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DEPRECIATION CHARGES
OF RAILROADS AND
PUBLIC UTILITIES
A MEMORANDUM FILED WITH
THE DEPRECIATION SECTION
OF THE BUREAU OF ACCOUNTS
OF THE INTERSTATE COM-
MERCE COMMISSION
By
ROBERT A. CARTER,
Chairman of the Committee on Rate
Fundamentals of the American
Gas Association; and
WILLIAM L. RANSOM,
of the New York Bar.
A. W. Stevens, Printer, 300 Wash'n St., Bklyn., N. Y. — Main 2300.
IXDEX
PAGE
Reasons for Interest in Subject 1
Effect of Increased Eailroad Rates on
Costs of Utility Service in New York
City 2-5
Pertinent Provisions of the Interstate
Commerce Act 5-7
Purposes of the Statute Analyzed 7.-9
Nature of *' Depreciation Charges^' as to
Railway Property 9-14
The Sound Treatment of ** Retirement
Expense'' 14-18
xlnalysis of the ** Depreciation Charges''
of Railway Carriers Since 1912 18-23
Concrete Recommendations as to the
Handling of ** Depreciation Charges" 23-24
The Two Opposing Views as to Provisions
for the Upkeep of Property 24-26
Decisions of the Courts and Regulatory
Commissions Concerning These Op-
posing Views 26
The New York S Queens Gas Co,
Case 26-32
Consolidated Gas Co. vs. Newton (267
Fed. 231) 32-36
N
The Nashville, C. 'S St. L. By. Co.
Case 36-43
^50473
II
PAGE
Basis of the 1920 Grant of Increased
Freight Eates 43-45
The Knoxville Water Co. Case 45-46,48-57
The Minnesota Rate Case 46-48
The Kansas City Southern Ry. Co. Case..
56-58, 92-93
The First Consolidated Gas Co. Rate Case 58-63
California and Oklahoma Decisions Cited
as Adverse Authority 70-73
Essential Purposes of the Statute and the
Relation of ^^Depreciation Charges''
Thereto .....< 73-74
Reasons Why the Cost of Retirements
Should Not Be Anticipated Through
Accruals Based on **Life Tables''. . . 74-76
Concrete Illustration of the Reasons Why
the Rate Should Not Be Burdened
With Charges Anticipating Future
Retirements 76-80
Other Decisions of Courts and Commis-
sions 92-101
Summary of Conclusions From the Fore-
going Decisions 101-102
Basic Objections to the ^^ Accrued Depre-
; ciation" Theory 102-105
The Brooklyn Borough Gas Co. Case and
Other Recent New York Rulings 105-107
In Conclusion 107-108
nao EAST :fifxeent-H sijreet
-New York City.
vChief vof -the Depreciatiotn Section,
bureau of AccouiLts,
Interstate Commerce CommissioJi^
WasJainglan, D, CL
Tkm imemorandnm, m letter form, is submitted
Iby way of compliance with your courteous com-
imimication ;o<f Marcli 2, 19-21, in wliich you stated
that for the purposes of the investi:gati0ns pre-
liminary txD the performance of the duties de-
volved upon the Interstate Commerce Commission
iby Section 20 of the Interstate Comm^roe Act as
amended, the Bureau of Accounts will foe glad to
receive an informal submission of the views of
those especially interested in the subject of depre-
ciation. I have asked Ex-Justice William L. Ean-
som, of counsel for some of the companies in
which I am interested, to co-operate with me in
the preparation of this memorandum, particularly
in so far as it deals with the construction of stat-
utes and the decisions of Courts and regulatory
tribunals.
First let me say a word as to my reasons for
interest in this subject, to which I have devoted
thought and study for many years. My interest
in the subject is neither academic nor speculative.
Consideration of its practical aspects is forced
upon me by the incidents of almost every day of
my business activity. Error on the part of the
Interstate Commerce Commission, in making the
classifications and regulatory requirements speci-
fied in paragraph 5 of Section 20 of the Inter-
•} *^
state Commerce Act as amended, would have seri-
ous consequences, both to the many investors in
the companies of which I am an executive or di-
rector, and to the many patrons whom those com-
panies desire to serve economically and w^ell.
The companies with which I am connected
furnish heat, light, fuel and power for the daily
requirements of many millions of people. The
total quantity of gas sold by the Consolidated
Gas Company and its affiliated companies in 1919
was 33,674,972,000 cubic feet. Its affiliated electric
companies sold in 1919, 865,388,322 kilowatt hours
of electric energy. As of April, 1920, the total
number of customers relying upon the Consoli-
dated Gas Company and its affiliated gas and
electric companies for their needs for heat,
light, fuel and power, was 1,409,774. Families
depend on gas and electricity for cooking, heating,
lighting and other domestic uses; included in the
list of consumers are countless factories, shops,
hotels, stores, theaters, and other industrial and
commercial enterprises, upon which several mil-
lions of people depend directly for livelihood. The
industrial and commercial success of the splendid
territory served by these companies demands the
furnishing of good service at the lowest rates con-
sistent with the maintenance of that quality of
service and the earning of a fair return on the cap-
ital investment. It is not too much to say that the
furnishing of gas and electric energy in adequate
quantities and at rates no higher than necessary
for the defraying of operating expenses and the
earning of a reasonable return upon the invested
capital, is probably the single service most essen>
tial to the convenience, comfort, health and life
of the inhabitants of the City of New York and
adjacent territory served by these companies, and
to the continuance and prosperity of the business
enterprises carried on therein.
We desire greatly, in the first place, to furnish
an efficient and acceptable service to all our con-
sumers and patrons, and, in the second place, to
charge them a rate no higher than is absolutely
necessary to reimburse us for operating expendi-
tures actually made, and yield, in addition, a fair
return on our actual investment as judicially es-
tablished. We adhere to that standard in the fixa-
tion of the rates charged by our companies; we
desire that railroads and regulated utilities whose
service we require in the carrying on of our busi-
ness, shall do the same thing. The amount of
money which we have to pay out for freight rates
becomes a large item in our operating costs ; and
we, in turn, as patrons of railway service, do not
wish to pay excessive rates or rates inflated by
fictitious charges, in the guise of operating ex-
penses or anything else.
In the production of these great quantities of
gas and electric energy and, to a lesser extent, in
transmitting the same from the manufacturing
and generating plants to the premises of myriad
consumers, there is required the consumption and
use of vast quantities of coal, oil and other mate-
rials, all of which coal, and a large part of which
other materials are necessarily transported for
greater or lesser distances over the lines of rail-
road common carriers operating in interstate com-
merce within the boundaries of the United States,
for which transportation the Consolidated Gas
Company and its affiliated gas and electric com-
panies pay annually large and increasing sums of
money in freight charges, the total of such charges
paid by them and charged to their operating ex-
penses amounting, on coal alone, during the year
1919, to not less than $3,967,422.00, and to a sub-
stantially greater sum in 1920. During the calen-
dar year 1919 there were delivered by rail trans-
4*.
jrortatibn 798,937' gross tons of coal! to^ tliese' affili^
atedi gas companies- and. 1,008^312. gross tons to>
tihe affiliated, electric companies, a total of. more*
than; 1,800,000. tons of coal, all of which, wasi usedl
in the generation: and. distribution of gas andi elec-
tricity during 19I9.\ The quantity usedi im 1920)
amounted.to.more than; 2,200,000 tons. By reasoni
of the foregoing, the gas andl electric industry
conducted. by the Consolidated! Gas. Company and'
its affiliated! companies- has been: and! is- one of
the largest, patrons of rmlroad! transportation ini
the United; Stiates;.
In the const!ruction"of new. plant; the installation;
of additions: to. apparatus and! equipment, the re-
pair and! upkeep of. structures and! apparatus, the',
making of replacements and extiensions of. the dis-
ttributing systiBms,- andithe Hke, there is required!
the use of. large quantities of brick, cement; steel,,
brass-work, iron' pipe,' and! other matierials, uponi
which, the freight charges amount, to- many thou-
sands of. dollars annually, which, freight: charges;
add greatly to the annual. cost of the maintenance,,
repair and. upkeep of the properties of. these affib-
ated. companies' in; their, continued; high, state of
operating efficiency, and . add . substantially to ; the •
Gost. off the. new construction, which, ini turn, be-
comesa part of the necessary investment: of the'
companies in property required : for the carrying
on of the gas; and! electric business, upon . which i
the consumers must pay a rate yielding ;a . fair re-
turn ' from year, to year; .
By reason' of the effect' on both' our operating
expenses and! our required' investment, we feel'
that we are directly and' actually interested in
seeing to it that the burden of the charges of rail-
road common carriers for the transportation of '
ooal, oil, brick, cement, iron, steel, pipe and other-
materials in i interstate commerce, shall! be and be.'
5
kept nt) greater than is from time to time reasdii-
ably necessary to pay tlie actual cost of the rend-
ering of adequate and efficient service by such
common carriers and the maintenance arid upkeep'
fof their property in first class o-perating condition,,
and to^ pay a reasonable return upon their in-
vested capital. That interest leads' to the prepa--
ifation and filing of tliis' memorandum.-
The Pfertinent Provision^ oi thi6 Statute^
Turning tO' the particular" statutory dnty of the'
Interstate Commerce Commission und^r discus--
sion, it may be n^ted- that S'eeti<^n 15a> paragraph-
^ of the' Interstate Commerce Act, as' amended, re-
quires that the rates of" carriers by railroad be so'
adgustedi that the saidi carriers
u# * * ^Qii^ under honest, efficient and' eco-
nomical- management and reasonable expendi--
tures for maintenance of way, structures and
equipment, earn an aggregate annual- net rail-
way operating income eqnal as nearly as may'
be to a fair return upon the aggregate value'
of the railway property of such carriers held-
for and. used- in the service" of frarifeporta--
tion.'''
smd' Paragraph 3^ of the same section provides-
* * that during the two* years beginning jtfarcli'
1, 1920, the Cbmmigsionshall'take as siich fair
return a sum equal' to^ 5i^ per ceriturii of such'
aggregate value, but may, in its discretion,
add' thereto* a sum' not exceeding oriie-half of
one per centum' of such aggregate value to'
make^ provision in" whole or in part for im-
provements, betterments or equipment, which,
according to the accounting system pre-
scribed by the Commission, are chargeable to '
capital: account ' ' '; ;
while Paragraph 1 of the same section defines the
term *^net railway operating income" as
** railway operating income, including in the
computation thereof debits and credits aris-
ing from equipment rents and joint facility
rents."
The term ** railway operating income" has
seemed to us to be used in the statute in obviously
the same sense as in the accounting system pre-
scribed by the Commission; namely, to denote
any excess of railway operating revenues over
railway operating expenses.
Section 20, paragraph 5, of the Interstate Com-
merce Act directs that
**The Commission shall, as soon as prac-
ticable, prescribe, for carriers subject to this
Act, the classes of property for which de-
J: preciation charges may properly be included
under operating expenses, and the percent-
ages of depreciation which shall be charged
with respect to each of such classes of prop-
erty, classifying the carriers as it may deem
proper for this purpose. The Commission
may, when it deems necessary, modify the
classes and percentages so prescribed. The
carriers subject to this Act shall not charge to
operating expenses any depreciation charges
on classes of property other than those
prescribed by the Commission, or charge with
respect to any class of property a percentage
other than that prescribed therefor by the
Y Commission. No such carrier shall in any
case include in any form under its operating
or other expenses any depreciation or other
charge or expenditure included elsewhere as
a depreciation charge or otherwise under its
operating or other expenses.' '
Purposes of the Statute Analyzed
The purpose of the prohibition contained in the
sentence last quoted above has seemed to us to
be obviously the prevention of excessive or im-
proper charges to expense accounts through du-
plicated charges, and the purpose of the provi-
sions respecting the so-called ^* depreciation
charges" is to keep them within reasonable
bounds. The necessity for strict scrutiny and reg-
ulation by the Commission in this regard appears
clearly when it is considered that the net rail-
way operating income, which the statute directs
shall be kept large enougl^ to yield for the car-
riers of a rate district a fair annual return on the
aggregate value of the property devoted to rail-
way service} is in turn dependent on the railway>^
operating income, which is what is left after de-
ducting railway operating expenses from railway
operating revenues>)L In order that the schedules
of railway rates at a given time in force may not
wrongly be made to appear to yield an insufficient
net operating income, and so, because of inflation
of the operating expense account, appear to be
inadequate, the Commission has now specifically
been given the duty, as well as the power and
jurisdiction, to control the estimated charges for
^^ depreciation'^ and the basis thereof. The im- '^
portance of this we shall hereinafter discuss with
concrete references to the so-called * depreciation
reserves'' of the carriers.^AVithout the possession *^
and exercise of this power by the Commission,
any carrier would be left in position to include in
its operating expenses unnecessary and excessive
charges under this head and thus make its reven-
ues and rates appear inadequate upon the face
thereof w^hen in fact they were ample or more
than amplej^ Another consideration impelling the "^
Congress to confer and the Commission to exer-
s
cise this power of regulation of ctorges bas^ed on
estimates is no doubt to be found in paragraph 6
of Section 15a of the mm& statute, which requires
that
*
^*If under the provisions of this section, any
carrier receives for any year a net railway
operating inconxe in excess of 6 per centum of
the value of the railway property held for and
used by it in the service of transportation,
one-half of such excess shall be placed in a
reserve fund established and maintained by
• such earlier, and the remaining one-half
thereof shall, within the first four months fol-
lowing the close of the period for which such
computation is made, be recoverable by and
paid to the Commission for the purpose of es-
tablishing and maintaining a general railroad
contingent fund * * *'^
and to the further effect shown in the statute. If
the carrier had been or were left subject to no con-
trol in respect of the charges which it might make
to operating expenses for * ^ depreciation ' ^ it might
easily, if such charges were based on estimates
and were not kept in close relationship to the ac-
tual disbursements, make these estimated charges
sufficiently high to create the appearance that its
^*net railway operating income" for any year did
not reach ^ * six per centum of the value of the rail-
way property held for and used by it in the service
of transportation'' and thus deprive the *^ general
railroad contingent fund'' of moneys that should
go into it in accordance with the provisions and in-
tent of the statute.
%
Nature of "Depreciation Charges" as to Railway
Property
In order to determine what amounts may prop-
erly be charged to operating expenses to repre-
sent * depreciation '^ as defined in the Act, and the
manner in which, as a practical business matter,
this phase of railway operation and management
should be handled, it is necessary to bear in mind
the proper purpose of such charges. The word
** depreciation,'' as commonly used, has a variety
of meanings. V. One of the most prevalent is to de-
note a decline or shrinkage in exchange value or
market pricey That, however, is obviously not the
meaning intended by Congress to be attached to
the word as it is used in the Interstate Commerce
Act. Changes in value are matters of fact to be
determined by observation and not by rule pre-
scribed by the Commission. The accounts of a "^
carrier must deal with receipts and outlays —
facts, not opinions as to variations in value or as
to the probable lapse of time before particular
units of property will be retired from use. The
railway property of a carrier is held for use and
not for sale; and fluctuations in its value, if and
as they occur, do not have any relation to the car-
rier 's operating expenses. A merchant may prop-''
erly reserve out of his revenues sums to provide
against shrinkage in the value of goods remain-
ing unsold, below their cost, for, until the complete
stock of goods is sold and converted into money,
the real profit or loss from his venture cannot be
ascertained. The rolling stock, road-bed and '^
equipment of a carrier by railway are not acquired
for sale like merchandise ; they are expected to be
operated forever in furnishing transportation, or
at least for an indefinitely long period. >The car-
rier sells transportation service to its patrons, not
its railway 'property piecemeal. A railway system "^
10
is composed almost entirely of tangible property
that could not readily, and to a large extent conld
•^not economically, be converted to other uses. Its
ownership may change and the price at which the
transfer is effected may be greater or less than
the cost of the property when installed, but it does
not appear that the utility of the property or its
relations to the shippers and passengers using it
•^is thereby affected. The rate charged for the
transportation service does not depend upon the
age of the engine, road-bed, or car; nor can it
properly be said that the carrier's operating ex-
penses vary with changes in the exchange value
of the property or the cost of reproducing it at a
particular time. As has been said by Mr. George
N. Webster in a recent monograph* on the sub-
ject :
' **The consideration of age enters no more
into the question of the rates of a public serv-
ice company, which is able to and does ren-
der the service it was organized to render,
than does the age of a taxicah^ or of its driver,
or of the clothes he ivears, enter into the
question of the fare. A driver twenty years
old with a new car and a new uniform can
charge no more than a man of sixty with a
ten-year-old car still operating efficiently. It
is transportation the passenger is buying —
and he expects to pay uniformly for a uniform
service, regardless of the age of the equip-
ment.
^*Nor does a lawyer or a physician expect
to regulate his fee by the age of his office
furniture, as one might think he should from
the arguments of the professional depreci-
*Copies of Mr. Webster's monograph entitled "Theoreti-
cal Depreciation: A Menace to the Public and the Inves-
tor," have been reprinted, and will be furnished to anyone
interested, on request to the undersigned.
11
ator. A laborer of twenty with a new pair
of overalls draws the same rate per diem as
the laborer of sixty with a pair of wornont
overalls. Both do a uniform day's work for
a miiform day's pay and age cuts no figure
so long as uniformity in service capacity
exists.
**A celebrated lawyer who died within a
year and who bequeathed many millions of
dollars to a great college had in his office the
simplest and oldest furniture the writer ever
saw. Furthermore, his earning capacity in-
creased annually to the day of his death at
the age of seventy-four. He probably never
realized w^hat a liar he was making out of the
professional depredationist. ''
y So far as the passenger and the shipper, the
purchasers of raihuay service, are concerned,
the essential thing is that the system be main-
tained in efficient operating condition and that
its service be rendered efficiently, economical-
ly, and at a fair price. Its operating expenses
are the out-goes necessary to efficient and eco-
>^omical operation. It has been commonly rec-
ognized that in the case of a railway or other
public utility, the cost of the maintenance of the
property in efficient and economical operating
condition, through adequate repairs of wearing
parts and through the renewal and replacement
of units retired from use for any cause, is a proper
charge against the cost of rendering the service
as represented by operating expenses; and the
statute has declared that the fair price for the
service rendered shall be so determined, as nearly
as may be, as to yield, in addition to such neces-
sary outgoes, a further sum which shall be, for the
carriers as a whole, in a given rate district, **a
fair return upon the aggregate value of the rail-
12
way property of such carriers held for and used
in the service of transportation." The statute
does not contemplate the inclusion of anything
beyond this in fixing the rate.
