was to determine as a guide average physical lives pertaining to the country as a whole and not necessarily applicable to any geographical area or any individual company and to consider and determine prices to be used, the classification of units of property, and the manner in which the prices would be determined to be used as a guide in determining the value of the respective carriers by pipeline.

Page 4 of valuation order No. 27 provides that carriers by pipeline shall insert in their field notes covering inventory of their properties "total estimated service life." This means "total estimated physical life" and has been defined as follows:

"Physical life is defined as the period in years between the time of installation and the time of retirement due solely to physical deterioration, wear, tear, rot, rust, decay, and the action of the elements. In determining physical life allowance is made for observed obsolescence, which can be seen by the eye in a field inspection. No allowance is made for the functional factors of depreciation which limit the service life, such as unobserved obsolescence, inadequacy, depletion, decline and exhaustion of the traffic which the property was designed to transport."

The definition set forth above was agreed to at the conference.

In the discussion of the procedure to be followed by the Bureau of Valuation in determining the value of property of carriers by pipeline the following pertinent information was developed :

Prior to the issuance of what is termed a "Preliminary engineering, accounting, and land report" by the Director of the Bureau of Valuation of the Interstate Commerce Commission, individual conferences between representatives of carriers by pipeline and the Bureau of Valuation of the Interstate Commerce Commission will be held in Washington at the request of the Director of the Bureau of Valuation for the purpose of determining pertinent facts relating to each individual carrier as to the depreciation and prices to be used by the Bureau in determining the reproduction cost new and reproduction cost new, less depreciation. At the conference the carrier will be afforded an opportunity to acquaint the Bureau with its experience or facts that the carrier desires for the Bureau of Valuation to consider in determining the value of its properties based on reproduction cost new and reproduction cost new, less depreciation.

When preliminary conference with each of the carriers has been completed and the preliminary engineering, accounting, and land report as referred to above has been completed, it will be released to the carrier by the Director of the Bureau of Valuation and the carrier will be granted 30 days in which to file its objections to the findings contained in said report (which objections must be specifically stated). If the carrier cannot complete its analysis of the report and file its objections within the 30-day period, upon written request from the individual carrier, addressed to the Director of the Bureau of Valuation of the Interstate Commerce Commission, additional extension for a reasonable period in which to file its objections will be granted the carrier. After the carrier has filed its objections the matter will be set for conference and representatives of the carrier will be requested to come to Washington and to discuss and by facts support or justify its objections. Any revisions or changes agreed upon at said conference will be incorporated in a revised preliminary engineering, accounting, and land report. The revised sheets will supersede the sheets contained in the first preliminary engineering, accounting, and land report and the revised preliminary engineering, accounting, and land report will be considered in determining the tentative valuation of the carriers' property by the Interstate Commerce Commission. When the carriers have been notified as to the tentative valuation of their properties, they will be granted 30 days in which to file a formal protest to the Commission's findings. If a formal protest is filed the case will be set for a formal hearing before an examiner of the Interstate Commerce Commission and the carrier will be given an opportunity to introduce such evidence as may be relevant or pertinent and the Bureau of Valuation will be afforded an opportunity of rebutting the evidence introduced by the carrier. The carrier, if it so desires, may request an oral argument, either before the Commission as a whole or a section or division of the Commission.

When the individual carriers are informed as to setting of conference or hearing as referred to above relating to their individual companies it is desired that they notify the chairman of the engineers-accountants valuation committee and at that time inform the chairman as to whether they desire any representation at the conference of members of the engineers-accountants valuation committee or the steering committee.

In connection with the above the following is quoted from section 19-A of the Interstate Commerce Act:

(h) Whenever the Commission shall have completed the tentative valuation of the property of any common carrier, as herein directed, and before such valuation shall become final, the Commission shall give notice by registered letter to the said carrier, the Attorney General of the United States, the Governor of any State in which the property so valued is located, and to such additional parties as the Commission may prescribe, stating the valuation placed upon the several classes of property of said carrier, and shall allow 30 days in which to file a protest of the same with the Commission. If no protest is filed within 30 days, said valuation shall become final as of the date thereof.

