182. Obligations of public to public utility undertaking 183. Obligation of public utility undertaking to the public 184. Maintenance of the value of the stockholders' investment. PUBLIC UTILITIES: THEIR COST NEW AND DEPRECIATION CHAPTER I PROPERTY VALUATIONS - GENERAL CONSIDERATIONS 1. Purpose of present treatise. 2. Limitation as to expert evidence relative to property value. 3. Present value dependent upon purpose of appraisal. 4. True present value to be determined by court or commission only. 5. Figures to be presented as indicating possible present value. 6. Original cost. 7. Replacement cost. 8. Depreciation. 9. Market value of bonds and stocks. 10. Capitalization of earnings. 11. Worth of service to the consumer. 12. Cost and value. 13. Value as "going concern." 14. Determination of fair present value. 15. Figures showing value independent of purpose of valuation. 16. Necessity of presenting all figures indicative of possible present value. 1. Purpose of present treatise. The increasing supervision by state authorities in the United States of the operation of public service undertakings has necessitated valuations of the properties employed by many classes of utilities. Much of the work which has been done in making such valuations has been carried out under the direction of engineers of wide experience, who have formulated methods which have been designed to furnish data upon which the true present value of the property under investigation could be determined with as near an approach to accuracy as is possible. On the other hand, a careful study of the details of the methods used by the various engineers and by the commissions, who have been engaged upon this work, shows a considerable variation both in the theories and principles which have been followed. It is of interest and of great importance that all such variations should be noted and the fundamental principles, involved in any complete valuation, be defined so clearly that two competent and experienced engineers presenting figures as to the value of the same property, independently, would obtain substantially the same results. An attempt has been made to record in the following pages the principles, as far as they have been established, which must form the basis of a valuation of the property of a public utility undertaking. References have been given to decisions, which have been rendered in many important cases, bearing upon this subject. 2. Limitation as to expert evidence relative to property value. As will be shown later, the fair present value of the property of an undertaking must be determined by a judicial weighing of figures showing possible present values determined by radically different methods. Some of these figures can be obtained only by engineers familiar with properties of the character of that under valuation. Other figures can be determined most accurately by experts on financial and economic problems. The figures presented, tending to show value based on engineering and economic considerations, involve many questions of law which can be answered only by one having a full knowledge of the laws bearing on cases of this character. This knowledge of the law is particularly necessary in forming a judgment as to the relative weight to be given, in each particular case, to the several estimates of present value presented by the experts. In consequence of the wide range of expert knowledge required in the determination of fair present value, some of the courts have excluded expert testimony except for the purpose of substantiating the particular figures tending to show the value that can be assigned to a property when determined by methods on which they are qualified by experience and training to speak. They have held that valuation is a mixed question of fact, judgment and law and that the court itself is competent only to assign the true value of the property by a judicial consideration of the facts, figures and law involved in each particular case. 3. Present value dependent upon purpose of appraisal. Most of the valuations which have been made thus far have had for their object a determination of the proper value of the property of an undertaking as a basis for taxation or for a determination of proper rates to be charged for the service or commodity sold by the undertaking to the public. In consequence of this, rulings have been made by the courts and decisions given by public service commissions, which offer many suggestions as to methods of valuation applicable to investigations for these two purposes. But, in addition to valuations designed as a basis for taxation or for rate regulation, appraisals are frequently required to determine the present value of a property prior to the issue of new securities, or to determine a price fair to the public, as well as to vendor and vendee, when a transfer of the property of a public utility undertaking becomes necessary in a case of sale. It is, therefore, important in any comprehensive study of the question of values of property to determine how far the methods of valuation employed must be modified to produce the true present value for any one of these four purposes. Many writers on this subject have contended that the fair present value of a property must be the same for whatever purpose such value may have been determined and that, in consequence, there can be but one method by which the true present value can be obtained. That such is not the case will be apparent when the entire subject of valuation has been fully discussed. As will be presently shown the fair present value of the property of an undertaking must be found by a judicial consideration of a number of sets of figures each purporting to show the value of the property at the time of the appraisal when determined from different points of view. Thus, speaking generally, one set of figures may be the value which engineers would place upon the property, another would be based upon what the users of the utility would feel that they should pay for the service rendered, another would be what the owners had paid for the property, another might be based on the earning capacity of the property, and another would be what the investing public at large thought of the commercial value of the property. In most cases each one of these values will be different and possibly no one value will be that which will be assigned as the true present value. The relative weight which will be given to these figures will be different depending upon the purpose for which the appraisal is made, as well as upon the special conditions affecting the property under consideration. 4. True present value to be determined by court or commission only. A careful study of the subject of the valuation of public utility undertakings shows that each one of the sets of figures, described in the last section as designed to show a value determined from different points of view, must be obtained without any regard whatever to the purpose of the appraisal. These figures are not designed to show the true present value of the property. The true present value of the property can be established only by the impartial judgment of the |