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the end of its estimated service life. In applying this method, it has
been common practice to compute annuities upon a basis of original
or reproduction cost and total service life, but the method applies as
well if, at any time, actual value and remaining service life are used.

3. — Compound-Interest Method. — (The same as the Equal-Annual-
Payment Method discussed in the Committee's Progress Report.) This
method makes provision from the earnings for annual depreciation
allowances, for any property unit, of such increasing sizes from the
beginning to the end of its estimated service life that when the same
interest rate is used for determining the return on capital and the
depreciation allowances, the sum of the return and the allowance is
the same in each year of such life. The rate of increase of the suc-
cessive depreciation allowances is also such that the "present worth"
of each is the same. The sum of the allowances without interest equals
the cost, less salvage, of each unit when it reaches the end of its esti-
mated service life.

J/.. — Straight-Line Method. — This method makes provision from the
earnings for equal annual depreciation allowances of such size, for
any property unit, that the sum of the allowances, without interest,
will equal the cost, less salvage, of each unit when it reaches the end
of its estimated service life. The annual depreciation allowances by
this method are each equal to the cost, less salvage, of the property unit
divided by the number of years of its expectation of life.

5. — Unit-Cost Method. — This method is based on the conception
that the value of a plant unit should be decreased from year to year
to such an extent that the cost per unit of output or service, taking
into account all annual charges for interest, depreciation, repairs, cost



VALUATION OF PUBLIC UTILITIES 1529

of operating, etc., shall be constant during each year of the estimated
service life of the unit.

Depreciation Allowance —Renewal Allowance— Retiring Allowance.

The provision which should be made through the rates by which
a sum may be taken from earnings periodically for offsetting the
decrease in value or worth of existing plant units. In accordance
with methods of accounting in general use by railroads for a part
of their property, and by some other public service corporations, the
annual decrease in value or worth is offset wholly or in part by charges
to maintenance or renewal expenses.

Depreciation Fund — Renewal Fund.

A fund consisting of cash or other quick assets set aside for the
purpose of renewing property subject to depreciation when it ceases
to be serviceable. This fund appears in the asset column of a financial
statement, and may have no direct relation to the depreciation reserve.

Depreciation Reserve — Retiring Reserve.

The excess of past charges to "operating expenses" for deprecia-
tion which have been credited to the depreciation reserve account,
over and above those retirements which have been charged thereto.

Deterioration.

Under Depreciation.

Development Expense.

A term which may be applied to all expenses incurred in developing
a property. In this report, however, it is limited to the expenses
incurred in developing the property and business after the period of
regular operation begins. That portion of development expense in-
curred in tuning up the plant and bringing the property to present
operating efficiency during the physical development period may be
accounted for as a construction cost. To a large extent, development
expense represents the deficiency in net distributable earnings below
a "fair return" on the "fair value" of the property during the early
period of operation after original construction, and after important
betterment or reconstruction. In other words, it is the cost of creating
the business.

Development Period— Physical.

See Physical Development Period.

Duplication Cost.

See Cost of Reproduction, under Cost — Investment.

Equal'Annual-Payment Method.

Under Depreciation Accounting.



153(1 VALUATION OF PUBLIC UTILITIES

Exchange Value.

Under Value.
Expectation of Life — Life Term.

These terms mean the estimated economically useful life of the dif-
ferent units or different groups of units of which a property is com-
posed.

Age. — The length of time that the property unit has been in
use. Sometimes referred to as past life.

Remaining Life — Remaining Service Life. — Generally, the differ-
ence between the age and the total expectation of life of a property
unit; but, as the unit grows older, the estimate of remaining service
life, sometimes termed future life, may be changed by the condition
of the property at the time of its appraisal.

Expense — Development.

See Devpjlopment Expense.

Expenses — Operating.

See Operating Expenses.

Fair Return.

This term is used to indicate the return to which the owner of a
public utility is equitably entitled for the use of his capital, in view
of the risks involved and the efficiency displayed in management.

Fair Value.

Tinder Value.
Franchise.

The authority granted by government to a person or corporation to
create and operate a public service property, to use public property,
and often to condemn property.

Going Value — Going Concern Value.

