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evidence before us from which the amount which would properly be
allowable in such condemnation proceedinjys can be ascertained.

5. "Moreover, it is manifest that an attempt to estimate what
would be the actual cost of acquiring the right of way, if the railroad
were not there, is to indulge in mere speculation. The railroad has
long been established; to it have been linked the activities of agri-
culture, industry, and trade. Commvmities have long been dependent
upon its service, and their growth and development have been con-
ditioned upon the facilities it has provided. The uses of property
in the communities which it serves are to a large degree determined
by it. The values of property along its line largely depend upon its
existence. It is an integral part of the communal life. The assump-
tion of its non-existence, and at the same time that the values that
rest upon it remain unchanged, is impossible and cannot be enter-
tained. The conditions of ownership of the property and the amounts
which would have to be paid in acquiring the right of way, supposing
the railroad to be removed, are wholly beyond reach of any process
of rational determination. 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 repi'oducing the property
may be ascertained with a proper degree of certainty. But it does
not justify the acceptance of results which depend upon mere con-
jecture. It is fundamental that the judicial power to declare legislative
action invalid upon constitutional grounds is to be exercised only
in clear cases. The constitutional invalidity must be manifest, and
if it rests upon disputed questions of fact the invalidating facts
must be proved. And this is true of asserted value as of other facts.

6. "The evidence in these cases demonstrates that the appraisement
of the St. Paul and Minneapolis properties which were accepted by
the master were in substance appraisals of what was considered to
be the peculiar value of the railroad right of way. Efforts to express
the results in the terms of a theory of cost of reproduction fail, as
naturally they must, to alter or obscure the essential character of the
work undertaken and performed. Presented with an impossible
hypothesis, and endeavoring to conform to it, the appraisers — men of
ability and experience — were manifestly seeking to give their best
judgment as to what the railroad right of way was worth. And
doubtless it was believed that it might cost even more to acquire the
property, if one attempted to buy into the cities as they now exist
and all difficulties that might be imagined as incident to such a 'repro-
duction' were considered. The railroad right of way was conceived
to be a property sui generis, 'a large body of land in a continuous
owmership,' representing one of the 'highest uses' of property and



1404 VALUATION OF PUBLIC UTILITIES

possessing an exceptional value. The estimates before us, as approved
by the master, with his increase of 25 per cent, in the case of the
Duluth property, must be taken to be estimates of the 'railway value'
of the land; and whether or not this is conceived of as paid to other
owners upon a hypothetical reacquisition of the property is not con-
trolling when we come to the substantial question to be decided.

7. "That question is whether, in determining the fair present value
of the property of the railroad company as a basis of its charges to
the public, it is entitled to a valuation of its right of way not only
in excess of the amount invested in it, but also in excess of the market
value of contiguous and similarly situated property. For the purpose
of making rates, is its land devoted to the public use to be treated
(irrespective of improvements) not only as increasing in value by
reason of the activities and general prosperity of the community, but
as constantly outstripping in this increase, all neighboring lands of
like character devoted to other uses? If rates laid by competent
authority. State or national, are otherwise just and reasonable, are
they to be held to be unconstitutional and void because they do not
permit a return upon an increment so calculated?

8. ''It is clear that in ascertaining the present value we are not
limited to the consideration of the amount of the actual investment.
If that has been reckless or improvident, losses may be sustained which
the community does not underwrite. As the company may not be
protected in its actual investment, if the value of its property be
plainly less, so the making of a just return for the use of the property
involves the recognition of its fair value if it be more than its cost.
The property is held in private ownership and it is that property,
and not the original cost of it, of which the owner may not be deprived
without due process of law. But still it is property employed in a
public calling, subject to governmental regulation, and while under
the guise of such regulation it may not be confiscated; it is equally
true that there is attached to its use the condition that charges to
the public shall not be unreasonable. And where the inquiry is as
to the fair value of the property, in order to determine the reasonable-
ness of the return allowed by the rate-making power, it is not admis-
sible to attribute to the property owned by the carriers a speculative
increment of value, over the amount invested in it and beyond the
value of similar property owned by others solely by reason of the
fact that it is used in the public service. That would be to disregard
the essential conditions of the public use and to make the public
use destructive of the public right.

9. "The increase sought for 'railway value' in these cases is an
increment over all outlays of the carrier and over the values of similar
land in the vicinity. It is an increment which caruiot be referred
to any known criterion, but must rest on a mere expression of judg-
ment which finds no proper test or standard in the transactions of
the business world. It is an increment which in the last analysis
must rest on an estimate of the value of the railroad use as compared
with other business uses; it involves an appreciation of the returns
from rates (when rates themselves are in dispute) and a sweeping
generalization embracing substantially all the activities of the com-
munity. For an allowance of this character there is no warrant.