It is a matter of common knowledge that in any
extensive or complicated system, plant or instru-
mentality, such as that of a railway or public
utility, the thing does not wear out or give way as
a whole. Some part wears or weakens to the
point that it ceases to operate satisfactorily, and
upon being repaired or replaced, the whole con-
tinues to operate satisfactorily. These repairs
and replacements in respect of any particular unit
of plant or equipment become necessary only at
irregular intervals, but in an extensive and hetero-
geneous railway or utility system subjected to a
variety of hazards, they tend to equalize them-
selves from year to year, and the tendency is still
more marked if longer periods be compared.
The statute does not indicate how frequently
the Commission shall revise and adjust the gen-
eral level of rates for the carriers of a particular
rate district, but presumably such readjustments
will be made only at intervals of several years.
It takes an appreciable period of time for traffic
to adjust itself to a new level of rates and such
level ought not to be disturbed until it becomes
clear that it is inadequate or excessive. If the
intervals between readjustments of rate levels
are long enough to permit the law of averages to
operate with respect to repairs and renewals and
replacements of rolling stock and equipment, it
seems apparent that there would be no occasion
at all for the introduction of any estimated
charges 'into operating expenses, to secure a fair
statement of cost of operation for the period. If
the intervals are too short for this, the justifica-
tion arises for the admission of charges based on
13
estimates of current outlays. Such estimates,
however, when permissible, should be restricted
to elements other than anticipated shrinkage in
** value" of parts of the property, for, as has
been said above, the carrier is not a trader or
merchandiser in respect of its railway property
and its duty in connection with its property is to
maintain the same in efficient operating condition
and to operate it efficiently and economically in
the transportation of goods and persons ; and any
charges for repairs, renewals and replacements,
w^hether actual or estimated, should be based only
upon the actual requirements for those purposes.
When any part of a unit of railway property
wears to such a point that the particular unit
no longer operates efficiently, it is the carrier's
duty, under the statute and in the exercise of ordi-
nary business judgment alike, to either repair it
or replace the w^earing part of such unit, and
thereby to overcome the actual deterioration of
the unit and restore it to full operating efficiency.
*^If in the interval since a complete unit was in-
stalled, the art of transportation has progressed
to such a point that it has become obsolete or is
inadequate and the economies to be realized
justify its withdrawal from service, it should be
replaced with a unit of improved type and ade-
quate capacity, and the cost of retiring the obso-
lete or inadequate unit, if too great to charge
against the provision for renewals for the cur-
rent year, should be borne by future passengers
and shippers. ''Abandonments occasioned by
changes of this character are therefore charge-
able to future earnings.^' (Kansas City Southern
^Ry. Co. vs. U. S., 231 U. S., 423, 451, 452.)
14
The Sound Treatment of "Retirement Expense"
When a given unit of property used in transpor-
tation service is installed, the executives who
financed its installation and are charged with the
duty of maintaining the property as a whole and
with making financial provision therefor, realize
that certain things may transpire as to the new
unit of property or portions thereof. If it is of
such a character that it has wearing parts, or that
portions of it will be affected by the action of the
elements, the executives of course are aware that
repairs of such wearing parts will have to be made
from time to time, else the unit and property as
a whole will not function efficiently and will break
down altogether if these repairs are not made as
required. On the other hand, they are aware that a
large portion of the property, at least if properly
maintained by these repairs and renewals of wear-
ing parts, has a practically indefinite life in ser-
vice, unless its retirement from use comes about
from causes in no way related to the effects of
use. At a recent hearing before the Federal
Power Commission, the Secretary of War, Mr.
Weeks, trenchantly inquired of a distinguished
hydraulic engineer whether an estimate could
soundly be made as to the probable **life'' of a
dam such as would figure in a water-power proj-
ect. The reply was, in substance, that such a
thing could hardly be calculated, because dams
known to be more than 2,000 years old are still
functioning and in use, with no signs of going
out of service because of any consequences of age,
use or wear. Probably these dams, too, have had
practically no repair work done upon them since
they were built before the Christian era.
As has been said by Mr. Webster in the mono-
graph already referred to:
15
** Stephenson's second locomotive was still
in use in 1911 (E^icjineering and Contracting,
October 11, 1911). The cast-iron water-
pipes leading from the river Seine to the foun-
tains at Versailles, were installed in 1658,
The only repairs that have been necessary
after two and a half centuries of service are
the occasional replacing of bolts (Engineer-
ing and Contracting y May 27, 1914). Kome
is still supplied with water by an aqueduct,
the construction of which was begun by Quin-
tus Marcius in 144 B. C. Tunis is now sup-
plied by an aqueduct built by Hadrian in
A. D. 120. The aqueduct at Nimes has been
in use for nearly twenty centuries. There
are many other instances of masonry and
concrete structures which have survived many
hundreds of years of useful service.'^
The wearing parts of units of railway property
are currently repaired as needed, and the effect
is to maintain the unit in existence and in high
operating efficiency, for an indefinite and unde-
finable period, and the expense of this repair and
replacement of wearing parts is properly assessed
by the comj^any executives against the current cost
of rendering the service in which the use and w^ear
took place.
The responsible executives of the carrier also
realize that although the newly installed unit may
continue in use for an indefinite and incalculable
period, if thus maintained in good operating con-
dition, it may go out of use, for other causes than
wear or the flight of time, and that such retire-
ment from use may come about at almost any time
— a time in no way susceptible of estimate at the
time it is installed, but varying altogether with
the particular carrier, the particular territory be-
ing served, the nature of the service being ren-
16
dered, the various factors affecting the cost of ser-
vice, and the like. The unit may be retired from
use because it has become inadequate to meet the
growing demands for service (and hence is uneco-
nomical) or because new inventions have resulted
in improvements in the type of a given unit, mak-
ing its retirement economical in the interests of
future patrons. A larger volume of traffic can be
handled or the existing volume of traffic can be
handled more cheaply or more efficiently, if the
present unit is removed and a new one put in, al-
though the unit taken out is still functioning as
efficiently as when installed. The time when such
supersession of a unit will take place cannot be
forecast in terms of years, by company executives,
engineers, or any one else, at the time the unit
is installed. ** Tables of useful lives'' of units
of that kind are unavoidably conjectural and
speculative, bearing no possible relationship to
the controlling factors, which vary utterly with
the individual instance. To try to ** assign'' a
probable period of *^life" to the unit when it is
installed, and then charge against current rates
an accrual based on the amortization of the
cost of the unit over that period, is to set up
a system of swelling operating expenses and
** padding" rates on a basis of mere conjectures,
because with the great mass of raihvay property
its proper maintenance by current repairs con-
signs all ^^life tables" to the realm of silly im-
practicabilities, and supersession, when it does
take place, occurs for causes in no way related
to such **life tables." Moreover, such super-
session comes about for causes which make im-
proper the amortization of its cost through in-
creased rates during the period before it is super-
seded.yr^^ ^^it did not wear out in the service
of the patrons it served. They paid the cost of
maintaining it in good, undiminished operating
17
efficiency; there is no reason why they should, in
addition, pay the cost of retiring it to put in a
new unit which will serve more patrons or serve
future patrons more cheaply \i^^]\Q existing unit
was serving present patrons e&ciently; the cost
of retiring it to put in a larger or more economi-
cal unit becomes a proper charge against those
who will be served and benefited thereby.)/ The ex- '^
pense of retiring property should therefore be
borne hy current or future charges, and not by
anticipatory accruals (Kansas City Southern R^.
Co. vs. U. S., 231 V. S., 423, 451-2)yin other words,
the retiring of a very large unit may necessitate
the distribution of the amortization of the invest-
ment therein, over a short period of succeeding i^
years. >^
It thus appears that wherever departure is
made from the actual current outlays, year by
year, for repairs and for the renewal and re-
placement of property withdrawn from service,
** depreciation '^ charges in operating expenses
should in any event be restricted to those neces-
sary to equalize from year to year the charges for
extraordinary repairs and for renewals and re-
placements which occur irregularly. As experi-
ence shows that in large plants and other utilities
whose property is distributed sufficiently widely
to be subjected to a variety of hazard, the actual
costs of repairs and retirements tend to equalize
themselves when taken over a period of years, it
is apparent that there is no need at all for per-
mitting the introduction of estimated charges in
operating expenses to cover the matter of ** depre-
ciation'' in connection with the determination of a
fair level of rates as defined in the statute, unless
the Commission contemplates frequent readjust-
ments of the rate level. If such frequent read-
justments are contemplated, the regulation of such
18
charges should be based on the actual present
and past experience of the carriers, and the
charges themselves should be proportioned on the
basis of the work done rather than on mere lapse
of time. Extensive reconstruction projects involv-
ing numerous renewals and replacements cannot
advisably be undertaken at a time of the year
when the plant is working under full load or over-
load, for at such times operation would be too
much impeded by the execution of any mainte-
nance work in excess of actual immediate needs.
Furthermore, at such times prices are usually
high and the supply of materials and labor re-
stricted, and it would be uneconomical to do work
of this character which is not absolutely essential
to the continuity of operation. In such periods,
therefore, when the actual disbursement for main-
tenance work is comparatively small, the esti-
mated charges may properly, if ever, be intro-
duced in operating expenses to make provision for
the time when traffic has slackened and the forces
of the carrier can advantageously be concentrated
on maintenance work.
Analysis of the "Depreciation Charges" of Railway
Carriers Since 1912
Illustration of the pertinency of the foregoing
suggestiontthat care be taken to limit ** deprecia-
tion charges ' ' to actual maintenance requirements
rather than to base them on tables of assumed
*4ives" of property ^is afforded by the fact that
an examination of the figures published in the In-
terstate Commerce Commission's reports on rail-
way statistics shows that during the four years
from June 30, 1912, to June 30, 1916, the credit
balance in the reserve account ^* Accrued depre-
ciation" for all Class I railways and their non-
19
operating subsidiaries increased from about $300,-
000,000.00 to about $555,000,000.00. In other
words, the charges to operating expenses for ^^ de-
preciation'^ during those four years were $255,-
000,000.00 greater than was necessary to provide
for all retirements of equipment and other rail-
way property made during that period and
charged against the reserve thus created. How-
ever, owing to some anomalies in the Commis-
sion's rules of accounting at that time in force,
there were charges made to *^ Profit and Loss''
account to the extent of about $59,000,000.00 for
**loss on retired road and equipment." Granting,
for the sake of argument, that all of this $59,-
000,000.00 might properly, in the absence of the
** depreciation" charges in operating expenses,
have been made to operating expenses, it is still
true that the charges to operating expenses in this
connection ivere about $196,000,000.00 (the differ-
ence hetiveen $255,000,000.00 and $59,000,000.00)
greater than were necessary to provide for all re-
tirements actually made during those four years,
or, in other ivords, for all renewals and replace-
inents necessitated during that period on the as-
sumption that such renewals and replacements
had cost no more than did the things renewed or
replaced. The Commission's rules properly per-
mit the excess cost of the replacement over the
cost of the original to be charged to the road and
equipment account, so that it is shown by the
Commission's figures that the operating expenses
of Class I carriers and their subsidiaries were
overstated during those four years by nearly
$200,000,000.00. Similarly, for the eighteen
months from June 30, 1916, to December 31, 1917,
the credit balance in the reserve account ** Ac-
crued depreciation" for such carriers increased
about $224,000,000.00, whereas the charges to
** Profit and Loss" for **loss on retired road and
20
equipment/' during the twenty-four mont*hs from
December 31, 1915, to December 31, 1917, were
about $30,000,000.00. Owing to the change in the
reporting year from that ending June 30th to that
ending December 31st, there is an overlap of six
months in the income accounts and profit and loss
accounts contained in the annual reports relating
to the year ended June 30, 1916, and that ended
December 31, 1916, and it is impracticable to say,
from the figures published by the Commission, what
this item of **loss on retired road and equipment''
charged to *' Profit and Loss" is for the eighteen
months from June 30, 1916, to December 31, 1917.
It is safe to say, however, that it is materially
less than thirty millions of dollars, and therefore
that the mnounts cliarged to operating expenses
for ^' depreciation' ' during those eighteen months
were more than $194,000,000.00 in excess of the
amount of retirements actually made during that
period, so that for the five and one-half years
from June SO, 1912, to December 31, 1917, the
amounts charged for ^' depreciation' ' in operating
expenses ivere over $390,000,000.00 more than ivas
necessary to provide for all of the retirements ac-
tually made during the period; or, in other words,
the operating expenses of this class of railroad
common carriers as reported during that period
were, so far as this item is concerned, overstated
by at least $390,000,000.00, with corresponding ef-
fect upon the net operating income and so upon
the apparent adequacy or inadequacy of the rates
paid by the companies represented by the under-
signed, in common with all other users of similar
commodities, for the transportation of coal,
oil, iron, steel, pipe and other materials in inter-
state commerce.
Another concrete instance emphasizing the im-
portance of sound treatment of ** retirement ex-
21
pense'' may be taken from the records of a reg-
ulated utility of whose service the Consolidated
Gas ComjDany (with its affiliated companies) is
probably the largest single patron. The sums
which we have to pay for telephone service enter
heavily into our operating expenses, amounting to
more than $200,000 per year. Examination of the
figures published by the Public Service Commis-
sion for the Second District shows that as of De-
cember 31, 1914, the credit balance in the two re-
serve accounts of the New York Telephone Com-
pany, entitled ^^ Accrued Depreciation'^ and
'' Amortization, '^ was $25,498,912. Five years
later, after taking care of all retirements of fixed
capital actually made over this considerable pe-
riod, the accruals had increased the reserves to
$63,390,038. In other w^ords, the rates charged
during the five years had included the collection
by the company, from us and other consumers,
of $37,891,126 more than the actual cost of prop-
erty retirements during the same period. In the
same five years, the telephone company's invest-
ment in fixed capital devoted to its telephone busi-
ness was increased $76,805,076 by the addition of
new facilities and equipment. Thus while less
than $77,000,000 of new property was being in-
stalled, 49.33 per cent, of its total cost was being
collected from consumers, over and above the ac-
tual requirements for the five years, on the theory
of providing for possible but uncertain future re-
tirements. During the eight months ended August
31, 1920, the credit balance in these reserves was
increased $6,580,064 over actual retirement ex-
penses, whereas only $14,460,695 w^as in the same
period added to the company's capital investment.
In other words, over a period covering five years
and eight months, the company collected from
its consumers, to make good its losses from the
retirement of property from service, $44,471,190
22
more than its actual losses from such retirements
over this considerable period, or approximately
$7,850,000 in excess of average actual yearly re-
quirements ; and the credit balance in its reserves,
as of August 31, 1920, representing collections
from consumers over actual retirements, was $69,-
970,102, or nearly 35 per cent, of its aggregate
property investment of $240,432,094.
Whether the rates charged by the telephone
company or by the railway carriers are or were
reasonable or excessive, we do not undertake to
say. That question is for the regulatory commis-
sions charged with the duty of seeing to it that
such rates are kept neither too high nor too low.
Our comments are only upon a system of accruals
through charges to operating expenses on the ba-
sis of theoretical estimates, which leads to the col-
lection of sums so greatly in excess of the actual
retirement expense over a representative period.
Whether the rates actually charged yielded
more than a fair return over and above actual
operating expenses, we do not here discusSy Any
sums collected in excess of actual operating costs,
including the actual retirement expenses (aver-
aged, if desired, over a representative period)
should be collected as return on investment or not
at all. No carrier or utility should be permitted
to collect from its patrons more than its operating
expenses plus a fair return, and no carrier or util-
ity should be permitted to make its return from
existing rates appear inadequate through charg-
ing to operating expenses a sum whose accrual is
not required by any actual outlays of the com-
pany, either current or prospective/^ No implica-
tion is intended to be conveyed agamst the policy
of making reserves, out of the fair return, for
contingencies, if it is deemed advisable to thus se-
gregate a part of the surplus earnings. There
23
should be left, however, no room for doubt that
when thus segregated such a reserve still repre-
sents surplus earnings belonging to the stockhold-
ers and that upon the property in which it is in-
vested the company has as unquestionable a right
to earn a fair return as it has upon the property
representing its surplus so called.
Concrete Recommendations as to the Handling of
Depreciation Charges
These were the practical considerations which
led the Consolidated Gas Company of New York,
in its petition of June 1, 1920, as intervenor in Ex
Parte 74 before the Commission, relative to in-
creases in freight rates, to present to the Commis>
sion a more formal statement of the foregoing con-
tentions, and accordingly to urge upon the Com-
mission the following suggestions, which are of
equal pertinency to your present inquiry :
* * 1. That the above-stated considerations be
taken into account and kept in mind by the
Commission in all pending and future pro-
ceedings for the fixation of the rates charge-
able by railroad common carriers in inter-
state commerce.
**2. That the petitioner be permitted to in-
tervene and be heard, by counsel, in such pro-
ceedings, and to file a brief therein, in behalf
of the considerations hereinbefore stated.
**3. That the Commission will find that for
Class I carriers there are no * classes of prop-
erty for which depreciation charges may
properly be included under operating ex-
penses,' and that it will require that the main-
tenance charges for any calendar year, in-
cluding charges for renewals and replace-
ments, he stated on the basis of expenses ac-
24
tually incurred during that year, to the end
that freight rates be placed at a level which
will be fair both to carriers and to shippers,
and that they be not made unduly high in or-
der to provide for estimated charges not
based on actual facts.
**4. In the event that the Commission be of
opinion that a year is not a suthciently long
period to include representative fluctuations
in maintenance charges, the petitioner prays
that the rules governing estimated charges
for 'depreciation^ shall hereafter he based on
the actual experience of the carriers during a
period of a length reasonably sufficient to in-
clude such fluctuations and that the estimated
charge shall he distrihuted from year to year
upoh a suitahle operating unit (such as, for
example, car-miles), so that during years of
heavy traffic the estimated charge may be cor-
respondingly great and during years of light
traffic it may be correspondingly less, and
thus avoid, so far as may be, fictitious fluc-
tuations in the ' net railway operating income '
which the statute makes the test of the ade-
quacy or inadequacy of a given schedule or
level of rates."
