The Determination of Elements of Value and Methods of Valuation by the Courts.

The preceding narrative of methods of appraisal work logically leads up to the question: Will these methods that have been adopted in various appraisal undertakings stand the test of the Courts? After all, the final seal of approval must be stamped on a method by the highest Courts before it can be said to be a definitely fixed and determined principle for general use in valuation.

In a careful perusal of many papers on this subject, quotations from judicial decisions will be noted which are literally correct as far as they go, but which are incomplete and often very misleading; and often such incomplete quotations are presented as to convey an entirely wrong impression of the full decision. In order that no such charge may lie against this paper, the quotations given are full enough to indicate clearly the intent of the Court, even at the expense of undue length.

An examination of all Federal and Supreme Court cases which bear on the subject of property valuation has been made, and quotations at length from some of the older cases, establishing precedent, together with citations to more recent decisions, are submitted. It is believed that the points of principle and method, in so far as they have been determined by the highest Courts, are quite fully set forth.

A study of the complete methods of the railroad valuation in Michigan, in connection with these decisions, discloses the fact that they comply with the requirements of the earlier cases, that all matters affecting value be taken into consideration, and that in the more recent decisions the detailed methods adopted in the Cooley physical appraisal have been sustained as to very many points. In no case have any of such methods been unfavorably criticized, and, while at this date the Supreme Court has not squarely passed on the propriety of any method for securing non-physical or intangible values, it has fully sustained the general position of Professor Adams in several important 113points. In addition to the complete examination of Federal cases, certain very interesting and valuable State cases have been examined, and some of them are quoted.

These cases involve both matters of taxation and rate-making. They cover railroads, water-works, gas-works, and other classes of public service corporations, and clearly demonstrate the fact that any analysis of the subject of property valuations must include all classes of corporations. Rate-making and taxation in themselves are entirely separate and distinct from valuation, which is a necessary preliminary step in either undertaking. For this reason all references which are not of special interest in the valuation part of the problem are omitted.

The case of Smyth vs. Ames (169 U. S., 466) was an action to question the constitutionality of a statute of Nebraska establishing rates. It is of great interest, and, based on the ruling of the Court in this case, the appraiser in Washington and the appraisers in Nebraska have undertaken to secure first cost as an element of value. The decision holds that:

(1) A railroad corporation is a person within the meaning of the fourteenth amendment.

(2) A State enactment establishing rates that will not admit the carrier to earn such compensation as would be just to it and to the public, would deprive such carrier of its property and would be repugnant to the fourteenth amendment.

(3) Rates established by a State cannot be so conclusively determined by the legislature that they cannot become the subject of judicial inquiry.

The reasonableness of rates prescribed by a State for intra-state business must be determined without reference to the interstate business done by the carrier or the profits derived from that business.

This paper is not concerned with the question of rates, which is discussed at length in this decision. It is, however, of special interest to note what the Court says in regard to the relation of the corporations to the people, and to elements of value.

"A railroad is a public highway, and none the less so because constructed and maintained through the agency of a corporation deriving its existence and powers from the State. Such a corporation was created for public purposes. It performs a function of the State. Its 114authority to exercise the right of eminent domain and to charge tolls was given primarily for the benefit of the public. It is under governmental control, though such control must be exercised with due regard to the constitutional guaranties for the protection of its property.... It cannot therefore be admitted that a railroad corporation maintaining a highway under the authority of the State may fix its rates with a view solely to its own interests and ignore the rights of the public. But the rights of the public would be ignored if rates for the transportation of persons or property on a railroad are exacted without reference to the fair value of the property used for the public, or the fair value of the services rendered, but in order simply that the corporation may meet operating expenses, pay the interest on its obligations, and declare a dividend to stockholders.

"If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization, and the apparent value of the property and franchises used by a corporation, as represented by its stocks, bonds, and obligations, is not alone to be considered when determining the rates that may reasonably be charged."

(The Court here quotes 164 U. S., 578, Covington and Lexington Turnpike vs. Sanford.)

