"Yard Stick" Methods

The 1921 committee recommended what it aptly describes as 'Yardstick methods of valuation" and this year's committee has endeavored to point the practical development of these methods for quick and economical appraisals.

The details of two particular valuations are available to the committee. The first made by the engineers of the Connecticut Public Utilities Commission, and the Connecticut Company, working in collaboration; the other in the case of the Louisville Railway Company, in which case a quick valuation was made by a number of engineers working independently of one another for purpose of affidavit to support application for preliminary injunction, estimating the value and the replacement cost of the property as of February 1, 1921. This was followed by a detailed inventory and appraisal by a nationally known engineering corporation, fixing the replacement cost as of April 1,

1921.

IN THE CASE OF THE CONNECTICUT COMPANY, the following comment is made:

The procedure in the appraisal of the Connecticut company, made jointly by the engineers of the Connecticut Public Utilities Commission and by the Connecticut company and which was followed in the similar appraisals of the other electric railway properties, was based primarily on two propositions:

First While the physical elements of a property can be measured with substantial accuracy, the determination of the amounts of hidden quantities, the fixing of the unit costs, and the allowances for overheads and intangibles, are all matters of opinion, and, as such may be given for the same property, materially different values by different valuers.

Second - While there is apt to be great variety in minor details of the physical property, the major part of these differences do not appreciably affect the cost as a whole.

These two propositions lead to two obvious conclusions:

I

There is little warrant for making a highly detailed appraisal of a part of the property if at much less cost these facts can be found with at least the degree of accuracy obtained in the case of another and considerable portion of the same property.

2 - Specific record of each minor difference is unnecessary if average figures can be applied to groups of such differing elements.

Accepting these propositions and conclusions, the Public Utility Commission and the company, taking such elements as would permit this, classed these in groups, determined prices for unit lengths of each group, and applying these, obtained values which in their judg

ment and it is to be noted that one member of the commission itself, its engineers and the engineers of the company engaged in the work have all had extensive construction experience are, at least as accurate as if determined by the usual highly elaborate and detailed appraisal. Specific details of the Connecticut company appraisal are given by Professor Archer E. Knowlton in the Electric Railway Journal, voluine 57, pages 947 and 985 (issues of May 21 and May 28, 1921).

Different properties naturally will require different set-ups to meet their particular types of construction, but while it is necessary to determine the facts, it will be surprising - although this is a direct proof of the correctness of the first proposition - how many types will figure out at substantially the same cost per unit.

Certain elements clearly cannot be so valued, but these are but few. Land can be classed in zones and an average per acre price applied which, while it may be quite obviously in error as applied to a specific and particular piece in the zone, will give a total as near the facts as can be determined any other way; grading below sub-grade, except in very uniform territory, requires detailed measurement; special work, road machinery and a few like items must also be taken in individual detail but by far the greater part of the property lends itself to the "Yardstick Method." As yet there have been but few examples of its use, but in two notable examples opportunity came for a check. The "Royal Commission to inquire into Railways and Transportation in Canada" employed Professor George F. Swain to make an approximate valuation of the roads under consideration. Thirteen thousand four hundred and twenty-five miles of road were to be valued, and a trifle less than six months was available. Professor Swain under date of August 22, 1916, suggested to Sir Henry Drayton:

"A detailed valuation of these properties, such as is being made by the Interstate Commerce Commission, or such as has been made by various States, would cost a very large sum of money, take a very long time, and would, in my opinion, be entirely unnecessary. All that your Commission should do, it seems to me, is to apply an approximate yardstick in the manner which you yourself have suggested, namely to find the value per miles of certain typical pieces of road, then to apply these prices to the railroads in question, having due regard to similarity of conditions and taking account of any exceptional elements of value."

This suggestion was followed, and after the work was done certain figures of cost became available. On the Mountain Division of the Grand Trunk Pacific Railway, the Swain "yardstick" valuation was $88,057,502; the government figures of cost $93,307,184; the valuation thus being 5.6 per cent less than the government cost figure; on the Prairie Division the corresponding figures were $38,763,294 and $37,424,653, with the valuation 3.6 per cent greater than the cost figure; while on the Canadian Northern the figures for the section from Rideau

Junction to Current were $42,554,678 and $42,358,181, the yardstick valuation being 0.7 per cent greater.

These figures well support Professor Swain's statement, pages 32 and 33 of the Appendix A:

'On the whole, I long ago became convinced of the fact that in making a physical valuation it is not desirable to go into extreme detail, in view of the many sources of inaccuracy, and the impossibility in any case of arriving at an exact result, and the further uncertainty, after the final valuation has been completed, as to what the courts or determining body will decide to be the fair value. Many people delude themselves with the idea that a lot of figures necessarily means exactness. In this, as in other computations, much depends upon the skill and good judgment with which the work is carried on, and the various prices and percentages determined, and if skill and good judgment are exercised, while individual results may be largely in error, such errors will largely compensate each other in the total, and the final result may be very close to the truth."

