The Problem of Railroad Valuation

September 19, 1927

Report Outline
Background of the Valuation Problem
The Commission's Valuation Work
Carrier's Attitude on Valuation
Criticism of Railroads' Position
Position of Supreme Court on Valuation

In the case of the O'Fallen & St. Louis Railroad Co. v. the Interstate Commerce Commission, scheduled for argument at Kansas City, beginning October 5, fundamental issues raised in the long process of railway valuation will be placed before the federal courts for final decision. The case is one of leading importance to the railroads and the public, for it involves the legality of the methods followed by the Interstate Commerce Commission in its task of valuing all the railroads of the United States for rate making purposes, and if decided in favor of the O'Fallon may pave the way for huge increases in railroad rates.

The case arises out of an order issued by the Interstate Commerce Commission, February 15, 1927, directing the O'Fallon to pay $226,880 to the Commission, with accrued interest, as recapturable excess earnings for the years 1920 to 1923, under the provisions of the Transportation Act. The recapture provisions of the act upon which the order was based direct that railroads earning a return of more than 6 per cent on the value of their transportation property, as determined by the Commission, shall turn over half the excess for the maintenance of a fund to assist the less prosperous roads. The O'Fallon petitioned the federal court at St. Louis in May to enjoin and annul the recapture order. Its petition was based mainly upon the claim that the Commission had grossly undervalued its property and that if the valuation had been fair much smaller, if any, excess earnings would have been shown. Thus the Commission's order was confiscatory and in conflict with the Constitution's guarantee against the taking of property without due process of law.

Significance of the O'Fallon Case

In valuing the O'Fallon, the Interstate Commerce Commission followed a method which gives preponderant weight to the amount of money actually invested in the property or the sum of the costs incurred for installation of the various units of the road and equipment since construction began in 1896, less allowances for depreciation. The railroad contended, on the other hand, in hearings before the Commission prior to the issuance of its recapture order, that the fair value of its property, as of the various recapture dates, was not less than the cost of reproducing it new at the prices then prevailing. The extent of the divergence of view between the Commission and the O'Fallon as to what represents a fair value of the road for rate-making and recapture purposes is indicated in the following table.

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