(i) If notice of protest is filed the Commission shall fix a time for hearing the same, and shall proceed as promptly as may be to hear and consider any matter relative and material thereto which may be presented in support of any such protest so filed as aforesaid. If after hearing any protest of such tentative valuation under the provisions of this act the Commission shall be of the opinion that its valuation should not become final, it shall make such changes as may be necessary, and shall issue an order making such corrected tentative valuation final as of the date thereof. All final valuations by the Commission and the classification thereof shall be published and shall be prima facie evidence of the value of the property in all proceedings under the act to regulate commerce as of the date of the fixing thereof, and in all judicial proceedings for the enforcement of the act approved February 4, 1887, commonly known as the act to regulate commerce, and the various acts amendatory thereof, and in all judicial proceedings brought to enjoin, set aside, annul, or suspend, in whole or in part, any order of the Interstate Commerce Commission."

The pricing period will cover the years of 1929 to 1934, inclusive. The prices to be used will not be determined by an average or weighted average but from consideration of the trend of the past, present, and future prices.

The special committee representing the Bureau of Valuation initiated a discussion of depreciation and depletion requesting the views of our conference committee on the subjects without an expression as to their views on the subjects. They were informed that we were not at this time in position to discuss or agree on these subjects. Furthermore, there were so many variable factors entering into these subjects that it would have to be worked out with the individual companies; however, it was possible that at some later conference we may be in position to express some opinion on these subjects.

As to physical lives of pipeline properties to be inserted in the field notes under requirements contained in Valuation Order No. 27, we were informed that any agreement between the company's representative and the field representative of the Bureau of Valuation would not be questioned by the Bureau at Washington and would be considered final unless the representative of the Bureau of Valuation filed with the notes as applicable to any valuation section his exception as to the physical lives inserted in the notes by the carrier.

It appears advisable that if a carrier proposes to insert in its field notes physical lives of its properties it endeavor to work the matter out as to physical lives with the representative of the Bureau of Valuation in the field in preference to endeavoring to handle the matter direct with the Bureau of Valuation at Washington.

The conference then proceeded to endeavor to agree on average physical lives for the country as a whole, with the understanding that they would not apply to any individual company and as a result of the experience of the different carriers there may be a wide spread as to physical lives between individual companies. The schedule of physical lives for certain classes of pipeline property agreed to at the conference is attached hereto, marked for identification exhibit A.

It is obvious that there must be some relation between the physical lives as shown in the field notes and physical lives as considered with other factors in determining the depreciation rates under Order 19200.

Although physical lives will be shown in the field notes, other factors will be considered in determining the percent of reproduction cost new in the computations on B. V. Forms 562 and 563 attached hereto, marked for identification exhibits B and C.

We were informed that the Bureau of Valuation in determining the reproduction cost new would do so under the theory that the company's entire property would be reproduced as of December 31, 1934, For example, if the carrier's

system contains 4,000 miles of various sizes of line pipe, they will assume the purchasing of the entire 4,000 miles at one time and the price of the material or equipment will be based on the f. o. b. factory price, less maximum discounts, plus the freight charges to destination, as the unit price of the material. The cost of unloading at destination and handling to location will be included under construction cost.

Considerable discussion was entered into as to the prior definition of secondhand equipment, but as no agreement could be reached the question was withdrawn with the understanding that it could be resubmitted and considered at a subsequent conference.

The Bureau of Valuation was requested to define and include in the minutes of conference held on December 7, 1935, their definition of the first and second cycle as it relates to physical and/or service life.

Director Lewis raised the question as to what reports the carriers had compiled or filed with the Bureau of Valuation to support the conclusions as to physical life of pipeline property as referred to in memorandum of April 5, 1935, entitled "Physical Deterioration of Pipe Lines Buried Underground" filed with the Bureau of Valuation of the Interstate Commerce Commission in opposition to the Commission's proposal of bell hole inspection by carriers by pipeline; however, the question was passed without discussion.

