WILL RAIL VALUATION PROTECT OR DEFRAUD?
Richberg, Donald R.
Will Rail Valuation Protect or Defraud? A Fifty Billion Dollar Lawsuit in Which the American People May Win or Lose More Money Than the World War Cost Them By DONALD R. RICHBERG Donald R....
...Real Public Operation Possible IF PUBLIC ownership becomes inevitable, political operation will not be inevitable...
...THE people of the United States are paying about $6,000,000,000 a year for steam railroad transportation, cf which about $1,000,000,000 a year goes to the owners of the railroads as net compensation for the use of their properties...
...but also methods of construction were being improved...
...7.Senator La Follette watched with increasing concern this rapid rise in the claims of the railroads and other public utilities, realizing that the day would come when there must be a show down on the question of what profits private owners should be permitted to make out of the ownership and operation of public utilities...
...so that the theoretical cost of reproducing a railroad would provide a good check on the recorded cost and furnish evidence of the prudent investment which had been made in the property, upon which the owners were entitled to earn interest...
...Now, in order to "reproduce" that property, it would be claimed that land for a right of way and for stations and yards would cost the price of either condemning or buying property in the heart of large towns and cities...
...Thus the machinery is provided upon which men may be employed to produce the goods or service needed by the community...
...The owners are now engaged in a stupendous litigation with the United States Government, seeking increased pay for the use of their properties...
...Yet we hear little in the newspapers about the efforts of the owners of the railroads to double or treble their pay, which is now over a billion dollars a year, Many years ago, the late Senator La Follette foresaw these increasing demands of the- railroad owners and, almost single-handed, he persuaded Congress to pass a law in the year 1913, in order to protect the public against such demands...
...Story of Development HERE is a short story of the development of the present situation: 1. When public regulation of railroad rates in this country began, it was generally held by the Courts that railroads were entitled to charge rates which would pay their expenses and give the owners a modest income on their investments...
...the cost of reproduction new...
...It is not necessary to pay private capital 10% or 20% or 30% on the amount invested, in order to induce private capital to invest in public utilities...
...Cheaper prices for consumers, or higher wages for labor, benefit great masses of the community and raise the average standard of living...
...The proper basis is just as clear today as it was thirty years ago...
...Numerous other theories were developed involving highly imaginary costs of reconstruction and costs of "reproducing business," costs that never had been incurred, or costs that had been paid in fact by the public and charged up as operating expenses...
...Wages and prices were going up...
...The purpose of public regulation of public utilities is to require the privately owned public utilities to furnish the best possible service at the lowest possible rates...
...The trouble with the situation today is that influential private owners of the public utilities still insist upon regarding them as sources of speculative profit...
...6. Thus it became evident in the earlier years of this century, that if railroad properties were to be "valued" on the basis of a theoretical "reproduction cost," the amount of the actual and prudent investment made by the owners could be increased two or three or ten times...
...The land for right of way and stations and terminals had been obtained very cheaply...
...Some judges have been persuaded to dignify such nonsense with its inclusion in judicial opinions, but such opinions are comparatively rare...
...special counsel for the city of Chicago in gas litigations since 1915...
...At his instance a National Conference on Valuation was organized in Chicago, May 25, 1923, by United States Senators and Representatives, Governors, Mayors of large cities, farm and labor organizations and many distinguished public men, without regard to party affiliations...
...Therefore, commissions are established to fix prices in order that the public may not be compelled to pay monopoly prices...
...or, for another example, they would contend that a lead pencil half used up is worth as much as a new lead pencil...
...14...
...much of it through public donations...
...and on this basis there will be opposition to the reduction of transportation rates, or to the increase of wages...
...An investment of $5,000 that might reasonably earn six per cent, or $300 a year, could be "valued" at $10,000 or $20,000 and the public thus required to pay $600 or $1,200 as compensation to the owners of the property...
