often recognize that valuation or specific elements of valuation may vary with the purpose. The best-considered decisions are undoubtedly those in which the problem of valuation has been worked out solely with reference to what was just and reasonable, with reference to the specific purpose for which the valuation was made. The result has sometimes been less fortunate when the reasoning has been influenced by the fact that because it was just and reasonable to adopt a particular rule in a valuation for a different purpose it was consequently proper to adopt the same rule for the purpose at hand.

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

This subject is treated in the 1911 report of the Valuation Committee of the National Association of Railway Commissioners: 7

Prior discussions of valuation both within and outside of this association have usually maintained that valuation should be the same regardless of the purpose for which the valuation is to be used. How, for example, can a State commission recognize four different kinds of value and make one valuation for municipal purchase, another for taxation, another for rate making, and another for capitalization? To do so seems at first thought inconsistent. On the other hand, a little consideration will show that value is meaningless unless made with reference to some particular object. To be sure, it may happen that fair value for one purpose is the same as fair value for another, but in order to determine what is fair value for any specific purpose, it is necessary to think it out with reference to this purpose only, and when we discuss the theory and elements of valuation, it seems necessary that we should have in mind a specific purpose that the valuation is to serve. It appears to us that considerable confusion in the discussion of the subject of val

7 National Association of Railway Commissioners, Proceedings of the 23d Annual Convention, October, 1911, p. 145.

uation has arisen either from lack of attention to this fact or from the false assumption that value may be ascertained without reference to purpose.

Some of the trouble doubtless arises from a confusion of the terms "cost" and "value." Cost is a definite amount regardless of purpose. The actual cost and the reproduction cost of any structure may be determined without reference to the purpose for which such estimates may later be used. This is what is often meant when it is said that valuation should be the same regardless of purpose. All that is really intended is that actual cost or reproduction cost should be the same. But cost is not necessarily value for any purpose, though it is an element in estimating fair value for almost any purpose. Thus fair value for rate purposes may be based largely on actual cost or on reproduction cost or on a composite of actual cost and reproduction cost. Considerations of equity may, as to certain elements of cost, lead to the acceptance of actual cost as the fairer basis, while as to other elements the cost of reproduction may be a better indication of present fair value for rate purposes. Take for example the question of promotion and other preliminary development costs. In a valuation for rate purposes, though cost of reproduction may be used as a general rule, it may seem more equitable to use actual cost of promotion; that is, the necessary cost of promoting the small initial plant, rather than the cost to-day of promoting a plant of the size of the present one, may be taken. Or, on the other hand, promotion cost may be entirely excluded from a valuation for rate purposes and considered only in fixing the fair rate of return.

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

George F. Swain, Engineer in Charge of Appraisal, in his report to the Massachusetts Joint Board on the validation of assets and liabilities of the New York, New Haven & Hartford Railroad Company, states that the

Published in Report of the Massachusetts Joint Commission on the New York, New Haven & Hartford Railroad Company, February 15, 1911, pp. 51-154.

physical valuation of a property may be undertaken for any one of a number of different purposes, and that the principle upon which such a valuation should be made will differ according to which purpose is in view. Mr. Swain says (at page 55):

1. Whether the physical valuation is a proper basis for taxation will depend upon the tax laws.

2. Physical valuation does not, in general, appear to be a fully adequate basis for justifying existing capital, for such capital generally depends upon the historical development of the property, and some or much of it may represent property which has been abandoned, or machinery which has been made useless, by necessary relocations, or by improvements in mechanical appliances.

3. Neither is a physical valuation a fair criterion for justifying or not justifying the further issue of securities. If actual improvements are needed upon a railway property in order to enable it to render proper service, or in order to effect operating economies, it would seem that new capital to meet those requirements should be authorized, independent of the existing capital. . . .

4. If the physical valuation is to be used for the purpose of aiding in fixing rates for service, earning power is not to be considered. Rates and earning power are interdependent, and one cannot be considered an element in fixing the other. . .

5. The physical valuation is not a scientific basis for an estimate of the public wealth, because that wealth depends upon the value of the property as a "going" concern, and this depends upon its earning capacity, not its physical valuation.

6. The treatment of depreciation, and of abandoned property in particular, should reasonably differ according to the purpose of the appraisal. . . .

If the object is to justify existing capital, or to serve as a basis for the issue of new securities, or to fix rates of service, it seems reasonably clear, however, that depreciation should not be allowed for.

§ 7. Value for taxation and for rate purposes.

As to the relation between valuation for taxation and valuation for rate purposes, the Valuation Committee of the National Association of Railroad Commissioners says: 9

There is no inherent inconsistency in using one method of valuation for tax purposes and another method for rate purposes. The tax, by whatever method assessed, is considered an operating expense in fixing rates, and is therefore borne by the user of the service wherever rates of charge are strictly regulated. Methods of ad valorem taxation must be worked out with an eye single to what is just and practicable in taxation, and methods of valuation for rate purposes must be worked out with an eye single to what is just and constitutional in rate making.

Substantially the same position is taken by the Railroad Commission of Indiana in a case entitled In the Matter of Local Merchandise Rates of the Express Companies in the State of Indiana, No. 495, January 31, 1912. In Indiana, express companies are taxed on the so-called unit rule on the entire value of their property as a going concern. In the above case the companies claimed that they were entitled to a fair return on the tax value of their property in the State of Indiana, but Commissioner Wood in delivering the opinion of the Commission states that tax value and fair value for rate purposes may be entirely different. He says:

With reference to taxation values in the State of Indiana, we hold that this is not the value upon which the carriers can claim a rate. We hold that they are entitled to earn and to pay to the State whatever assessment is made against them, no matter on what method the assessment may be made, and that the amount paid must be allowed to them just as the cost

'National Association of Railway Commissioners, Proceedings of the 23d Annual Convention, October, 1911, p. 148.

of operation is allowed to them, but on the other hand the taxation value is not the value upon which to base the rate, but the rate must be based upon the amount which they have invested, and not otherwise.

In Spring Valley Water Co. v. San Francisco, 165 Fed. 667, 696, decided Oct. 7, 1908, District Judge Farrington says:

The argument that the franchise ought to be worth something for rate-fixing purposes if it is worth millions for taxation is not without force. The value fixed by the assessors, however, is not admissible as evidence of value in condemnation proceedings. Lewis on Eminent Domain, § 448. And such evidence is of little worth here. If the aggregate value of the franchise and physical property as assessed did not exceed the total valuation for water rates, the company suffered no injustice.

In Willcox v. Consolidated Gas Company, 212 U. S. 19, 51, 29 Sup. Ct. 192, 53 L. ed. 382, decided Jan. 4, 1909, the United States Supreme Court rejected the company's claim that the tax value of special franchises should control their value for rate purposes, saying:

The fact that the State has taxed the company upon its franchises at a greater value than is awarded them here, is not material. Those taxes, even if founded upon an erroneous valuation, were properly treated by the company as part of its operating expenses, to be paid out of its earnings before the net amount could be arrived at applicable to dividends, and if such latter sums were not sufficient to permit the proper return on the property used by the company for the public, then the rate would be inadequate. The future assessment of the value of the franchises, it is presumed, will be much lessened if it is seen that the great profits upon which that value was based are largely reduced by legislative action. In that way the consumer will be benefited by paying a reduced sum (although indirectly) for taxes.