VALUATION OF PUBLIC UTILITIES 1405

10. "Assuming that the company is entitled to a reasonable share
in the general prosperity of the communities which it serves, and thus
to attribute to its property an increase in value, still the increase so
allowed, apart from any improvements it may make, cannot properly
extend beyond the fair average of the normal market value of land
m the vicinity having a similar character. Otherwise we enter the
realm of mere conjecture. We therefore hold that it was error to
base the estimates of value of the right of way, yards, and terminals
upon the so-called railway value of the property. The company would
certainly have no ground of complaint if it were allowed a value for
these lands equal to the fair average market value of similar land
in the vicinity, without additions by the use of multipliers, or other-
wise, to cover hypothetical outlays. The allowances made below for
a conjectural cost of acquisition and consequential damages must
be disapproved; and in this view we also think it was error to add
to the amount taken as the present value of the lands the further
sums calculated on that value, which were embraced in the items of
'engineering, superintendence, legal expense', 'contingencies', and
'interest during construction.' "

Conclusions to he Drawn from the Minnesota Rate Case. — Careful
study of this case seems to indicate that the Court did not intend to
exclude from railway lands any of those elements of cost which neces-
sarily must be met in their acquisition; on the contrary, it is distinctly
stated that

"It is impossible to assume that the company would be required
to pay more than its fair market value. It is equipped with the power
of eminent domain. * * * It would be free to stand upon its legal
rights and it would not be supposed they would be disregarded."

Thus, the Court makes the cost of acquiring by condemnation the
test. The utility cannot claim any more in the reproduction estimate
than would be paid were all the land to be condemned, giving the
owners its fair market value for all available uses and purposes.

Another point that is strongly brought out is the fact that land
valuation must be capable of proof by reference to known and estab-
lished criteria and must not be based on speculation or hypothesis.
Among the paragraphs quoted by the Court from Mr. Cooper's tes-
timony, is the following:

" 'Q. * * * There is nothing in any of your exhibits which will
show, nor are you now prepared to state, the difference in what
might be termed the normal, true, ordinary market value of the
lands to the ordinary individual, and the sum which you have fixed
as the market value to the railroad company if it were now compelled
to purchase? A. That is correct.'"

Again, after discussing all the elements of value which would be
allowable in case of condemnation, the Court says :



1406 VALUATION OF PUBLIC UTILITIES

"There is no evidence before us from which the amount which would
be properly allowable in such condemnation proceedings can be ascer-
tained."

and, in the next to the last paragraph quoted:

"The amount of the fair value of the company's land cannot be
satisfactorily determined from the evidence."

This decision must be looked on as sounding a strong note of
warning against adding elements of value which are hypothetical, or
increments which are based on generalization or speculation.

The adoption of a sweeping rule and its application, when "it
cannot be referred to any known criterion", and has "no proper test
or standard in the transactions of the business world", is not endorsed
in this case. The problem in the valuation of lands of the class under
consideration is to find such a rule as will apply, as will be capable
of direct proof, and as will be supported by the standard of ordinary
transactions in the business world and by actual experience in the
buying of lands for similar purposes under similar conditions.

Although the decision does not seem to be capable of such an
interpretation as would exclude any elements of value which would
actually be paid for in acquiring the land, it does unequivocally
bar from consideration any intangible values which would attach
to the property by reason of its new ownership and new use. No
hypothetical "railway value" is to be considered. The decision,
throughout the discussion of land values, is full of references to these
speculative elements of value and the impossibility of their deter-
mination by any known rules. It would appear to be clear that the
Courts will not approve any attempt to attach to land values, in
connection with the valuation of physical property, "a speculative incre-
ment of value, over the amount invested in it and beyond the value
of similar property owned by others solely by reason of the fact that
it is used in public service."

There is one element of loss to the owner which is not mentioned
in the decision, but the Committee feels sure that the omission was
not intended to deny the propriety of including the element, because,
as seems to be indicated in Paragraphs 6 to 10, the Court satisfied
itself with the decision that an attempt had been made to show "rail-
way value", "what the taker had gained", for the land, that this was
improper, and that there was no evidence submitted to show what the
real value might be, and hence that other questions which might be
pertinent were not considered. The element to which reference is
made is that of damage to the remaining property by reason of the
taking of a part of it — severance damages.

There is a long line of Court decisions in condemnation cases,
and some State statutes which sustain the inclusion of this element of



VALUATION OF PUBLIC UTILITIES 1407

cost ■wherever condemnation is necessary. It is not believed by the
Committee that this decision is to be construed as arbitrarily exclud-
ing this element of just compensation, or value to the seller, where
it would occur, and would be capable of proper proof.

