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of them be made in any valuation.



VALUATION OF PUBLIC UTILITIES 1395

Three classes result from a consideration of the extent and char-
acter of the acquisition :

1. — The acquisition of a single whole parcel, which may be selected
from among several available parcels.

2.— The acquisition of a number of whole contiguous parcels to
form a tract of moderate size.

3. — The acquisition of a number of parcels, both whole parcels and
parts of parcels, to form a continuous strip, such as a rail-
road right of way, or a large body, like a collecting or storage
reservoir.

1. — Single or Detached Parcels of Land. — In many instances lands
are acquired and used by public service companies, which are in
detached parcels of ordinary size, not connected with the other lands
owned or used in the conduct of the business. These lands are not
acquired in response to a need for the particular parcel. Any parcel
of the same or similar area, in the same general locality, would meet
the requirement of the company nearly or quite as well. Examples
of this class are seen in lands acquired for electric generating- or
sub-stations, car barns, warehouses or material yards, gas plants or
gas-holders, office buildings, and other similar uses.

It may be that location on a water-front, or a point of convenient
access to side-track facilities, is a desideratum, but any one of several
parcels, which meets those requirements in the vicinity, may serve
tlie purpose. It would seem to be clear that in such cases the same
general laws which regulate values of land for any other purpose in
the immediate neighborhood would govern, and that the reproduction
cost of the land would be fixed by the value of other lands used for
general purposes, as shown by sales, asking prices, or in any other
manner that is usual and proper.

Presumably, the public service corporation, in the same way as
an individual seeking a factory site or residence, would have a fairly
wide range of selection and would choose that tract which would
meet the requirements and could be had at the most reasonable
price. It is fair to assume that such purchases would be at substan-
tially the market value of lands in the vicinity at the time of acquisi-
tion, and would be subject to the same increase or decrease in value
as other near-by similar lands the values of which would be affected
by the same causes.

Therefore, it would appear that the reproduction cost of such a
holding as an ordinary lot, or a tract of not unusual size, which is
entirely disconnected from other holdings, should be based on adjacent
or near-by land values for general purposes, should include no severance
damages, but should include a reasonable allowance for the costs of
acquisition.



1396 VALUATION OF PUBLIC UTILITIES

2.— Tracts of Land. — Tracts of land of considerable area, including
a number of lots or blocks, offer a more difficult case, for, aside from
any such expenses as vacation of streets or alleys, or other work done
to bring- the tract as a whole into a usable condition, there is likely
to have been originally an element of enhanced cost, due to the fact
that the demand for a large number of contiguous small parcels
tends to enhance the price rapidly, and even in a district where a
large part of the l&nds are for sale, the demand affects the price
before all can be acquired. Usually, in the acquisition of such a
body of land, made up of many small parcels, some owners will have
to be dealt with who are unwilling sellers and who hold out for an
extreme price, making necessary either condemnation, or the forced
payment of a higher consideration than would ordinarily be the case.
Any condition necessitating the purchase of a number of adjacent
parcels and uniting them into one large tract suitable for a specific
purpose tends to remove the transaction from the simpler first case
and take away the free choice of sites. Such cases demand a much
more careful study of costs, especially with reference to recent
accumulation of property of the same kind.

It may be seen readily, for example, that the purchase of 50
or 60 lots from numerous owners may increase the price per lot far
above the normal price under a demand for only one lot or a few lots.
The immediate demand for all the lots may and usually does add
materially to the cost of the whole. Later, the demand being supplied
and ceasing, prices drop to the old level, so that a valuation based on
later sales of neighboring lots would show less than original cost and
less than any possible cost of reproduction at the time of making
the estimate.

Although general land values will have an important bearing on
the price, consideration based on actual experience in comparable
situations should be given to the effect of the large and pressing demand.