The Two Opposing Views as to Provisions for the
Upkeep of Property
In line with the foregoing, there may be said to
be two opposite views, two radically differing pol-
icies, which may be followed by a regulatory body
in fulfilling duties such as those devolved upon the
Interstate Commerce Commission by Section 20
of the Interstate Commerce Act as amended :
/
25
1. The course four-square with business
practice in large utility and industrial estah-
lishments; which recognizes that property-
used in public service does not go out of use
on arbitrary or theoretical grounds or accord-
ing to any preconceived ** table of lives," but
for reasons not calculable in advance as to
time, and commonly related to economies in
the cost of service or increases in demand for
service ; and hence does not make ' ' accruals ' '
of reserves over estimated periods to provide
for a ^ Agoing out of use'' which does not oc-
cur with any calculable reference to such esti-
mates or such periods and does not undertake
to burden present consumers or patrons with
the cost of retiring property altogether ade-
quate for their needs but not adequate for the
needs of a larger number of patrons or not as
economical in serving future patrons as some
newly developed unit or machine.
"^ 2. The course predicated on preconceived
''lives of property"; which disregards actual-
ities and substitutes for business experience
the theories of academicians; which creates
unnecessary charges to current operating ex-
penses to create unnecessary ** reserves,'' all
to the end that through these accruals current
passengers and shippers may be compelled to
contribute to a piece-meal but surreptitious
** purchase" of the property, to be effected by
the deduction of the amount of such reserves
from the sum on which the company would
otherwise be entitled to earn a return or the
sum for which the company would be entitled
to be compensated, when, if ever, the
* theoretical depredationists" have their way
and the Federal Government takes over rail-
road property for governmental ownership
and operation.
-t
26
Decisions of the Courts and Regulatory Commissions
Concerning These Opposing Views
Although we recognize that a business problem
of this character cannot be solved merely by cita-
tion of judicial decisions, we believe that an analy-
sis of the pertinent rulings may prove of assist-
ance to the Depreciation Section and the Bureau
of Accounts at this juncture. Particularly in the
early years of rate litigation, it cannot be said
that the Courts always perceived the problem in
all its aspects or phrased their discussion of it
with the exactness of expression which has come
^ with fuller consideration. It remains true that no
leading or well-considered case has decided that
** accrued theoretical depreciation" must be de-
ducted from the so-called ^^rate base" and pro-
vided for in the rate. The trend of decision is
unmistakably toward rejection of this concept
altogether. As has recently been said by Ex-
Judge H. M. Wright, the distinguished Special
Master who has heard many of the rate cases
arising on the Pacific Coast, the whole subject
must be re-examined and earlier conclusions re-
vised, because of the trend of judicial decisions
/and recent literature. (See Pacific Gas and Elec-
tric Co, vs. City and County of San Francisco;
U. S. Dist. Ct; No. Dist. of Cal.; Report filed
March 2, 1920; quoted from on page 71, post).
One of the most recent decisions in the Federal
Courts was in New 'York and Queens Gas Com-
pany vs. NewtoHi, et al., in the United States Dis-
trict Court for the Southern District of New York,
on November 19, 1920, before Mayer, D. J., on a
motion to confirm the Report and Opinion of the
Honorable A. S. Gilbert as Special Master. (See
269 Fed. 277, and supplemental opinion by
Mayer, D. J., not officially reported). The Special
Master had ruled that there should be no deduc-
27
tion. from actual investment or present value of
property, for so-called *^ expired life^' or *^ accrued
theoretical depreciation/' and the Federal Court
agreed with him and refused to make any such
deduction.
The whole issues of fact and engineering and
accounting experience having to do with the main-
tenance of property and the provisions to be made
for renewals and replacements were exhaustively
litigated in this case, and the Report and Opinion
therein seem conclusively to establish the pro-
priety of handling these matters in the practical
business way urged in this memorandum. We
quote from the opinion in that case and urge that
the matters of fact therein set forth are fatal to
the theoretical assumptions on which some of the
proposed regulations on this subject are based:
"No Deduction for 'Accrued Theoretical
Depreciation*
**In determining that the complainant's
property has a fair present value of at least
the amount of the complainant's actual in-
vestment therein as found by me, viz., at least
$1,655,877.94, I have made no deduction for
what is termed * depreciation, ' in whatever
way calculated. Under any basis of deter-
mining present value, the complainant's
property is now worth at least the amounJ>
of such investment therein, and the sound rule
of law and policy seems to require the allow-
ance of a reasonable return upon at least that
sum.
**Upon the present trial, it was insistently
urged upon me by some of the defendants
that there should be deducted from the cost
of the property (irrespective of whether
28
'original/ * pre-war/ or 'present reproduc-
tion' cost be under consideration) an amount
claimed to represent so-called 'accrued theo-
retical depreciation/ based upon an assump-
tion of 'life expectancy' for a gas plant and
equipment and the estimated or known num-
ber of years since the same was erected or
installed. From the testimony given upon
the trial, I was strongly impressed by the
fact that in respect of a very large proportion
of gas property, there is no ascertainable
'life expectancy.' The withdraw^al of such
property from service comes about from in-
adequacy or obsolescence which dannot be
forecast in terms of years or even satisfac-
torily guessed at. Certain parts of operating-
machinery and equipment are of course sub-
ject to effects of use. The replacement of
these wearing parts enters into the cost of re-
pairs. As to the substantial units of struc-
tures, apparatus, mains, and equipment, their
withdrawal from the property accounts comes
about from causes not attributable to the con-
dition of the property itself or any diminu-
tion in its operating efficiency, .but varying
utterly with the particular plant, time, local
conditions and service demands and hence
capable of being forecast only as the occasion
for such change in plant or equipment be-
comes imminent.
"The Renewal and Replacement of Gas Property
"In other words, in order to keep abreast
of improvements in the art of making and
distributing gas when and as it becomes eco-
nomically advantageous to do so, and to meet
the growing demand of the public for service
more adequately and economically than would
29
be possible through merely making additions
and extensions to existing plant and equip-
ment, larger or better and more economical
and efficient units of plant and equipment are
from time to time installed to take the place
of units which still are operating as efficiently
as when first installed. The loss due to such
supersession cannot properly be said to have
accrued during the period the superseded unit
was in service. It occurred when supersession
took place. It became a proper charge against
the economies to be realized therefrom. It
furnished no basis for the imposition of an
additional charge against the user of the
superseded unit during the period of its use-
ful service over and above the higher cost
of operating it. Such a charge could not be
justified either on the ground that the unit
was losing potential life, or that the capital
invested in it was being consumed, because
neither is true.
"Additional Burden on the Consumer
Unwarranted
*Mn order to justify the deduction of
* theoretical depreciation,' I w^as asked in this
case to assume that a * depreciation reserve'
equal to the computed theoretical deprecia-
tion' had been collected from the public, and
then to deduct from the company's invest-
ment the amount of such assumed reserve.
No such reserve had, in fact, been collected
or accumulated by this company. The rate
chargeable did not permit it, and there is no
reason to believe that the Legislature, in pre-
scribing the rate, ever contemplated it. As
I have set forth in Findings Nos. 32 and 27
iof my Keport and as I have elsewhere mdi-
30
cated herein, the complainant gas company
has maintained its property and investment
intact in the past, through renewals and re-
placements, at an average actual cost of ap-
proximately three cents per thousand cubic
feet of gas sold, and no reason appears for
believing that it cannot continue to do so on
that basis. Even assuming that the statute
permitted such a rate, to have imposed on
the company's consumers an additional bur-
den nearly twice as great, representing a
purely theoretical item of operating cost,
merely to accumulate a useless reserve to
justify a drastic deduction from investment
in some ultimate proceeding as to rates, could
not have been justified on any sound theory
in the past and cannot now be sustained as to
the future.
"Effects of an Unnecessary Reserve
**In order to justify the assumption that a
* depreciation reserve' was or should have
been collected, defendants' witness Hine testi-
fied in this case that such a reserve was
necessary *so that when the property is re-
tired for any. cause whatsoever the fund can
be charged with the cost of the property. ' He
testified also that the reserve should be, in his
opinion, * invested in the property,' and that
when the funds were needed for renewals and
replacements they would be provided *by issu-
ing securities against construction work
w^hich had been done originally out of this
fund, for the money laid aside for this fund,
just to reimburse the treasury on account of
these expenditures.' This view seemed to me
to disregard the obvious fact that having de-
ducted the amount of the reserve temporarily
31
invested in property from that on which he
proposed the company should be allowed to
earn a return, he, to all intents and purposes,
destroyed the earning power of such prop-
erty and investment; that therefore he could
not issue any securities against such prop-
erty, there being no earnings therefrom with
which to pay interest on the securities; that
the reserve could never thereafter be availed
of for the purpose for which it was alleged to
have been created, and that it w^ould be, in
fact, as if it had never been created. Thus he
not only failed to sustain his contention that
a depreciation reserve' was necessary for the
purposes which he alleged, but he proposed to
treat the reserve as if he himself believed it
to be both unnecessary and ineffectual, except
for the purpose of justifying a deduction from
the complainaint's investment.
*^It is obvious that the collection of an un-
necessary reserve and its periodic deduction
from the value of the property in service
would operate to effect a piece-meal purchase,
on the part of the public, of the property
used by the utility in its service. In other
w^ords, it is really ashing the consumer to pay
for the plant y instead of paying a return on
the investment. If such a consummation is
desirable, of which there is no evidence, it
should be effected openly, and not surrepti-
tiously under the guise of providing for so-
called theoretical depreciation.'
"Present Condition of the Property
''Mr. Miller testified that as of April, 1920,
the expenditure of $6,144.07 for repairs, re-
newals and replacements, would put the plant,
structures, machinery and equipment in con-
32
dition substantially as good as when they
were erected or installed. His testimony in
this respect was not contradicted by that of
any witness. This sum, however, does not, in
my opinion, measure any impairment in the
• present value of the property used and use-
ful in the gas business. It represents merely
an unmatured obligation to maintain the
property in efficient operating condition out
of future earnings, the expert witnesses of
'- both the complainant and the defendants
agreeing that it was and is maintained in effi-
cient and first-class condition, I therefore
have not deducted this or any other sum rep-
resenting so-called * accrued depreciation'
from the amount found by me to represent
the investment of the complainant in its gas
property upon which it is entitled to have its
rate such as to yield a reasonable return.''
Judge Hand's Rejection of "Accrued Depreciation"
Theories
The ** straight-line " theory of *' depreciation"
and the setting up of ^^ reserves "and deductions
based thereon, have also been emphatically re-
jected by Judge Learned Hand, in the United
States District Court for the Southern District of
New York (Consolidated Gas Co. vs. Neivton, 267
Fed., 231, 265; P. U. K. 1920 F, page 485). The
Special Master in this case also had rejected the
claim that deduction must be made for ^* accrued
depreciation," in ascertaining present value.
Judge Hand said:
'^Maltbie figured a * straight-line ' deprecia-
tion of three and a half millions, for all plants
and holders. This was necessarily a conjee-
33
lure, based upon the supposed life of the
plant ; it has no application while the plant is
kept up, * * *
*^The other elements of depreciation are
for mains, about one million five hundred
thousand dollars, and services and meters,
one million five hundred thousand dollars.
Ajiy depreciation in the mains appears to me
quite fanciful. Little said that the life of a
main when properly buried was indefinite ; the
only question is of obsolescence and repairs,
and I should suppose that obsolescence would
occur only after it got too small for its re-
quirements. It might of course be possible to
show that all necessary mains could now be
laid for less than the book cost, but the plain-
tiff has shown the contrary by Miller, and it
is not contradicted.
*^As to meters and services the case is not
so strong because even if their life be seventy-
five years, as Little thinks, no one knows the
age of all those in use. Moreover, the depre-
ciation of one million five hundred thousand
dollars is only about twelve per cent of their
cost. However, the same rule applies as be-
fore. The plaintiff proved the cost and the
necessary repairs to bring the whole plant up
to its original condition. It proved that the
cost of reproducing fixtures of equal capacity
was more than the book cost. That made a
case, in my judgment, which was proof against
any theory of * straight-line ' depreciation.
The allowance for repairs might be attacked
on the ground that the condition of the plants
and fixtures in fact required inordinate re-
pairs, but that was not done. In accordance
with the principle which I have tried to dem-
onstrate I decline to make any allowance for
depreciation. ' '
Age of a Plant "Not a Function in Rate Base"
On the broader aspects of the subject, Judge
Learned Hand had occasion to consider its legal
and economic aspects in the light of the more
thorough and intelligent investigation which re-
cent experience has prompted, and he stated his
conclusions as follows:
*^The defendants insist upon the element of
depreciation based upon an allowance each
year of that proportion of the total value
which a year bears to the whole life of the
plant. The Supreme Court (Knoxville Water
Co. vs. Knoxville, supra, Minnesota Rate
Cases, supra) has recognized that some de-
preciation is a proper element in estimating
the *rate base,' but has not as yet authori-
tatively settled on what principle it shall be
calculated. It seems to me hardly possible in
the case at bar to avoid taking a position with
regard to that principle.
*^If the proper standard for a * rate-base' is
the present cost of a substitute plant of equal
capacity, as I believe, depreciation can be a
function of it only in case the allowance for
renewals to the plant under consideration will
in the future be greater than that of the as-
sumed standard. If the rates allowed in the
future include only an allowance for renewals
of a new plant the company will have to abate
something from its normal profits because of
its extraordinary renewal charges. Theoreti-
cally it makes no difference whether this prob-
lem is met by giving the plant a smaller value
at present because of its future greater re-
newal charges and then allowing a higher rate
for renewals, or by giving it its present value
based on capacity and letting it bear its extra
renewals out of its normal profits. Were the
35
plant sold, the future abnormal renewals
would be reflected in the sale price, being dis-
counted at once, but that would be because
the parties must at present clear their ac-
counts once and for all. The seller would be
unwilling at once to abate from his price, and
later to allow the buyer from time to time for
his unusual renewals. In the case of a public
service company where the authorities may
always require the plant to be kept up to
standard, there is an obvious advantage in
declining to attempt a repeated adjustment
between the actual renewals necessary and
normal renewals, as would be necessary if the
present prospect of such allowances were now
discounted; it is the better practice to allow
the plant to bear its own extra renewals and
to insist that it shall always be kept up.
Therefore, it appears that, so far as concerns
the future, the age of the plant should not he
a function in the 'rate-base.'
^ ' On the other hand, in computing the * rate-
base' from the original cost, depreciation is of
vital consequence. Practical men will prefer
to ascertain the cost of a present plant by
experience, when they can, rather than by
estimate, just as the master here has done.
In so arriving at the cost of a present plant
of equal capacity, it is clear that the original
cost of the plant in question must be abated
by depreciation, so far as that is reflected in
a loss of capacity. In such a calculation, how-
ever, there must figure past renewals as an
offset to past depreciation and if in fact the
capacity has remained the same, depreciation
should not he a functidn of the 'rate hase' at
all. In such a case the inquiry as to deprecia-
tion should be confined to changes in * price-
levels.' "
36
There heing no loss of capacity to serve, in the
case of the rolling-stock, road-bed, terminals^
round-honses, and other property and equip-
ment of a raihvay common carrier, through lapse
of time, but probably rather an increase in ca-
pacity and efficiency over previous years, and the
property being in fact maintained in repair and
excellent operating condition, as the statute re-
quires, there is no sound reason to set up and
accrue any sum for *^ accrued theoretical deprecia-
tion'' or to require that this be done.
The Nashville Railway Company Case
(^ The so-called *' accrued theoretical deprecia-
tion'' concept is in contradiction to the rulings
of the United States Circuit Court of Appeals for
the Sixth Circuit on December 7, 1920, in Nash-
ville C. S St. L. Ry. Co. vs. United States (269
Fed., 351). In that case, the railway company
had computed *^ depreciation" of roadway for the
two years in question by the so-called '^straight-
line" method, taking three per cent.' of the value
thereof as annual depreciation on the theory
that the average life of the perishable elements
was thirty-three and one-third years, and had de-
ducted the amount from gross income. The Gov-
ernment's contention was that there was no net
depreciation in the intrinsic value of the roadway
and structures considered as a unit and that the
deduction should not have been made. The Cir-
cuit Court of Appeals sustained this view, quot-
ing with approval the testimony of witnesses that
'Hhere may be depreciation in the units compris-
ing the roadway, track and structures of the rail-
road, while there is no depreciation in the machine
as a whole;" also that it is possible '*to maintain
the roadway, track and structures so that there
will be no depreciation if we consider the roadway,
37
track and structures as a composite wliole;" also
that ^Hhe service life of any normally operated
and well maintained railroad is perpetual and it is
maintained in the condition of property serving
its purpose by annual renewals and replace-
^^ments. ' '
Contentions of the Government in the Nashville Case
Of very great interest in connection with the
foregoing decision of the United States Circuit
Court of Appeals are the following excerpts from
the brief filed In behalf of the United States, by
way of reply to the contention of the brief submit-
ted in behalf of the railroad company :
*^The Government admits that there would
have been depreciation to the roadway of the
railway for the years 1909 and 1910 after all
reasonable and proper repairs merely had
been made; but the Government proved that
the renewals and replacements together with
the repairs which were made, maintained the
roadway, and, in fact, kept the roadway in
as good or better condition at the end of each
of said years as it w^as in at the beginning of
each of said years, and that therefore there
was no depreciation,
**It is the theory of the Government that
the usefulness of roadways determines their
value in use. In other words, as their useful-
"^ ness isj so is their value. If their usefulness
remains the same, their value also remains the
^ sam,e; if their usefulness is increased, their
value is correspondingly increased; if their
usefulness is decreased, their value is like-
wise decreased. It is obvious, therefore, that
whatever increases or reduces the usefulness
of railroads, correspondingly increases or re-
38
duces their value. In this connection, it is
well known that wear and tear, etc., reduces
the usefulness, and consequently the value of
railroads. On the other hand, it is equally
well known that repairs, renewals, and re-
placement of parts increase the usefulness
and consequently the value of railroads. It
is also well known that the occurrence of wear
and tear is the occasion for repairs, renewals
and replacements of parts, and that, with the
roadway and other property properly man-
aged, railway companies' wear and tear no
sooner occurs than renewals and replacements
are made — so that both take place simultane-
ously and tend to counteract or offset each
other.
**When this occurs, i. e., where wear and
tear suffered by railroads is sought to be off-
set or counteracted by repairs, reneivals, and
replacements of parts, one of three results
must happen. First, if the wear and tear is
exactly offset or counteracted by repairs, etc.,
the usefulness and value of the railroad re-
mains the same and the value is said to be
* maintained' intact. Second, if the wear and
tear is not entirely overcome by the repairs,
etc., the usefulness and value are reduced and
the value is said to be depreciated' to the
extent of the difference between the original
and present value of the railroad. Third, if
the wear and tear is more than overcome by
repairs, renewals, etc., the usefulness and
value is * increased' and the increased value is
regarded as *an additional capital invest-
ment. '
39
** Counsel for the railway, on page 44 of
its brief, says:
*The fallacy in the Government's theory
is first, that it considers *^ betterments'' as
a means of offsetting depreciation. This
cannot properly be done; smns for better-
ments are charged to capital account, not
operating expenses.'
