mined by the value of its bonds and stocks. Without citing the numerous cases decided by the courts, both state and national, approving this method of assessing railroad, telegraph, and other property of this nature, the following may be referred to: State Railroad Tax Cases, 92 U. S. 575, 23 L. ed. 663; Kentucky Railroad Tax Cases, 115 U. S. 321, 6 Sup. Ct. 57, 29 L. ed. 414; Western Union Telegraph Co. v. Massachusetts, 125 U. S. 530, 8 Sup. Ct. 961, 31 L. ed. 790; Pullman Co. v. Pennsylvania, 141 U. S. 18, 11 Sup. Ct. 876, 35 L. ed. 613; Columbus Southern Railway Co. v. Wright, 151 U. S. 470, 14 Sup. Ct. 396, 38 L. ed. 238; Pittsburgh, etc., R. R. Co. v. Backus, 154 U. S. 421, 14 Sup. Ct. 1114, 38 L. ed. 1031; Adams Express Co. v. Ohio, 166 U. S. 186, 17 Sup. Ct. 604 (41 L. ed. 965), where the court said:

"Whatever property is worth for the purpose of income and sale, it is worth for the purpose of taxation."

And this is the rule sanctioned by the Supreme Court of Arkansas. Wells-Fargo Express Co. v. Crawford County, 63 Ark. 576, 40 S. W. 710, 37 L. R. A. 371.

This is evidently the rule recognized and acted on by the railroad assessing board of the state of Arkansas, as shown by the evidence in this case. The main line of the Iron Mountain Railroad is practically a water-level road—no mountains to cross, no rocks to blast or tunnels to excavate, and the leading commercial cities and industries of the state along its line. On the other hand, the White River branch of that road was the most expensive road ever constructed in the state. Miles of it had to be cut out of rock, and tunnels cut through rocky mountains. There are no large cities along its line, and the country but sparsely settled. Owing to the heavy grades and the many curves, made necessary by the topography of the country, it cannot possibly carry as many cars to a train and transport freight as economically as the main line. The state officials, charged by law with the duty of assessing the property, must have taken these facts into consideration when they assessed these railroads. The White River branch, in spite of its great cost, was in 1907 valued by that board at $19,000 per mile, and assessed on the basis of 50 per cent. of its value at $9,500, while

the main line was valued at $45,000 per mile, and assessed at 50 per cent. of that sum, at $22,500 per mile.

For these reasons, the earning capacity of a railroad is the most important factor to be taken into consideration in determining its value. As shown above, it has been taken into consideration by the assessing officers of the state, and should be taken into consideration for the purpose of determining the apportionment of values in this case. If, by reason of the higher rates allowed by the state tariff, the net earnings of the property are increased, the value of the property is correspondingly increased, and the assessment for taxation made accordingly.

The foregoing, while apparently an argument for the general use of market value as a basis of valuation, is in the above connection made with reference only to the apportionment of values as between intrastate and interstate traffic. The statement is made in justification of a revenue basis rather than a ton mileage basis for the apportionment of property value between interstate and intrastate traffic.

CHAPTER IV

Cost of Reproduction as a Standard of Value for Rate

Purposes

§ 70. Arguments advanced.

71. Fluctuations in railroad costs-Minnesota rate decisions.

72. Trend of recent decisions.

73. Identical reproduction of existing plant.

74. Identical reproduction-Wm. H. Bryan on waterworks appraisals. 75. Equally efficient substitute plant.

76. Substitute plant-Maine water plant condemnations, 1902-1904. 77. Substitute plant-Columbus, Ohio, Electricity Rate Case, 1906.

78. Substitute plant-Spring Valley Water Case, 1908.

79. Substitute plant-Discussion by J. E. Willoughby.

80. Substitute plant-Discussion by C. L. Corey.

81. Cost under present or original conditions.

82. Present or original conditions-Discussion before American Society of Civil Engineers, 1911.

83. Present or original conditions-St. Louis Public Service Commission, 1911.

84. Present or original conditions-Conclusion.

§ 70. Arguments advanced.

Strong arguments have been advanced for the use of cost of reproduction as the standard of value for rate purposes. It is asserted that what the public is entitled to is service at a rate of charge sufficient only to pay a fair return on the investment that would be required at present to furnish this service; and conversely what the company is entitled to receive is a fair return on the capital investment that it or another company would have to expend at present in order to provide the service. A rate of charge measured on this basis corresponds to the present economic cost of the service. Economically considered, the present capital investment is the cost at

present prices of land, labor and materials of the existing property devoted to the service of the public, less an allowance for existing depreciated condition, i. e., the costof-reproduction-less-depreciation. But there are great fluctuations in the price of land, labor and materials as well as changes in the physical, political and financial conditions under which public utility enterprises are organized and constructed. If present cost of duplication is made the basis of rate regulation all of these changes and fluctuations affecting present cost result in an unearned or unmerited gain or loss either to the consumer or to the investor. For a further discussion of this problem see below, §§ 100-101.

§ 71. Fluctuations in railroad costs-Minnesota rate decisions. Two railroad rate cases in Minnesota, one in 1897 and the other in 1911, serve to point out the fluctuation in railroad costs. In both cases the court has nevertheless used present reproduction cost rather than actual cost as the standard of value. In 1897 the general price level was low while in 1911 it was high and, moreover, the growth and prosperity of the state had greatly increased land values.

The case of Steenerson v. Great Northern Railway Company, 69 Minn. 353, 72 N. W. 713, decided October 20, 1897, Supreme Court of Minnesota, involves the valuation of a railroad for rate purposes upon a reduction of rates by the Minnesota Railroad and Warehouse Commission. Judge Canty, in delivering the opinion of the court which reversed an order of the lower court unfavorable to the Commission's determination and ordered a new trial before the lower court, says (at page 715):

Again, the railroad may have been constructed years ago, when iron rails cost $85 per ton, and everything else in proportion, or it may have been constructed yesterday, when

steel rails cost but $16 per ton, and everything else nearly in proportion. Counsel for the railway company dwell much upon the original cost of the older portions of these lines of road. If a railroad was built 30 years ago at a cost of $40,000 per mile, and another one equally as good was built within a year through the same territory at a cost of $12,000 per mile, on what principle should it be held that the old road is entitled to 3 times as much income as the new road? No guaranty was ever given by the state to the old road that the price of materials and the cost of construction would not decline, or that capital invested in railroads should not be subject to like vicissitudes as capital invested in other enterprises. Modern improvements and other causes have continued to reduce the cost of construction of all kinds of new plants, and to reduce the value of old plants, or render them wholly worthless, and the state did not guaranty that those causes should not in like manner affect the capital invested in railroads. Then the material question is not what the railroad cost originally,. but what it would now cost to reproduce it. .. Then the burden is on the railroad company to show that the rates fixed by the Commission are unreasonable, and for this purpose the original cost of the road, the amount of its present fixed charges, and its history, are material only so far as they show what it would now cost to reproduce the railroad.

Though in this case the Supreme Court of Minnesota took strong ground in favor of cost of reproduction as a basis of fair value for rate purposes, it adopted a rule as to rate of return to be allowed on terminal lands that to a large extent serves to offset the benefit that would otherwise accrue to a railroad or other public utility from increase in land values. The court also states that it has not been necessary to consider for the purposes of this case the important fact that the railroad had received a valuable land grant from the state.

1

In 1911 the valuation of Minnesota railroads for rate

1

Quoted below, § 120.