...The right of way originally constructed through land worth perhaps $10 an acre would now be "reproduced" through land worth $100 an acre or more...
...Commission is Divided THE Commission has divided upon the question of original cost, a majority of the Commissioners holding that it cannot be ascertained from the records of the railroads and a large minority holding that where the records are lacking the original cost should be estimated...
...5. Two developments became evident about this time, which operated to increase considerably the valuation of railroad properties...
...2. It soon became apparent that many investments in railroad properties had been made wastefully, or dishonestly...
...Let it be pointed out that an editorial in the Wall Street Journal of August 2, 1026, states the attitude of the railroad owners quite bluntly: "There have been many suggestions and many legislative attempts to fix an arbitrary basis for rates by limiting earnings...
...November 1, 1926...
...Cheap Right of Way FOR example: Most railroads had actually been built through farm lands and small towns...
...The increasing menace of the railroad valuation claims caused Senator La Follette in 1923 to begin a new effort to protect the public interest...
...THIRD: The railroads are now contending that practically no depreciation should be deducted from a reproduction cost estimate...
...Second: The representatives of railroads and other public utilities were devising theories for estimating the "cost of reproduction," by means of which they could double and treble the actual cost...
...The valuation which is given to property, either by private individuals or by public authority, is the result of, or the basis for, the capital charge upon industry...
...The scheme of re-valuing public utility properties, in order to give private capital an excessive return upon the amount actually invested is simply a scheme for defrauding the public...
...He immediately entered the practice of law at Chicago...
...He introduced a bill in Congress which, after years of effort, he had passed in 1913, which provided that the Interstate Commerce Commission should ascertain and report the value of all railroad properties and in so doing should report particularly the original cost...
...But on the other hand, an excessive wage for capital will result in excessive prices for the consumers, or inadequate wages for the workers...
...So long as the wage paid for capital is sufficient to encourage the investment of the necessary amount of new capital and to retain the use of the capital already invested, there is little social justification for a higher capital wage...
...Therefore, such an estimate can be increased almost indefinitely through devising new theories and exercising more imagination...
...Other claims which the railroads are making, for the application of their theories of estimating cost of reproduction, would further increase the total estimate so that, according to their present contentions, the cost of reproducing the railroads today would exceed $50,000,000,000...
...The whole purpose of public regulation is thwarted if public utilities are permitted by law to "revalue" their properties so as to increase the capital charge from a "fair return" upon the investment to a "fair return" on an alleged "value" which is two or three times the amount of the investment...
...Yet if it were kept perfectly clear that the "value" of the railroad is the amount of INVESTMENT in the railroads, it would also be made plain when the owners' profits are excessive and when transportation rates should be reduced, or when the wages of railway employes should be increased...
...For example, if a railroad has been built at a cost of $10,000,000, and is earning 15% on the investment, it should be apparent that either -transportation rates should be reduced or the wages of railway employees should be increased...
...Want High Rates THE TRUTH is that the private owners of public utility proporties do not want to charge the public the FULL amount of their claims...
...Excessive wages for capital only benefit the small group of those who live upon the profits of ownership...
...There is little actual competition which would keep down prices, because public utilities have a partial or complete monopoly...
...In the field of private industry, wherever there is real competition, the owner of property is forced by his competitors to content himself with a fair return upon the amount of his investment, because if he attempts to earn, let us say, 20%, a competitor who is content with 10% will be able to undersell him...
...and since July, 1923, this Conference has played a considerable part in the valuation proceedings...
...or (2) take over the ownership of public utilities and eliminate the interests of private ownership...
...A fair wage for capital is necessary for the health of industry...
...Recently the Commission has considered a tentative report, in which the position is definitely taken that a railroad should be valued by ascertaining as near as possible the amount of prudent investment in the property...
...In this way, if a railroad had been extravagantly or dishonestly built, the owners would he entitled to receive only compensation for the amount which should have been properly expended...
