CHAPTER XVI Adaptation and Solidification § 370. Definition-Minnesota railroad appraisal, 1908. 371. Washington railroad appraisal, 1908, and subsequent rate valua tions. 372. Texas, Michigan and Wisconsin railroad appraisals. 373. South Dakota railroad appraisal, 1910. 374. Appraisal of N. Y., N. H. & H. R. R., 1911. 375. Texas Railroad Rate Cases, 1892-1898. 376. Oklahoma Railroad Rate Case, 1910-Physical and commercial adaptation. 377. Minnesota Railroad Rate Case, 1911. 378. New York Railroad Tax Case, 1911-Seasoning disallowed. 379. Irrigation Rate Case, 1911-Claim for solidification of earthwork rejected. 380. Adaptation of street railway-New York Public Service Commission, First District, 1912. 381. Alabama Railroad Rate Cases, 1912. 382. Summary. § 370. Definition-Minnesota railroad appraisal, 1908. In December, 1908, the Minnesota Railroad and Warehouse Commission completed a valuation of the railroads of the State. The appraisal was intended for use in rate matters and was made under the direction of Dwight C. Morgan, engineer. Like the other general state railroad appraisals it is an estimate of cost of reproduction and of existing depreciation. Mr. Morgan allowed an item of $11,743,007 to cover the cost of adaptation and solidification of roadbed. This is about 20% of the estimated reproduction cost of the grading. He defines these terms as follows: "Adaptation in its application to the problem of reproduction cost is the adjustment of the physical 1 See Annual Report Minnesota Railroad and Warehouse Commission, 1908, p. 40. line to its environments and purposes. Solidification of roadbed is its settlement to a stable condition. The terms are closely related to each other, yet neither in itself gives adequate expression to, or clearly defines, the meaning and scope of the application." Mr. Morgan states that a railroad is seldom if ever completed at the time that actual operation is undertaken. "The newly made excavations wash and slip, the ditches fill from the action of the elements, the embankments settle and the track superstructure is in almost constant need of attention; resurfacing, lining and dressing of ballasted and unballasted track is necessary, waterways become clogged up, bridges settle or go out of line, station grounds are to be improved and finished, scattered and unused material must be picked up and stored, in fact, all the loose ends which are the immediate sequence of construction must be gathered in and the property brought to an orderly condition." The Minnesota Railroad and Warehouse Commission to which Mr. Morgan's report was submitted, refused to allow the inclusion of the item to cover adaptation and solidification of roadbed, on the theory that this item of cost was paid for from operating expenses and was not a proper item in the reproduction cost of constructed lines. § 371. Washington railroad appraisal, 1908, and subsequent rate valuations. In the Washington Railroad appraisal, 1908, the Commission made an allowance for "seasoning" of roadbed similar to that covered in the Minnesota appraisal under the term "adaptation and solidification of roadbed." In valuing the Great Northern Railway Company, the Commission stated that an allowance of 10% on the cost of grading and surfacing should be made for seasoning. The following is from the findings of the Commission: "That after a railroad is originally constructed and after the same is turned over to the operating department, improvements are constantly made in the grading and surfacing of the road by section men and by the operating department of the road, the expenditures of which are necessarily charged to the cost of operation and that for approximately five years after such road is turned over to the operating department, the grade undergoes what is known as seasoning, and after said term of five years said grade has appreciated in value and is approximately of a value 10 per cent. greater than its value would be at the time the same was turned over to the operating department. This seasoned value has, however, been considered and allowed in the unit quantities hereinbefore given and in the cost of reproduction hereinbefore set out." 2 In valuing an interurban electric railway the Washington Commission in a later decision also allowed 10% for seasoning of roadbed. (See Paulhamus v. Puget Sound Electric Railway, February 26, 1910, Finding No. 6.) The same rule has since been applied in a number of valuations made by H. L. Gray, the chief engineer of the Commission. § 372. Texas, Michigan and Wisconsin railroad appraisals. No specific allowance was made for "adaptation," "solidification" or "seasoning" in the state railroad appraisals of Texas, Michigan or Wisconsin. The Texas appraisals have been primarily for capitalization purposes, while those of Michigan and Wisconsin have been for tax purposes. Mr. Thompson, then engineer to the Texas Railroad Commission, in a paper before the American Society of Civil Engineers, says: 2 See Second and Third annual reports of the Washington Railroad Commission, 1907-1908, pp. 127, 288. Method used by the Railroad Commission of Texas under the stock The writer, certainly, is not one to contend that "seasoning" of the roadbed of a railroad does not in a sense add to its physical value. It is valuable in many ways, viz., the maintenance charges per mile are less, the danger of accidents is decreased, the wear and tear on rolling stock is less, etc. But the question to be decided by the Commission, when establishing its methods of valuation, was whether or not such value was mortgageable, and, if so, how could its value be ascertained. The expense of "seasoning" is properly charged, through roadbed account, to maintenance, and does not appear in the "permanent improvement" or "capital" accounts. It involves no additional outlay of capital by the owners of the road, in the sense that other permanent improvements do, and hence is not value that should be mortgaged; that is, interest charges should not be permitted to be collected thereon. In accordance with the decisions of the Federal Courts, the Commission must permit sufficient rates on freight to enable the railroads to earn, in addition to operating and maintenance expenses, a fair rate of interest on the value of the property. Had it recognized that "seasoning of roadbed" was an item which must be valued in determining the amount of stock and bonds which a railroad could issue, it would have been in the position of imposing a double charge on the public on account of such value, viz., the original cost of such "seasoning" and an annual interest on such cost. Henry Earle Riggs, an engineer connected with the Michigan railroad appraisal, states in his paper on Valuation before the American Society of Civil Engineers, that in the Michigan appraisal, while no special allowance was made, nevertheless the cost of adaptation and solidification was considered. He intimates at page 1419, that a portion of such cost was taken care of in the contingency allowance of 10%. He also says (at page 1515): 1 4 and bond law in valuing railroad properties, by R. A. Thompson, in Transactions American Society of Civil Engineers, vol. 52, pp. 328, 362 (1904). 'Proceedings American Society of Civil Engineers, November, 1910. There can be no reasonable objection to adding to the contract prices for grading, ballasting, etc., a reasonable amount to cover, not so much the seasoning and settling of the new roadbed, as the actual money disbursed in work on this new roadbed during the first three or four years of operation in order to bring it up to the proper operating condition. A very considerable part of the money spent on "maintenance of track" for the first few years after a new line is built is in reality deferred construction cost. § 373. South Dakota railroad appraisal, 1910. Carl C. Witt, Engineer to the Board of Railroad Commissioners of the State of South Dakota, in his Report of the appraisal of the railroad properties in the state, dated October 1, 1910, discusses this question as follows (Annual Report South Dakota Railroad Commission, 1910, page 31): Nothing is allowed for the item known as "adaptation and solidification of roadbed" except as reflected in the condition of the roadbed and ballast at the time of making the inspection. This item has been given considerable prominence recently in values placed by railway companies and others engaged in making railway appraisals and is added because of the work done in repairing the damage to track in line and surface due to settlement of embankments, the cost of clearing out ditches and cuts, etc., etc. While there is no question that such expense is necessary, it is an item properly chargeable to maintenance and is so charged by the operating railway companies and paid for out of the revenues the same as renewing worn out ties, and should not constitute an item of physical valuation. The fact that this work is necessary proves that there has been depreciation in the physical condition of the track, due to the action of the elements and the pounding of the trains, and this depreciation has to be met until the embankment becomes solid. The very most that could be allowed would be that the roadbed is maintained at one hundred per cent. |