"A corporation maintaining a public highway, although it owns the property it employs for accomplishing public objects, must be held to have accepted its rights, privileges, and franchises subject to the condition that the government creating it, or the government within whose limits it conducts its business, may by legislation protect the people against unreasonable charges for the services rendered by it. It cannot be assumed that any railroad corporation, accepting franchises, rights, and privileges at the hands of the public, ever supposed that it acquired, or that it was intended to grant to it, the power to construct and maintain a public highway simply for its benefit, without regard to the rights of the public. But it is equally true that the corporation performing such public services, and the people interested in its financial affairs have rights that may not be invaded by legislative enactment in disregard of the fundamental guaranty for the protection of property. The corporation may not be required to use its property for the benefit of the public without receiving just compensation for the services rendered by it. How such compensation may be ascertained, and what are the necessary elements in such inquiry, will always be an embarrassing question.

"We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining 115a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stocks, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates established by the statute, the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth."

The body of this decision is quoted at length to show:

First. That the Court reiterates the relation of the people to the corporation, as defined by Covington and Lexington Turnpike Road vs. Sanford (164 U. S., 578) and by Stone vs. Farmers' Loan and Trust Company (116 U. S., 307).

Second. That the basis for computing a fair rate is the fair value of the property, which must be arrived at by a computation or series of computations taking into account many different factors.

Third. That while the Court mentions certain things that may serve as indices of value, which are to be taken into account and given due weight, the Court does not outline or define any method of arriving at a value, but does recognize it as an embarrassing question.

Fourth. That no such stress has been laid by the Court on original cost as has been construed by some appraisers.

The principles enunciated in Smyth vs. Ames are reiterated by the Court in San Diego Land Company vs. National City (174 U. S., 739), with the further ruling:

"The contention of the appellant in the present case is that, in ascertaining what are just rates, the Court should take into consideration the cost of its plant; the cost per annum of operating the plant, including interest paid on money borrowed and reasonably necessary to be used in constructing the same; the annual depreciation of the plant from natural causes resulting from its use; and a fair 116profit to the Company over and above such charges for its services in supplying the water to consumers, either by way of interest on the money it has expended for the public use, or upon some other fair and equitable basis. Undoubtedly, all these matters ought to be taken into consideration and such weight given them, when rates are being fixed, as under all the circumstances will be just to the company and to the public. The basis of calculation suggested by the appellant is, however, defective in not requiring the real value of the property and the fair value in themselves of the services rendered to be taken into consideration. What the company is entitled to demand, in order that it may have just compensation, is a fair return upon the reasonable value of the property at the time it is being used for the public. The property may have cost more than it ought to have cost, and its outstanding bonds for money borrowed, and which went into the plant, may be in excess of the real value of the property. So that it cannot be said that the amount of such bonds should in every case control the question of rates, although it may be an element in the inquiry as to what is, all the circumstances considered, just to both the company and the public."

In the case of Columbus Southern Railway vs. Wright (151 U. S., 479), the Court quotes approvingly from Franklin Company vs. Railroad (12 Lea (Tenn.), 521-537-538-539), and shows that the doctrine quoted had already been enunciated by the Supreme Court in the State Railroad Tax Cases (92 U. S., 575-607). The Court quotes as follows:

"The property of a railroad company for purposes of taxation consists of its realty, its local personalty, its rolling stock, its choses in action, and its franchises. The franchise is a privilege conferred by the charter of incorporation, namely the right to exercise all the powers granted in the mode prescribed for the purpose of profit. It is a unit not confined to any one county in which it may be exercised.

"Obviously, after ascertaining the value of the entire franchise in the State as a unit, no more approximate or just division of this value can be made for purposes of taxation than to allot it among the counties through which the track runs in proportion of the entire length of track in the county to the entire length of track in the State....

"The roadway itself of a railroad depends for its value upon the traffic of the company and not merely upon the narrow strip of land appropriated for the use of the road, and the bars and cross-ties thereon. The value of a roadway at any given time is not the original cost, nor, a fortiori, its ultimate cost after years of expenditure in repairs and improvements. On the other hand, its value cannot be determined by ascertaining the value of the land included in the roadway assessed at 117the market price of adjacent lands, and adding the value of the cross-ties, rails, and spikes. The value of land depends largely upon the use to which it is put and the character of the improvements upon it."

The mileage basis of apportionment is sustained in the following and other cases:

State Railroad Tax Cases 92 U. S., 608

Delaware Railroad Tax Case 18 Wall., 206

Erie Railway vs. Pennsylvania 21 Wall., 492

Western Union Telegraph Company vs. Mass 125 U. S., 530

Pullman Palace Car Company vs. Pennsylvania 141 U. S., 18

Maine vs. Grand Trunk Railway 142 U. S., 217

Pittsburg, Cincinnati, Chicago, and St. Louis Railway vs. Backus 154 U. S., 430

Therefore this basis of division of values between territorial units appears to be well established by precedent. This is in a measure unfortunate, as certain classes of property cannot be apportioned equitably in this way, unless the value of a railroad be determined, and then that value allocated between different territorial units in proportion to mileage, without any regard to the location of any structure or series of structures in any State or county, the track-mileage basis must be looked upon as a method of apportionment which is subject to modification or which will lead to error.