These terms have been given many definitions. Mr. Justice
Moody, in the Knoxville case, referring to an allowance for the going
concern, makes this statement :

"The latter sum, we understand to be an expression of the added
value of the plant as a whole, over the sum of the values of its com-
ponent parts, which is attached to it because it is in active and suc-
cessful operation and earning a revenue."

The term "going value" has also been given a less comprehensive
meaning, in the valuation of public service properties, making it cor-
respond closely with what has been defined heretofore as "development
expense"; for instance. Judge Miller, in the Kings County Lighting
case, said:

"1 define 'going value' for rate pur^josea as involved in this case
to be the amount equal to the deficiency of net earnings below a fair



VALUATION OF PUBLIC TJTILT'J'IK8 1531

return on the actual investment due solely to the time and expenditure
reasonably necessary and proper to the development of the business
and property to its present stage, and not comprised in the valuation
of the physical property."

The Committee defines the term as the difference between the
exchange value and the physical value of an established and operating
property, due to the intangible values — such as franchise, good will,
efficiency, favorable business arrangements, designs, strategic location,
leases, easements, traffic and operating agreements, water rights,
strategic advantages, and other rights or privileges — in contradis-
tinction and addition to the development expense (or tangihle costs
and losses of the business-acquisition, or development-period, which
are to be included in the physical value of the property).

Good Win.

In ordinary business, the good will represents the special value that
a business has by reason of its popularity and the amount of business
thereby attracted. It is a part of the value of a "going concern".

Improvements.

Additions and betterments to an existing property.
Inadequacy.

Under Depreciation.

Increment.

See Appreciation.

Intangible Value.

lender Value.
Inventory.

The schedule with items multiplied by appropriate prices.

Investment.

See Cost — Investment.

Item.

Under Unit.
Items— Measurable.

See Measurable Items, under Unit.

Life— Remaining.

See Remaining Life, under Expectation of Life.

Life Term.

Soe Expectation of Life.

Maintenance.

The act of keeping a property in condition to perform adequately
and efficiently the service for which it is used. The term may be
applied either to the property units which are kept in such serviceable



1532 VALUATION OF PUBLIC UTILITIES

condition by repairs or otherwise, or to the property as a whole which
may be kept in such condition by the replacement of parts which
become worn or otherwise inefficient.

Under the rules prescribed by the Interstate Commerce Commis-
sion for steam roads, the word "maintenance" has a broader signifi-
cance, as maintenance expenses include :

"also the loss through depreciation of the property used in operations,
including all such expenses resulting from ordinary wear and tear of
service, exposure to the elements, inadequacy, obsolescence, or other
depreciation, or from accident, fire, flood, or other casualty."

Maintenance— Deferred.

See Deferred Maintenance.
Market Value,

Under Value.
Measurable Items.

Under Unit.

Obsolescence.

Under Depreciation.

Operating Expenses.

Strictly speaking, these are the expenses incurred in operating a
property, for which its owner is entitled to receive reimbursement
through sufficiently large earnings. In accounting, the term has been
given a broader meaning to include all expenses necessary for the
maintenance of the integrity of the property and its operation.

Original Cost — Original Cost to Date — Original Cost plus Improvements.

Under Cost— Investment.

Overhead Charges.

This is a term used for expenses incurred in producing a pi-operty,
which cannot well be included in the unit prices. The methods of
accoTinting used in connection with the construction of public or
public service works do not, as a rule, provide for the charging of such
expenses as those for promotion, administration, engineering, interest,
and many other things to the different property units, although they
are necessarily a part of the cost of such units. In the preparation of
estimates of cost provision must be made, also, for contingencies which
experience has shown do arise during construction. Hence, the engi-
neer, using all available accounts and records as a basis, can make
the most accurate estimate of reproduction cost by applying unit
prices which do not include these overhead charges, and adding for
the different elements which make up the overhead charges such per-
centages of the total cost of the plant units or measurable items of
property, otherwise obtained, as are warranted by experience.



VALUATION OF TUBLIC UTILITIES 1533

Physical Development Period.

The period, following the construction period, necessary to bring
any physical property to present operating efficiency.

Physical Value.

