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r o y a . m m nfeh Consulting Engineer “ ? Pacific Mutual Building 660 Market Street San Franeiseo 4, California June 9, 1951. Mr. 1. E. Bennett, General Solicitor, Union Pacific Railroad Company, 422 West Sixth Street, Los Angeles, California. Dear Mr. Bennett: I am sure that you and Mr. Renwick are glad to have the Las Vegas rate matter submitted and behind you. It dragged on much longer than it should, for reasons that you are fully aware of. I suppose there lies ahead several months of negotiations in attempting to arrive at a sales price for the properties with the District. I don’t think you should sell at any sacrifice price and I don’t see any reason why you should necessarily be in a hprry to compromise below a reasonable price for the properties. Because the dollar age of the properties is not very old, the matter of the accrued depreciation to be deducted is probably not too important. However, the straight line method gives an erroneous result in computing the depreciation where a value deter­mination is involved. It results in too high a deduction. This is so because the straight line method ignores the interest component. In determining the amount for sale, it is the value of the property remaining after deducting a proper depreciation amount computed on the value concept basis— that is the objective. In the use of the terms "cost” and ’’value”, I intend to use the two in their true economic sense. For example, at the rate hearing, the term ’’value" should not have been used since we are dealing entirely with ’’cost” figures and not ’’value” amounts. In the discussion with the District, the latter will un­doubtedly attempt to utilize, or at least refer to, the depreciated eost figures that were developed in the rate case. For your infor­mation, while the California Commission utilizes the original cost base for fixing rates, it likewise uses reproduction cost new, less depreciation (the latter figures on the sinking fund basis) in deter­mining present market value for sale purposes. To the latter figure it adds or incorporates an intangible element of value under the heading of ’’going concern". Thus, in our State, the Commission recognizes a different basis for rate fixing; for the sale of property; and for tax purposes. * 1 3 1951 k* C, c.