IN THE CASE OF THE LOUISVILLE RAILWAY COMPANY

In order to apply for an injunction in the Federal Court at Louisville, it was necessary to prepare a hurried valuation of the property for submission February 17, 1921.

An inventory of the property had been previously prepared (Dec. 23, 1920-Feb. 10, 1921). This inventory did not cover details, but enumerated the size and locations of real estate and buildings, details of equipment of power plants, sub-stations, rolling stock and comprised only some thirty (30) pages of letter size paper, double spaced. All valuations were made, based on the replacement value new as of the time of valuation.

Rapid valuations were made as follows, all based on the property inventory previously prepared.

A by the company engineers, covering a period of two weeks B-by a local consulting engineer one week

C-by a local consulting engineer one week

Dby an industrial engineer of wide experience one week

E by an industrial engineer two days

F-by two (2) industrial engineers of wide experience, two days

A DETAILED VALUATION WAS MADE

G-by a nationally known engineering corporation who made from February 5th to April 21st an itemized inventory, under four (4) engineers, each engineer having a corps of checkers, counters and clerks; and from April 22d to November 1st, 1922, on office work where unit prices were applied and report completed, total time of approximately nine (9) months.

The detailed inventory of the property containing inventory of all equipment and unit quantities in buildings and structures will be of

great value for present and future reference and this will not be available, of course, where rapid valuations are made.

The following table compares the valuations made by parties "A" tɔ "F" and "G" under the above conditions:

Per Cent Variation from Detailed Valuation 3.4 Per Cent Higher The practicability of the "Yard Stick" method of valuation is demonstrated in the Louisville Railway Company case above recited, and its development and general application is warmly recommended.

Conclusions and Recommendations

The committee recommendations are as follows:

A That wherever applicable the "Yard Stick" method of valuation be employed.

B-That the committee for next year endeavor to complete arrangements with the National Association of Railway and Public Utilities Commissioners, in a search for broad, fundamental principles of valuation.

C That a study be made of "price trends " and a method worked out by which they may be used in determining the fair value of the property useful and used by the company, at the time of the inquiry."

Respectfully submitted,

ARTHUR W. BRADY,
ROBERT M. FEUSTEL,
WILLISTON FISH,

J. H. HANNA,
W. H. MALTBIE,

A. T. PERKINS,

ALBERT S. RICHEY,

W. H. SAWYER,

PAUL SHOUP,

JAMES P. BARNES, Chairman,

Committee on Valuation.

J. P. BARNES: Before disussing this report, Mr. President, I ask permission to read a discussion which has been presented by one of the members who was unable to attend the meeting today. There was some confusion of the yardstick method terminology, and a member of the Committee thought that matter should be further amplified. His comments which I am about to read, state his position clearly in this

matter.

St. Louis, Mo., Sept. 29, 1922.

MR. CHAIRMAN AND GENTLEMEN :— The first of the three recommendations in the Report of the Committee on Valuation reads as follows:

6

That wherever applicable the Yard Stick' method of valuation be employed.'

While signing the report of the Committee, I felt that some interpretation of the qualification "wherever applicable" should be made. My understanding of that qualification is about as follows:

Yard Stick methods are applicable:

(1) When valuations are carried out jointly by corporations and commissions for taxation assessment purposes, when no third parties appear.

(2) When valuations are carried out jointly by corporations and commissions for rate-making or reorganization purposes when no third parties, such as municipalities, civic associations, etc., are contestants, and when court review is not probable.

(3) When valuations are made by representatives of financial institutions, where the general character and extent of plant are to be appraised for financial standing.

Yard Stick methods are not applicable:

(1) When valuations for rate-making or reorganization purposes are carried on before public commissions and the extent and value of the property are contested by third parties, such as municipalities, civic associations, etc.

66

(2) When court review of the results will probably be necessary. These explanations seem to me to be quite necessary, especially when political considerations become a factor. Unfortunately there seem to be some engineers who seem willing to make up so-called "valuations" " on "Yard Stick" methods in almost any way to meet the desires of politician clients. That sort of thing has to be met in controversies before Public Service Commissions and courts. In such cases you might have your own "Yard Stick valuations by the most reputable engineers you can find and then you would have to establish before the Commission or before the court the fact that your own engineers are reliable and that the engineers of the other parties are unreliable and unworthy of credence, and, perhaps, more difficult still, you would have to establish that same thing in the public press.

The letter is from Mr. Albert T. Perkins, Manager for the Receiver, United Railways of St. Louis.