CHAPTER I

Purpose of Valuation

§ 1. Purposes of valuation.

2. Valuation for public purchase.

3. Valuation for rate purposes.

4. Valuation dependent on purpose.

5. Same subject-Report of Committee National Association of Railway Commissioners.

6. Same subject-Report to Massachusetts Joint Board on N. Y., N. H. & H. R. R.

7. Value for taxation and for rate purposes.

8. Tax and rate purpose-Nebraska Supreme Court in Bee Building Co. Case, 1902.

9. Tax and rate purpose-District Judge McPherson in St. Louis & S. F. R. Co. Rate Case, 1909.

10. Tax and rate purpose--Arkansas Railroad Rate Cases, 1911. 11. Value for rate purpose and for public purchase.

12. Capital value and rate and purchase value.

§ 1. Purposes of valuation.

This treatise is concerned only with valuations made for governmental purposes by official appraisers, commissions or courts. Official valuations of the property of public service corporations are made for four general purposes: (1) Taxation; (2) Accounting and capitalization; (3) Public purchase; (4) Rate making. Valuations for tax and capitalization purposes are only included in so far as they may throw light on the problems raised by valuation for the last two purposes, rate making, and public purchase, to which this treatise is mainly devoted.

§ 2. Valuation for public purchase.

There have been numerous valuations of public utility property for purposes of condemnation or public purchase but there is very little information available in relation to

the methods used in such valuations. In the earlier days toll bridges were occasionally taken by condemnation or purchased on agreed terms. Later, numerous private water plants were transferred to the municipalities, usually by voluntary agreement but occasionally by formal arbitration, under the authority of a court. Several gas plants have been municipalized in the same way. Many small electric light plants and a number of larger ones have more recently been purchased by the municipalities. The purchase of private water plants is still a frequent occur

rence.

§ 3. Valuation for rate purposes.

The valuation of property for rate purposes is a recent development. The right of the courts to restrain the enforcement of an act of a legislature regulating the rates of a public service corporation was not fully established by the United States Supreme Court until 1889, and careful valuations for the purpose of determining just rates of charge have for the most part been developed since the decision in the leading case of Smyth v. Ames in 1898. The question of rate regulation first came before the United States Supreme Court in the so-called Granger Cases decided in 1876.1 In these cases the acts in question regulating rates were upheld on the ground that the property was affected with a public interest and the regulation of the rate of charge was solely a legislative power and the courts were powerless to prevent the abuse of such power by the legislature. This doctrine was soon modified and later completely reversed. In 1884, in Spring Valley Water Works v. Schottler, Chief Justice Waite hinted at a modification of the doctrine, and in 1886, in the Railroad Commission

1 Munn v. Illinois, 94 U. S. 113, 24 L. ed. 72, October, 1876, and other cases reported in the same volume. See, also, Wyman on Public Service Corporations, Vol. II, §§ 1427 to 1430.

2 110 U. S. 347, 4 Sup. Ct. 48, 24 L. ed. 173, February 4, 1884.

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cases, Chief Justice Waite remarked: "It is not inferred that this power of limitation or regulation is itself without limit. This power to regulate is not a power to destroy, and limitation is not the equivalent of confiscation." In 1888, however, in Dow v. Beidelman, Justice Gray said: “The court has no means, if it would under any circumstances have the power, of determining that the rate of three cents a mile fixed by the legislature is unreasonable." Nevertheless, in 1889, in Chicago, Milwaukee & St. Paul Railway v. Minnesota," the court held that it is necessarily within the power of the courts to declare illegal and unreasonable a rate fixed by a legislature or commission. However, it was not until 1898, in the leading case of Smyth v. Ames, that it was clearly decided that a fair return on the fair value of the property used for the convenience of the public was the chief basis for the determination of the reasonableness and the constitutionality of a rate.

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§ 4. Valuation dependent on purpose.

A fundamental question is whether the identical valuation can serve for all of the four general purposes (see § 1) for which public valuations are made. Is valuation the same regardless of the purpose or is valuation meaningless unless used with reference to some specific purpose? Upon the answer to this question depends the use that can be made of precedents concerning the rules and elements of valuation as laid down by courts and commissions. As a matter of fact the courts and commissions in their opinions

116 U. S. 307, 331, 6 Sup. Ct. 334, 29 L. ed. 636, January 4, 1886. These cases, reported under the title of, and cited as "Railroad Commission Cases," are: Stone et al. v. Farmers' Loan & Trust Company, Stone et al. v. Illinois Central Railroad Company, Stone et al. v. New Orleans & Northeastern Railroad Company.

* 125 U. S. 680, 8 Sup. Ct. 1028, 31 L. ed. 841, April 16, 1888. 134 U. S. 418, 10 Sup. Ct. 462, 33 L. ed. 970, March 24, 1890. 6 169 U. S. 466, 18 Sup. Ct. 418, 42 L. ed. 819, March 7, 1898,