The Government Proved There Is No "Accrued
Depreciation" of Railway Property
**The Government did not consider better-
ments as a means of offsetting depreciation
when sums expended for betterments were
charged to the capital account of the railway.
The Government proved that it is an estab-
lished policy of American railways not only
to maintain but to improve the usefulness and
value of their roadways; and to accomplish
this end, it is their practice to make repairs,
renewals, and replacements of parts as occa-
sion requires, ' and that as a result of such
policy and practice, railways prevent or over-
come depreciation in the value of their road-
ways as a whole and continue the service life
of their roadways indefinitely. Materials of
a more modern and improved type are con-
stantly being used in effecting renewals and
replacements of a roadway which actually
constitute an improvement or betterment
which is not usually shown on the books, as
will be shown from Mr. Isbell's testimony, on
pages 43 and 44, which is as follows :
*I do not think the deduction made by
the railway for depreciation of its roadway
should be allowed because in these charges
for maintenance of roadway are included
items for renewals and replacements. Un-
40
der the income tax law, renewals and re-
placements should be charged not against
expenses, but should be taken from a depre-
ciation reserve, if such a reserve is on the
books. It cQuld not be taken from a de-
preciation reserve unless such reserve does;
appear on the books. Then it is not an al-
lowable expense or deduction on the income
or excise tax returns, for the reason that
this renewal or replacement keeps the prop-
erty to its original value. As to w^hat I
mean by original value, when the railroad
replaces any item, they try to, according to
my experience, make it as good or better.
For instance, if a cross-tie is replaced, if
they can get a better cross-tie to put in
there, they do it. In the matter of what is
technically known as other track material,
consisting of such things as switches and
frogs and things like that, they try to put
in a better one if they have to replace an
old one ; they try to put in better ballast, if
possible. In that way they not only effect
a renewal, but they have an improvement or
betterment, which is not usually shown on
the books. Of course, if they build addi-
tional trackage, that is charged to capital
account, and is an addition or betterment,
and that does not enter into this question
whatever * * *
*When a tie is played out, a new tie is
put in place. That is called a renewal or
replacement. In the same way, if a depot
needs to be rebuilt, and about the same
character of structure is to be built, that is
called a renewal or replacement of the de-
pot, and the same thing is true of a trestle.
If the trestle is replaced as near as possi-
41
ble at about the same cost as the old one,
that is called a renewal or replacement of
that bridge or trestle.
^If an additional track is built, for in-
stance, a branch line is built to a new town
or new territory, even if it is one mile or
fifty miles long, that is called an addition
or betterment. If a bridge costing $10,000
is replaced by a new one costing $20,000,
then $10,000 is a renewal and charged to op-
erating expenses, and the additional $10,000
is an addition or betterment, and that goes
into the capital. It is not charged as an
expense against the gross income for one
year.' "
The Contention of the Government as to the
Effect of Renewals and Replacements
** Counsel for the railway states on page
45 of its brief as follows :
*The Government gave no consideration
to such repairs as painting a depot, putting
window^s in machine shops, fixing the floor
of a section house — that class of repairs
that prolong the life of the unit repaired
but cannot totally arrest its depreciation.'
**Mr. Isbell, one of the Government's wit-
nesses, in his answer to the following question
in regard to repairs to depots, shows very
plainly that repairs are taken into considera-
tion (see Tr., page 47) :
*Q. If a railroad company repairs a de-
pot, by painting, for instance, will that
arrest the functional depreciation that is
accruing daily to take care of increased
business in the future?
42
'A. It arrests the deterioration of the
plant. It replaces the paint. It would not
arrest the depreciation of any other part.
That would be arrested when that other
particular part might be repaired.' ''
** Since, as Mr. McKeand stated, a railroad
property is of necessity a composite prop-
erty, made up of individual units, the proper
and only basis upon which any sane method
of depreciation could possibly be figured
would be upon the composite property and
not upon the millions of individual units
which go to make up the composite property.
**In other words, as aptly expressed by the
learned Trial Judge in his charge:
*I further charge you, as a matter of
law, construing this statute, that in that
sense you should not consider each of the
individual units that enter into the road-
way. It was not intended to have a system
of bookkeeping with reference to each par-
ticular cross-tie or each particular rail, but
you should look to the value of the roadway
as a whole, comparing its value at the
beginning of the year with its value at the
end of the year' (Tr., page 104).
*^If the statement of counsel for the rail-
way that *it is undisputed that functional
depreciation cannot be arrested, retarded or
offset by repairs, renewals or replacements'
were correct, then it would necessarily follow
that no matter how much money was expended
each year on any roadway, then it would be
impossible to prevent that roadway from at
some time becoming absolutely worthless, and
it would have to be abandoned at some time
43
in the future. It is a matter of common
knowledge that such a catastrophe never
occurs, and that if a roadway is properly-
maintained from day to day and month to
month and year to year by the expenditure
of proper amounts in making repairs, renew-
als and replacements, that the life of the
roadway is perpetual and that the roadway
will never have to be junked as a whole or
entirely rebuilt.''
** Since the railway has admitted that its
railroad is a well maintained railroad, and
since one of its experts, who was called as a
witness for the railway in its behalf, has sug-
gested that Hhe service life of any normally
operated and normally and well maintained
railroad is perpetual, and it is maintained
in the condition of properly serving its pur-
pose by annual reneAvals and replacements,'
it is apparent that the service life of the
N., C & St. L. By. is perpetual and that the
repairs, renewals and replacements which
were 7nade to it during the years 1909 and
1910 eliminate both functional and physical
depreciation or any other hind of depreci-
ation which would have taken place had it
not been for the repairs, renewals and re-
placements which were made, as testified
to by its Chief Engineer, Mr. Hunter Mc-
Donald."
The Basis of the 1920 Grant of Increased Freight
Rates
The Interstate Commerce Commission, in grant-
ing the increase in freight rates effective last
August (Re Increased Freight Rates, 1920, 58
44
I. C. C, 220), was required, as we understood it,
to determine, in accordance with paragraph 3 of
Section 15-A of the Interstate Commerce Act, as
then recently amended, *Hhe aggregate property
value'' of the railroads, ujx)n which a percentage
constituting a fair return was to be earned under
rates fixed by the Commission. There was avail-
able no detailed appraisal of the railroad prop-
erties, and the carriers submitted as a basis *Hhe
book figures for investment in road and equip-
ment, improvements on leased railway property,
materials and supplies and government allocated
equipment, hereinafter referred to as the book
costs'' (page 227).
The Interstate Commerce Commission pointed
out that
**The carriers recognize the infirmities
inherent in the investment accounts as car-
ried upon the books of the carriers, as a meas-
ure of the value of the respective properties
taken separately."
The aggregate amount carried as book costs of
road and equipment was stated to be $20,040,-
572,611 (page 228).
The Commission found that
*Hhe value of the steam-railway property of
the carriers subject to the act held for and
used in the service of transportation is, for
the purposes of this particular case,"
approximately $18,900,000,000 (Re Increased
F r eight Bates, 1920, 58 I. C. C, 220, 229).
/ The exact basis on which the Commission re-
duced the aggregate book investment from
$20,040,572,611 to $18,900,000,000 was not dis-
closed in the published opinion, and has not since
been made public; but it has seemed to us to be
45
obvious that the Interstate Commerce Commis-
sion took no account whatever of ^^ expired life''
or ^^ accrued theoretical depreciation" in arriving
at such an investment figure as representing a
minimum value of the property for the purpose
^of granting emergency relief. Had any such
deduction been made, the valuation would have
been placed at between thirteen and fifteen billion
dollars instead of at $18,900,000,000, which was
but five per cent, less than the value claimed by
the carriers.
The Knoxville Water Company Case
The Knoxville Water Company case (212 U. S.,
1) is sometimes urged as authority supporting
the view of the ultra-depreciationists. In that
case, decided in 1909, the Supreme Court said:
'*A water plant, with all its additions, be-
gins to depreciate in value from the moment
of its use. Before coming to the question of
profit at all the company is entitled to earn
a sufficient sum annually to provide not only
for current repairs but for making good the
depreciation and replacing the parts of the
property ivhen they come to the end of their
life. The company is not hound to see its
property gradually waste tvithout making
provision out of earnings for its replacement.
It is entitled to see that from earnings the
value of the property invested is kept unim-
paired, so that at the end of any given term
of years the original investment remains as
it was at the beginning. It is not only the
right of the company to make such a provi-
sion, but it is its duty to its bond and stock-
holders, and, in the case of a public service
corporation, at least, its plain duty to the
46
public. If a different course ivere pursued
the only method of providing for replace-
ment of property ivhich has ceased to he use-
ful ivould he hy the investment of neiv capital
and the issue of new honds or stocks. This
course would lead to a constantly increasing-
variance between present value and bond and
stock capitalization — a tendency which would
inevitably lead to disaster either to the stock-
holders or to the public, or both.'^
In other words, there should, of course, be at
all times included in the operating expenses of a
railroad or other public utility a sufficient amount
to provide for the replacement and renetval of
property as the need arises. The Court referred
to ** making good depreciation '^ synonymously
with ^* replacing the parts of the property when
they come *to the end of their life.'' This does
not mean that a reserve for *^ accrued depreci-
ation" based on theoretical age must be provided,
if provision is made for meeting all withdrawals
and replacements of property when and as the
need arises. If proper provision is made in oper-
ating exjjenses for current replacements, and the
property is kept in a high state of repair and
efficiency, as railroad property is required to be
maintained, both as the result of legal requirement
and the exigencies of operation, the investment
remains unimpaired and subject to no deduction,
and no ** reserve" need be set up to create a pre-
text for a reduction.
The Minnesota Rate Case
In the Minnesota Rate Case (230 U. S., 352),
the Master had made no deduction for so-called
depreciation, holding that w^hile as to certain
classes of carrier property there had been depre-
47
elation in fact, yet it was more than offset by the
appreciation; that the roadbed was constantly
increasing in value through having become solid-
ified and adjusted to surface drainage, et cetera.
The Supreme Court declined to approve this dis-
position of the Master, pointing out that he had
also allowed a gross s<um separately for adapta-
tion and solidification of the roadbed. At page
457, Mr. Justice Hughes said:
* ^ It is also to be noted that the depreciation
in question is not that which has been over-
come by repairs or replacements, but is the
actual existing depreciation in the plant as
compared with the new one. It would seem
to be inevitable that in many parts of the
plant there should be such depreciation, for
example, old structures and equipment re-
maining on hand. And when an estimate of
value is made upon the basis of reproduction
new, the extent of existing depreciation
should be shown and deducted. * * * And
when particular physical items are estimated
as worth so much new, if in fact they be depre-
ciated, this amount should be found and
allowed for. If this is not done the physical
valuation is manifestly incomplete, and it
must be regarded as incomplete in this case.
Knoxville vs. Knoxville Water Co., 212 U. S.
1, 10.^'
There can be little doubt as to the kind of depre-
ciation the Supreme Court was discussing in the
Minnesota Bate Case. It was actual deterioration,
represented by old and useless buildings and
equipment remaining in existence but of no util-
ity, not equipment and buildings actually render-
ing service as economically and efficiently as when
new. The citation by the Court in the Minnesota
Bate Case of its prior opinion in the Knoxville
48
case reveals what was meant in the latter case
even if that was not made clear in the opinion
written in the earlier case itself.
In Lincoln Gas Co. vs. Lincoln (223 U. S., 349,
363), decided two years after the Knoxville case,
the Supreme Court said:
**The question as to what sum, if any, upon
the facts of this case, should be annually de-
ducted from the net income as a permanent
maintenance or replacement fund is novel,
and presents a grave problem.'^
Comments on the Knoxville Case
The observations of Mr. Justice Moody in the
Knoxville case have recently been discussed, from
what may be regarded as an executive and ac-
counting point of view, rather than that of legal
theory, in a letter sent to one of the members of
the Interstate Commerce Commission by one of
the authors of this memorandum (Mr. Carter)
under date of December 7, 1920, and that com-
munication is here quoted from in lieu of a restate-
ment of the subject-matter thereof. After making
the quotation from the Knoxville case set out on
page 45 hereof, ante, the letter to the Commis-
sioner continued:
** Writing as a lawman, it does not seem to
me that this expression of view by Judge
Moody in his opinion in the Knoxville Water
Company case in 1909 is necessarily to be
construed as *the holding of the Supreme
Court' in this regard, but rather as ^ dicta'
which carries no finding of fact or force of
precedent.
**It is a question Avhether in the discussion
of this subject Judge Moody was not depart-
49
ing from the field of law and fact and enter-
ing that of theory and speculation and direct-
ing his attention to questions of economics
and finance, regarding which, at that time,
there was sharp disagreement between such
students of these subjects as had ventured
to express an opinion thereon. Or whether
Judge Moody did not go even further than
this and assume a familiar knowledge of the
effect upon physical property of its employ-
ment in the public service, a phase of the sub-
ject requiring more or less technical engineer-
ing knowledge which, it must be assumed, if
the Court concluded, as is alleged, that such
property gradually wastes, the Court did not
possess.
**Must it be assumed that the Court fell
into the error of accepting as sound theories
of depreciation which had nothing to com-
mend them but their plausibility and which
have long since been rejected by all sound
thinkers? And if so, would it not be reason-
able to subject the remarks of the Court to
the closest scrutiny and analysis as to their
meaning, in order to determine whether they
are really susceptible of the kind of interpre-
tation which some students of the subject are
disposed to place upon them?
**It may be noted, for example, that Judge
Moody's language has been availed of by pro-
fessional depredationists as sustaining them
in the application of theories of accrued de-
preciation designed to impair, by purely arti-
ficial means, the investment of public utilities
in plant and equipment devoted to the public
service. In fact, it is the only language ap-
pearing in any decision of the United States
Supreme Court which even appears to sus-
tain these destructive theories.
50
'^ There is not the slightest indication that
■in Judge Moody's mind there Avas any thought
of the impairment of the investment of util-
ities in their properties through the applica-
tion of depreciation theories. On the other
hand, the language of the Court in the para-
graph quoted plainly discloses the intent of
the Court to indicate the rights and privileges
of utilities to maintain their properties and
their investment intact. In the lirst sentence,,
for example, the words *the company is enti-
tled' are used; in the second sentence appear
the words 'The company is not bound to see
its property gradually Avaste;' in the third
sentence the words *It (the company) is enti-
tled to see that from earnings, etc., etc./ are
used, and in the fourth and last sentence in
the paragraph are found the words * The right
of the company' and 'Its (the company's)
duty to its bond and stockholders, etc.;' this
sentence also indicating that in the Court's
opinion, making provision for the mainte-
nance of the property by renewals and re-
placements is the public service corporation's
plain duty to the public.
''From the writer's point of view, the
thought which was in Justice Moody's mind
and which he sought to express in the form
of a rule of procedure was, in substance, that
the maintenance of plant and equipment by
renewals and replacements was a proper
charge against earnings and that the earnings
should be adequate for this purpose. In other
words, that the cost of such maintenance
should not be capitalized. All of which is
perfectly sound. In fact, it is so self evident
as to lead one to inquire as to the reason for
its enunciation. The answer is found in the
fact that in the Knoxville Water Company
51
case the Master included in the assets of the
company — in other words, in the rate base
upon which the rate of return was computed —
certain plant and equipment that had been
superseded by other plant and equipment and
had been definitely withdrawn from service.
In the Court's opinion this inclusion was im-
proper on the theory that the discarded plant
and equipment should have been charged
against prior earnings and not continued in
capital account. The record does not dis-
close (1) whether the earnings had been
theretofore adequate to enable the writing off
of the loss due to the withdrawal in question ;
(2) whether, if they were inadequate, the
company had the right arbitrarily and of its
own motion to increase its rates and make
them adequate. If the answer to both is in
the negative then an obvious error was com-
mitted because the right to charge the loss
against the earnings continued and provision
should have been made therefor in the rate
under review, which would require a slightly
higher rate during the period of amortization
than would be necessary to pay merely a re-
turn on the unamortized investment. If it
was the Court's intention to establish a rule
that the loss due to renewal and replacement
of property may in no event be charged
against earnings accruing after the fact, then
such rule has definitely been set aside by the
United States Supreme Court in the Kansas
City Southern case.
^*It has come to be generally recognized
that a very large percentage of the cost of
supersessional operations, commonly alluded
to as * renewals and replacements,' is due to
inadequacy or to advancement in the science
52
of rendering public utility service. Some of
the best informed engineers attribute from
90 to 95 per cent, of the cost of so-called re-
newals and replacements to these causes and
from live to ten per cent, to wear and tear.
This being the case it is manifest that such
cost is chargeable against current or subse-
quent earnings and not at all to prior earn-
ings. As a matter of fact it is almost univer-
sally provided for out of current earnings.
The most recent system of accounting formu-
lated for public utilities (*) provides not
only that the cost of renewals and replace-
ments shall be charged against current earn-
ings but that in case the amount involved
exceeds the current provision therefor to-
gether with such balance as may appear to
the credit of the renewal account it may be
carried in a capital suspense account pend-
ing its amortization through the annual pro-
vision for this purpose.
**In this connection the report of the Spe-
cial Master in the NeAv York mid Queens Gas
Company case, a copy of which is enclosed^
contains a discussion of the subject and of
the testimony of witnesses in the case who
make the exploitation of theories of so-called
'accrued depreciation' a matter of their
bread and butter.
''The fact that the greater part of the plant
and equipment of a utility has no ascertain-
able life and that if kept in repair it can be
operated as efficiently as when it was installed
until the end of time, unless for purely econ-
(*) Uniform System of Accounts for Gas and Electric
Companies, recommended to the regulatory commissions of
the various States by the National Association of State Rail-
way and Public Utility Commissioners at its Annual Con-
vention in Washington, D. C, November 9-12th, 1920.
53
omic reasons it is displaced by other plant
and equipment, leads to the conclusion that if
Judge Moody's conclusions were based upon
the assumption that such property had a defi-
nite life which was terminated by wear and
tear and that in the meantime it was grad-
ually wasting, he was palpably and obviously
in error. In this as in all other debatable sub-
jects theory must, in the final anal^^sis, yield
to fact.
