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

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In view of the wording of the Valuation Act, some have assumed
that the word "new" requires the assumption of new rail in
making a valuation, but that where records show that the material
in the road was originally second-hand material, and is at present
second-hand material, an initial depreciation equivalent in amount
to the difference between the cost per ton of new rail and the cost
per ton of relayer rail, such as was used, may be entered under the
depreciation column. A further examination of the property itself
at date of valuation will determine whether or not there is any addi-
tional depreciation, and to what extent it exists.

We speak of a new property and thereby refer to a property which
has been created where no such property existed before. It may be
of new material in all its parts, or it may be "new" as to grading,
ownership of land, and many other of its elements, but have second-
hand material and equipment entering largely into its construction.

If substitute units are to be excluded from consideration, consist-



VALUATION OF PUBLIC UTILITIES 1377

ency demands that original conditions of existing units in their
present service must be restored, and that no interpretation of the word
''ne\v" is to be permitted which places a property unit in any better
or worse condition that it was in when first installed in present
service. The property to be reproduced is the existing property. Each
unit of property which is in existence is to be reproduced in the same
condition as it was when it was put to its present service.

Conclusion as to the Proper Conception of Reproduction. — In line
with the foregoing discussion, the Committee recommends that repro-
duction estimates be based on the assumption that the identical prop-
erty is to be reproduced, rather than a substitute property; that while
apparent present-day conditions, that would affect the cost of repro-
ducing the property, must be considered in any logical estimate, yet
history must also be considered, to determine what is to be repro-
duced, the conditions under which it is to be reproduced, and how the
estimates must be made; that for all those items, concerning which
there can be no doubt, the engineer should use the basis plainly apply-
ing, and that for those that are doubtful, or have been questioned,
he should present the effect of the use of the different bases clearly,
that the determining body may have the data for a wise decision; and
that normal present conditions shall determine the prices and methods
for doing the work.

Work Preliminary to the Making of the Estimate of Keproduction.

The Schedule. — The first step in estimating the reproduction cost
of a property is such a study of the property and its history as will
enable the estimator to make a complete list of all items, lay out a
proper financial and construction programme, and fix proper unit
prices to the several items of the schedule.

Every appraisal offers its own problems, and it would be impossible
for the Committee to lay down any fixed rules for the detail of ap-
praisal that would be of universal or even of general application.

When the records of a conipany owner — maps, plans, specifications,
deeds, and other titles to property — engineering records of construc-
tion and accounting records are sufiiciently complete, it may be possible
and permissible to make up schedules from the records and depend on
inspection in the field to furnish a check on the records and to apply in-
formation to make good any deficiencies. Where, however, as is often
the case, the records are incomplete and fragmentary, it becomes neces-
sary to make most careful field schedules of the property, using the
records as far as practicable to check field measurements and to furnish
as much light as possible on the history of the construction.

Classification of Property. — For scheduling, the property should be
divided into groups of items or units, preferably following some well-



1378 VALUATION OF PUBLIC UTILITIES

established classification of accounts. For example, in railroad valua-
tion, the grouping of items in each schedule should follow the group-
ing in the correspondiiig account of the Interstate Commerce Com-
mission's Classification of Property chargeable to capital accounts.
Where units of property or items of cost appear to have no place in
such classification of accounts, but are clearly part of the cost of the
property or are claimed as such, they should be set up as a sub-group,
in the account that appears to be most appropriate.

Field Schedules. — When it becomes necessary to make surveys or
field inspections in order to prepare the schedules, it is desirable that
each property xmit in each schedule be described so fully, and identified
by such complete measurements, that no question could be raised as
to its identification or as to the propriety of the use of the unit price
that is subsequently assigned to it. It is entirely possible to prepare,
based on field work alone, complete schedules of all visible physical
property of a company operating any sort of a public utility, but it
must be borne in mind that such schedules are not complete, because
they ignore the history of the construction, and that by no means all
the legitimate cost of creating or reproducing any property is repre-
sented by visible physical property, even where every item is capable
of being fully measured. Careful consideration must be given to such
history as shows any specially favorable or unfavorable conditions that
may have been encountered during the construction of these items.