It is argued that, in such a case as the one cited, actual original
cost, and not reproduction cost based on present land values, would
be ample allowance, especially as in many cases the actual original
cost of the assembled tract would be considerably in excess of the
present value of neighboring lots for general purposes. It would seem
to be fair, however, in those cases in which the original cost of an
entire assembled tract exceeded the total market value of all the
separate parcels at the time the acquisition was commenced, to assume
that, if general values of lots increase in the vicinity, the cost of
reproduction of the tract acquired for a specific purpose should, as
a general rule, increase pro rata.

Similar questions are raised where lands are acquired for the exten-
sion of an existing plant. In such cases, prices may be and some-
times are demanded and necessarily paid which are far above normal.



VALUATION OF PUBLIC UTILITIES 1397

In the cases cited there may be some freedom of choice as to the
exact lands, but the difficulties due to acquisition of numerous parcels
will be encountered no matter which of several possible tracts is
selected. The reproduction estimate should be based on the value
of land in the vicinity, the figure adopted including the incidental
costs of acquisition of private titles, severance damages, if there was
any severance, and the cost of acquiring any rights requisite for the
use of the tract as a whole, such as vacation of streets or alleys, and
the purchase of leases. All recorded excess costs above a normal
market value should be given due weight. Only thus will the present
reasonable cost of reproduction be obtained.

3. — Connected Strips or Bodies of Land. — By far the greatest diffi-
culty arises when required lands constitute a connected strip or body,
and there is no option in the choice of lands, all of which must be
acquired to form the required strip or body.

An example of this class is furnished by a steam or electric railroad
right of way. Here, the lands are a narrow strip, not purchased in
ordinary commercial units of 10, 20, or 40-acre tracts, or of lots or
other subdivisions of a plat, but in small fractions of such tracts taken
without reference to the effect on the remainder of the tract from
which they were taken. The location is determined by topography
and continuity of route, and may not be varied on account of the
objections of a land-owner. All the right of way must be acquired.

Another example is that of flowage lands for a reservoir. In this
instance, many entire parcels must be acquired, and unless a greatly
excessive acreage is taken, many irregular fractions must be bought.
Here, as in the railroad right of way, conditions of topography and
continuity govern. It must be this particular land and no other, and
all of it must be had.

All valuations of lands acquired for any use where all must be
had, and no choice or option as to the selection is left the purchaser,
must rest on the same general principles of valuation. The Courts
have clearly established the general principles which govern the fixing
of value of property condemned for public use.

All elements of value must be considered. The owner must be
recompensed, not only for the value of the land taken, but for all dam-
ages or losses of value suffered by him on account of the taking.

Under the law interpretation of just compensation, there can be
no doubt that in cases of water-works reservoirs, railroad rights of
way, flowage lands, or other properties of like nature, where the
lands are not necessarily in uniform parcels, and where part of the
land is taken and part cut off and left, just compensation will include
the value of the lands taken and the money equivalent of any dam-
ages suffered by the owner by reason of the taking. This is all value
to the seller and represents what is taken from him.



1398 VALTTAtlOlSr OF PUBLIC TTTiMTIES

It would seem that these same principles are applicable in the
valuation of such property in making a reproduction estimate.

The Term "Just Compensation" as Defined hy the Courts. — The
Constitution prescribes that private property shall not be taken with-
out just compensation. The rules governing the condemnation of
private property have been thoroughly established by a long line of
decisions. All elements of value must be considered. The owner must
be recompensed, not only for the value of the land taken, but for all
damages or losses of value suffered by him on account of the taking.

The terms, "compensation", "just compensation", "due compensa-
tion", etc., have been defined in many cases.

In Virginia & Truckee R. R. Co. vs. Henry, the Court said (8
Nev., 165) :

"It is difficult to imagine an unjust compensation; but the word
'just' is used evidently to intensify the meaning of the word 'com-
pensation'; to convey the idea that the equivalent to be rendered for
property taken shall be real, substantial, full, ample; and no legisla-
ture can diminish by one jot the rotund expression of the constitution.
So are all the decided cases. While courts have differed upon minor
points, two of which the statute of this state settles, namely, the
allowance for particular benefit derived from the construction of the
railroad and the exclusion from the calculation of damages of the
cost of necessary cattle guards and fences when the petitioner offers
to construct, yet upon the great substantial underlying basis upon
which only can arise a constitutional law for the taking of private
property for public use — the absolute protection of the individual by
just compensation — there has been, could be, no dispute."