Althougli the decision seems to exclude another item of cost to the
company- — namely, the costs of acquisition — the Committee believes
that this exclusion is apparent rather than real, and that a proper
estimate of the costs of acquisition, which should be made on a
rational basis, the result of experience in or knowledge of similar pur-
chases, would undoubtedly have been approved. The testimony before
the Court seemed to include all the elements of cost over "fair value"
as "fair value", and then to add to this and resulting sums successive
percentages for engineering, etc., contingencies, and interest; all of
which appealed to the Court as creating a purely hypothetical or con-
jectural value.

Therefore, in spite of the quite positive character of the latter half
of Paragraph 10, the Committee believes that this wording, taken
in connection with the last three sentences of Paragraph 3, the second
sentence of Paragraph 4, the well-known interpretation at law of the
term "just compensation", and the character of the testimony offered
in the Minnesota rate case, does not exclude properly estimated "fair
market value", "severance damage" where it would be incurred, or
proper "costs of acquisition", from an estimate of the cost of repro-
duction, however the Court may regard any of these items when finally
determining "fair value".

All three are certainly elements of the cost recognized by all per-
sons who have had to do with the purch-ase of properties for public
utilities whether privately or publicly owned. The Court contented
itself with showing that the evidence before it was to sustain the
value as what the taker would gain, not what the seller would lose;
and that this is not a proper basis for cost of reproduction.

The Meaning of the Term "Market Value." — The words "market
value" in the ordinary acceptance of the term mean the price of a
commodity in the open market, the price at which it is bought and sold.

The market value of land for general purposes, as used in con-
demnation and similar cases, has been defined many times. As com-
prehensive and satisfactory a definition as any is that of the Supreme
Court of Kansas, as follows (Kansas City, etc., Rd. Co. vs. Fisher, 49
Kans., 17) :

"The market value means Ihe fair value of the property as between
one who wants to purchase and one who wants to sell, not what could
be obtained for it under peculiar circumstances when a greater than
its fair price could be obtained, nor its speculative vahie; not a value
obtained from the necessities of another; nor on the other hand is it
to be limited to that price which the property would bring when forced



1408 VALUATION OF PUBLIC UTILITIES

off at auction under the hammer. It is what it would bring at a fair
public sale when one party wanted to sell and the other to buy."

Mr. Justice Hughes fixed condemnation as the measure.

''It is impossible to assume * * * that the company would be
compelled to pay more than its fair market value. It is equipped with
the governmental power of eminent domain. * * * The owner of
each iiavcel would be entitled to receive on its condennuition its fair
market value for all its available uses and purposes."

What is the measure of damages in condemnation? What would
the seller of the land be compelled to take as the fair market value?
Lewis in ''Eminent Domain", Section 463, states:

"Measure of damages when entire tract is taJcen. This case presents
but little difficulty, and, so far as we have observed, there is no differ-
ence in the authorities as to ihe proper measure of damages. A fair
equivalent for any entire piece of property is its value in money."

Also, in Section 464 :

"]]']ten part is tahen, Just Compensation includes damages to the
remainder. Upon this point there is entire unanimity of opinion.
The constitutional provision cannot be carried out, in its letter and
spirit, by anything short of a just compensation for all the direct
damages to the owner of the lot, confined to that lot, by the taking of
his land. The paramount law intends that such owner, so far as that
lot is in question, shall be put in as good a condition, pecuniarily, by
a just compensation, as he would have been in if that lot of land had
remained entire, as his own property. How much less is that lot, and
its erections thereon remaining, worth to the owner, as property to be
used or leased or sold the day after the part was taken, to be used for
the purposes designed, than the whole lot intact was the day before
such taking (Bangor & Piscataqua R. 11. Co. vs. McComb, 60 M. E.,
290). In considering damages to the remainder however, the whole
remainder must be taken into account. If part is damaged and part
benefited, the question will be whether the whole is worth less than be-
fore the taking."

The same use of the word "just" is to be found in nearly every
State Constitution wherein "just compensation" is used to express the
measure of damages for taking of property under the right of eminent
domain.

The value to be used, therefore, is the fair market value of the
property taken and the damages to that not taken, and "just compensa-
tion" shall take into account all elements of value heretofore discussed.

The Committee is of the opinion that in estimating cost it is not
error to consider each parcel originally acquired, and to attach to it
such reproduction cost as would be fixed in condemnation, including
severance damages, where severance would actually occur, and that
the reproduction cost so found should be accepted as significant. To



VALUATION OF PUBLIC UTILITIES 1409

assume arbitrarily a rule of valuation, based on the use of hypothetical
multiples, and apply it to the entire acreage of lands in a State cannot
be sustained. The failure to point out what proportion of lands bear
severance damages, and the failure to support by actual recent costs
or actual recent experience in the acquisition of similar lands, and the
further failure to indicate the relation existing between the price per
acre measure when applied to utility lands, many if not most of which
have a large element of consequential damages, and the price per
acre measure applied to entire tracts taken or tracts sold for general
purposes, is likely to be serious and defeat the object of the valuation.