It must be emphasized that all items of material or work which en-
tered into or were incidental to actual existing units are to be con-
sidered in the reproduced units as far as they can be determined.

Use of Records. — Most careful study of all existing records consti-
tutes an essential part of the work of a reproduction estimate. Every
plan, note, or cost record existing which relates to a plant unit meas-
ured and described in the field should be studied so that error may be
eliminated and full data secured. It frequently occurs that plans are
made for a structure and that during construction changes were made
without notation on the original plans, such changes being indicated
by fragmentary supplementary plans which are not preserved, or by
no plans at all. In all such cases the appraisal record should correct
the existing record as completely as practicable. Existing records
should be used to the fullest extent to identify invisible items of prop-
erty, such as underground construction or other inaccessible property,
and to establish the nature and condition of existing items when
originally installed.

Additional Information Not in Official Records. — Occasionally a
case will be encountered where the history of the property is not to be
determined with any degree of completeness from existing records, but
on inquiry among former officials, former employees, consulting engi-



VALUATION OF PUBLIC UTILITIES 1379

neers, contractors, or others who may have had connection with the
property during all or a part of the building period, a large amount
of thoroughly reliable information may be had which will throw great
light on history and on costs. The use of all such data is highly
desirable.

Little dependence should be placed on mere gossip or recollection
unaided in any way by record, especially if it involves any increase
in cost beyond a normal figure.

An illustration of the advantages to be gained from such an inquiry
occurred in a recent valuation on a mid-western interurban railway.
One of the branches of this road had been built as an independent line
which changed owners once before coming into the hands of the pres-
ent company. Aside from maps, a top-of-rail profile, and general data
as to structures, all of which had been secured by a recent survey, the
company had no records, not a word as to history, and nothing as to
original cost. Inquiry developed the fact that all the construction
records had been stored in the ofiice of one of the officials, had not been
turned over to the second owner, and after the death of this former
official had been sold for old paper. Further inquiry yielded the names
of one or two contractors. One of these men was visited. He went
through his vault and unearthed complete profiles, copies of all progress
and final estimates for grading, bridging, and track laying, plans for
several bridges, and a large volume of construction photographs.
With his aid, the men who purchased the right of way were found, and
by their correspondence and receipts the original cost of most of the
right of way (none of which was disclosed by deeds) was secured. This
search disclosed the fact that many expenses were incurred which
would not be even surmised by an examination of the property.

It is clearlj' the duty of the men engaged on an appraisal to take
every precaution to secure to the fullest extent all data bearing on the
actual work of construction as, in making an estimate of the cost of
reproduction, due weight must be given to all evidence showing what
the actual construction of the property included.

No Specific Assumptions as to Difficulties Where Not Capable of
Proof. — In cases where no records are obtainable which will su])ple-
ment actual field measurements and observed conditions, it would ap-
pear that the only proper course is to base the estimate of cost of re-
production on each unit of property as measured, assuming it to have
been built under conditions which may be presumed from recent sur-
roundings. To assume that the unit in question would cost less or
more than the average unit, or that work has been omitted, or extra
work done, in the case of a specific unit, when there are no records
or obtainable data and nothing in the general property to justify the
assumption, woiild be conjectural and carry little weight.



1380 VALUATION OF PUBLIC UTILITIES

The Field Inspection. — The Committee deems it to be no part of
its duty to undertake to outline methods in detail. It is jiroper to
emphasize the necessity of full and complete records of field inspection
in such form that they may be readily used in computation and fully
indexed for filing. There is always a possibility of doubt regarding
plans and records of old properties, uncertainty as to changes or
abandonment, and, unless supported by field work, many really valuable
records may be minimized in importance. It must be borne in mind
that valuation work, especially the making of schedules, is of i^erma-
nent value as a record of property, and that its value as a record for
the Courts depends on the completeness of the description and identi-
fication of each property unit.