...8. The Interstate Commerce Commission began this valuation work in 1914...
...If these public utili ties were operated by the State, the operation would be controlled by this principle...
...In the first place, the traffic will not bear the charge...
...The intolerable result of this sort of private ownership was never more clearly shown than in the case of the valuation claims now being advanced in behalf of the great railroad systems...
...Scheme of Re-valuation AS THE earning power of a piece of property increases, the owners "value" their property at a higher figure...
...But these brief statements do not show the tremendous economic issue which is involved, or give a picture of its importance to the American people...
...If the State owned and operated public utilities, the capital charge to be included in the rates would not exceed the amount necessary to induce the investment of the necessary capital and to maintain it unimpaired...
...4. Up to about 1910, there was no very great difficulty in using figures of "original cost" and "cost reproduction" to determine the amount of prudent investment, or, as the courts called it, the "fair value" of a railroad property...
...and thus legalize increased rates to the extent of from 300 million to 1,800 million dollars a year...
...It is what the traffic will tear...
...The opinions of the Commission set forth all the data obtained and then fix a "value" without explaining how the result is found.' 13...
...They select operators, not to produce safe returns upon capital invested, but to produce speculative profits...
...If it were necessary to pay such an extortionate capital charge, then the cost of private ownership would be clearly too high and public ownership of public utilities would become inevitable...
...and the cost of reproduction, less depreciation...
...The National Conference on Valuation filed a petition with the Interstate Commerce Commission, supported by a supplemental petition by Governor Blaine o£ Wisconsin, and asked that the National Conference should be recognized as a party in future valuation proceedings, which request was granted by the Interstate Commerce Commission...
...It shows the policies which the railroads are pursuing in an effort to foist higher freight rates upon the public.—Managing Editor...
...Thus the wages of the capital investors of the railroads could be indefinitely increased...
...That is the estimate made in a recent editorial in the Wall Street Journal...
...First: Actual costs of construction were advancing, so that "cost of reproduction" was becoming far greater than any possible "original cost...
...When private persons undertake to do the work of the State and to furnish public service, they must accept the same obligations that would be imposed upon public officials...
...and the Supreme Court of the United States finally held that rates would be "reasonable" which allowed the owners to make a fair return on the "fair value" of their properties...
...In other words, public ownership and public operation are not in-separable...
...The National Conference, ever since its first appearance, has been urging the Interstate Commerce Commission particularly to do two things: FIRST: The Commission should follow the law and report the original cost of the railroads, SECOND: The Commission should value the railroads primarily on the basis of the prudent investment which the owners have made and which is being used in the public service...
...The revaluation of public utility properties for the purpose of giving the owners an annual profit of two or three or four or five times a fair interest upon their investment is, in simple language as before state, merely a scheme for defrauding the public...
...A Fifty Billion Dollar Lawsuit in Which the American People May Win or Lose More Money Than the World War Cost Them By DONALD R. RICHBERG Donald R. Richberg, Chicago lawyer, is one of the leading authorities in the United States on railroad valuation...
...He was special assistant state attorney from 1913 to 1915...
...it, by law, the private profits to a fixed return upon actual investment and refuse to permit the making of any speculative profit out of public utility service...
...He has always sought to make just as much money as possible out of public utility service and it seems that he will continue this effort just so long as public utilities are operated for private profit...
...A terminal might have been developed at a cost of $1,000,-000, but it would be claimed that it would cost $20,000,000 to reproduce it...
...This is the perennial claim of the public utility operator...
...They argue that no matter how much of its life has been used up, a piece of property should be "valued" at the cost of reproducing it NEW, if it will still "operate efficiently...
...SECOND: The cost of reproduction new has been reported by the Commission on the basis of prices prevailing about 1914, whereas the railroads have contended that by applying recent prices this cost of reproduction new should be increased about one hundred per cent...
...What the private owners of public utilities are seeking to do, is to establish a LEGAL RIGHT to charge much MORE than the traffic will bear...