In an Indiana tax case, Cleveland, Cincinnati, Chicago, and St. Louis Railway vs. Backus (154 U. S., 444), the late Justice Brewer, of the Supreme Court, in handing down the judgment, said:

"The true value of a line of railroad is something more than an aggregation of the values of the separate parts of it, operated separately. It is the aggregate of those values plus that arising from a connected operation of the whole, and each part of the road contributes not merely the value arising from its independent operation, but its mileage proportion of that flowing from a continuous and connected operation of the whole.... The value of property results from the use to which it is put, and varies with the profitableness of that use, past, present and prospective, actual and anticipated. There is no pecuniary value outside that which results from such use....

"In the nature of things it is practically impossible, at least in respect to railroad property, to divide its value and determine how much is caused by one use to which it is put and how much by another. Take the case before us, it is impossible to disintegrate the 118value of that portion of the road within the State of Indiana and determine how much of that value springs from its use in doing interstate business and how much from its use in doing business wholly within the State. An attempt to do so would be entering upon a mere field of uncertainty and speculation."

In the Michigan cases, the principal one being Michigan Central Railroad vs. Powers (201 U. S., 245), the question of method of valuation was not passed on by the Courts for the reason that, after the evidence was in, and during the argument, counsel for the railroad admitted that the Cooley valuation was as correct a figure as it was possible to secure under then existing conditions, methods and rates of taxation being the issue.

It is thus seen that the Supreme Court of the United States was not, in any of the earlier cases, required to pass squarely on the propriety of any method of arriving at a "fair value," and consequently had not, prior to 1909, defined any hard-and-fast rules of procedure in determining such value. The Circuit Courts have passed on kindred questions in a few cases, among which San Diego Land and Town Company vs. National City (74 Fed., 83), and San Diego Land and Town Company vs. Jasper (110 Fed., 714) hold as above, and cite most of the cases referred to. In the latter case the Court says:

"The actual value of such property obviously depends upon a variety of considerations—among them the actual and prospective number of consumers—and is no more unchangeable than the value of any other kind of property."

As an illustration, there is cited the effect of a year's drouth on an irrigation plant as temporarily affecting the value of property.

In the case of Cotting vs. Kansas City Stock Yards (82 Fed., 839) the Circuit Court touches on one very interesting argument, in the light of some of the methods of valuation advocated by railway managers and some of the criticisms of recent valuation work.

"Different methods of estimating the value of property may properly be employed when it is valued for different purposes. When a valuation is placed on property which has become affected by a public use, for the purpose of ascertaining whether the maximum rate of compensation fixed by law for its use is reasonable or otherwise, it is obvious that the income derived therefrom by the owner before it was subjected to legislative control cannot always be accepted as a 119proper test of value because the compensation which the owner charged for its use may have been excessive and unreasonable. Again, when property has been capitalized by issuing stock, neither the market value nor the par value of the stock can be accepted in all cases as a proper criterion of value, because the stock may not represent the money actually invested, and furthermore because the property may have been capitalized mainly with reference to its income producing capacity, on the assumption that it is ordinary private property which the owner may use as he thinks proper without being subject to legislative control. On the other hand, however, when property is valued for the purpose last stated, it is clear that the owner thereof is entitled to the benefit of any appreciation in value above the original cost and the cost of improvements, which is due to what may be termed natural causes. If improvements made in the vicinity of the property, the growth of city or town where it is located, the building of railroads, the development of the surrounding country and other like causes, give property an increased value, the owner cannot be deprived of such income by legislative action which prevents him from realizing an income commensurate with the enhanced value of his property."

The language of the late Judge Brewer, sitting as one of the circuit judges in the case of National Water-Works Company vs. Kansas City (62 Fed., 853), is definite as to the necessity of taking into account some elements of intangible value, and is here quoted as giving the views of this eminent jurist:

"The difficult question, however, still remains; and that is, what is the 'fair and equitable value,' which by the statute and ordinance the city is to pay for the water-works? * * * We are not satisfied that either method, by itself, will show that which under all the circumstances can be adjudged the 'fair and equitable value.'