Many uncertainties can be cleared up, and much of the speculative
character of estimating past conditions can be eliminated by good
field work. There is a lack of significance, a failure to meet the re-
quirements of appraiser or Court in every case Avhere field inspection
is hastily or carelessly made or no adequate record is made of the work.

Forms for Field and Ojfice Record. — -The use of forms is becoming
so general and their value in securing uniform information from dif-
ferent field men is so great that there seems to be no ground for ques-
tioning their desirability or the propriety of their use. There are so
many difi^erent forms required on a large appraisal and so many have
been devised in connection with appraisal work in progress in the
United States that no attempt is made to discuss the subject or to
make suggestions. The adoption of full, complete, and carefully drawn
field and office forms for field notes, schedules, and inventories is ap-
proved practice. The more completely all pertinent data regarding any
class of property can be developed on a single set of forms without
transcribing, the more satisfactory and convincing is the record.

Unit Prices on Physical Property Other Than Land.

There is no more important consideration in connection with valu-
ation work than the correct determination of unit prices.

Necessarily, every large valuation involves a special study of the
conditions which alfect cost of work in the community and on the
property, and of actual costs of various classes of work on the property
under investigation. The prevailing rate of wages for different classes
of labor, local prices on material, freight rates on material, or local
contract prices, are by no means the only matters which are to be
considered and taken into" account.

Unit prices, or unit costs, which are finally determined upon and
adopted as multipliers in the schedule should contain every element
of cost which can be determined and allocated to each particular item.



VALUATIOX OF PUBLIC UTILITIES 1381

A very erroneous result is likely to be secured if the appraiser adopts
net cost for materials delivered to the property as shown by the vouch-
ers for material, and actual contract figures for labor items, because
in general these do not take into account all elements of cost to the
owner.

In arriving- at miit prices for final application, all relevant facts
must be considered, and eventually sound judgment must be brought
to bear on all data, if a proper unit is to be secured. The Committee
desires to emphasize the fact that in the adoption of unit prices there
is wide room for variation and error. A schedule may be made with
the greatest of accuracy, field inspection may be most elaborate, and
every possible check may be applied to the computations, but, if iniit
prices are carelessly adopted, which are too low or too high, a con-
siderable error may be made easily in the valuation of tangible prop-
erty.

The unit prices on most of the items entering into a valuation are
not capable of exact and absolute determination or proof. This is
especially true of all items in which labor largely enters into the cost.

The correctness of the figure finally adopted in every case depends
in large measure on the reliability of records of actual costs, of similar
units in recent years, the thoroughness of the study that has been
made of those records, and the experience and soundness of judgment
of the appraiser in the use of these studies and of other support-
ing data.

In the determination of unit prices the following general matters
must be considered:

1. — What allowances should be made for contractor's profit in
fixing prices?

2. — Shall unit prices be averaged over a period of time or shall
actual prices as of the date of valuation be used?

3. — To what extent shall prices prevalent in piecemeal construc-
tion be considered?

4. — What should be included as elements of unit cost in fixing
the price to be used?

1. — Contractor's Profit. — In assuming the reproduction of a prop-
erty, the most reasonable assumption in general is that it would be
let by contract, and that prices should be applied which would include
the profit of contractors engaged on the work.

The fair total contract cost of the work, after award on fair com-
petitive bidding, constitutes an equitable basis of unit cost determina-
tion, such cost including a reasonable profit to the contractor and
necessary sub-contractors. To this should be added incidental unit



1382 VALUATION OF PUBLIC UTILITIES

costs, overhead, administrative, and general costs incurred by the
corporation, which are definitely assignable to the different units of
property as part of the unit price.

There are cases, however, in which it would be a proper assumption
that the company would establish its own organization, purchase its
own plant and material, and do its own work.