In Pick V. Rubicon Hydraulic Co. (27 Wis., 445), the Court said:

"In the case of Bigelow vs. The Western Wisconsin Railway Co.,
decided by this court at the present term, it was held that 'just com-
pensation' consists in making the owner good, by an equivalent in
money, for the loss he sustains in the value of his property by being
deprived of a portion of it; and that it includes not only the value
of the portion taken, but also the dimunition in value of that from
which it is severed. In establishing this rule, we followed the reason-
ing of this court in Robbins v. Milwaukee and Horican R. Co., 6
Wis., 636; in Snyder vs. Western Union R. Co., 25 Wis., 60; and in
Welch v. Milwaukee and St. Paul R. Co., 27 Wis., 108; and adopted
the doctrine of numerous adjudications by the courts of other states
upon the same subject."

The cases cited show the general rule as to the taking of lands by
condemnation. There can be no doubt that, in the case of a water-
works reservoir, a railroad, flowage lands, or other property of like
nature, where the lands are not necessarily in uniform parcels, and
where part of the land is taken and part cut off and left, any amount
necessarily paid as just compensation or as damages is a cost which



VALUATION OF PUBLIC UTILITIES 1399

cannot be evaded by the purchaser. It is value to the seller, reim-
bursing him for what has been taken from him. It is an actual cost
to the purchaser which is properly chargeable to the capital account.

The reproduction cost, or present cost of acquisition, does not
include elements of value arising subsequently to and because of the
taking for utility purposes. It includes only such sums, for the land
itself, as the several owners would be entitled to in case of present
acquisition, plus costs of purchasing.

Same Elements Must he Considered in Valuation as in Fixing
"Just Compensation." — It would seem to be clear from a study of
all the cases that, in valuation of lands which partake of the nature
of rights of way or flowage lands, the same principles should govern
as in condemnation, and all such elements should be considered in
valuation as are taken into account in fixing just compensation in con-
demnation. Thus, the cost to the utility at the time of acquisition
is not to be substituted for, or taken to be, the equivalent of reproduc-
tion cost, because the land may have declined or increased in value
since the acquisition. Nor does the source of the title, or of the funds
used to acquire, affect the matter, because that which is paid for out
of surplus, or that which is donated, is as much the property of the
company owner as that acquired by the expenditure of other capital
and payment of full value.

The market value of the land actually taken from an owner is one
element of cost, the damage to remaining and adjacent lands of the
same owner is another, the costs of all investigations of title, attorneys'
or agents' fees, surveys, plans, and expenses, and all other costs in con-
nection with the transaction, constitute another. All taken together
make up the price of the property acquired, and, as a general rule, in
the absence of mistakes, dishonesty, or extravagance, may be taken as
the value at the time of investigation. As said in the Minnesota rate
cases (page 451) :

"It [the utility] would be free to stand upon its legal rights and
it cannot be supposed that they would be disregarded."

Thus, the presumption is that the amounts in condemnation judg-
ments are not excessive. And, as a general rule, in the case of acquisi-
tion by purchase, it may be assumed that the utility does not pay
more than the owner is legally entitled to receive.

All these elements of value for which "just compensation" wouid
be rendered in a condemnation, exist in greater or less degree and
must be considered, whether the land was actually acquired by con-
demnation or by private purchase. It occasionally happens in the case
of many corporations not having the right of eminent domain, such as
hydro-electric power properties in some States, that the prices paid
are excessive of necessity.