Considerable discusison was had as to the basic price data to be used in establishing reproduction cost new and it was suggested that at our next conference, where we would endeavor to deal with facts, for expediency and to the mutual interest of both the Government and the carriers it would be advisable to divide the conference committee into groups, assigning to each group classes of property for which prices are to be determined, and at the conclusion of the group meetings we would convene in a general meeting to review and to accept or reject the conclusions or agreement reached by the various groups as to price data.

In the discussion as to pipeline-construction cost it is the idea of the Bureau's engineers to develop unit prices similar to the classification of detail cost as shown on forms B. V. 630. The price schedule shall be established by as many zones as may be feasible so that variables between companies will be reduced to the minimum. Separate schedules of construction-cost prices applicable to the individual companies would be developed but using the base schedule as a guide. The construction cost as developed would be based on normal conditions. In determining normal conditions consideration will be given to the weather, roads, etc. In determining units of property the Bureau of Valuation stated that they would be disposed to follow the carriers' basis as far as practical to do so. This is most important because the order which the Commission will subsequently issue requiring reports to be filed for the purpose of perpetuating the inventory to date must be in accordance with units of property as established by the Bureau of Valuation as of December 31, 1934. If the order defines units that do not agree with units as defined in the Uniform Classification of Accounts, it will require unnecessary work to compile the report.

The Bureau of Valuation agreed to prepare what they termed a "fictitious engineering report" (forms BV 562 and 563), using a specific carrier, but identifying it as "ABC company," showing the manner in which the report will be prepared and units of property. The fictitious report will be released to our conference committee on or about February 1, 1936, with the understanding that we will have the privilege of releasing copy of same to all carriers for their criticism or suggestions, which should be conveyed to our conference committee for study and consideration prior to the date we will be required to confer with the Bureau of Valuation, with a view of agreeing as to units of property and form of report. As to pricing of buildings, we were informed that each building would be considered individually and that the Bureau would determine the unit price on a cubic-foot basis and compute the value based on the cubic contents of the building. Foundations would be handled separately and on the basis of cubic yards of concrete in place. The Bureau will develop cost data having to do with buildings of various classes of construction.

Our conference committee was requested by the Bureau to develop or secure a list of average annual unit prices on fittings for a 7-year period, that is, from 1929 to 1935, both inclusive. Request will be made of the Bureau of Valuation to determine the class of fittings on which prices are required, and when the information is received a meeting of the conference committee will be held, for the purpose of assigning to various members of the committee, class of fittings

on which they will be asked to develop competitive prices so as to avoid duplication of effort or placing the entire burden on one or two members of the committee. There was some discussion on tanks, and it was generally agreed that the cost would be based on a tank erected as a unit. For example, a 55,000-barrel capacity tank as so described in the field notes will be priced at the location erected.

Under the subject of machinery, it was suggested that, rather than going to a great deal of trouble to obtain unit prices on the various classes of equipment, the Bureau already had a large volume of information on all but a few of the major items, such as diesel engines, that are peculiar to the pipeline industry, and it may be possible that price trend so established could be used in the pipeline valuation.

The importance of a conference committee agreeing on the unit prices of reproduction cost was stressed at some length by a member of the Engineering Section of the Bureau of Valuation, and he pointed out the advantages obtained by a similar committee in railroad valuation and that considerable saving would have resulted to the railroads and the Government if such a committee had been formed at the beginning of the railroad-valuation work. It was explained that while at the beginning it seemed almost a hopeless task to come to some agreement on prices due to the fact that there was so wide a range in unit prices, they found that such effort was worthwhile and they did come to an agreement with the railroad carriers. In railroad valuation they prepared a price-period curve of prices, based on prewar dollar, covering the years of 1910-14. In determining said prices, they secured quotations from the manufacturers where necessary and they had a vast amount of cost data from the individual carriers that could be used in determining the pricing period. They classified the various classes of machinery and had about six different classes, and they weighted these to the extent that they were used by the railroad carriers. Some of the classes represented only 1 or 2 percent of the total investment, but they used them according to the amount represented in the railroads' investment and from that determined a sort of general-average-price periods which they plotted from year to year. The Bureau is under the impression that there is a considerable amount of pipeline carriers' equipment similar to railroad carriers' equipment and perhaps the price relationship could be established based somewhat on the information that they have compiled in railroad valuation. The following is an example as to the procedure followed:

