In so far as the equipment of the railroad had been valued on the basis of the cost of reproducing it, the court held that the value so found would necessarily be reduced by the estimated depreciation of the property. The present value is neither the original cost nor the cost of buying new nor the selling value when separated from the road in operation, but is represented by the cost to reproduce less an allowance of the amount that the value had been reduced by use, that is, a fair allowance for depreciation.

The court further held that the value of the property used in the business within the state could not be found by apportionating the value of the whole system according to the proportion which the revenue derived from operation within the state bore to the total revenue. It was pointed out that if the rates within the state were too low, the earning would be thereby diminished and the share of the property apportioned to the intrastate business would be too low. By increasing the rate, the earnings would increase and the apportionment of the property would be increased, although there would be in fact no greater use of the property than before. This makes the test of the rate change with the very change of the rate, so that it is in no sense a measure of the fairness. The court said: "It is necessary to find a basis for the division of the total value of the property independently of the revenue or earnings basis, and this must be found in the actual use that is made of the property. It is said that this is extremely difficult; it does not appear, however, that it is impossible, and since the company has assailed the constitutionality of the rates, it is bound to establish its case and to present accurate data which will permit the court to draw the right conclusion. The method here adopted is not of a character to justify the court in finding that the rates were confiscatory."

Ruling Law. Story Case Answer

The valuation of public service property is a subject Which has only recently come into prominence. It has become of immense importance, with the development of public control over public service corporations. Since the leading case of Smyth vs. Ames, decided by the United States Supreme Court in 1898, the question of what elements will be considered by courts and commissions in determining "fair value" has become the critical problem in public service regulation. It seems that the principal test in determining whether a rate schedule or other regulation is illegal and confiscatory, is whether it permits the company to earn a fair return on the "fair value" of its property. The question as to what elements should be included in a valuation for any specific purpose, is fundamentally economic. The entire question is still in a development stage, and many of the points involved will not receive final, authoritative determination for many years.

Valuations of the property of the public service corporations are made for four general purposes: (1) tax-' ation; (2) accounting and capitalization; (3) purchase of property by the public; (4) rate making. A fundamental question is whether the identical valuation can serve for all four general purposes. It seems that this is not true, and valuation is meaningless unless used with reference to some specific purpose. The courts and commissions, in their opinion, recognize that valuations may vary with the purpose. The fundamental rule is to work out each specific problem of valuation with reference to what is just and reasonable, having in view the specific purpose of the valuation. (Whitten "Valuation Public Service Corporations.")

On this point, the Committee of the National Association of Railway Commissioners reported: "Prior discussions of valuation both within and outside of this association have usually maintained that valuation should be the same regardless of the purpose for which the valuation is to be used. How, for example, can a State commission recognize four different kinds of value and make one valuation tor municipal purchase, another for taxation, another for rate making, and another for capitalization? To do so seems at first thought inconsistent. On the other hand, a little consideration will show that value is meaningless unless made with reference to some particular object. To be sure, it may happen that fair value for one purpose is the same as fair value for antoher, but in order to determine what is fair value for any specific purpose it is necessary to think out with reference to this purpose only, and when we discuss the theory and elements of valuation, it seems necessary we should have in mind a specific purpose that the valuation is to serve. It appears to us that considerable confusion in the discussion of the subject of valuation has arisen either from lack of attention to this fact or from the false assumption that value may be ascertained without reference to purpose.

Some of the trouble doubtless arises from a confusion of the terms "cost" and "value." Cost is a definite amount regardless of purpose. The actual cost and the reproduction cost of any structure may be determined without reference to the purpose for which such estimates may later be used. This is what is often means when it is said that valuation should be the same regardless of purpose. All that is really intended is that actual cost or reproduction cost should be the same. But cost is not necessarily value for any purpose, though it is an element in estimating fair value for almost any purpose. Thus, fair value for rate purposes may be based largely on actual cost or on reproduction cost or on a composite of actual cost and reproduction cost. Considerations of equity may, as to certain elements of cost, lead to the acceptance of actual cost as the fairer basis, while as to other elements, the cost of reproduction may be a better indication of present fair value for rate purposes. Take for example the question of promotion and other preliminary development costs. In a valuation for rate purposes, though cost of reproduction may be used as a general rule, it may seem more equitable to use actual cost of promotion; that is, the necessary cost of promoting the small initial plant, rather than the cost today of promoting a plant of the size of the present one, may be taken. Or, on the other hand, promotion cost may be entirely excluded from a valuation for rate purposes and considered only in fixing the fair rate of return."

In purchase cases, the point to be determined is how much should be parted with by the purchaser for the purpose of acquiring the entire property, including the business attached thereto. The inquiry is as to the exchange value of the property; that is, the sum or amount which should be parted with by the purchaser in order to acquire that which he desires. The exchange value is, in case of a property whose function is simply to earn money, determined primarily by the earning power; not alone the earning power at the moment, but the earning power at the moment plus prospective earning power over a period of years. In purchase cases the inquiry is, what is the exchange value of the plant? What is its earning power, present and prospective? And upon the amount of that earning power depends the determination in the case. In rate cases, the question in determining the value is not how much has been or can be got out of the property, but how much has been put into it, in order that from that fact it may be determined how much may be reasonably taken out of it in the way of net income. The cause of complaint in a rate case, and hence the point issue, is whether too much return has been obtained from the public, and whether that return ought not to be cut down to a smaller sum: whether the net income is not too large, and should not be smaller. In such a case, the earning power of the plant is uncertain until the decision as to the rate is made, because that is the very thing the controversy is about. It follows that in a rate case the earning power cannot be considered in determining what is the value of the property, for the reason that such value depends upon the earning power, and the earning power depends again upon the rate, and the rate depends upon the decision which may be made in the case. The contentions of the lawyers for the people in the Story Case are correct.