"Capitalization of earnings will not, because that implies continuance of earnings, and a continuance of earnings rests upon a franchise to operate the water-works. The original cost of construction cannot control, for original cost and present value are not equivalent terms. Nor would the mere cost of reproducing the water-works plant be a fair test, because that does not take into account the value which flows from the established connections between the pipes and buildings of the city. * * * A complete system of water-works, such as the company has, without a single connection between the pipes in the streets and the buildings of the city would be a property of much less value than the system connected as it is with so many buildings and earning, in consequence thereof, the money which it does earn. The fact that it is a system in operation, not only with a capacity to supply the city but actually supplying many buildings, in the city—not 120only with a capacity to earn but actually earning—make it true that the 'fair and equitable value' is something in excess of the cost of reproduction."

The foregoing authorities cover practically all the older cases in the Federal Courts. These cases have been examined, and such of the subject matter has been quoted as would show the conclusions of the Courts as to what constitute the various elements of true value. The latest Federal decision bearing on the subject, and in many ways the most replete with argument, is the case of Consolidated Gas Company vs. City of New York (157 Fed., p. 849), which was decided in December, 1907.

In this case the valuation was determined by the master:

1.—A valuation of tangible assets, consisting of real estate, plant, mains, services, meters and miscellaneous equipment, and the property of subsidiary companies, the whole aggregating $63,357,000. Of this an allowance of $3,616,000 was made by the master for working capital, and this entire amount was treated as tangible property.

2.—Finally, an intangible value of 0,000,000 was assigned by him to the franchise and good will.

Objections were raised, as follows:

(A) Land values represent no original investment by the Company, do not indicate land especially appropriate for the manufacture of gas, and increase the apparent assets without increasing the earning power.

(B) The values of physical property are not original cost, but are cost of reproduction less depreciation.

(C) Some of the property cost more than new articles of the same kind at the time of inquiry. Some are of designs not now favored by the scientific and manufacturing world.

The disputed questions involved, as far as tangible property is concerned, were:

1.—Whether the values ascribed to the several enumerated items are based on competent and persuasive evidence.

2.—Whether the method of valuation pursued by the master is in accordance with law.

3.—Whether the items of property are "employed" (in the legal signification of the word) in the production of gas.

121The first, a question of fact, is found affirmatively, and the evidence was found to be competent.

The second question is one of law, and, quoting from the cases cited in this paper, the Court holds as follows:

"This method of valuation correct * * * upon reason it seems clear that in solving this equation the plus and minus quantities should be equally considered and appreciation and depreciation treated alike.... The value of the investment of any manufacturer, in plant, factory, or goods, or all three, is what his possessions would sell for upon a fair transfer from a willing vendor to a willing buyer, and it can make no difference that such a value is affected by the efforts of himself or others, by whim or fashion, or (what is really the same thing) by the advance of land values in the opinion of the buying public. It is equally immaterial that such value is affected by difficulties of reproduction. If it be true that a pipe line under the New York of 1907 is worth more than was a pipe line under the city of 1827, then the owner thereof owns that value, and that such advance arose wholly or partly from difficulties of duplication created by the city itself is a matter of no moment. Indeed, the causes of either appreciation or depreciation are alike unimportant if the fact of value be conceded or proved; but that ultimate inquiry is oftentimes so difficult that original cost, and reasons for changes in value, become legitimate subjects of investigation as checks upon expert estimates, or bookkeeping, inaccurate and perhaps intentionally misleading. * * *

"The so-called money value of real or personal property is but a conveniently short method of expressing present potential usefulness, and 'investment' becomes meaningless if construed to mean what the thing invested in cost generations ago. Property, whether real or personal, is only valuable when useful. Its usefulness commonly depends on the business purposes to which it is or may be applied. Such business is a living thing, and may flourish or wither, appreciate or depreciate; but, whatever happens, its present usefulness, expressed in financial terms, must be its value. * * * It is not to be inferred that any American government intended when granting a franchise, not only to regulate the business transacted thereunder, and reasonably to limit the profits thereof, but to prevent the valuation of purely private property in the ordinary economic manner, and the property now under consideration is as much private property as are the belongings of any private citizen. Nor can it be inferred that such government intended to deny the application of economic laws to valuation of increments earned or unearned, while insisting on the usual results thereof in the case of equally unearned and possibly unmerited depreciation.

