Abstract: Accounting for Regulation: Unearthing and Understanding the Origins of the Federal Valuation Act of 1913

Scott E. Randolph

Abstract

The purpose of the Federal Valuation Act of 1913 was to develop a rational basis for setting railroad rates. Regulators and managers possessed no systemic understanding of the fully apportioned cost of providing transportation; consequently, rate-setting and rate regulation was essentially ad hocSmyth v. Ames established the right of railways to earn a reasonable return on invested capital, but that profits should not be excessive was more contentious. Anti-monopolists asserted that railroads “watered” their stock, the value of which was used to justify high rates.  Contemporary economists suggested that the aggregate use value of physical assets was the fairest method for establishing a rate base-line that balanced the public’s right to transportation at reasonable cost with the need for railroads to earn revenues sufficient to cover operations, fixed costs, and a profit.  The reality was far more complex.

This paper –the first fruit of a new research project– will examine the literature on this neglected subject and suggest paths forward.  It is necessarily conjectural, but will seek to connect the progressive faith in calculation for social good to the broader problem of assuring that the network efficiencies of the railroad system balanced private gain with public weal.