Under Value.

Plant Unit.

See Unit.

Prices.

See Unit Prices.

Property.

See Public Service Property.

Property Unit.

See Unit.
Public Purchase Base.

Under Value.
Public Service Commission.

The general title given to a public body authorized by law to
regulate or control the actions of individuals, corporations, or public
bodies owning or operating public utilities. As a rule, the authority
is conferred on special bodies, as, for example, the Interstate Com-
merce Commission, and the public service commissions which have
been created in recent years in most of the States, but this authority
may also be conferred on the governing bodies of cities, as, for in-
stance, in California, where, by the provisions of the Constitution of
the State, the supervisors of a city were until recently required each
year to fix the rates for water supplied by public service corporations
to such city and its inhabitants.

Public Service Property— Public Utility.

The popular names given to a property created, under the pro-
visions of a general or special law, to furnish service to the public.
The public utility may be owned or controlled by individuals, a cor-
poration, or a public body.

Public Utility.

See Public Service Property.

Rating Base.

See Return Base under Value.
Remaining Life— Remaining Service Life.

Under Expectation of Life.
Remaining or Depreciated Value.

Under Value.



1534 VALUATION OF PUBLIC UTfLlTIES

Renewal— Renewal in Kind— Replacement.

Renewal. — The making new of plant units by replacing them with
corresponding new units, although the term is sometimes used even
when the new units are not altogether similar to those replaced.

Renewal in Kind. — Used to indicate that the renewal is made with
an identical plant unit.

Replacement. — The act of replacing a plant unit which is going
oat of service, with a substitute which may be either identical with
the unit replaced or different from it. A replacement which increases
the value is classed as an improvement to the extent of its increased
cost.

Renewal Alio wance.

See Depreciation Allowance.

Renewal Fund.

See Depreciation Fund.

Renewal in Kind.

Under Renewal.

Repairs.

The process of mending or of restoring to a sound and good state.
In connection with the valuation of a public service property, the word
may have two very different meanings. It may mean either the mend-
ing and restoring of parts of a unit to keep it in a sound and good
state, or the mending and restoring of the defective parts of the whole
plant to maintain it in a sound and good state. The meaning intended
is sometimes indicated by the context, and where not so indicated the
difference in meaning is a source of misunderstanding.

The frequently used term current repairs refers to the repairs be-
longing to the time immediately passing, and, like the word repairs,
may relate either to plant units or to the whole plant.

Replacement.

Under Renewal.

Replacement Cost.

See Cost of Reproduction, under Cost — Investment.

Replacement Method.

Under Depreciation Accounting.

Reproduction Cost.

See Cost of Reproduction, under Cost — Investment.

Reproduction Period.

The period estimated as necessary for the inception, construction
and bringing to present operating efficiency of any property. It em-



VALUATION OF PUBLIC UTILITIES loB-'j

braces a construction and a physical development period and the period
necessary to acquire the business of the utility.

Retiring Allowance.

Sec Depreciation Allowance.

[Retiring Reserve.

See Depreciation Reserve.
Return Base.

Under Value.
Salvage or Scrap Value.

Under Value.
Schedule.

A detailed list of all of the items of property.
Scrap Value.

See Salvage or Scrap Value, under Value.
Service Life.

See Expectation of Life.

Sinking Fund — Amortization Fund.

A fund instituted and invested in such wise that its gradual ac-
cumulations will enable it to meet and wipe out a liability or debt at
maturity. The term "sinking fund" is sometimes used loosely in con-
nection with any kind of a fimd which will reach the amount of a
liability or debt at maturity, but should be used only in connection
with a fund made up of annual or other instalments which require tJte
accumulation of interest in order to reach the full value at maturity.

Sinking'Fund Method.

Under Depreciation Accounting.
Straight-Line Method.

Under Depreciation Accounting.

Supersession.

Under Depreciation.
Taxing Base.
Under Value.

Unit.

A subdivision of a plant or property consisting of a single article
or item, or a group of articles or items. The subdivision of the plant
or property into units, not necessarily the same for different pur-
poses, for convenience in estimating cost or in estimating and
placing depreciation. A plant unit is a subdivision of the physical
property ; a property unit a subdivision of either physical or intangihle
property.