"I think the method of valuation applied by the report to land, plant, mains, services, and meters lawful. To 'working capital, Coke 122and Coal Company, and Astoria' the above considerations are not applicable, and these items will be treated separately."

The Court's review of the third question raises no points of special interest as to valuation.

The question as to amount of "working capital" is taken up, and that term is defined as:

"The amount of cash necessary for the safe and convenient transaction of a business, having regard to the owner's ordinary outstandings both payable and receivable, the ordinary condition of his stock, or supplies in hand, the natural risk of his business, and the condition of his credit; and unless these matters, and perhaps others, be looked into, no comparison can be drawn between one business and another, or even between those of the same general nature."

In this instance it is of interest to note that the Court reduced the "working capital" from $3,616,000 to $1,616,000.

Perhaps the most novel and interesting part of this decision is that dealing with the intangible elements of value. The master was unable to separate the two elements, good will and franchise value, but gave their combined value.

"From the testimony I think it apparent that what is here meant by good will is the organization of complainant, long established, and doubtless well manned and equipped. Such organization is clearly of value, because without it neither tangible nor intangible property can be profitably managed. Yet the organization itself is but a method of utilizing that which is invested, it is really dependent for its existence and continuance upon the franchise, without which there can be no useful organization. Tangible property has a certain value entirely apart from franchise or right to continue business, but good will in the sense of the organization for the business of furnishing gas, can have no existence whatever apart or detached from the franchise conferring the necessary privilege. Would any one think of capitalizing good will of this kind and distributing its assumed value in the shape of new shares among stockholders new or old? I think the most ingenious financier could not imagine such a proceeding, and, if this good will be not property capable of such capitalization and distribution, I do not think it property capable of capitalization as against the State.

"Finally, this claim of good will seems to forget that for many years the price and distribution of complainant's gas has been regulated by law. A citizen is entitled to have a clean street before his house because he pays taxes, inter alia, for that purpose. He is much more plainly entitled to have complainant's gas in his house because the 123company must give it to him if he pays for it. I think it apparent that the conceivable good will of a gas company in this city is about equal to that of the street-cleaning department of the municipal government."

Is a public service corporation entitled to add the value of its franchise to the assets from which a fair return may lawfully be demanded? This question is taken up and discussed exhaustively by the Court (157 Fed., 872 to 879), and while it is clear in reading his judgment that he does not believe it sound doctrine to invest a franchise with value, yet, after citing a large number of cases, he reaches the conclusion that he is "compelled" to consider franchises, not only as property, but as productive and inherently valuable property, and to add their value, if ascertainable, to complainant's capital account before declaring the rate of return.

This case went to the Supreme Court of the United States, where, under the title Willcox vs. Consolidated Gas Company (212 U. S., 19), citation is made to many cases in connection with the matter of franchise value. The decision of the Court is:

"The value of real estate and plant is to a considerable extent a matter of opinion, and the same may be said of personal estate when not based upon the actual cost of material and construction. Deterioration of the value of the plant, mains, and pipes is also to some extent based upon opinion. All these matters make questions of value somewhat uncertain."

The Supreme Court permitted the tangible values found by the lower Court to stand. It concurred with the lower Court in that it was not a case for a valuation of good will. It concurred with the lower Court in holding that the company was entitled to the benefit of any increase in tangible values, and that such increases should appear in the appraisal. It did not agree with the Court in the increase of franchise value above that which was capitalized in 1884, with the consent of the State of New York, and reduced the franchise value figure to $7,781,000. On this basis, the estimated return, under the new rate on the valuation of $55,612,435, was 5½%, which rate, in view of all the circumstances, is held to be not confiscatory and to be a not unreasonable return on the investment. The franchise value, as commented on in these cases, is referred to at considerable length in the following pages.

124On January 4th, 1909, the case of Knoxville vs. Water Company (212 U. S., 1) was decided. This, in some respects, is of greater value to the engineer than any others cited, in its determination of methods. In this the appraisement of the tangible property was made in minute detail, the sum of $10,000 was added for "organization, promotion, etc.," and $60,000 for "going concern."

