tive principles of capitalization would keep capitalization close to the actual cost. The valuation committee of the National Association of Railway Commissioners expresses this situation as follows: 17 The books of a company kept from the start in accordance with a correct accounting system would show a capital account that would be closer to what seems a just fair value for rate purposes than any other single basis. But owing, perhaps, to lack of accounts kept as above, the court decisions have given greater weight to cost of reproduction or cost of reproduction less depreciation than to actual cost in determining fair value for rate purposes. Capitalization, or the amount of stock and bonds issued (which may be a very different amount from the book assets), might also if issued under strict supervision from the start be a most important element in fixing fair value for rate purposes. If the bonds, however, were issued either at a premium or at a discount this fact would have to be taken into account. Whether bonds are issued at a premium or a discount, it is the actual amount in money received therefrom that is of importance in fixing value for rate purposes. The same may be said of stock issued at a premium. However, the fundamental distinction for present purposes between accounting and capitalization and valuation for rate purposes and for public purchase is that the rules as to accounting and capitalization are subject entirely to the control of the various commissions and legislatures. They involve no constitutional rights. The basis of valuation for rate purposes and public purchase on the other hand will necessarily be fixed by the Supreme Court of the United States. 17 Report of committee on railroad taxes and plans for ascertaining the fair value of railroad property submitted to the twenty-third annual convention of the National Association of Railway Commissioners, October, 1911, p. 148 CHAPTER II Fair Value for Rate Purposes § 20. Earlier decisions. 21. Justice Brewer in Union Pacific Railway Cases, 1894-No hard and fast rule of valuation. 22. Circuit Judge Ross in San Diego Land and Town Case, 1896Present value, not cost, the true basis. 23. Circuit Judge Thayer in Kansas City Stock-Yards Case, 1897-Cost plus appreciation in value. 24. Justice Harlan in Smyth v. Ames, 1898-Fair value of property used and how ascertained. 25. Justice Harlan in San Diego Land and Town Case, 1899-Reasonable value at time used. 26. Justice Holmes in San Diego Land and Town Case, 1903-Reasonable value at time used. 27. Circuit Judge Morrow in Spring Valley Water Case, 1903-Reasonable value at time used. 28. Justice Peckham in San Joaquin Irrigation Case, 1904-Present value. 29. Columbus, Ohio, Electricity Rate Case, 1906-Fair present value of tangible and intangible property. 30. Justice Peckham in Consolidated Gas Case, 1909-Fair value generally includes appreciation. 31. Iowa Supreme Court in Cedar Rapids Gas Case, 1909-Reproduction-cost-less-depreciation the controlling factor. 32. Oklahoma Supreme Court in Pioneer Telephone Case, 1911-Reproduction-cost-less-depreciation the controlling factor. 33. District Judge Evans in Cumberland Telephone Company Case, 1911-Fair value not determined by construction cost. 34. Wisconsin Railroad Commission in Manitowoc Water Case, 1911Elements of physical valuation. 35. District Judge Farrington in Spring Valley Water Rate Case, 1911Elements of fair value reviewed. 36. Trend of decisions on fair value. 37. No authoritative determination of standard of value. 38. Recent decisions. 39. Valuation standards. § 20. Earlier decisions. The discussion of fair value for rate purposes is of recent origin. As we have seen above (§3), the courts have but recently held that a rate established under the authority of a state could be annulled on the ground that it failed to afford the company a fair return on the fair value of its property. Consequently the elements of fair value have only recently been discussed. In the earlier of these opinions the discussions are vague and do not attempt to actually fix a fair value for the purposes of the case in hand. Detailed information for this purpose was for the most part lacking, and the discussion of the court was largely in the nature of dicta. It is only in a few of the most recent cases that the court has had the complete data essential to more definite conclusions. In the following pages the court decisions are quoted with a view to showing in the courts' own words the development of this concept. § 21. Justice Brewer in Union Pacific Railway Cases, 1894 -No hard and fast rule of valuation. In Ames v. Union Pacific Railway Company, 64 Fed. 165, decided in the United States Circuit Court on November 12, 1894,1 actions were brought by the complainants, stockholders in the railroad corporations named as defendants, to restrain by injunction the officials of the State of Nebraska from enforcing certain acts of the Nebraska legislature prescribing maximum rates on intrastate railroad freight. The injunction was granted. Justice Brewer