1536 VALUATION OF PUBLIC UTILITIES

The term plant unit generally relates to a complete unit like a loco-
motive, a building, or a dam, and not to the parts like the wheels of a
locomotive, the windows of a building, or the earthwork or masonry
of a dam.

The word unit may be at times synonymous with the word item, but
frequently will include two or more similar or dissimilar items. For
instance, a dam may be called a property unit, but, in estimating its
cost of reproduction, its various parts, such as earthwork, masonry,
paving, etc., would be entered as items in the schedule. On the other
hand, an item in a summarized schedule often includes many units.

Item. — An article; also a separate article or entry in an account
or schedule.

Measurable Items. — Items of physical property which can be counted
or measured.

Unit-Cost Method.

Under Depreciation Accounting.

Unit Prices.

These are the prices or costs to be set opposite each plant unit of
the schedule, as multipliers.

Valuation.

The general definition is the act of valuing. In connection with
public service property, the word means the determination of actual
or reproduction cost, depreciation, and the many other factors which
affect "fair value" or the bases for estimating ''fair return", permis-
sible capital, public purchase price, or proper taxation and the deter-
mination of such "fair value" or bases.

Value.

Primarily defined in the Standard Dictionary as "the desirability
or worth of a thing as compared with the desirability of something
else". As the desirability or worth of a thing is usually estimated in
money, this definition in the present case may be abbreviated to "the
desirability or worth of a thing, estimated in money".

As indicated in the introductory chapter, the Committee is of the
opinion that the confusion which has resulted from the use of the
word, value, because of the many different shades of meaning that have
been given to the word, is so great as to justify a modified terminology.
It therefore recommends:

(a) that the meaning to be attached to the word value be the
primary meaning as defined in the first paragraph, except
when it is necessary to use the words "value" and "fair value"
with the meanings assigned to them by the Courts;



VALUATION OF PUBLIC UTILITIES 153?

(6) that, in so far as the practice of valuation is concerned, the
word should not be used, except as above stated, without
proper modifying words to indicate what meaning is intended ;

(c) that the principal purposes of valuation being to furnish a
basis for a purchase or rental price, to obtain evidence as a
guide for rate-making or the determination of the reason-
ableness of rates, to furnish a basis for authorization of
capital, and to furnish a basis for taxation — these bases not
being necessarily the same and not being the equivalent of
value in every case — the use of the word value should be
avoided and the propriety of the following terms recognized:

Capitalization Base. — The sum on which capital securities may be
issued or authorized.

Public Purchase Base. — The price which should be paid in the case
of the purchase of a public utility by the public.

Return Base. — The amount on which the public service company
is entitled to earn a "fair return". This is what the Courts have
termed the "fair value", in various rate cases.

Taxing Base. — The amount which should be subjected to taxation.
Under the laws of some States, the basis to be used for taxation of
property is not its value estimated in money by any ordinary rules,
but a sum determined in accordance with such laws.

Exchange Value. — The desirability or worth of a thing, estimated
in money. (See also Value and Market Value.)

Fair Value. — As applied to a public service property, this is a
technical term used by the Courts to express a base for rate regula-
tion, public purchase, capitalization, or other purpose, which is fairly
obtained and fair to the parties affected.

Going Value. — See Going Value — Going Concern Value.

Intangible Value. — Existing value which is not represented by
physical property and is not measurable by determinable cost. Intan-
gible value exists by reason of franchise, grants, contract rights,
location, market, age, strategic advantages, and efficiency, and possibly
other elements that give a property value.

Market Value. — This term, applicable only to a property for which
there is a well-established market, has been properly defined as the sura
which a willing and intelligent buyer desiring such property would
give for it to a willing, intelligent and solvent seller.

Physical Value. — The value of the physical property in contra-
distinction to that of the intangible property. Riggs,* referring to the
"physical property" element of value, says :

"This consists of those things which are visible and tangible, capable
of being inventoried, their cost of reproduction determined, their de-

* "The Valuation of Public Service Corporation Property", by Henry Earle
Riggs, M. Am. Soc. C. E., Transactions, Am. Soc. C. E., Vol. LXXII, June, 1911, p. 18.