The extent and character of the property under investigation, the
actual history of the construction of the property itself, or the general
practice in the part of the country in which it is located, will be the
determining factors in arriving at the proper assumption to adopt.

When it is proper to assume that the company does the work itself,
the estimated full cost to it should govern, including in the estimate
proper recognition of the use of plant, hazards, and the fact that
changes, modifications, and adaptation of the original plans generally
occur and involve increased cost over the estimate, but no contractor's
profit; unit prices should then be used, which represent what the esti-
mated total unit cost to the company would be, by the method assumed
to be proper.

2. — Shall Average Prices or Prices as of a Certain Date he Used?
— When a valuation is made as of a certain date, it must be deter-
mined whether prices of materials and labor as of the date in question
shall be used, or whether prices averaged over a period of years are
more proper.

A study of the trend of prices of various commodities shows
widely differing conditions. For example, Bessemer steel rail has
remained steadily at $28 per ton, f. o. b. mills, since 1901 until recently;
in some sections of the country lumber has increased with a fair degree
of uniformity from 1901 to the present time, oak showing more than
50% increase, white pine more than 100% increase, and hemlock
more than 50% increase; Portland cement, on the other hand, has
decreased in some localities from $3 in 1880 to about $1 per bbl. in 1915,
but increased in the year following; labor has steadily increased in
recent years, with the upward trend still noticeable.

Other materials — an example of which is copper — have fluctu-
ated, going up and down from extreme high to extreme low figures
without any relation to changes in labor or other material prices.
These facts compel most careful analyses of the records of the prop-
erty under appraisal, and of other like properties in the same vicinity,
to determine price tendencies, actual costs of work done, and special
local conditions which affect costs, if average prices are to be used.

The illustration afforded by the Buffalo gas case (3 P. S. C, 2d
Dist. N. Y., 1913), is given as showing the effect on valuation of price
fluctuation. There were almost exactly 30 000 tons of cast-iron gas



VALUATION OF PUBLIC UTILITIES 1383

pipe in question. The Commission summarizes the fluctuations as
follows :

In 1897 when the property was taken over this

would have been worth, at the prevailing price. $547 500
Had a valuation been made in 1907, it would have

been worth, at the price of that year 1200 000

On the average prices of 5 years, 1893 to 1897 617 700

On the average prices of 5 years, 1898 to 1902 746 700

On the average prices of 5 years, 1903 to 1907. .. . 944 400

On the average prices of 5 years, 1908 to 1912 720 600

It seems to the Committee that what is desired is what may be
termed normal present-day prices.

By normal, present-day prices is meant such prices, actual or
average, as will be fairly representative of the period, but which do
not reflect violent fluctuations up or down. These normal prices
will be to some extent affected by changes in the market.

Many commodities, of which cement is an example, have had a
downward trend, owing to increase in home manufacture and to im-
provements in the art. Other commodities, like lumber and timber of
^11 kinds, have steadily increased in price owing to decreasing supply
and greater demand. There can be no serious question as to the pro-
priety of the use of normal, present prices, or prices averaged over 2 or
3 years at most, rather than the use of a long average which would
bring the price above or below a proper, normal, present price.

In the case of such materials as iron pipe and copper, the price
fluctuations of which have been violent during short periods, the prob-
lem becomes specially difficult. The actual construction of all large
properties has extended over a period of years. An investigation of
actual costs of construction on large properties will generally disclose
the fact that materials have actually been bought at both high and low
figures ; frequently large quantities will be bought near one limit or the
other. Actual cost, where ascertainable, gives actual investment in
this material. Actual cost is not always capable of determination
over the entire life of a property, and for such material as entered
in during such period some arbitrary unit must be adopted, even in
the case of "original cost" estimates.

The practice, adopted on some recent appraisals, of using a price



Online LibraryAmerican Society of Civil EngineersTransactions of the American Society of Civil Engineers (Volume 81) → online text (page 121 of 167)