says (at page 177): What is the test by which the reasonableness of rates is determined? This is not yet fully settled. Indeed, it is doubtful whether any single rule can be laid down, applicable to all cases. If it be said that the rates must be such as to secure to the owners a reasonable per cent. on the money invested, it 1 The decision covered also the cases of Smith et al. v. Chicago & N. W. R. Co. et al., Higgonson et al. v. Chicago, B. & Q. R. Co. et al. will be remembered that many things have happened to make the investment far in excess of the actual value of the property,injudicious contracts, poor engineering, unusually high cost of material, rascality on the part of those engaged in the construction or management of the property. These and many other things, as is well known, are factors which have largely entered into the investments with which many railroad properties stand charged. Now, if the public was seeking to take title to the railroad by condemnation, the present value of the property, and not the cost, is that which would have to pay. In like manner, it may be argued that, when the legislature assumes the right to reduce, the rates so reduced cannot be adjudged unreasonable if, under them, there is earned by the railroad company a fair interest on the actual value of the property. It is not easy to always determine the value of railroad property, and if there is no other testimony in respect thereto than the amount of stock and bonds outstanding, or the construction account, it may be fairly assumed that one or other of these represents it, and computation as to the compensatory quality of rates may be based upon such amounts. In the cases before us, however, there is abundant testimony that the cost of reproducing these roads is less than the amount of the stock and bond account, or the cost of construction, and that the present value of the property is not accurately represented by either the stocks and bonds, or the original construction account. Nevertheless, the amount of money that has gone into the railroad property-the actual investment, as expressed, theoretically, at least, by the amount of stocks and bonds-is not to be ignored, even though such sum is far in excess of the present value. It was said in the case of Reagan v. Farmers' Loan & Trust Co., 154 U. S. 362, 412, 38 L. ed. 1014, 14 Sup. Ct. 1047, 1059, decided May 26, 1894: It is unnecessary to decide, and we do not wish to be understood as laying down an absolute rule, that in every case a failure to produce some profit to those who have invested their money in the building of a road is conclusive that the tariff is unjust and unreasonable. And yet justice demands that every one should receive some compensation for the use of his money or property, if it be possible, without prejudice to the rights of others. It is not always reasonable to cast the entire burden of the depreciation on those who have invested their money in railroads. Take the Union Pacific Railway, for illustration. At the time the government created the corporation, to induce the building of this transcontinental road through a largely unoccupied territory, it loaned to the company $16,000 a mile; taking as security therefor a second lien on the property, and granting to the corporation the right to create a prior lien to an equal amount, which was done. There is testimony tending to show that the road in Nebraska could be built to-day for $20,000 a mile. Would it be full justice to the government, would it satisfy the common sense of right and wrong, would it be reasonable, for the state of Nebraska to so reduce the rates that the earnings of the road would only pay ordinary interest on $20,000 a mile, and so, the holders of the first lien being paid their interest, the government be forced to be content with only interest on one-fourth of its investment? Or, to put the case in a little stronger light, suppose the promoter of this enterprise had been some private citizen, who had advanced his $16,000 a mile as a second lien, and that the road could be constructed to-day for only $16,000 a mile. Would it be reasonable and just to so reduce rates as to simply pay to the holders of the first lien reasonable interest, and leave him without any recompense for his investment? Is there not an element of equity which puts the reduction of rates in a different attitude from the absolute taking of the property by virtue of eminent domain? In the latter case, while only the value is paid, yet that value is actually paid, and the owners may reinvest, and take the chances of gain elsewhere, whereas, if the property is not taken, the owners have no other recourse than to receive the sum which the property they must continue to own will earn under the reduced rates. Considerations such as these compel me to say that I think there is no hard and fast test which can be laid down to determine in all cases whether the rates prescribed by the legislature are just and reasonable, and that often many factors enter into the determination of the problem. |