1400 VALUATION OF PUBLIC UTILITIES

MarJcet Value of Adjacent Lands, per Acre, Not Always Con-
clusive. — It must be remembered that general land values are based
on sales where a willing seller deals with a willing buyer. In the
case of farm lands, for example, a man who desires a farm in a certain
locality has the choice between a number of pieces that are on the
market. He may be satisfied with one 40-acre farm, but considers the
price too high. He has the option of paying the price or taking
another farm at a lower price. As has been said, the railroad or the
water company has no such option, but must take that parcel and no
other. Experience has shown that condemnation juries often fix a
high price and that often it is better business judgment to pay as
large a sum as the condemnation prices, in order to avoid the expenses
of condemnation, the delay caused by the proceeding, and the feeling
aroused in a community by litigation. It often occurs that contiguous
lands have not the same availability or value as the lands acquired by
a utility, and only when they are comparable can the market value of
such lands be used as a basis for estimate.

From the nature of the strips of land acquired for public utilities,
the compensation paid, when measured in terms of dollars per acre
on lands actually taken, appears to be very high compared with the
per acre price paid in sales of similar lands for general purposes.

For example, a railroad company condemned a strip of land, 100 ft.
wide, across a tract containing approximately 40 acres, cutting it in
two nearly in the middle. The strip taken was 1 600 ft. long and con-
tained 3.65 acres, leaving 36.25 acres to the owner, divided approxi-
mately 20 acres on one side of the road and 16 on the other. The
building of the railroad necessitated changing fields and drainage,
introduced two farm crossings with gates to open and shut in per-
petuity, and not only cut off a corner of an orchard, but introduced
a fire hazard, as the stables were near the line.

All these considerations caused a jury to fix as compensation the
sum of $100 per acre for land taken, which was a fair figure based on
several recent sales, and the further allowance of $15 per acre as the
damages to the remainder. The compensation, therefore, was, for land,
$365, for damages, $545, a total of $910, to which was added acquisi-
tion and overhead costs in excess of $170, or a total cost to the com-
pany, exclusive of interest, of $1 080, or almost exactly three times
til© acreage price fixed by the jury.

Several purchases at private sale in the same county were at approxi-
mately the same figure.

In some of the early valuations, notably the State railroad valua-
tions in Michigan, Wisconsin, and Minnesota, the attempt was made
to establish the relation between sales to railroads and sales to indi-
viduals by a study of the record of actual sales. Based on these



VALUATION OF PUBLIC UTILITIES 1401

studies, a system for fixing the cost of reproduction of railroad lands
by the use of multiples applied to farm land values was adopted.*

The Michigan tax cases, in which this method of valuation was
used, reached the Courts without any contention being raised as to
the methods or results of the valuation, but on other issues. Hence,
the question was not passed on. The Minnesota valuation of land by
this method became an issue in the Minnesota rate cases, and the
method was not approved by the Supreme Court.

The Minnesota Rate Case Decision. — In many respects the most
important decision bearing on land valuation is that of Mr. Justice
Hughes in the Minnesota rate cases. This decision is of such impor-
tance, and has had so many interpretations placed on it, that extended
quotation from it appears to be desirable. The decision must be con-
strued as a whole, and all parts of it bearing on the subject of land
must be studied together, in arriving at a conclusion as to the exact
meaning. (Simpson et al., constituting the Railroad and Warehouse
Commission of the State of Minnesota v. Shepard, 230 U. S.. 352.
ei seq. (1912), Syllabus, page 355.)

"For fixing rates the basis of calculation of value is the fair value
of the property of the carrier used for the convenience of the public."
(Smyth V. Ames, 169 U. S., 466.)

"There is no formula for the ascertainment of the fair value of
property used for convenience of the public, but there must be a rea-
sonable judgment having its basis in a proper consideration of all
relevant facts. * * *

"Assets and property of a carrier not used in the transportation
business cannot be included in the valuation as a basis for I'ate-
making.

''Property of a railroad company cannot be valued for a basis of
rate-making at a price above other similar property solely by reason
of the fact that it is used as a railroad, and increases in value over
cost cannot be allowed beyond the normal increase of other similar
property."

