the experience or ability of employees. Further, in view of the conditions which brought about the appointment of receivers and the present status of the Metropolitan system, it is not possible to conclude that the system is being operated in such a way as to warrant an appraisal of values upon this score. In this case the allowance for adaptation was considered. in connection with claims for going concern value and expense of promotion and preliminary organization. The Commission concludes as follows (at page 173): After considering all the opinions and peculiar facts relating to this system it is the opinion of the Commission that a sum of from $5,000,000 to $7,000,000 for development expenses in addition to the amounts already allowed. . . . is ample to cover promotion expenses, preliminary legal fees and technical services, adjustment of plant and all other elements which should be included. §381. Alabama Railroad Rate Cases, 1912. Special Master W. S. Thorington in his reports in the Alabama Rate Cases makes an allowance for solidification and seasoning of roadbed. He fixes the appreciation due to this cause at 10% of the cost of the grading in the case of the Central of Georgia Railway Company and at 25% of such cost in the case of the Western of Alabama Railway Company. In the latter case he says (at page 85):7 Mr. Bonnyman is shown by the testimony to be Chief Engineer and General Manager of the Atlanta, Birmingham & 7 Western of Alabama Railway Company v. Railroad Commission of Alabama, United States District Court, Middle District of Alabama, Northern Division, Report of Special Master W. S. Thorington, April 3, 1912; Central of Georgia Railway Company v. Railroad Commission of Alabama, United States District Court, Middle District of Alabama, Northern Division, Report of Special Master W. S. Thorington, Janu ary 8, 1912. Atlantic Railroad. . It is fairly deducible from the testimony of this witness that when a railroad is built and said to be finished, the work of putting it into shape and operation is but just commenced; a process of settling goes on through many years; that it requires a number of years for the roadbed to become settled and for nature to sod and protect it; that a 14 or 16 foot roadbed may be built, yet, before it is operated a year many of the embankments will work back almost to the ties; they are weathered off, and worked off, and must be continually renewed. This process continues on the sides of embankments, and, in the settling process which is continually going on, it is necessary to keep renewing the roadbed. It is also shown in his testimony that the Atlanta, Birmingham & Atlantic Railroad has steam shovels at work on its roadbed after five years of original construction and expects to have work for the shovels some two or three years longer before its railroad bed is in the shape of that of the Western Railway, so far as the width and permanency of the roadbed are concerned. And that during the process of settling the road is continually getting down on one side or the other, and there is no way to get a good track except from the rains falling on it, and running the trains on it, and by the continual putting it up, and keeping it up, until, finally after some years there is a settled roadbed. §382. Summary. As indicated above special allowances for adaptation, solidification or seasoning have been made in railroad appraisals in Minnesota and Washington, in the Massachusetts appraisal of the New York, New Haven and Hartford Railroad and in the report in the Alabama Railroad Rate Cases. In Washington and Massachusetts the allowance is clearly limited to the solidification or seasoning of the grading while in Minnesota it covers. also adaptation which is defined as "the adjustment of the physical line to its environment and purposes." "Adaptation" and "solidification" as applied to roadbeds are also applicable in some degree to other structures and particularly to extensive public utility plants and systems. This is sometimes referred to as the element of value arising from an "adjustment of parts" or from the "trying out" of the plant. It is recognized that it is impossible to plan any large system so carefully and in such detail that it will actually meet the demands upon it without a great many alterations and additions. Actual use will bring to light numerous imperfections and will show the need of many readjustments. It may be said that the construction period does not actually end until these readjustments have been made. Considered in this way, expenditures for adjustment and solidification are a proper charge to construction cost. They are of the same nature as items included under the head of contingencies in estimating cost and some estimators enlarge the contingency allowance to include at least a part of the probable expenses for adjustment, adaptation and solidification after construction is nominally complete. As a matter of fact, expenditures for adaptation and solidification are usually charged not to construction but to operation. In the case of solidification of roadbed it would seem that it would be very difficult to say what part of the expenditures for maintenance of the first few years could be properly considered an addition to capital value and what part was purely an operating expense. Other expenditures for adaptation and adjustment would be very difficult to distinguish from supersession due to inadequacy or obsolescence. But however this question may be taken care of in the accounting system, it is clear that the fact that a plant or railroad has passed through the initial period when expenditures are necessary for adaptation and solidification adds to its physical structures an element of value. Anything that tends to decrease the current charges of an old structure as compared with such charges for a new structure tends to increase the present value of the old structure as compared with the value of the new structure. If fair value is based on present commercial or market value of the physical structures, any actual appreciation through adaptation or solidification will necessarily be considered. If fair value is based not directly on money value but on cost or the ratio that remaining utility bears to original or reproduction cost less salvage value, the same conclusion is reached. The difficulty in application arises from the danger that this item will be included both in operating expenses and in fair value for rate purposes. CHAPTER XVII Physical Depreciation § 390. Depreciation problem. 391. Physical depreciation and functional depreciation. 392. What is depreciation? 393. Other definitions. 394. Straight line method of measuring depreciation. 395. Sinking fund method of measuring depreciation. 396. Sinking fund method discussed. 397. Present worth method of measuring depreciation. 398. Present worth method applied to a class. 399. Present worth method applied to system as a whole. 400. Other methods of measuring depreciation. 401. Uniform investment cost method of adjusting depreciation. 402. New York Public Service Commission, First District, rejects sinking fund method. 403. Straight line method in New York City Street Railway Fare Case. 404. Depreciation rule contained in uniform water supply accounts, 1911. 405. Depreciation of overhead charges. § 390. Depreciation problem. Having determined the cost-of-reproduction-new it remains to determine the relation of the existing property to this factor. There is no doubt that worn rails because of their shorter remaining life have a smaller total utility and a smaller money value than new rails. A company can afford to pay more for new cars and new rails than for old. Depreciation is however one of the most difficult and elusive problems connected with valuation. It is not necessary for the purposes of this book to attempt a complete discussion of the subject but merely to consider it to such extent as may be necessary to determine its general relation to valuation for various purposes. In venturing to discuss this problem the author realizes that the result must be incomplete and tentative. |