"Lathe purchased in the period of 1910 to 1914 during the prewar pricing period cost $1,000 with total service life of 30 years, having only 6 years remaining service life. From the machinery index curve they found the price of this lathe to be $1,800 (assuming the index was 180 percent), with 20 percent remaining life, which would give them a reconstruction estimate of $1,800, salvage value $100, leaving a total service value of $1,700, which, multiplied by 20 percent, would determine a service value of $340, and adding $20 (representing 20 percent of estimated salvage value) would give a remaining service value of $360."

It was brought out that in review of the B. V. forms filed with the Commission there is a wide variation in the installation and foundation costs as reported. The functions of the Conference Committee will be to endeavor to agree as to the basis to be used in determining salvage or scrap value.

Mr. Robert A. Lacey, Head Auditor Property Changes, of the Interstate Commerce Commission, stated that his section was not in position to confer with our committee, at this time, as to the form of questionnaire to be used in the establishment of working capital but will desire to do so at some future date and he is inclined to believe that the proposed form of questionnaire which our committee submitted as a substitute for the form of report the Bureau of Valuation originally proposed can be further simplified and would still develop the amount of working capital which the carriers would be entitled to.

During the conference minutes were recorded by a member of the Engineering Section acting as secretary for the conference and copy of same is attached hereto and marked for identification exhibit D and should be considered as part of the minutes of the Conference Committee.

CONCLUSIONS

1. It appears advisable for the carriers to summarize the quantities, by classes and kinds of property, in each valuation section or subsection for the following

reasons:

(a) For quick verification as to quantities which will be shown in the Preliminary Engineering, Accounting, and Land Report as applicable to each valuation section.

(b) For verification against original cost records for the purpose of determining omissions from field notes.

2. In inserting physical lives in field notes that the definition of physical life as agreed to at the conference and referred to above should be inserted in the field notes as evidence that the lives as shown are physical and not service lives.

3. The period prices or price data which members of the Conference Committee will establish and agree upon in conference with the Bureau will be circularized to all carriers as such basic data will be required by the carriers if the prices used by the Bureau in the tentative valuation are contested.

4. The Bureau of Valuation stated the reason for making this valuation is to determine the true value of the carriers' properties for (tariff) rate purposes. 5. That we insist that the Bureau of Valuation define units of property in accordance with the Uniform Classification of Accounts prescribed by the Interstate Commerce Commission, effective January 1, 1935.

At the adjournment of the conference with the Bureau of Valuation of the Interstate Commerce Commission it was agreed that another conference with the Bureau on the same subjects would be held on dates to be agreed upon later, but not before February 15, 1936.

The meeting adjourned at 5 p. m., on December 7, 1935, subject to call of the chairman. R. B. MCLAUGHLIN, Chairman.

NEW YORK, N. Y., December 9, 1935.

EXHIBIT A

PHYSICAL LIFE TABLE OF PIPELINE PROPERTY

Physical life is defined as the period in years between the time of installation and the time of retirement due solely to physical deterioration, wear, tear, rot, rust, decay, and the action of the elements. In determining physical life allowance is made for observed obsolescence, which can be seen by the eye in a field inspection. No allowance is made for the functional factors of depreciation which limit the service life, such as unobserved obsolescence, inadequacy, depletion, decline and exhaustion of the traffic which the property was designed to transport.