After setting forth the values allowed by the Master and the Court
below for land in the JSTorthern Pacific case, stating the contentions in
the case, and quoting from Mr. Cooper's testimony at some length, in
order to show how he arrived at his estimates of value, and after
bringing out the fact that "market value", as used by Mr. Cooper,
was intended to mean, not the value of land for general purposes, but
what it would cost the railroad to acquire the land, the Court says:

l.f "In reviewing the findings, the court below reached the con-
clusion that 'the master in effect found that the cost of reproduction

• "The Valuation of Public Service Corporation Property", by Henry E. Riggs,
M. Am. See. C. E., Transactions, Am. Soc. C. E., Vol. LXXII, pp. 59-64, inclusive.
Discussion by the late W. D. Taylor, M. Am. Soc. C. E., Transactions, Am. Soc. C. E.,
Vol. LIT, p. 359. Report of Mr. Dwight C. Morgan to Minnesota Railroad and Ware-
house Commission.

t Paragraphs are numbered by the Committee for convenience in referring to them
in discussion.



1402 VALUATION OF PUBLIC UTILITIES

and the present value of the lands for the terminals in the three great
cities, including therein all cost of acquisition, consequential dam-
ages, and value for railroad use which he allowed, was only about 30
per cent, more than the normal value of the lands in sales between
private parties. He found the value of the lands outside the terminals
to be only twice their normal value.'

2. "From our examination of the evidence we are unable to con-
clude that the excess stated may be thus limited. What is termed the
normal value does not satisfactorily appear. It further will be observed
— from the summary of valuations we have set forth in the margin —
that the amount thus allowed in item 1 for lands, yards, and terminals,
both in and out of the three cities ($21,024,562), was included in the
total on which 4J per cent, was allowed in item 30 for 'engineering,
superintendence, legal expenses', and again was included in the total
on which 5 per cent, was allowed in item 37 for 'contingencies', and,
in addition, was included in the total on which 10 per cent, was
allowed in item 39 for 'interest during construction'.

3. "These are the results of the endeavor to apply the cost-of-
reproduction method in determining the value of the right of way. It
is at once apparent that, so far as the estimate rests upon a supposed
compulsory feature of the acquisition, it cannot be sustained. It is
said that the company would be compelled to pay more than what is
the normal market value of property in transactions between private
parties; that it would lack the freedom they enjoy, and, in view of its
needs, it would have to give a higher price. It is also said that this
price would be in excess of the present market value of contiguous or
similarly situated property. It might well be asked, who shall describe
the conditions that would exist, or the exigencies of the hypothetical
owners of the property, on the assumption that the railroad were
removed? But, aside from this, it is impossible to assume, in making
a judicial finding of what it would cost to acquire the property, that
the company would be compelled to pay more than its fair market
value. It is equipped with the governmental power of eminent
domain. In view of its public purpose, it has been granted this
privilege in order to prevent advantage being taken of its necessities.
It would be free to stand upon its legal rights and it cannot be sup-
posed that they would be disregarded.

4. "It is urged that in this view the company would be bound to
pay the 'railroad value' of the property. But supposing the railroad
to be obliterated and the lands to be held by others, the owner of
each parcel would be entitled to receive on its condemnation its fair
market value for all its available uses and purposes. (United States
V. Chandler-Dunbar Water Power Co., decided May 26, 1913, 229
U. S., 53.) If, in the case of any such ovsmer his property had a
peculiar value or special adaptation for railroad purposes, that would
be an element to be considered. (Mississippi, etc.. Boom Company v.
Patterson, 98 U. S., 403; Shoemaker v. United States, 147 U. S., 282;
United States v. Chandler-Dunbar Co., supra.) But still the inquiry
would be as to the fair market value of the property — as to what
the owner had lost, and not what the taker had gained. (Boston
Chamber of Commerce v. Boston, 217 U. S., 189, 195.) The owner



VALUATION OF PUBLIC UTILITIES 1403

would not be entitled to demand payment of the amount which the
property mig:ht be deemed worth to the company, or of an enhanced
value by virtue of the purpose for which it was taken, or of an
increase over its fair market value, by reason of any added value
supposed to result from its combination with tracts acquired from
others, so as to make it a part of a continuous railroad right of way
held in one ownership. (United States v. Chan dler-D unbar Co.,
supra; Boston Chamber of Commerce v. Boston, supra.) There is no



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