"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 component parts, which is attached to it because it is in active and successful operation and earning a return. We express no opinion as to the propriety of these two items in the valuation of the plant for the purpose for which it was valued in this case, but leave that question to be considered when it necessarily arises. We assume without deciding, that these items were properly added in this case. This valuation was determined by the master by ascertaining what it would cost to reproduce the existing plant as a new plant. The cost of reproduction is one way of ascertaining the present value of a plant like that of a water company, but that test would lead to obviously incorrect results if the cost of reproduction is not diminished by the depreciation which has come from age and use.... The cost of reproduction is not always a fair measure of the present value of a plant which has been in use for many years. The items composing the plant depreciate in value from year to year in a varying degree. Some pieces of property, like real estate for instance, depreciate not at all, and sometimes, on the other hand, appreciate. But the reservoirs, the mains, the service pipes, structures upon real estate, stand-pipes, pumps, boilers, meters, tools, and appliances of every kind begin to depreciate with more or less rapidity from the moment of their first use. It is not easy to fix at any given time the amount of depreciation of a plant whose component parts are of different ages with different expectations of life. But it is clear that some substantial allowance for depreciation ought to have been made in this case.

"The company's original case was based upon an elaborate analysis of the cost of construction. To arrive at the present value of the plant large deductions were made on account of the depreciation. This depreciation was divided into complete depreciation and incomplete depreciation. The complete depreciation represented that part of the original plant which through destruction or obsolescence had actually perished as useful property. The incomplete depreciation represented the impairment in value of the parts of the plant which remained in existence and were continued in use. It was urgently contended that in fixing upon the value of the plant upon which the company was entitled to earn a reasonable return, the amounts of complete and incomplete depreciation should be added to the present 125value of the surviving parts. The Court refused to approve this method, and we think properly refused. A water plant with all its additions begins to depreciate in value from the moment of its use. Before coming to the question of profit at all the company is entitled to earn a sufficient sum annually to provide not only for current repairs but for making good the depreciation and replacing the parts of the property when they come to the end of their life. The company is not bound to see its property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any given term of years the original investment remains as it was at the beginning. It is not only the right of the company to make such a provision but it is its duty to its bond and stockholders, and, in the case of a public service corporation at least, its plain duty to the public. If a different course were pursued the only method of providing for replacement of property which has ceased to be useful would be the investment of new capital and the issue of new bonds or stock.... If, however, a company fails to perform this plain duty and to exact sufficient returns to keep the investment unimpaired, whether this is the result of unwarranted dividends upon over issues of securities, or of omission to exact proper prices for the output, the fault is its own. When, therefore, a public regulation of its prices comes under question, the true value of the property then employed for the purpose of earning a return cannot be enhanced by a consideration of the errors of the management which have been committed in the past."

The Court holds that there was error in only considering the operations of the company for a period of one year, and that this should have extended to enough time to remove danger of abnormal business conditions and observe the effects of certain ordinances.

The decision of the Supreme Court, in the Omaha Water-Works case, decided on May 31st, 1910 (Supreme Court Reporter, July 1st, 1910), is of general interest in its discussion of the procedure of appraisers in making a water-works appraisal, and in the distinction drawn between appraisals and arbitrations; but it does not touch on appraisal methods or elements of value, except to discuss "going values." The language of Judge Lurton on this point is as follows:

"The option to purchase excluded any value on account of unexpired franchise, but it did not limit the value to the bare bones of the plant, its physical properties, such as its lands, its machinery, its water-pipes or settling reservoirs, nor to what it would take to reproduce each of its physical features. The value, in equity and justice, 126must include whatever is contributed by the fact of the connection of the items making a complete and operating plant.

"The difference between a dead plant and a live one is a real value, and is independent of any franchise to go on, or any mere good will as between such a plant and its customers. That kind of good will, as suggested in Willcox vs. Consolidated Gas Company (212 U. S., 19), is of little or no commercial value when the business is, as here, a natural monopoly, with which the customer must deal, whether he will or not. That there is a difference between even the cost of duplication, less depreciation, of the elements making up the water company plant and the commercial value of the business as a going concern is evident. Such an allowance was upheld in National Water Works Company vs. Kansas City (62 Fed., 853), where the opinion was by Mr. Justice Brewer. [This decision is quoted in the foregoing pages.] We can add nothing to the reasoning of the learned Justice, and shall not try to. That case has been approved and followed in Gloucester Water Supply Company vs. Gloucester (179 Mass., 365, and 60 N. E., 977), and Norwich Gas and Electric Company vs. Norwich (76 Conn., 565). No such question was considered in Knoxville Water Company (212 U. S., 1) or in Willcox vs. Consolidated Gas Company (212 U. S., 19). Both cases were rate cases and did not concern the ascertainment of value under contracts of sale."