*^It is not necessary, however, to ascribe
error to the Court if the language used may
be shown not to justify the extreme interpre-
tation put upon it by professional depreda-
tionists.
*^The first sentence in the quoted para-
graph reads as follows :
* Before coming to the question of profit
at all the company is entitled to earn a suf-
ficient sum annually to provide not only for
current repairs but for making good the
depreciation and replacing the parts of the
property when they come to the end of their
life.'
**If there is any doubt that what is meant by
the last half of the sentence is that the com-
pany is entitled to earn a sufficient sum an-
nually for making good depreciation by re-
placing the parts of the property when they
are withdraivn from service, then Congress
has settled the question in the Water Power
Bill b}^ providing for a depreciation reserve
and defining very definitely w^hat it is for,
viz., the renewal and replacement of plant
and equipment. The same bill also plainly in-
dicates that by such renewal and replacement
the investment is kept intact and unim-
paired.''
54
**The second sentence reads as follows:
*The Company is not bound to see its
property gradually waste, without making
provision out of earnings for its replace-
ment. '
**In the light of the facts before the Court
in this case it may be assumed that the Court
had reference to the practice apparently pre-
vailing in that company of continuing to
carry, in capital account, property which had
been withdrawn from service and discarded,
making no provision either at the time or sub-
sequently for the amortization out of earn-
ings of the investment therein, Avhich practice
would represent a wasting of assets and an
impairment of the investment as measured by
the property remaining in service, and that
the thought in the mind of the Court was that
the cost of property displaced and tvithdrawn
from service should he charged against the
earnings.
The third sentence reads :
*It is entitled to see that from earnings
the value of the property invested is kept
unimpaired, so that at the end of any given
term of years the original investment re-
mains as it was at the beginning.'
*^If a utility has been permitted to earn a
sufficient sum annually to enable it to charge
all property withdrawn from service against
earnings and had so charged off all displaced
property and has maintained the rest of its
plant and equipment in good operating con-
dition, so that at the end of any terms of
years its capacity for rendering service re-
mains unimpaired, the original investment in
^y
the plant still in service remains what it was
at the beginning. Prof. Laughlin has well re-
ferred to the investment as a stream of capi-
tal. As fast as water from the stream runs
over the mill-wheel, it is replaced by new wa-
ter. The value of the water-power is not de-
creased by the water that runs away.
*^ Judge Learned Hand, in the Consolidated
Gas Company case last August, found as fol-
lows, in this regard:
***** if in fact the capacity (of the
plant) has remained the same, deprecia-
tion should not be a function of the **rate
base'' at all. In such a case the inquiry
as to depreciation should be confined to
changes in ** price levels''.'
**Thus interpreted Justice Moody's opin-
ion conforms not only to sound theories of
economics and finance, but to the facts regard^
ing the operation and maintenance of the
plants and equipment of public utilities.
' ' Shrinkage in value may not be attributed
to the mere incidence of use where the article
used does not deteriorate from use. There-
fore, the word * depreciation' applied to prop-
erty which does not deteriorate from use,
must have the meaning of *a shrinkage in
value' due to a decrease in the price level.
Similarly the word * appreciation ' applied to
property which does not improve from use
must have the meaning of *an expansion in
value' due to an increase in the price level.
**The proposition that an investment in
property, which does not deteriorate from
use, begins to * shrink' the moment it is made,
notwithstanding the fact that the price level
remains unchanged, cannot be sustained for a
56
moment. It is not conceivable that Justice
Moody would have made such a pronounce-
ment as this; and yet, shorn of all verbiage,
this is just the interpretation which some
theorists seek to place upon his utterances.
**The kind of shrinkage which Justice
Moody had in mind is that which would result
from failure to charge the cost of displaced
property against earnings and from capitaliz-
ing the expenditures involved in superses-
sional transactions thus destroying the iDarity
between outstanding stock and hojids and
property in actual service, the former ex-
ceeding the latter, thus producing a shrink-
age in the property in service as compared
with the capitalization. That this was really
all that he had in mind would seem to be es-
tablished beyond controversy by his remarks
immediately following those heretofore
quoted :
*If a different course w^ere pursued the
only method of providing for replacement
of property which has ceased to be useful
would be by the investment of new capital
and the issue of new bonds or stocks. This
course would lead to a constantly increas-
ing variance between present value and
bond and stock capitalization — a tendency
which would inevitably lead to disaster
either to the stockholders or to the public,
or both.' ''
1
The Kansas City Southern Case
It may further be pointed out that if, as is often
urged, the Supreme Court intended in the Knox-
ville case to hold that the cost of superseded prop-
erty should not be amortized from present or
V
57
future earnings, its decision in Kansas City
Southern By. Co', vs. U. S. (231 U. S. 423; quoted
from on page 93, post), must be regarded as an
overruling precedent. The major part of the
culminated depreciation involved in the Knoxville
case arose from the abandonment of a water sta-
tion which had cost a predecessor company
$52,000. Its withdrawal from service was attrib-
uted to the fact that it was a duplication of plant
facilities, and its use by the present company was
no longer economical or necessary. The position
of the company before the Circuit Court was that
the amount of ** culminated depreciation'' should
not be deducted from the **rate base'' unless and
until the same had been amortized and provided
for through the operating expense accounts (Print
202; 13th Exception, Print 191). The Circuit
Court sustained this contention. The Supreme
Court deducted $50,000 for * depreciation" from
the figures representing * ^ reproduction cost new,"
but omitted to add anything to the expense ac-
counts for the amortization of the sum deducted.
In the Kansas City Southern case, nearly five
years later, the Supreme Court sustained a rule
of the Interstate Commerce Commission provid-
ing for the amortization by way of charge to
future operating expenses of the cost of portions
of a railway division withdrawn from service be-
cause of the construction of a new line with lower
grades and increased capacity, holding that the
cost of property thus withdrawn from service
should not remain in the investment accounts and
that ** abandonments occasioned by changes of
this character are therefore chargeable to future
earnings. ' '
58
The First Consolidated Gas Company Rate Case
The case of Willcox vs. Consolidated Gas Com-
pany (212 U. S., 19), which was decided on Jan-
uary 4, 1909, the same day as the case of the
City of Knoxville vs. Knoxville Water Co. was
decided, but in which the opinion was filed on Jan-
nary 12, 1909, is sometimes cited as a companion
case to the Knoxville case and in support of the
contention that *^ theoretical accrued deprecia-
tion'' should be deducted from the reproduction
cost.
Any claim that the decision in the first Consoli-
dated Gas Company case sustains such a theory
is due to a lack of familiarity with the facts in
that case, and with what the Court did in fact find
and decide. The Master in that case flatly re-
jected the claims of fact on which * theoretical de-
preciation" was advanced by the defendants' wit-
ness Marks, for the first time in any rate case in
Court (Master's Report, pages 35-37) ; Judge
Hough, sitting in the United States Circuit Court,
approved the Master's finding (157 Fed. Rep.,
849, 856), and the United States Supreme Court
expressed its concurrence with the lower court in
failing to deduct so-called depreciation (212 U. S.,
19, 52).
The facts in the first Consolidated Gas Company
case, as disclosed in the record, are in brief as
follows: The complainant called Frederick J.
Mayer, who had been a practicing mechanical en-
gineer for thirty-four years, and for the preced-
ing twenty-three years had been connected with
the firm of Bartlett, Hayward & Co.,. the largest
manufacturers of gas holders and apparatus in
the country. Mr. Mayer testified to a value of
the plant, consisting of buildings, apparatus, hold-
ers and general connections at the stations, of
$15,532,489, after deducting the sum of $604,988,
59
*'for depreciation based on an examination of
each individual item upon which it was com-
puted. Such deduction represented his esti-
mate of what w^ould be required to place the
plant in every respect in condition as good as
new, and amounted in the aggregate to $604,-
988.'' (Master's Report, pages 29 to 30, 35).
A purported valuation w^as also put in by Mr,
Henry H. Edgerton, who estimated the value of
the ^^ plant'' at $10,023,057.25; and another pur-
ported valuation was put in by William D. Marks,
also called in behalf of the defendants, who esti-
mated the value at $9,348,692. (Master's Report,
page 29.)
The Master reported (page 31) that Mr. Edger-
ton and Mr. Marks
** showed no especial qualifications to testify
as experts on this branch of the case. Neither
Mr. Marhs nor Mr. Edgerton had recent expe-
rience in the construction of gas plants in
large cities or shoived familiarity with exist-
ing metropolitan conditions. The former,
some 30 years ago, was connected with the
construction of a plant in St. Louis, but his
practical experience in recent years has been
limited to small towns in North Carolina. He
has never conducted building operations or
installed manufacturing apparatus in New
York City. This is the case likewise with Mr.
Edgerton. His chief connection with practi-
cal gas manufacturing, aside from a small
plant in Connecticut, appears to have been
over 30 years ago. Neither of these gentle-
men made a careful detailed examination of
the plants, and each frankly stated that the
time at his disposal was entirely inadequate
for the preparation of an accurate appraisal
of values.''
60
Mr. Marks, the defendant 's witness, had made a
deduction for * theoretical depreciation of the
proposed life of the plant,'' and this deduction
was completely rejected by the Master, as appears
from the following portion of his report (pages
35 to 37) :
'* Having thus obtained his total cost, Mr.
Mayer made deductions for depreciations
based on an examination of each individual
item upon which it was computed. Such de-
ductions represented his estimate of what
would be required to place the plant in every
respect in condition as good as new, and
amounted in the aggregate to $604,988.
**The examination made by Mr. Edgerton
was of such a cursory nature that his figures
for depreciation were necessarily made less
carefully. In one case, for instance, he
ascribed the same depreciation of 10 per cent,
to new apparatus installed in 1904-5, as to old
apparatus installed 15 or 16 years earlier.
* ^ Mr. Marks did not particularly regard the
extent of depreciation actually existing, but
assumed a theoretical deterioration of the
supposed life of the plant.
'* He testified:
'^ 'Depreciation results from several
causes. The most ordinary one is decay or
wear and tear, as observed. There is an-
other factor which is inadequacy, owing to
the increase of the business. There is also
another cause of depreciation, obsolescence,
which is due to the changes in the arts and
in the methods and in the general growth
of scientific knowledge ; if a works built at
a certain period is kept in perfect repair,
61
meaning by that, always restored to their
original condition, and in good worldng
condition, there remains, assuming that, a
depreciation due to both obsolescence and
to inadequacy.'
**In this view he made estimates on the
theory of the cost of final replacement to cover
such inadequacy or obsolescence ranging
from 25 per cent, to 60 per cent, and based
on a supposed life of 120 years for the plant.
The discrepancy between his valuations and
those of Mr. Mayer is largely due to their dif-
ferent methods of estimating depreciation.
He said :
** *Mr. Mayer does not differ largely
from my own figures of structural cost.
You may say for all ordinary purposes they
coincide, with the exception of the gas
holders, and even there they do not differ
largely. It is the question of depreciation
entirely. '
^^As will hereafter appear, it is proper in
the administration of a manufacturing plant
to tahe depreciation of the character above
described into account and provide against it
by setting aside a reserve fund from current
earnings. For the purpose of determining
present value, however, particularly on the
basis of cost of reproduction, the method fol-
lowed by Mr. Marks does not commend itself.
It appears from the record without substan-
tial dispute, that while certain of the plants
and apparatus may not be in perfect repair,
they are, as a whole, in efficient operating con-
dition, and that a large proportion of their
capacity is represented by the latest pattern
of water gas apparatus installed within the
62
last few years. The books show expenditures
since November, 1885 :
For renewals offsetting depre-
ciation by loss or abandon-
ment $1,227,683.10
For repairs to buildings 1,275,749.03
For repairs to apparatus 4,865,362.51
New construction 3,904,937.31
Total $11,273,731.95
**The fact thus being that the plants are in
good order and operating efficiently, it does
not appear reasonable, for the purposes of
this case, to charge them with a theoretical
deficiency so great as, if actually existing,
would make their successful operation a
practical impossibility. An estimate of de-
preciation like those of Mr. Edgerton and
Mr. Mayer, based on 'a detailed examination
of the property as it stands to-day, affords in
my opinion a more fair and practical method
to be followed in determining its value.
*^I accordingly find and report the value of
the complainant's plants to be substantially
in accordance with the estimate of Mr. Mayer,
a summary of which is given below; but
adopting, for purposes of convenience and to
allow for possible over-valuations in some
details, the round figure of $15,500,000, in-
stead of $15,532,489, as shown by the ap-
praisal.''
It is true that the Master made a deduction for
the amount representing Mr. Mayer's estimate
**of what would be required to place the plant in
every respect in condition as good as new," but
the amount was arrived at ^y the actual examina-
tion of the plant and not by any theoretical esti-
63
mate of expired age based upon hypothetical lives
attributed to the component p^rts of the plant or
by a process of averaging which is altogether
baseless and misleading. i
The Opinion of Judge Hough in the Circuit Court
When the report of the Master in the Consoli-
dated Gas case came before Judge Hough in the
United States Circuit Court, he completely ap-
proved the Master's finding and his method of ar-
riving at the value in this respect (Consolidated
Gas Co. vs. City of New York, 157 Fed. Kep., 849,
854, 855, 856), saying:
**It appears by undisputed evidence that
some of these last items of property cost more
than new articles of the same kind would have
cost at the time of inquiry; that some are
of designs not now favored by the scientific
and manufacturing world, so that no one now
entering upon a similar business would con-
sider it wise to erect such machines or obtain
such apparatus. In every instance, hoivever,
the value assigned in the report is what it
would cost presently to reproduce each item
of property, in its present condition, and cap-
able of giving service neither better nor worse
than it noiv does. As to all of the items enu-
merated, therefore, from real estate to me-
ters inclusive, the complainant demands a
fair return upon the reproductive value there-
of, which is the same thing as the present
value properly considered. To vary the
statement: Complainant's arrangements for
manufacturing and distributing gas are re-
ported to be worth the amounts above tabu-
lated if disposed of (in conunercial parlance)
*as they are.'
64
*'Upon authority, I consider this method of
valuation correct. What the Court should as-
certain is the ^fair value of the property be-
ing used' (Smyth vs. Ames, 169 U. S., at page
546, 18 Sup. Ct., at page 434 [42 L. Ed.,
819] ) ; the * present' as compared with ^origi-
nal' cost; what complainant ^employs for the
public convenience' (169 U. S., at page 547, 18
Sup. Ct., at page 434 [42 L. Ed., 819] ) ; and it
is also the ^ value of the property at the time
it is being used' {San Diego Land Co. vs. Na-
tional Citij, 174 U. S., at page 757, 19 Sup. Ct.,
at page 811 [43 L. Ed., 1154] ) . And see, also,
Stanislaus Co. vs. San Joaquin Co., 192 U. S.,
201, 24 Sup. Ct., 241 [48 L. Ed., 406]). It is
impossible to observe this continued use of
the present tense in these decisions of the
highest court without feeling that the actual
or reproductive value at the time of inquiry
is the first and most important figure to be
ascertained, and these views are amplified by
San Diego Land Co. vs. Jasper (C. C), 110
Fed., at page 714, and Cotting vs. Kansas
Citij Stock Yards (C. C), 82 Fed., at page
854, where the subject is more fully discussed.
Upon reason, it seems clear that in solving
this equation the plus and minus quantities
should be equally considered, and apprecia-
tion and depreciation treated alike. Nor can
I conceive of a case to which this procedure
is more appropriate than the one at bar. The
complainant by itself and some of its con-
stituent companies has been continuously en-
gaged in the gas business since 1823. A part
of the land in question has been employed in
that business for more than two generations,
during which time the value of land upon
Manhattan Island has increased even more
65
rapidly than its population. So likewise the
construction expense not only of buildings,
but of pipe systems under streets now con-
sisting of continuous sheets of asphalt over
granite, has enormously advanced.
' ' The value of the investment of any manu-
facturer in plant, factory, or goods, or all
three, is what his possessions would sell for
upon a fair transfer from a willing vendor to
a willing buyer, and it can make no difference
that such value is affected by the efforts of
himself or others, by whim or fashion, or
(what is really the same thing) by the ad-
vance of land values in the opinion of the
buying public. It is equally immaterial that
such value is affected by difficulties of repro-
duction. If it be true that a pipe line under
the New York of 1907 is worth more than was
a pipe line under the City of 1827, then the
owner thereof owns that value, and that such
advance arose wholly or partly from difficul-
ties of duplication created by the city itself
is a matter of no moment. Indeed, the causes
of either appreciation or depreciation are
alike unimportant, if the fact of value be con-
ceded or proved; but that ultimate inquiry
is oftentimes so difficult that original cost
and reasons for changes in value become legi-
timate subjects of investigation, as checks
upon expert estimates or bookkeeping inaccu-
rate and perhaps intentionally misleading.
Cf. Ames vs. Union Pacific R. E. (C. C), 64
Fed., at pages 178, 179. If 50 years ago, by
the payment of certain money, one acquired a
factory and the land appurtenant thereto,
and continues to-day his original business
therein, his investment is the factory and the
land, not the money originally paid; and un-
m
less Ms business shows a return equivalent to
what land and building, or land alone, would
give if devoted to other purposes (having due
regard to cost of change), that man is engaged
in a losing venture, and is not receiving a fair
return from his investment, i. e., the land and
building. The so-called ' money value ' of real
or personal property is but a conveniently
short method of expressing present potential
usefulness and * investment' becomes mean-
ingless if construed to mean what the thing
invested in cost generations ago. Property^
whether real or personal, is only valuable
when useful. Its usefulness commonly de-
pends on the business purposes to which it is
or may be applied. Such business is a living
thing, and may flourish or wither, appreciate
or depreciate; but, whatever happens, its
present usefulness, expressed in financial
terms, must be its value.
** As applied to a private merchant or manu-
facturer the foregoing would seem elemen-
tary; but some difference is alleged to exist
where the manufacturer transacts his busi-
ness only by governmental license — ^^vhether
called a franchise or by another name. Such
license, however, cannot change an economic
law, unless a different rule be prescribed by
the terms of the license, which is sometimes
done. No such unusual condition exists here,
and in the absence thereof it is not to be in-
ferred that the American Government in-
tended, when granting a franchise, not only to
regulate the business transacted thereunder,
and reasonably to limit the profits thereof,
but to prevent the valuation of purely private
property in the ordinary economic manner,
and the property now under consideration is
67
as much the private property of this com-
plainant as are the belongings of any private
citizen. Nor can it be inferred that snch gov-
ernment intended to deny the application of
economic laws to valuation of increments
earned or unearned, while insisting upon the
usual results thereof in the case of equally
unearned, and possibly umnerited, deprecia-
tion.
