, and cost the railroad company, upwards of $40 an
acre because of its timber value, and the company paid another $40
or $50 an acre, for clearing and grubbing. The timber industry
developed, the surrounding lands were cleared and proved to be unat-
tractive for agricultural development, and no large cities built up
along the railroad. To-day the timber is gone, there is no clearing
to do, and the land has depreciated to a value of $5 or $6 an acre. In
this case human progress has taken away from the value of the ter-
ritory, rather than, as is more usual, added to it. The railroad has



VALUATION OF PUBLIC UTILITIES 1367

suffered as well, because its local business is largely gone. It has.
however, as a part of a large property that has taken it over, developed
a good through business. It would seem that all these things must
be considered, when determining whether the original conditions for
right of way and clearing, capable of proof, shall be used in an esti-
mate of reproduction cost, or on the other hand what would be the
present-day cost of acquiring the already cleared right of way. It is
manifest that the railroad company contributed to the present condi-
tion, by providing the means for removing the lumber. Presumably
its promoters should have been able to foresee what the general result
of the lumbering operations would be, and should have reimbursed
themselves, in the early days of the enterprise, for the possible future
loss in value, due to the changed conditions, and in general it must be
said that such enterprises assume the hazards of such results of
human progress, particularly those to which they themselves contri-
buted largely. Nevertheless this line, while apparently not now needed
for the country through which it operates, and which, but for its con-
nection with a greater property, would certainly have to be depreciated
in value by at least the diminished cost of reproduction ; yet, as a
going property, adequately serving the public in its through business,
it would seem to be unjust to take away from it all hope of future life
as might result from a limitation of its return to "fair return" on a
greatly depreciated actual investment.

One element of cost, being typical of a class and easily separable,
deserves discussion by itself. This is the cost of removing and replac-
ing paving of streets over and around public utility properties. It is
of importance in connection with street railways and all underground
conduit lines for gas, electricity, water, or other commodities.

Street railway properties occupying the streets of large cities do
so under grants which vary widely in terms as to paving. In every
case the burden is on the company to build such a type of construc-
tion as will permit that part of the public not depending on the railway
company for transportation to enjoy the free and unrestricted use of
the street.

A certain street railway company owns a large mileage of track in
paved streets. In addition to the not uncommon case of tracks which
were laid before the streets were paved, several different cases of com-
plication as to paving are found:

Case 1. — The street railway company built all the track founda-
tions, track superstructures, and pavement.

Case 2. — The street railway company built all the track founda-
tions and superstructures, but the city built the pavement.

Case 3. — The street railway company built the track superstruc-
ture, but the city built the track foundations and pavement.



1368 VALUATION OF PUBLIC UTILITIES

Case 4. — The street railway company built the track foundations
and superstructure and took out and rebuilt existing pave-
ments, but subsequently the city repaved the entire street at no
expense to the company.

In making an appraisal of this property it will be necessary to
define clearly what items shall be included in the reproduction esti-
mate, and to answer, among others, these questions: Shall allowance
be made for the removal of paving on all streets, whether they were
unpaved or paved when the tracks were built? Shall allowance be
made for all track foundations, or shall investigation be made as to
what was done by the city, and that part excluded? Shall allowance
be made for paving in all streets in which there is paving?

The Committee is of the opinion that in all cases where such ques-
tions are at issue, the terms of the contract should govern. The prop-
erty built by the corporation under the terms of its charter or fran-
chise, whether the items belong to the corporation or the public, is the
property to be reproduced. Franchise or contract provisions usually
settle all questions of ownership or of division of joint expense. Such
provisions should govern as to the inclusion of all, or part, of the
expense in the reproduction estimate. It is immaterial whether another
corporation or the public is the other joint owner. The division should



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