The writer does not read into the language of this decision an approval of a separate element of value to be called "going concern value" or "going value" in addition to other non-physical values, but rather a recognition of the fact that certain non-physical elements of value, by whatever name they may be called, must be taken into account in arriving at the fair and equitable final figure of value of a live and operating concern for the purpose of carrying out a contract of sale.

It appears to be doubtful whether the Court can be construed as approving such an element of value in rate cases.

It thus appears that the United States Courts have laid down a few rules, which may be regarded as fixed and definite and must be followed, but that many important questions have not yet been decided. The value to be determined must be a "fair value" of the property being used for the convenience of the public. The par value of stocks and bonds may not alone be considered (although it may be considered), the market value of stocks and bonds, original cost plus cost of additions, the probable earning capacity, the cost of reproduction, depreciation, appreciation, all these, and any others that will 127throw light on the "fair value" must be taken into account and given the weight to which they are entitled. Any fictitious book values due to over-issues of stock and bonds are to be given no weight, but the appraisal must give the fair value, in the light of all the facts, of the property in actual use at the time of the appraisal.

There are several decisions of the State Supreme Courts which discuss these subjects, but an examination of a number of these gives practically nothing more, in the way of definite conclusions as to method, than has been cited. Perhaps the most complete and painstaking consideration of appraisal problems by any Court was that given by Judge Savage of the Supreme Court of Maine (97 Maine, 185, and 99 Maine, 371). These were neither rate cases nor taxation cases, but proceedings under statute to require from the Court instructions to a board of appraisers appointed to value the plants. In the later or Brunswick case, Judge Savage elucidates a number of points left not altogether clear in the Waterville case. The Brunswick decision contains some interesting views on "going value," and the Court's remarks on the general difficulties in making rules for an appraisement are exactly to the point:

"There are many difficulties, if not dangers, in attempting to formulate rules which are to be applied to facts not yet ascertained. While it may be easy enough to state rules in the abstract, it is much more satisfactory in an opinion of the court, to express them in terms which are applicable to the facts in the precise case in hand.... It must be always understood that our answers to these questions are intended to be given only in the most general and comprehensive terms, which may, or may not, be found to be fitted to the facts which may subsequently be developed. No other course would be wise or safe.... A public service property may or may not have a value independent of the amount of rates, which for the time being may be changed. A public service company may, under some circumstances, be required to perform its services at rates prohibitive of a fair return to its stockholders, considering their property as an investment merely....

"Now, what is the property which the district has taken by power of eminent domain? In the first place it is a structure, pure and simple, consisting of pipes, pumps, engines, land rights, and water rights. As a structure, it has value independent of any use, or right to use, where it is, a value probably much less than it cost, unless it can be used where it is, that is, unless there is a right to use it. Nevertheless, it has value as a structure. But, more than this, it is a structure 128in actual use, a use remunerative to some extent. It has customers, it is actually engaged in business, it is a going concern. The value of the structure is enhanced by the fact that it is used in, and in fact is essential to, a going concern business. We speak sometimes of a going concern value as if it is, or could be, separate and distinct from structure value—so much for structure and so much for going concern. But this is not an accurate statement. The going concern part of it has no existence except as a characteristic of the structure. If no structure, no going concern. If a structure in use, it is a structure whose value is affected by the fact that it is in use. There is only one value. It is the value of the structure as being used. That is all there is of it."

The Court then argues that, as the structure is being used under authority and by virtue of franchises, it is more valuable. The franchise, however, is limited; other and competing franchises may be granted; a franchise may exist entirely independent of a structure. He holds that the structure is more valuable with the franchise.

"It is a structure in actual use, and with a right on the part of the owner to use it and to charge reasonable rates to customers for services rendered. It is threefold in discussion but it is single in substance."

This case is largely taken up with a discussion of the reasonableness of rates which furnish a basis for the estimate of value. There is no specific attempt to describe methods of procedure. That is left to the appraisers. These two Maine Cases, together with a valuable paper^[17] thereon by Leonard Metcalf, M. Am. Soc. C. E., constitute an extremely valuable addition to the literature of appraisements.

It is clear, from a study of all the cases referred to in this paper, that the Courts have laid down a line of precedent which is equitable and just, that the interests of both public and corporations will be safeguarded, and that the likelihood of any unfair or improper valuations passing the scrutiny of the Supreme Court is but remote.