* ' I think the method of valuation applied by
the report to land, plant, mains, services, and
meters lawful.^'
The United States Supreme Court, in reviewing
the case, no doubt fully conscious' of what it had
decided the same day in the Knoxville case, ap-
proved the views and accepted the resultant fig-
ures of valuation reached by Judge Hough, who
had, as we have seen, adopted the method of val-
uation applied by the Master (212 U. S., 19, 52).
The Decision in Bonbright vs. Geary
Eeference is frequently made to the decision of
the Special Statutory Court convened under Sec-
tion 266 of the Judicial Code of the United States
in Bonbright vs. Geary (210 Fed. 44), as sus-
taining the deduction of ^* accrued theoretical de-
preciation. ' ' We do not find such a citation to be
warranted. That decision w^as rendered in the
United States District Court for Arizona, in 1913,
by Morrow, Circuit Judge, and Van Fleet and
Sawtelle, District Judges. The rates proceeded
against were gas and electric r^tes prescribed by
the Corporation Commission of Arizona. After
quoting (210 Fed. 52) from the ** uncontradicted
statement^' of the expert engineer for the com-
pany to the following effect :
6S
^^ Condition of Property. The gas and elec-
tric plants of Pacific Gas & Electric Company-
are in good and efficient condition. All parts
of the electric generating plant are modern,
up-to-date installations, including turbo-gen-
erators, water-tube boilers, condensers, oil
and lamp black burning apparatus, etc. There
is an ample water supply obtained from wells.
The new gas generating plant is a modern,
up-to-date, reversible Lowe water gas appar-
atus. Both plants are housed in brick build-
ings with steel truss roofs covered with fire-
proof material. Neither plant could be im-
proved upon anywhere. The electric dis-
tributing system is the most modern type for
distribution in cities of this character, and all
the lines, transformers, and service equip-
ment are of the latest, most improved type.
The gas distributing system includes ample
mains, well laid, the greater portion of w^hich
have been installed during the last three
years. This distributing system is in the best
possible condition and of the most up-to-date
qualifications. The utility equipment of the
company is also of the latest design, including
automobile trucks and the latest office labor-
saving devices. ''
The Court, through Morrow, Circuit Judge,
said, along lines sustaining the views hereinbefore,
expressed as to the proper interpretation of the
Knoxville case :
*^It would seem that, if the plant is in the
condition set forth in this statement, a
deduction of 49 per cent, from its original
value for depreciation, or approximately
that percentage, is excessive; but to what
extent it is excessive we do not now deter-
mine. We call attention to the statement
69
for the purpose of referring to the fact that
the plant appears to have been kept in
repair and is now in good condition. In
the Knoxville case the Supreme Court com-
mended this method of preserving the in-
tegrity of a public service plant. * j^ *
*^This brings us to a peculiar feature of
this case. There was on hand in the treas-
ury of the company at the time of the valua-
tion of the plant the sum of $64,292.67,
accumulated for the purpose of meeting the
expense of current repairs and for replac-
ing such parts of the property as had been
worn out and the life of the part ended.
The fund had been withheld from the stock-
holders that it might be used in preserving
the plant in good condition and in proper
efficiency. This was good business judg-
ment on the part of the officers of the cor-
poration and must be approved. Public
service corporations are to be encouraged
in maintaining their plants in a proper state
of efficiency. We are of the opinion that
the Corporation Conunission was in error
in its estimate of depreciation of this plant,
and particularly was in error in omitting
this reserve fund from its valuation of the
plant, ^^
The Cumberland Telephone & Telegraph Case
The decision of the United States Circuit
Court in Cumberland Telephone S Telegraph Co.
vs. City of Louisville (157 Fed. 637, 650; reversed
212 U. S. 414), does not seem to warrant the fre-
quent references made to it by advocates of the
** accrued depreciation" theory. The Court said:
70
^*We have not been able, from anything
said by the Master, to see what his reasons
were for the reduction of 10 per cent, for
depreciation, as shown in the above extract
from his report, particularly as the large
sums shown by him to have been expended
for maintenance and reconstruction had, as
he tells us, put the plant in excellent con-
dition and practically equal to a new one,
and had prevented any material change of
its value during the 20 months the case was
before him. If we eliminate the 10 per cent,
reduction made by the master we find that
his estimate of the value of the plant would
be $1,506,665.09, which would be $133.88 in
excess of the original cost of the plant,
which he found to have been $1,506,531.21.
AVe think the reduction of 10 per cent, under
the circumstances, was in large measure an
arbitrary reduction in the sense that it was
without an adequate basis in view of the
large expenditures made to keep the plant
up to the standard,''
California and Oklahoma Decisions Sometimes Cited
as Adverse Authority
The reports filed by Ex-Judge H. M. Wright in
Contra Costa Water Co. vs. City of Oakland (113
Pac. 668) and in Spring Valley Water Co. vs. San
Francisco (252 Fed. 979) (1918), are often cited
as giving support to the inclusion of provision for
** accrued theoretical depreciation" in utility rates
and the deduction of the estimated amount of
such *^ depreciation" from the sum on w^hich the
fair return to be earned by the utility would other-
wise be computed. Those who cite these earlier
discussions from the erudite pen of Judge Wright
71
overlook the conclusions of his elaborate report
as Special Master in Pacific Gas and Electric Co,
vs. City a^id County of San Francisco, filed March
2, 1920 (Northern District of California; Second
Division).
In the case just cited, Judge Wright said
that in view of recent literature and judicial de-
cisions the whole subject must be re-examined. He
concluded that in a rate case, the matter of de-
preciation is a false quantity and that the real
question is ^^When shall the charges to provide
funds for replacement begin and endf
He said:
^^ Unlike tables of human mortality, tables
of the mortality of structural elements,
founded on the experience of plants all over
the country, or a table of abandonments in
the plant under examination, will, all alike,
be unsafe guides for prediction of future ex-
perience. For certainly, to the extent that
past abandonments have occurred by reason
of obsolescence or inadequacy, there can be
no uniform rule, in the nature of things, and
therefore no guide for forecast of the future''
(page 45).
Advocates of *^ accrued theoretical deprecia-
tion" often cite as authority in their behalf the
decision in Pioneer Telephone & Telegraph Co. vs.
Westenhaver (299 Okla. 420) (1911). In so doing
they overlook the later decision in Pioneer Tele-
phone S Telegraph Co. vs. State of Oklahoma (167
Pacific 995), in which the Supreme Court of Okla-
homa said, in 1917:
**We are unable to perceive the necessity
for building up a fund to be used for the pur-
72
pose of counteracting a purely theoretical de-
preciation. The theory of the Commission
seems to be that charges should be made in
rates sufficient to counteract or prevent de-
preciation by replacements and that where
replacements are thus fully provided for de-
preciation is counteracted."
The Superior Court of Pennsylvania has re-
cently reaffirmed its decision respecting deprecia-
tion in Ben Avon Borough vs. Ohio Valley Water
Company case (9 Pa. Corp. Kep. 404; reaffd. Id,,
P. U. K. 1918 A, page 161 ; see, also, 253 U. S. 287),
in which the Pennsylvania Court said :
** Depreciation, though largely theoretical
in its nature, which is allowed on the repro-
duction cost, seems to have a fixed place in
valuation. If, however, replacements and re-
newals are amply provided for and made, de-
preciation only to a very small extent takes
place. If, through depreciation, the value of
the property is largely reduced, the securities
which were placed thereon may be unneces-
sarily reduced in value. As these charges
withdraw from the rate-making base, such de-
preciation naturally effects a purchase of a
part of the property for the consumer — a
thing never contemplated. A rate for re-
newals and replacements should be provided
and expended for that purpose ; when that is
done, as is the custom in every utility con-
cern, depreciation is a very small fractional
per cent. This should be placed in a reserve,
and it, with renewals and replacements, are
properly allowable in fixing a schedule of
rates. ' '
73
Essential Purposes of the Statute and the Relation of
"Depreciation Charges" Thereto
Looking at the matter from the viewpoint of
fundamentals, it may be observed, at the risk of
repetition in part of what has already been said
^ herein, that the object of statutory provisions,
such as are contained in Section 20, and correlated
sections of the Act, is threefold: (1) to ensure
to the public good, safe service, through keeping
raihvay property in good repair and operating
efficiency; (2) to protect the public from unlawful
and burdensome exactions, and (3) to secure to
investors in railway enterprises a fair return upon
the property employed in the public service. The
object in view cannot be accomplished unless an
economically sound plan for the maintenance of
the integrity of the property and investment
through repairs, renewals and replacements be set
up and followed. The application of unsound and
fanciful theories lea'ds to results most unjust to
all affected. The carrier or other public utility is
at all times entitled to a reasonable return on the
fair value of its property, and the user of its ser-
vice is entitled to service at the lowest cost con-
sistent with efficiency of service, the defraying of
operating expenses, and the earning of a fair re-
t^turn on the investment.
The investment of money in a railroad or utility
is made to serve the needs of particular communi-
ties, usually a territory in course of growth and
development. Continuous and efficient service is
demanded and must be provided. Eepairs are
necessary as portions of units of property are
worn in the service of the patrons, and the expense
thereof must be currently provided in the rate.
As time goes on, certain items of property which
have not been affected by use or wear, must never-
74
theless be retired to meet the growing demands
upon the system. Some are retired to effect econo-
mies; others go out because larger facilities are
needed or become more economical. These proc-
esses of repair, renewal and replacement go on
continuously; their combined effect is to per-
petuate the railroad property as a going concern.
No one thinks of a time when the entire rolling
stock, structures and equipment will be retired or
go out of service. The railway property is per-
petuated and its efficiency maintained, and the
expense thereof borne by the users.
Additions to the capacity of the system, exten-
sions of its lines, etc., should of course be pro-
vided for by the employment of new capital in-
vested by those having the capital to invest and
not by exactions from passengers or shippers.
All those expenses which are required for what
are commonly know^n as repairs and which are
currently made i^ the every day operation of the
system to make good the parts that actually wear
out in the service, should be met by the every day
users of the transportation service and provided
'for in the rates and fares charged. The cost of
items of property which are not worn out in use,
but which it may become necessary to retire for
other reasons, such as increases in facilities to ac-
commodate additional shippers or passengers, or
to effect the economies made possible by the prog-
ress of the art, is chargeable against the economies
resulting from such retirement. .
Reasons Why the Cost of Retirements Should Not
Be Anticipated Through Accruals Based
on "Life Tables"
r This may be made concrete by saying that out-
side of such portions of the rolling stock, equip-
ment, etc., as are affected by w^ear and tear and
75
so are made good by current repairs, the great
bulk and in fact substantially all the major items
going to make up a railroad or utility property,
are not subject to wear and tear and have lives
of indefinite duration, and are continued in use in-
definitely if the service conditions presented when
the demand for service greatly increases do
not render them inadequate or if economies and
betterments made possible by the progress in the
art do not make them obsolete, even though still
rendering their original services at least as eco-
/^nomically and efficiently as when installed. This
increase often necessitates the installation of
larger or different units to meet the increased de-
mands, but otherwise their use goes on. For ex-
ample, in a gas plant or steam-generating plant
for electricity, the replacement of checker brick in
a gas machine, the installation of new tubes in a
steam boiler or a condenser, the repairing of a
meter or service, the painting of a holder or a
building, the replacing of a pole, the overhauling
of a pump or engine, the pointing up of a wall,
renewal of the slate or shingles on a roof, and
the like, are all matters of repair w^hich are taken
care of in the everyday operation of the plant
and charged to its operating expenses. In this
way the consumer bears his burden of maintain-
ing the plant in condition to render him service.
It is his proper burden and should rightly be borne
by him because it is his use of the service that
makes the expense necessary.
But when the times comes, if it ever should
come, that a length of gas main, a purifier box, a
rotary converter, or a switchboard, or a part of
some such unit, would need to be retired, such ex-
pense should not be put upon the past consumers,
because their use has not made the retirement
necessary. Use has not lessened the efficiency of
76
these units or created the conditions of increased
demand, greater economies, or progress in the art,
which lead to their retirement. The mere expira-
tion of time has not created these conditions,
which bear no relation to any fanciful ** expired
portion'' of an '^estimated life'' of the property
to be retired. The burden or expense should, as
was pointed out in the opinion in the Netv York &
Quee^is Gas Company case, quoted from on pages
26-32, ante, be met in another way from that fol-
lowed as to current repairs, and the only just way
to meet it is by placing it upon those who benefit
by the change, to wit, the larger body of consum-
ers, whose present and prospective requirements
compel the change, and it is a change which
would not be made were not the improvements and
economies effected thereby to operate to their
benefit. The expense of such retirement adds
nothing to the rate, because being offset by econo-
mies it does not unduly burden the operating ex-
penses. If collected in advance, however, it would
mean increased rates to those who might never de-
rive any benefit therefrom.
Concrete Illustration of the Reasons Why the Rate
Should Not Be Burdened With Charges
Anticipating Future Retirements
That the method above outlined produces a
price such as the consumer is entitled to and may
demand, and which does not overcharge him to
the advantage of some future consumer, may best
be illustrated by citing a typical case, which any
manufacturer or utility would recognize as char-
acteristic of the business of producing and selling
commodities and service:
Smith embarks in the business of producing a
commodity involving the employment of plant and
77
equipment representing an investment of $100,-
000.
For all that he knows to the contrary, the plant
and equipment in which he has invested his capi-
tal may be operated perpetually, if maintained
by repairs, renewals and replacements, as occa-
sion therefor arises.
He can produce 500,000 articles which will sell
for ten cents apiece.
His gross receipts are $50,000.
His expenses are $40,000.
His profit is $10,000, or ten per cent, upon his
investment.
His investment is represented by :
Land $10,000
Structure 60,000
Machinery 30,000
At the end of three years, he learns that an in-
ventor has improved upon the machinery required
for the production of this particular article and
upon investigation ascertains that by the installa-
tion of the new machinery, at a cost of $30,000, he
can save in the operating expenses $10,000 per
annum. The new machinery is installed and the
machinery with which he began business, and
which is as good as it ever was, and which he
might continue operating perpetually, is with-
drawn from service, with the result that of his
gross income of $50,000 there is required :
For expenses $30,000
For Amortization (3 years) . 10,000
Leaving a profit of 10,000
There is no more reason than there was in the
first instance for his speculating as to the time
78
when new discoveries or inventions will make it
profitable for him to displace his new equipment.
Nevertheless, after the expiration of another three
years, he again learns that improvements have
been made by an inventor in the type of machin-
ery required for the manufacture of his particular
article, which will reduce his expenses $10,000 per
annum. The new machinery is installed at a cost
of $30,000 and the machinery theretofore used is
withdrawn from service.
At the same time he is able, as the result of the,
first supersession, to reduce the price of his com-
modity from ten cents per article to eight cents
per article, and in the seventh year his revenue
statement would be as follows :
Gross receipts $40,000
Expenses 20,000
For Amortization (3 years) . . 10,000
Leaving a profit of 10,000
At the end of the ninth year, he reduces the
price of his commodity to six cents per article and
thereafter until and unless some further inven-
tion justifies or necessitates another superses-
sional transaction, his annual operations will be as
follows :
Gross receipts $30,000
Expenses 20,000
Leaving a profit of 10,000
During the entire ten years, there was no
change in the amount of his profit. During the
first six years there was no change in his price.
The cost in the first three years was his operating
expenses of $40,000. During the second three
years his operating expenses, including as a
proper element of cost the amortization of invest-
ments in the superseded machinery, were ($30,000
79
plus $10,000) $40,000. During the next three
years (7th, 8th and 9th) his annual exj^enses were
($20,000 plus $10,000) $30,000, which gave him,
notwithstanding a decrease of two cents in the
selling price per article of his commodity, a profit
of $10,000.
In the tenth year, as stated, he was able to re-
duce the price of the article two cents more, to six
cents, reducing his gross revenue to $30,000 and
the amortization of the last withdrawal having
been completed, his expenses amounting there-
after to only $20,000, his profits continued at the
rate of $10,000 per annum on his investment of
$100,000.
For the purpose of presenting the illustration m
its simplest form, the elements of interest in con-
nection with the process of amortization and of
scrap value of withdrawn machinery have been
disregarded. The fact that, in order to provide
for the elements of scrap value and interest on
the unamortized investment during the period of
amortization, the annual economy would have to
be a little greater, or smaller, or the amortiza-
tion period a little longer, or shorter, than the il-
lustration indicates, has no relevancy to the prin-
ciple involved.
Had this manufacturer been so misguided as to
adopt so-called *^ theoretical depreciation '' as a
basis for determining the cost of his product and
had he possessed actual powers of clairvoyance
and been able to forecast that at the expiration of
the first three years his machinery would be su-
perseded, had he seen fit to disregard the fact
that the supersession would pay for itself , and un-
dertaken to collect it in advance, his selling price
for the first three years would have been twelve
cents per article produced, instead of ten cents.
80
Not only would he have been robbing Peter (his
customers during the first three years) to pay
Paul (his customers for the second three years)
but, for reasons above stated, he would have put
himself out of business altogether, since it is im-
possible to conceive that all of his competitors
would be guilty of similar folly.
The "Woodpile" and "Fleet-of-Taxicabs" Illustrations
As Used by the Depredationists
n
The *' stock'' arguments of the advocates of
accrued theoretical depreciation" are predicated
on what may be termed the 'Svoodpile illustra-
tion'' and the *^ fleet of taxicabs" illustration.
These fallacious illustrations were testified to at
length by Milo E. Maltbie and other champions
of the depreciation theory in Consolidated Gas Co.
vs. Newton, et al. (see pages 32 to 36, ante), as
well as in New York S Queens Gas Company vs.
Newton, et al. (see pages 26 to 32, ante); and so
were taken up, analyzed, and refuted in detail,
before the Special Master in both those cases.
