Valuation

The members of the Interstate Commerce Commission acted last week like ten schoolboys appointed to settled a schoolyard dispute. They made their decision, but like schoolboys, they knew that their teachers (in this instance the nine justices of the U. S. Supreme Court) would be the final arbiters. The dispute was over the valuation of U. S. railroads. It had been stewing a long time--since 1914 when the Esch-Cummins Act went into effect. By this Act Congress ordered the I. C. C. to reckon up the values of each of the U. S. railroads according to some fair formula and to use such valuations as the basis upon which to figure transportation rates. The Act also provided that after a railroad earned 6% profits as calculated upon the I. C. C. valuation, it must split its extra profits half and half with the U. S. Government. That is, if a railroad worth $100,000 earned $7,000 (7%) in a year, it could keep $6,000 (6%) as its Esch-Cummins profits, but must divide the extra $1,000 with the Federal Treasury.

The railroads accepted this national law (they secured certain guarantees of profits under it). But they have quarreled with shippers and other transportation users about the method of calculating their valuations. It takes far more money to construct a road in 1927 than it did in 1914. It might cost $140,000 now to replace completely a line that 13 years ago cost $100,000. So replacement value is the great quarreling point, because $7,000 profit is only 5% of $140,000, although 7% of $100,000. In one case the railroad earns less than it is permitted (6%) profit, in the other it makes more but has to donate to the Government $500 (half of its excess $1,000). Last year all the U. S. railroads earned 5.23% on the amount of money it would have taken to have constructed them anew (according to the Committee of Public Relations of the Eastern Railroads). Railroads prefer the larger, replacement values upon which to base transportation rates, and so, profits. But shippers insist on a fixed, 1914 valuation. The I. C. C., they say, must catch the values of the railroads at some point, and the year 1914 is as good as any. People who use trains must pay profits on some fixed sum.

To create a formula which it could apply to all the railroads the Interstate Commerce Commission, after 13 years of accumulating information, last week ordered the St. Louis & O'Fallon Railway, a 21-mile Illinois road controlled by the Adolphus Busch (breweries) estate, to pay into the U. S. Treasury within 90 days $226,878. This is one-half of the $453,756 which the I. C. C. says that the road earned from 1921 to 1924, in excess of 6% of its 1914 valuation. It is a trivial sum. But the decision carried a threat of possible loss in values to all the U. S. railroads of eleven billion dollars.

I. C. C. Commissioner Balthasar Henry Meyer, who used to be a schoolteacher in Wisconsin, wrote the St. Louis & O'Fallon decision. Five other commissioners agreed with him; four disagreed. Next must come the superior arbitrage of the U. S. Supreme Court.

Owners of railroad securities accepted the I. C. C. decision as the effect of cussedness. In fact, the average price of 20 railroad stocks moved up from $128.28 a share fortnight ago to $130.30 last week. This can mean: 1) Stockholders have accepted valuations at the 1914 figures. 2) They expect the Supreme Court to declare that the present replacement valuations should be the basis for charges.* 3) After all the to-do and snarlings there may be little relative difference between present valuations and the 1914 valuations to which the railroads have been adding, legitimately, the cost of repairs, replacements of equipment and other improvements. If this third interpretation is authentic, no railroad operator or any opponent has yet stepped out of his partisanship to emphasize it.

*Their precedent is the Supreme Court's decision last November which said that the Indianapolis Water Co. might use its "spot" (current) reproduction cost as "a fair measure of the value of the physical elements of the property."