1538 VALUATION OF PUBLIC UTILITIES

preciation measured, and without which the property would be unable
to produce the commodity on the sale of which income depends. This
physical property is considered as an operating entity, and not as a
collection of inert and partly worn-out equipment, and, being so con-
sidered, carries, as part of the physical value, those costs and charges
which are an inseparable part of the cost of construction but do not
appear in the inventory of the completed property."

This definition of physical property is broader than that sometimes
given, which excludes the overhead charges. The Committee agrees
with this definition of Professor Riggs, as all costs required to create
the physical property and put it in its full present condition of operat-
ing efficiency should be included in determining the physical value.

Remaining or Depreciated Value. — The value of a property after
proper deduction has been made for depreciation.

Salvage or Scrap Value. — These terms are often used interchange-
ably, but a distinction may be made that salvage is the net value which
an article possesses for further use for utility purposes other than
that for which it was originally used, or as a second-hand article; and
scrap is the net value of an article no longer useful for service.

Wear and Tear.

Under Depreciation.

Weighted Average.

The average foimd by dividing the sum of the several products
of a series of multiplications of variable factors, by the sum of the
factors of one class.

Working Capital.

Under Capital.



VALUATION^ OF PUBLIC UTILITIES 1539



APPENDICES

TO THE

REPORT OF THE SPECIAL COMMITTEE

TO FORMULATE PRINCIPLES AND METHODS

FOR THE VALUATION OF RAILROAD PROPERTY

AND OTHER PUBLIC UTILITIES



Appendix I Depreciation Tables.

Appendix II Some Examples of Expectation of Life of

So-Called Permanent Structures.

Appendix III Some Examples of Actual Overhead Cost.

Appendix IV Some Kecords of Abandoned Property.



1540



VALUATION OF PUBLIC UTILITIES



APPENDIX I.

Accompanying Final Report of the Special Committee on

Valuation op Public Utilities.

DEPRECIATION TABLES,

Based on Compound-Interest Method,
Heretofore Called Equal-Anntjal-Payment Method.

Interest Compounded Annually.
(" Value " is value at end of year ; " Dep. " is depreciation during year.)

5-Year Life.



d .


Interest Rate.


Interest Rate.


Interest Rate. |


Interest Rate.


4%


5%


60





^%




Value.


Dep.


Value.


Dep.


Value.


Dep.


Value.


Dep.





100.0000


18.4627


100.0000


18.0975


100.0000


17.7396


100.0000


17.3891


1


81.5373


19.2012


81.9025


19.0023


82.2604


18.8041


82.6109


18.6063


2


62.3361


19.9693


62.9002


19.9525


63.4563


19.9322


64.0046


19.9087


3


42.3668


20.7680


42.9477


20.9501


43.5241


21.1282


44.0959


21.3024


4


21.5988


21.5988


21.9976


21.9976


22.3959


22.3959


22.7935


22.7935


5


0.0000




0.0000




0.0000




0.0000






100.0000


100.0000 1


100.0000


100.0000








IC


-Year


Life.











100.0000


8.3291


100.0000


7.9505


100.0000


7.5868


100.0000


7.2377


1


91.6709


8.6623


92.0495


8.3480


92.4132


8.0420


92.7623


7.7444


2


83.0086


9.0088


83.7015


8.7654


\ 84.3712


8.5245


85.0179


8.2865


3


73.9998


9.3690


74.9361


9.2037


, 75.8467


9.0360


76.7314


8.8666


4


64.6308


9.7439


65.7824


9.6638


66.8107


9.5782


67.8648


9.4872


5


54.8869


10.1336


56.0686


10.1470


57.2325


10.1528


58.3776


10.1513


6


44.7533


10.5389


45.9216


10.6544


47.0797

1


10.7620


48.2263


10.8619


7


34.2144


1

10.9606


35.2672


11.1871


36.3177


11.4078


37.3644


11.6223


8


23.2538


11.3989


24.0801


11.7464


24.9099


12.0922


25.7421


12.4358


9


11.8549


11.8549


12.3337


12.3337


12.8177


12.8177



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