We quote from the resume of that argument, as
set forth in the brief submitted to Judge Learned
Hand in the Consolidated Gas Company case (for
his opinion, see pages 32 to 36, ante):
**0n page 13,316 of the printed record. Pro-
fessor Maltbie confused a gas-plant with a
wood-pile and gave it as his opinion that the
plant disappears in the same manner as a
wood-pile disappears as the result of * putting
a chunk of wood into your stove right along,'
and adds, Hhat wood-pile is depreciating in
value.' The absurdity of this illustration is
at once apparent to the sound thinker. A
gas plant is not treated as a wood-pile is
treated. There is no analogy between the
81
withdrawal of wood from a pile and the oper-
ation of a gas-plant. No * chunks' of plant
are taken out and consumed for fuel nor for
any other purpose. On the other hand, if any
part of a plant is taken out of service it is
immediately replaced — otherwise the plant
could not operate. If the wood-pile were sim-
ilarly maintained it would never diminish
either in dimensions or in value. In other
words the. gas-plant is like a wood-pile to
which a stick of wood is added every time
one is withdrawn.
* * On page 13,137 of the printed record, Pro-
fessor Maltbie endeavored to improve upon
the wood-pile analogy by a clumsy attempt
to expound the sophistries by which it is un-
dertaken to demonstrate that a unit of equip-
ment when new, produces a certain store of
productivity which diminishes progressively
during its period of life expectancy and is
finally reduced to zero. He said, *When you
start out with anything there is a certain
amount of service it will render and it has
value because it will render that service.
Now, as time goes on the amount of remain-
ing service which that thing will render de-
creases as you go along and consequently the
value of that commodity, or article, or plant,
whatever it may be, decreases in value be-
cause the person who owns it has a shorter
and shorter time to get service out of that
plant or anything.'
Fallacy of the "Wood-pile" Illustration
**The falsity of this theory lies in the as-
sumption that a gas-plant as a whole, or even
95 per cent, of the units contained in it.
82
actually have any ascertainable limit to pro-
ductivity. In other Words, their capacity to
produce runs to infinity. It is only what may
be termed the ^wearing parts' of a gas-plant
to which may be attributed any limitation of
their productivity, but the renewal and re-
placement of such wearing parts constitutes
a proper item of operating cost and does not
in any way affect the continuing productivity
of the plant as a whole. The fact that the
growth of a utility's business or the develop-
ment in the art of producing artificial gas
may require that in the interests of economy
and efficiency units of equipment, which would
otherwise last forever, are displaced, has
nothing to do with the productivity of the
unit. It is not because its period of productive
usefulness has expired that it is withdrawn
from service, but that the interests of economy
and efficiency may be conserved that units of
equipment are withdrawn. Such withdrawals,
however, uniformly furnish their own eco-
nomic justification. The loss involved in such
withdrawals if too large to charge against the
revenue for the year in Avhich the withdrawal
occurs should be charged against the revenues
thereafter until the loss is amortized out of
the earnings. There is no good nor plausible
excuse for providing for the loss involved in
such withdrawals in advance of their occur-
ring. The reasons are several and obvious.
Aside from the fact that the rates paid by the
users of an improved service should bear the
burden of improving the service (and this
does not imply that it is ever necessary to
increase a rate in order to amortize the loss
involved in a replacement for obsolescence or
inadequacy, for no instance of the kind is
recorded), is the impossibility of forecasting
83
in respect of what unit of plant or equipment
obsolescence or inadequacy will ultimately
disclose itself and the consequent impossi-
bility of adjusting the provision to the neces-
sity — and even if this could be done, there
would still be no justification for imposing
upon the users of a given unit of plant or
equipment the obligation of providing in ad-
vance for the loss involved in its ultimate
displacement with no assurance that the then
rate-payer would ever benefit by the trans-
action. In other words, an attempt to provide
in advance for future obsolescence and inade-
quacy (which are the only causes for which
units of plant and equipment are displaced)
would involve not only speculation as to the
amount, but would lead inevitably to a bur-
densome rate and to the accumulation of a
useless fund which could never be used for
the purpose for which it was alleged to have
been created.
** Since the rate for service, if properly
adjusted to cover the operating expenses, in-
cludes a fair return on the investment, in-
cluding the cost of maintaining the property
by renewals and replacements as and when
necessary, and providing the amount neces-
sary to reimburse the company for the loss in-
volved by renewals and replacements on ac-
count of obsolescence and inadequacy, it is
obvious that no parts of the plant diminish in
value so long as they are in use. The amount
recoverable in the rates for renewals and re-
placement of plant for obsolescence and in-
adequacy is the amount in each case of the
investment in the unit of the plant or equip-
ment retired. Its value, therefore, suffers
no diminution or impairment during the
84
period that it is in use. The investor buys a
plant which becomes second-hand the moment
it is put in service. Theoretically, it has lost
value, actually it has lost nothing, and the
investment remains intact. In fact, the in-
vestment is in the plant as it may be found
at any time during the period of its opera-
tion. The idea that something more than the
cost of maintaining it should be collected in
the rates in order to maintain the investment
unimpaired has no basis in fact nor in eco-
nomics. The absurdity of the theory that an
investment in gas-plant becomes progressive-
ly impaired and must be compensated for by
the accumulation of unnecessary funds and the
charging of an unnecessarily high rate for the
service is best demonstrated by considering
the investment made in the distributing sys-
tem. When a company has removed a nec-
essary amount of pavement and excavated a
trench four feet deep and has installed there-
in a gas-main and has dug laterals and made
house connections and has then refilled the
trench and repaved the street-opening and
has expended in this process say $1,000,000,
it has, in substance, thrown that amount of
money away, except as the law recognizes
that the amount invested was invested in good
faith to enable the utility to render a service
in accordance with its franchise obligations,
and that upon the amount invested it is en-
titled to earn a return so long as the invest-
ment remains in the property and is not re-
funded to the utility. So far as worth or
value is concerned, independently of the fran-
chise and the legal rights of the company in
the premises, the buried mains and services
have no value whatsoever. It would cost a
great deal more to recover the pipe thati it
V
85
was worth. It would cost more to recover
it than it cost to bury it. If the questions
of worth and value are to be considered in-
dependently of the question of the investment,
then the utility should collect from its pros-
pective consumers the cost of installing the
mains and services before they are installed,
Avhich would, of course, be impossible. The
thing has but to be stated to disclose the non-
sense of it, and if it is considered that such
an investment may be made by a gas company
. with safety and propriety, then there is no
ground upon which at any time any impair-
ment of the investment may be alleged as
long as the mains and services continue to
perform their function of conveying gas to
consumers. Every dollar thereafter expended
'Ion such mains and services becomes either a
/ 1 capital charge or an operating expense. If
it becomes necessary, in order to meet a de-
mand for a volume of gas in a particular sec-
tion, the necessity for which could not be fore-
seen, to provide additional main capacity, the
problem would be whether it would be better
to install an additional main to the one
already in use and of perhaps a correspond-
ing size, involving the maintenance and up-
keep of two mains instead of one, or of in-
stalling a single main of sufficient capacity to
meet the demand and withdrawing the old
main from service. The economic question
presented in such a case is whether to make
an additional capital investment of a given
sum and charge against the revenue derived
from the additional business to be obtained
from the additional main capacity the interest
on the capital and the cost of maintaining
the main, or of amortizing the capital invest-
ment in the old main, installing a larger
86
main and obtaining from the earnings of the
larger main the amount necessary to maintain
a single main instead of two mains, to cover
the amortization cost in the main withdrawn
and to pay a return upon the capital invested
in the single main. The problem, when solved
in accordance with the facts disclosed in the
particular instance, adds nothing to the rates.
The company has recovered — probably out of
the earnings for the current year, and cer-
tainly out of the earnings for that and one or
two subsequent years — the amount of its in-
vestment in the discarded main and the entire
incident discloses no ground whatever for
the accumulation of any reserves nor for the
application of any theory of depreciation.
^^The proper method of dealing with a case
of obsolescence may be briefly illustrated by
citing the case of one of the Consolidated Gas
Company's affiliated companies which, in
addition to doing a gas and electric business,
operated a trolley line. Its equipment con-
sisted of the conventional surface cars. The
proposition was made by the engineering
staff that a new type of cars known as the
^one-man-car' could be substituted advan-
tageously for those in use and that the econo-
mies resulting from the saving in the use of
electric current required to operate the cars
and in the wages of one man, would suffice to
amortize the investment in the old cars within
a period of three years. Instructions were,
therefore, given to dispose of the old cars at
the best price which could be obtained for them
and to charge the loss involved in their with-
drawal from service to a capital account en-
titled *^ Unamortized investment in cars with-
drawn from service;" to buy the new cars
87
and charge them to capital account and to
charge against the operating expenses and
credit to the unamortized investment in the
old cars the amount of estimated savings, so
as to amortize the balance of this account
within a period of three years. No change
was necessary in the rates in order to effect
the result. This case is typical of what has
been going on, in respect of all classes of pub-
lic service corporations, including railroads
throughout the country, for the last half cen-
tury. The method of bookkeeping may have
differed and different terminology may have
been used, but the substance and effect of the
transaction was substantially the same.
**0n page 13,335 of the printed record, the
Master asked: *How is the public interested
so far as the cost of gas to the public is con-
cerned F and then after Maltbie stated that
there is depreciation notwithstanding the fact
that a plant or property may be rendering
sufficient service at the time (p. 13,336), the
Master said: *He is entitled to have a nor-
mally efficient, up-to-date, economically op-
erated plant, isn't heV
*^It is to be emphasized that what the Mas-
ter described is exactly what the investor has
put his money into. It represents his invest-
ment unimpaired and undiminished by any
theory of expired life, in other words, by so-
called * * accrued depreciation. ' '
**0n page 13,377 of the printed record, in
answering the Master's question as to re-
newals and replacements and their being pro-
vided for in the rates , Professor Maltbie
said: *I cannot see that they should be al-
lowed for those repairs and disregard the
other' (depreciation) * because the two things
ss
have got to be taken together/ This is not
true. They have not got to be considered to-
gether and should not be taken together. The
only provision required in order to continue
serving the public until the crack of doom is
that for maintenance and repairs, and nothing
else.
The Analogy to a "Fleet of Buses"
**The witness Maltbie was asked by coun-
sel for the defendant Newton to explain in
his own way as to Hhe value of depreciation
as applicable to a bus and a fleet of buses.'
The explanation which follows furnishes a
striking illustration of the disingenuous cas-
uistry of the professional depreciationist. He
did not take a single bus because he knows
that the absurdity of a computation applied
to a single bus would disclose itself imme-
diately. He does not even take ten buses and
work out his depreciation theory as applied
thereto, but undertakes to make the compu-
tation more complexed and involved by as-
suming that at the expiration of every year
new buses are added to the fleet. To put the
matter simply and to show why the owner of
a single bus would handle his individual
problem differently from the owner of a fleet
of buses and to show why in neither case, nor
in the case of a gas company, there is any
excuse for using a bogus formula designed for
the purpose of finding something that does
not exist, it is only necessary to explain that
the provident operator of a single taxi-cab,
who expected to continue in business after his
cab became inadequate or obsolete, would set
aside out of his earnings and deposit in the
bank such a sum, periodically, as would, at
89
compound interest, equal the difference be-
tween the amount he would be able to obtain
for his old cab and the amount he would have
to pay for a better one. No one would ques-
tion his right to collect in his fare the amount
necessary to provide by the sinking fund
method for the loss due to the obsolescence
or inadequacy of his cab as nearly as he could
compute it. No one would have the temerity
to question his right, in the meantime, to col-
lect a uniform fare for the use of his cab. It
w^ould be difficult to conceive of a situation
where the operator of a taxi-cab would have
to disclose to a prospective customer the
period of life expectancy of his cab, the per-
centage of such life expectancy which had
elapsed, and have his customer compute by a
bogus formula called * straight line deprecia-
tion' the extent to which his fare should be
reduced below that which he was entitled to
charge when his cab was new.
**The owner of a fleet of ten cabs is under
no obligation to increase the number of cabs
he has in service. If he started with a fleet
of ten cabs he would probably have a great
deal of trouble during the first year in mak-
ing both ends meet. Two or three years would
elapse before his profits became great enough
for him to set aside in the bank, at interest,
a sum designed to maintain by replacements,
when necessary, a cab which became obsolete
or inadequate. By no stretch of the imagina-
tion can it be assumed that his ten cabs would
become obsolete or inadequate simultane-
ously, or that they would all be subjected to
identically the same vicissitudes of vehicular
operation. Furthermore, he would control
his impulse to replace his cabs in accordance
with his ability to do so out of his earnings.
90
*'The results of the actual operation of his
fleet would probably spread his cab renewals
over a period of several years, so that each
year he would have to provide, out of his
savings bank fund and out of current earn-
ings, the amount necessary to replace a dis-
carded cab, which would probably be sold to
some one less fortunate and who operated in a
less exacting district than he. With these
financial problems which he has to solve the
public has no concern. He performs his pub-
lic obligation when he provides transporta-
tion at a rate not exceeding the statutory
limit, with a cab which will hold together
long enough to complete the trip. The fact
that he has accumulated a sum in the bank to-
ward the replacement of his equipment, which
might be large or small accordingly as he is
fortunate or unfortunate, provident or im-
provident, could not be used as an argument
in favor of a diminution of the investment in
the taxicabs upon which he is entitled to earn
a return. If he has set aside any money for
this purpose, it is in the nature of a sinking
fund and the authorities are perfectly clear
that a reserve created upon the sinking fund
basis may not be deemed as a measure of de-
preciation for any purpose. It remains to be
asserted by any one who speaks authorita-
tively, or understandingly, that taxicab fares
should be adjusted to conform to so-called
* theoretical depreciation' computed on the
so-called * straight-line ' method.
**In the case of a corporation such as a gas
company, with plant and equipment made up
of units whose life, except for obsolescence and
inadequacy, would extend to infinity, no rea-
son discloses itself — or ever has disclosed it-
91
self — for the creation and maintenance even
of a sinking fund for the replacement of prop-
erty. As has already been made clear, the
incident of obsolescence and inadequacy fur-
nishes no excuse for burdening the rates for
the purpose of creating reserves against
which the loss, due to obsolescence and inade-
quacy, may be charged. The reason is that
the rates, without such a burden, are adequate
to cover the operating expenses and maintain
the property and pay a fair return on the in-
vestment indefinitely. The rates without such
a burden are sufficient to take care of obso-
lescence and inadequacy as it occurs because
the ultimate effect of replacement for obso-
lescence and inadequacy is to reduce the cost
and, eventually, to reduce the rates.
**It cannot be alleged in respect of the va-
rious units of plant and equipment of the Con-
solidated Company that, taken collectively,
they are in any worse condition physically
than they were ten or twenty or thirty years
ago, or at any other period in the company's
history. As a matter of fact they were never in
better condition nor rendered more efficient
and economical service than they are render-
ing to-day, and their productivity is greater
per dollar of investment than it was thirty,
or twenty, or ten years ago.
**It cannot be alleged in respect of the plant
and equipment of the Consolidated Company,
taken as a whole, that any calculable percen-
tage of any determinable period of life ex-
pectancy has expired. Taken collectively, the
plant will last forever. Its life may be per-
petuated to infinity by the renewal and re-
placement of parts subject to wear and tear.
Its life, like that of the franchise under which
92
it is operated, is perpetual. It cannot be
alleged that the investment in the plant and
equipment of funds obtained from whatsoever
source is impaired by any physical or
economical process, as for example by lack of
newness. The plant as it is to-day is the
plant in which the funds have been invested.
It cannot be alleged in respect of the invest-
ment of the Consolidated Company that there
has occurred what is termed by false theorists
* capital consumption.' Such a thing is not
possible in the case of a public utility like the
complainant. Unlike the wood-pile, the
plant and equipment are not consumed. Units
of plant and equipment are being withdrawn
only to be replaced immediately by other
units, by w^hich means the investment is kept
intact. It cannot be alleged that the Consoli-
dated Company has accumulated a useless re-
serve disguised as a depreciation reserve or
as a reserve for the maintenance of its prop-
erty. It has been the Consolidated Com-
pany's contention throughout that no such
reserve should be accumulated ; that it is con-
trary to public policy; that the companies do
not require or desire it and that there should
not be permitted in the rates any such re-
serve, since it involves an unnecessary en-
hancement thereof over the actual cost of the
service, at the expense of the consumer, from
which he derives no benefit."
Other Decisions of Courts and Commissions
If further authority be needed for such a
handling of this problem as has been hereinbefore
proposed, in the railroad as well as the public
utility field, it would seem to be afforded by Kan-
sas City Southern Railway Company vs. United
93
States, 231 IT. S., 423, already referred to on
page 57, ante. A railroad had, according to the
facts before the Supreme Court in that case,
been constructed to meet the needs of a new coun-
try with the minimum investment necessary. As
a result, there were steep grades. With the de-
velopment of the country and increased traffic it
was found more economical to build a new divi-
sion with lower grades and to abandon parts of
the old line. The company issued bonds, with the
proceeds of which it made the new construction.
The question was how the cost of the new line re-
placing the line abandoned should be provided for
and paid. The Supreme Court said, at page 451 :
^^The road or structures have to be re-
placed with stronger or more efficient instru-
mentalities. Abandonments occasioned by
changes of this character are, therefore,
chargeable to future earnings, for the reason
that the improved condition of the road is not
only designed to meet the demands of the fu-
ture, but presumably will result in economo-
mies of operation, and so the resulting bene-
fits will be reaped by those who hold the stock
of the company in the present and in the fu-
ture. * * *
^^In case, however, the amount is so large
that its inclusion in a carrier ^s operating ex-
penses for a single year would unduly burden
the operating expense account for that year,
the carrier may, if so authorized by the Com-
mission, distribute the cost throughout a
series of years.''
In the Havre de Grace Bridge case (Havre de
Grace and P. Bridge Co. vs. Towers, 103 Atl., 319 ;
P. U. E., 1918D, page 484), the Maryland Court of
Appeals characterized as ''mere guess work" all
94
attempts to foretell the period of useful life of
engineering structures, such as the radical de-
predationists would base an accounting system
upon. The Court said in part :
**No item of depreciation, as such, appears
in the tabulation, though it is probably in-
tended to be covered under the so-called *main
depreciation reserve.' This was based not
upon any direct ascertainment of actual de-
terioration in the bridge structure, but upon
the basis of the estimated future life of the
bridge. It is difficult to characterize this by
any other term than guess work. The engi-
neers gave the estimate of the probable dura-
tion of such bridge from the time of its con-
struction. This was followed up by an esti-
mated duration of the bridge in the condition
in which it was at the time when the valuation
was made, and which, if correct, would show
a far longer period of durability than would
have been anticipated at the time when first
constructed. This is a factor which under the
circumstances of this case is in the highest
degree speculative and impossible to measure
in terms of dollars and cents, as the Commis-
sion undertook to do.
