Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-05-26
BY GREGORY HANKIN.

present, problem for mere conjecture
And speculation.
Mr.. Justice Stone, in his dissenting
opinion. estimated that the decision, if
given effect in all cases. would result in
1aising the valuation of the railroads
some $21 900. 100000. Other estimates
give a maximum increase of about
$4,000, 100000. These increases, how
ecet, will not be due entirely to the
Ofailon decision. The present primary
valuation of about $21 ,0o0,oo0,000 is
BASED on valuation of properties ac-
uuired before 1914 and additions to the
properties up to June 80, 1919. With
the gradual retirement of those prop
critics and their replacement by new
plants, roads and equipments, the origi-
nal costs and the reproduction costs
will gradually converge to the same
figure.
Valuation Work Little Affected.
The valuation work already accom-
piished by the commission is little af-
fected by the OFallon decision. 1t has
been suggested that since the OFallon
decision was directed against the meth
DDS of valuation adopted by the COM
mission, the tremendous amount of val
uation work already done will be
strapped. The OFallon decision will
have no such effect. Thus far the COM
mission has expended over $34, 000,00
in valuation work, of which only about
$4,000 is attributable to the O'Fallon.
Furthermore, the O'Fallon is the only
railroad against which a recapture order
has been issued.
Part of the costs of valuation are ap-
piled to lands This is unaffected by
the decision. The greater part of the
valuation work of the commission was
spent mainly in gathering inventories
and inventory changes between 1914
and 1919. These are not yet out of
date. Furthermore, whether the ORAL
lon decision had resulted in favor Of the
commission or, as happened, against it,
the commission would have been obliged
to gather these data in accordance with
the provisions of section 10 (a) Of the
interstate commerce act.
Part Of the costs already incurred
prepared the way for a cumulative in
ventory Of the railroads properties as
OF December 81, 1927, which will serve
as new valuation base for rate max
ing and recapture purposes. That, Of
course, has likewise not been affected
by the O'Fallon decision.
The commission will thus utilize all
the data it has gathered for the purpose
Of arriving at the aggregate values of
the railroads in order to carry into eff
feet the policy adopted by Congress in
i
will have to give consideration to the
reproduction cost theory in accordance
with the OFallon decision.
Policy Of Recapture.
In 1920, when the period Of Govern
ment control ended, and the railroad
properties were turned back to private
control, Congress embarked upon q new
policy which may be summarized in
the following three-fold object:
% To prescribe a basis of return
which would give assurance to investors:
ca to make the return fairly certain, to
secure for the public lower capital
charge than would otherwise be neces-
sary, and go to require those carriers
which under a given body Of rates
would earn more than fair return
to pay part of the excess to the Gov
eminent, so that it might be used to
help the weaker carriers and thus help
to maintain the general system Of
transportation, and to retain the re-
mainder Of the excess earnings as a
reserve fund, to be used only for spe-
cif1c purposes, as prescribed in the
transportation act.
To carry this policy into effect Con-
gress directed the commission to de-
termine the value Of the railroads, and
that In doing so 1t shall give due
consideration to all elements of value
recognized by the law Of the land for
rate making purposes, and shall give
to the property investment account Of
the carriers only that consideration
which under such law 1t is entitled to in
establishing values for rate-making
At the time this provision was
enacted, the reproduction cost Of the
railroad properties throughout the
country was about $4,000, 000, 900,
whereas the property investment ac-
count was only about $4,000, 900 900.
Immediately the question arose, What
theory of valuation was the commits
sion going to use? The original cost,
prudent investment, the reproduction
cost theory, and other theories Of value
suggested themselves. Each of the
theories Is based on considerations
which are important elements in deter
mining the value of an operating rail-
road system. Each of these, however,
piled to determine the value Of rail-
road In relation to all other economic
facts.
In arriving at the value Of the ORAL
lon Railway properties the commission
did not adopt any one of these theories.
It emphatically rejected the reproduc-
ton cost theory, having characterized
it as Inconsistent with any sound con-
ception Of justice" and as economically
unSound. 1t leaned strongly toward
the prudent investment theory as max
ing for stability of investment and as
providing fixed rate base.
The commission arrived at its own
synthetic valuo of the OFallons
properties as follows: % 1t determined
the reproduction cost, less depreciation
at pre-war prices of the property ac-
Quired prior to June 80, 1914: ca to
this it added the actual costs from
July /, 1914, to June 80, 1919, in excess
Of reproduction cost at 1914 prices; 90
to this was added an amount for work.
ing capital; a. an allowance for land
at the present value; go about per
cent for intangibles, such as going con-
Germ value, and 60 for each Of the re-
capture periods there was added the
actual investment in additions and i'm
provementS, less retirements, subse-
quent to June 80, 1919.
The O'Fallon complained that the
commission merely used formula" to
which 1t subjected the valuation of the
railroad properties without exercising
to the relevant facts, and especially to
she reproduction costs. The commission
n It's report stated that it had not used
any formula" but that
ut considered and weighed carefully,
In the light of its own knowledge and
experience, each fact, Circumstance and
condition, called TO its attention on
behalf of the carrier"
In fairness to the carriers, 1t must be
stated, that the commission did arrive at
a formula in the making of the valu-
alton. On the other hand, in fairness
% the commissions efforts under the
valuation provisions, 1t must be observed
that the adoption of formula" is not