...He was chief counsel for the railway unions in the government injunction suit in 1922 and has been general counsel for the National Conference on Valuation of Railroads since 1923...
...In effect, they are claiming that a 1910 automobile, which has been run 40,000 miles, but which still operates efficiently, is worth as much as a 1926 model new...
...9. As the valuation work has been proceeding, there have been three remarkable developments...
...The Commission has never announced the exact theory upon which the railroads are being "valued...
...and, generally speaking, encourage wasteful, luxurious living at the expense of the general welfare...
...He was born at Knoxville, Tennessee, in 1881 and received his legal degree at Harvard in 1904...
...But if this property is re-valued and is claimed to be worth $30,000,000, then the contention will be plausibly made, that the railroad is not earning 15%, but is only earning 5% on its "value...
...Having established this claim, they will then be in a position to insist that rates should be fixed as high as the traffic will bear...
...master in chancery, Circuit Court of Cook County, from 1916 to 1919, and director of the national Legislative Reference Bureau for the Progressive Party from 1913 to 1914...
...FIRST: The Commission has failed entirely to report the original cost of the railroads, stating officially that this could not be ascertained, although various members of the Commission, and the director of the work of valuation, have also officially stated that this original cost COULD be ascertained, even more accurately than reproduction cost...
...A final opinion in this ease has not yet been handed down...
...a stupendous job, which is now being pushed rapidly to a conclusion...
...and also being made by practically all other utilities...
...Every single one of these has failed...
...The public can employ managers, or grant to private parties the right to operate public utilities for a fixed compensation...
...The effect of this is to absorb for ownership the increased productivity of industry which would be more evenly distributed throughout the community through higher wages or lower prices...
...It is a curious fact that whenever the employes of railroads seek an increase in their wages, amounting to a few million dollars a year, there is a loud clamor raised in the newspapers over the possibility that transportation rates may be increased...
...Cost of reproduction" is an imaginative, theoretical estimate, not any actual cost...
...The "value" of the railroads may be fixed at from five to thirty billion dollars more than the actual private investment...
...It is quite evident that if the people of the United States are to obtain the best possible public utility service for the lowest possible price, they must do one of two things: (1) Lim...
...The opinions of the majority and minority of the United States Supreme Court have recently shown that this court, like the Interstate Commerce Commission, is divided on the question as to how the value of the railroads shall be ascertained and whether the investment in a railroad or its "reproduction cost" should be regarded as the controlling element in its valuation...
...Today the private owners of the public utilities are quite distinct from the private operators, who are mainly not owners, but employes...
...Everyone will admit that, under our present economic system, it is important that capital invested in industrial enterprises should receive a sufficient compensation so that savings will be encouraged and the investment of capital will be encouraged, to the extent necessary to promote the development of an industrial plant and to maintain it in good order...
...In the second place, rates would be so much greater than the reasonable cost of the service that tne demand for public ownership would become irresistible...
...Richberg's article on the valuation of the railroads in this issue of La Follette's Magazine is an outstanding contribution on this subject...
...If public opinion is ever adequately informed and public understanding is created regarding the fraudulent nature of the claim that a public utility should be valued on the basis of an imaginative estimate of a theoretical "reproduction cost," a public demand will be heard that public officials, whether members of regulatory commissions or members of the judiciary, shall not participate in perpetrating such a fraud upon the American people...
...Protection to Public THE purpose of public regulation is to preserve so far as possible, for the consumers of public utility service, the benefits of competition...
...3. In order to determine what the "fair value" of railroad properties might be, the courts held that consideration should be given, not only to the cost of constructing and equipping a railroad, but also to the cost of "reproducing" it...
...Big Economic Issue Raised THE foregoing fourteen numbered paragraphs show, in outline, the development of the present issue over the valuation of the railroads...
Vol. 18 • November 1926 • No. 11