Value to Owner and Taker. — The Element That Must he Excluded
in Valuation. — Turning to Boston Chamber of Commerce v. Boston
(217 U. S., 189, 195), we find the origin of the expression of the quoted
paragraph, ''as to what the owner had lost, and not what the taker had
gained", and the facts in that case clearly indicate that in condemna-
tion cases the inquiry must be, "What has the owner lost?"

It is somewhat difficult to understand that the taker may fairly
obtain something with which the owner does not part, but, taken in
connection with Paragraphs 478 and 479 of Lewis on "Eminent
Domain", and with decisions heretofore quoted, it seems to be quite
apparent that Mr. Justice Hughes made what he meant sufficiently
clear when he said:

"The owner would not be entitled to demand payment of the amount
which the property might 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."

This language harmonizes with the well-settled principles set forth
by Lewis, and shows tliat there may be something gained by the taker
that is not properly a part of the damages which the owner sustains.
This additional value is not properly to be included in the reproduc-
tion estimate.

The subject is gone into at some length in U. S. v. Chandler-
Dunbar (229 U. S., pages 79-81), where a strategic value was claimed
for certain property. Therein, the Court said:

"That the property may have to the public a greater A-alue than
the fair market value, affords no just criterion for estimating what
the owner should receive. It is not proper to attribute to it any part
of the value which might result from a consideration of its value as a
necessary part of a comprehensive system of river improvement which
should include the river and the upland upon the shore adjacent. * * *
A 'strategic value' migiit be realized by a price fixed by the necessities
of one person buying from another, free to sell or refuse as the price



1410 VALUATION OF PUBLIC UTILITIES

suited. But in a condemnation proceeding, the value of the property
to the Government for its particular use is not a criterion. The owner
must be compensated for what is taken from him, but that is done
when he is paid its fair market value for all available uses and pur-
poses, Lewis, Eminent Domain, 2d Ed., Sec. 706 ; Moulton v. ISTewbury-
port Water Co., 137 Mass., 163, 167; United States v. Senfert Bros.
Co., 78 Fed. Eep., 520; Alloway v. Nashville, 88 Tenn., 510, 514; United
States V. Honolulu Co., 122 Fed. Eep., 581."

The Committee interprets the decision of the Court to support quite
clearly the contention that all elements of value and damages to the
seller considered in condemnation must be considered in valuation,
but that special values due to increased earning power by reason of a
new use are not approved in these decisions. This feature is especially
emphasized in City of New York vs. William Sage, Jr., (229 U. S., 372).

In this case, the Commissioners appointed by the City reported that :

"The sum of $7 624.45 for lands and buildings and the further
sum of $4 324.45 for reservoir availability and adaptability being a
grand total of the sum of $11 948.90 is the sum ascertained and deter-
mined by us * * * to be paid to the owners of and all persons in-
terested in said land for the taking of the fee thereof, designated
* * * as Parcel 733."

The report was confirmed by the Circuit Judge (190 Fed., 413)
and by the Circuit Court of Appeals (124 C. C. A., 251, 206 Fed.,
369) but was reversed by the U. S. Supreme Court, which said (229
U. S., 372):

'"Upon an inspection of the record it appears to us, as the language
of the Commissioners on its face suggests, that their report does not
mean that the claimant's land had a market value of $11 948.90 — that
it would have brought that sum at a fair sale — but that they considered
the value of the reservoir (site) as a whole and allowed what they
thought a fair proportion of the increase, over and above the market
value of the lot, to the owner of the land, subject to the opinion of
the Court upon the point of law thus raised. * * * But the only
explanation of the separation of items by the Commissioners is that
they were not prepared to say that the market value of the lot was
$11 948.90, seeing that the claimant bought it a few days before for
$4 500, but that they thought the additional value gained by the City's
act should be taken into account and shared between the City and the
owner of the land — a proposition to which we cannot assent (Minne-
sota Rate Cases, 230 U. S., 352, 451; McGovern v. New York, 229
U. S., 363, 372)."

"The decisions appear to us to have made the principles plain. No
doubt when this class of questions first arose it was said in a general
way that adaptability to the purposes for which the land could be used
most profitably was to be considered; and that is true. * * » But
it is to be considered only so far as the public would have considered



VALUATION OF PUBLIC UTILITIES 1411

it if the land had been offered for sale in the absence of the City's
exercise of the power of eminent domain.

''The fact that the most profitable use could be made only in con-
nection with other land is not conclusive against its being taken into
account, if the union of the properties necessary is so practicable that
the possibility would affect the market price. * * * But what the
owner is entitled to is the value of the property taken, and that means
what it fairly may be believed that a purchaser in fair market condi-



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