Then superadded to all of the considera-
tions thus far noted was the following: ^We
have given consideration to the circumstances
therein set up and have construed them as
creating substantial equities in the public
with respect to the rates of toll proper to be
charged over the bridge in question.' Just
what these supposed substantial equities were
the opinion of the Commission throws no
light upon, but having them in mind, and af-
ter the deductions already mentioned, an al-
lowance, and apparently a substantial allow-
95
ance, was made for these equities, with the
result that the value of the bridge was de-
creased $100,000 and its value fixed at $250,-
000, and the tolls attempted to be adjusted so
as to yield to the stockholders of the Bridge
Company a proper return upon such valua-
tion.
^^By a similar process of reasoning j it
would have been entirely possible to have
reached any valuation which anight have been
desired. This is not intended as in any way
reflecting upon the bona fides of the intent of
those constituting the Public Service Commis-
sion, either in fixing the fair value of the
bridge, or the rates promulgated by the Com-
missioner's order but it is important as show-
ing that the method adopted and result ob-
tained was unreasonable.
*'It is not the function of this Court either
to fix the valuation of the property or the rea-
sonableness of the rates. Its sole power and
duty is to examine those rates in the light of
the method by which they were obtained, and
say whether in our judgment the same were
reasonable or unreasonable, and, after careful
consideration, we are bound to hold the ac-
tion of the Commission unreasonable, and the
decree appealed from must, therefore, be re-
versed. ' '
The fundamental proposition has been stated
with great clarity by the Supreme Court of Idaho
in Murray vs. Public Utilities Commission (150
Pac, 57; P. U. E., 1915F, page 438), in reversing
the ruling of a majority of the Idaho Commis-
sion and sustaining the contentions made in the
minority opinion of Commissioner Ramstedt in
the Pocatello Water Company case. The Idaho
Supreme Court said in part :
96
*'So far as the question of depreciation is
concerned, we think deduction should be made
only for actual, tangible depreciation, and not
for theoretical depreciation, sometimes called
* accrued depreciation.' In other words, if it
he demonstrated that the plant is in good
operating condition, and giving as good ser-
vice as a neiv plant, then the question of de-
preciation may he entirely disregarded/^
To the same effect see Sandpoint vs. Sandpoint
W. d L. Co., P. IT. R., 1915F, page 464 (Idaho).
The Idaho Public Service Commission has sub-
sequently rejected the *^ accrued depreciation''
theory with great positiveness. The fair value of
the property of the Wood River Poiver Company,
an electrical corporation of Idaho, w^as fixed by
the Commission, on January 10, 1921, at $312,-
360.86. In arriving at this value, no deduction
was made for accrued depreciation. The Com-
mission gave its reports for this as follows
(P. U. R. 1921 B, page 531) :
** Depreciation is a general term used to
cover all of the factors affecting the physical
serviceability of a public utility property that
cannot and need not be currently met, but
which will ultimately force retirement or re-
placement. Service is not a thing of the mo-
ment, but includes the future, and the assur-
ance that service will be continuous for so
long as the users demand and are willing to
pay for it. The assurance of continuance of
service is of even more importance than is the
service presently rendered. Business and liv-
ing plans are made with regard to it. Com-
munity and district growth are affected by it,
and it may be said that service to-day is a
convenience, while the assurance of continu-
97
ons future service is a necessity. The physi-
cal serviceability of a utility 's property means
both its present ability to carry the load and
its power of continuing in service in the fu-
ture. When the property is all physically new
its physical serviceability is at its highest
point, but this new physical condition cannot
be maintained. The passing of time — age;
the development of new devices or better
means of service — obsolescence; the growth
of service needs in the community or district
served — inadequacy — all of these contribute
to the deterioration of the physical element
of the property while in use. The effect of
these cannot be met or offset from day to
day or year to year, but in spite of repairs
and upkeep cumulates to a point where re-
tirement or replacement is necessary. When a
public utility engages in the business of serv-
ing the public it assumes a responsibility for
keeping its means of service in such condi-
dition that the service will not be interrupted
or impaired. Its property cannot be removed
and used elsewhere so long as it is needed in
service, and it cannot be permitted to run
down or get out of repair to a point where
service is affected. Because it is not possible
to meet the factor of depreciation from day to
day or year to year, the full serviceability of
the utility's property can be maintained only
when there is a provision against the time
w^hen retirement or replacement must be
made. This provision must necessarily be
financial in its nature. It must be reasonably
liquid so that its use, when needed, will not
be unduly delayed; it must be reasonably
adequate in amount, and it must be fully pro-
tected at all times. From the nature of the
98
obligation which rests ujjon the utility this
provision is as much a part of the utihty's
property as any physical unit in it, and when
present it makes the immediate physical con-
dition of the property unimportant, as what-
ever may have gone from the physical
through use is represented in a ready finan-
cial ability to retire or replace, when neces-
sary. Serviceability of a going public util-
ity is part physical and part financial, the
relative importance bf each factor being a
matter of constant change under operation,
but the total remaining unchanged/'
In Re Campbell Bros. Water Company (case
F-396; Order No. 752, February 25, 1921), the
Idaho Commission made no allowance for *^ ac-
crued depreciation'' of a water company's prop-
erty, where no '^tangible depreciation" was ob-
served and the property was in every respect in
efficient * * service condition. ' '
The Wisconsin Commission in its recent cases
has uniformly taken the position that depreciation
should not be deducted in arriving at a rate base,
lacking definite proof that the depreciation has
been earned and that it has been appropriated to
the investor. Notable among the decisions of this
commission are those in the cases of Milwaukee
Electric Raihvay S Light Company, et al, vs. City
of Mikvauhee, P. U. R. 1918E, page 1, and Be
Mineral Point Public Service Company, P. U. R.
1919A, page 795, which made the following ruling :
*^ Rates or earnings should not be based
merely on the estimated value of the property
of the utility after deduction of accrued de-
preciation, where it does not appear that past
earnings have been fully adequate to cover all
proper charges."
99
A similar position has been taken by commis-
sions in other states, the New Jersey Board of
Public Utility Commissioners having decided, on
July 17, 1919, Re Medford Gas Compmiy, P. U R.
1919E, page 707, that
^* Accrued depreciation should not be deducted
from the value of utility property for rate
making where the net earnings have not been
sufficient to provide for it together with a fair
return. ' '
The Washington Public Service Commission in
the case of Public Service Commission of Wash-
ington vs. Kelso Water Company, P. U. R. 1919E,
page 206, recently said:
*^ We believe there is thought worthy of con-
sideration in an article entitled * Theoretical
Depreciation,' by George N. Webster of New
York, wherein he states :*
*The method of unsound valuation
against which this article is directed may
be described briefly as the **cost less depre-
ciation'' method. The *'cost" may be
** original cost," ** average cost," or ^* pres-
ent cost." The depreciation which is de-
ducted therefrom, and which may be said
to have its origin in the concept that used
property is less valuable than new prop-
erty, is based upon the assumption that
used property becomes uniformly less valu-
able during the period of its alleged life
expectancy, starting at 100 per cent, value
and ultimately reaching zero value. The
amount to be deducted is computed by find-
ing the ratio of the expired life to the
assumed total life, and by applying that
*See note on page 10, ante.
100
ratio to the **cost;'' the amount thus ob-
tained, deducted from the **cost/' is sup-
posed to represent the ^* present value''
* * *
'It is not conceivable that anyone could
give the subject of depreciation of the kind
here illustrated serious consideration with-
out discovering its utter fallacy. That so
few have raised their voices in protest
against it must be attributed to the fact
that few have really considered it seriously.
These, who are unalterably opposed to the
theory, include some economists, some
members of the judiciary, a few of the Pub-
lic Service Commissions, some executives
of corporations, and some members of the
legal, engineering and accounting frater-
nities. They have discovered that the
question is not one of engineering, nor of
accounting, but one of economics and
finance and the legal protection of property
rights.' "
In Re Arkansas Light £ Power Company (P. U.
E. 1920 D, page 775), the engineer testifying be-
fore the Arkansas Commission, in behalf of the
municipal authorities, had filed a physical valua-
tion of the company's electric light and power
plant, based upon original cost where the figures
thereof were obtainable from inquiry, and upon a
ten-year average of prices prior to 1917, where
original cost data was not available. The engi-
neer then arrived at a '* depreciated value" by as-
suming a 50-year life for the plant, and a 17-year
depreciation thereof, at two per cent, a year, on a
* ' straight-line ' ' basis. Quoting with approval the
decision of the Washington Public Service Com-
mission in the Kelso Water Company case (see
page 99, ante) and its excerpt from the Webster
monograph, the Commissit)n''t?ont3iiid*ed:" *^This
method of valuation cannot be accepted by the Ar-
kansas Corporation Commission," adding, signifi-
cantly: ^*An unwise administration of regulatory
law will drive capital from this field and bring on
public calamity by causing the utilities to cease to
function."
In Re Gardiner Electric Light S Water Com-
pany (P. U. R. 1920 D, page 821), the Montana
Public Service Commission refused to make any
deduction from a valuation based on actual invest-
ment, where no reserve had been created out of
earnings and the earnings had been inadequate.
The Commission intimated that a deduction for
* depreciation " would be made only if the com-
pany sought to claim a return based on ** appre-
ciation," in the form of the present reproduction
cost of its property.
Summary of Conclusions from Foregoing Decisions
^ The conclusions to be drawn from the foregoing
decisions may be summarized and paraphrased as
follows :
If a utility's patrons have received its ser-
vice at a fair price based upon actual cost in-
cluding a fair return 07i its investment, and
not at a price inflated by the arbitrary in-
clusion therein of a provision for theoretical
depreciation, no deduction for depreciation
should be made from the value of its prop-
erty. If on the other hand, it has been so
misguided as to accrue ** reserves" on the
** theoretical depreciation" basis and has
exacted from its patrons an additional charge
therefor, the amount thus exacted is com-
monly deducted from the value of its prop-
erty. K
-. 102
Basic 'Objections to the "Accrued Depreciation"
Theory
It is of course true that the practice of requir-
ing reserves for ** accrued theoretical depreci-
ation" based on ^Hables- of estimated lives" of
railroad and public utility property, has found a
measure of adherence on the part of some public
officials charged with regulatory duties and also,
in some instances, on the part of executives of
raihvay and public utility enterprises. Partic-
ularly at times when public sentiment was adverse
to allowing enterprises of this character to earn
a rate of return really adequate, and the obtain-
ing of money for new construction has in conse-
quence been difficult, regulatory officials have pre-
ferred to permit utilities to fix their rates on a
basis of accruing large *^ reserves" for so-called
'^ depreciation" and allowing perhaps a very mea-
ger return on the property, over and above the
amount of such reserves. Utilit}^ managers have
short- sight edly been willing to avail themselves
of this method of securing from their patrons a
fund which can be invested in new construction,
especially where the net effect is to allow the
utility to exact from its patrons, over and above
actual operating charges (including the actual
cost of repairs and the retirement of property)
a much more liberal sum than the regulatory
officials would feel it politically prudent to allow
in any other guise.
Taking advantage of this short-sighted view on
the part of these utility managers, propagandists
of radical views, who are often found in the staffs
of regulatory commissions and sometimes in their
membership, urge and advocate the accrual of
still larger ** reserves" on this hypothetical basis.
They know that, in addition to giving them a pre-
text for keeping the rate of return down to a
103
point deemed politically prudent, it also gives
them a basis, sooner or later, for asserting two
contentions that accord fully with their radical
tenets :
(1) That the railway or utility having
accrued a large ^* reserve'' for ** depreci-
ation'' on the theory that a corresponding
part of the ** useful life" of its property
has ** expired" and been reduced by the
flight of time, and the amount of such
*^ depreciation" in ^^ value" having been
collected, year by year, from the rate-
payers, the company cannot be heard to
claim that its property has not *' depreci-
ated" in *^ present value" to that extent,
and the amount of such * * reserve, ' ' invested
usually in existing property of the railway
or utility, must be deducted from the aggre-
gate amount on which the company would
otherwise be entitled to have a fair return
computed.
(2) For similar reasons, whenever these
radical propagandists feel that public opin-
ion is favorable to their peculiar views, they
loudly advocate governmental acquisition
and operation of the property, claiming
that the government can secure the same
more cheaply because the rate-payers have
been contributing annually to a piecemeal
purchase of the property, through the cre-
ation of a ^* reserve" that has been collected
from them, over and above operating ex-
penses and a fair return.
Thus the utility and railway managers who
countenance the *' accrued theoretical depreci-
ation" concept, and the regulatory officials who
acquiesce in its adoption, are lending themselves
104
to the confiscation of property and the overthrow
of regulation. We submit, on the basis of the gen-
eral American experience:
(1) That the setting up of * ^ depreciation
reserves'' based on ''life tables" leads inev-
itably to an unjust and burdensome inflation
of the rate charged to patrons and to the
accrual of reserves vastly greater than are
actually necessary to make provision for the
retirements of property as and when they
occur.
(2) That when reserves are set up and
accrued on this basis, the amount of such
reserves constitutes the minimum amount
which is sooner or later deducted from the
smn on Avhich the company would otherwise
have its fair return calculated, and would in
any event be deducted from the sum which
the government would pay for the property
upon any acquisition of the same.
(3) That this deduction is made in com-
plete disregard of the fact that even including
the net balance in such reserves as a part of
the sum earned by the enterprise over and
above actual operating charges, the aggre-
gate figures still constitute less than the fair
return which the enterprise was constitution-
ally entitled to earn upon the fair value of
its property.
(4) That where the matter of retirement
expense is treated in a sound way, on the
basis of actual outlays therefor, charged
against operating expenses, none of these
confiscatory consequences rise up to plague
the enterprise and deprive its investors of
their constitutional rights.
105
The Brooklyn Borough Gas Company Case and Other
Recent New York Rulings
The foregoing views may be fortified by the
examination of other judicial decisions, in addi-
tion to those already quoted from. The decision
of Ex-Justice Charles E. Hughes, as Keferee in
Brooklyn Borough Gas Company vs. Public Serv-
ice Commission for the First District (17 State
Dept. Rep., 81, 103, 104), is sometimes cited as a
claimed precedent for a deduction of ** accrued
depreciation" from the reproduction cost of prop-
erty. In that case, the distinguished Referee
simply deducted from the reproduction cost of
the property, as found by the Public Service Com-
mission and as entered by the Company in its
fixed capital account as the book cost of its prop-
erty, the amount which the company itself carried
in the general reserve account entitled ** Accrued
Amortization of Capital,'' representing the ** total
extent of accrued depreciation according to the
plaintiff's estimate.''
The Referee observed that:
** There is no evidence ivhatever to impugn
the correctness of this estimate of the accrued
depreciation or of the propriety of the annual
additions to the depreciation reserve, or the
correctness of the total estimate of accrued
depreciation by the account known as ^ac-
crued amortization of capital' as it stood on
December 31, 1917."
The Referee stated the basis of his action to be
that:
** There is simply deducted the amount of
its own estimate of the accrued depreciation
in its plant (17 State Dept. Rep., 81, 103)."
106
The New York Public Service Commission for
the Second District, while following Judge
Hughes' view that the reserve must be deducted
where the company has itself created such a re-
serve, ruled recently that ivJien no '' depreciation
reserve' ' has been created by the company, no
deduction for depreciation should be made from
fixed capital. If the company has itself created
and carries on its books such a reserve, the Com-
mission held that the amount thereof is of neces^
sity deducted by the State regulatory body in
arriving at the quantum of property investment
upon which the company is entitled to earn a
return. In Complaint against Binghamton Light,
Heat S Power Company (24 State Department
Eeports, 651, at page 655), the Public Service
Commission for the Second District, in a unan-
imous opinion by Commissioner Irvine, held:
**The company has failed to set aside as a
depreciation reserve as much as was recom-
mended by the Commission in a capitaliza-
tion case in 1916. Its books now show a
reserve of $170,830.67. The books indicate
that this has all been reinvested in plant and
should, therefore, be deducted from fixed
capital in obtaining a rate base. It is claimed
that the deduction should be on the basis
recommended. While the Court of Appeals
has, in a case relating to this very company,
emphatically declared the necessity of such
a reserve (People ex rel. B, L. H. & P. Co.
vs. Stevens, 203 N. Y., 7), it has also declared
that the Commission is without power to
impose upon a corporation any specific re-
quirement therefor (People ex rel. N. Y. R.
Co. vs. P. S. C, 223 N. Y., 373). As the Com-
mission may not directly impose such a re-
quirement it would seem that it may not indi-
107
rectly do so by charging arbitrarily against
the fixed capital a non-existent reserve suf-
ficient to meet its ideas of what should prop-
erly have been set up. Nothing has been
taken from the public on this account beyond
the amount actually set up and there has been
no obsolescence or retirement decreasing the
efficiency of the plant or not reflected in cred-
its to fixed capital/'
See, also, Hoffman vs. Elmira Water, Light &
Railroad Company (N. Y. Pub. Serv. Comn, 2nd
Dist.; January 22, 1920; P. U. K. 1920 D, page
266 ; Ibid, P. U. R. 1921C, page 409) ; Re New
York State Railways (N. Y. Pub. Serv. Comn, 2nd
Dist ; P. U. R. 1921C, page 496). In both the cases
last cited, the Commission refused to deduct ** ac-
crued depreciation '' from the ** original cost'' of
the utility property, but based such action, at
least in part, on a finding that the ** present
value" of the property was at least the investment
therein, without deduction.
In Conclusion
The adoption of theoretical depreciation as the
basis of the provision to be made by common car-
riers for the ** depreciation" referred to in the
Act, finds no justification in sound principles of
economics or finance. Its adoption would be con-
trary to public policy and would do more to de-
stroy public confidence in railroad securities than
any other suggestion that has come from the camp
of those at heart opposed to private ownership
and operation under adequate public regulation.
If enforceable, it would wickedly burden railroad
rates with a fictitious expense when they are
already overburdened with legitimate operating
expenses compelling rates so high as to menace
108
the industries and commerce of the country. It
would in effect, be to play into the hands of Fed-
eral ownership fanatics at a time when the people
have unqualifiedly placed their disapproval on
governmental ownership and have retired its
strongest advocates from office. We protest,
therefore, that the Interstate Commerce Commis-
sion would have no right or reason to put the seal
of its apparent approval upon a theory, which,
if carried to its logical conclusion, would result
in the virtual confiscation of billions of dollars
invested in railroad property, this being the real
aim and purpose of the proponents of this theory.
Nor would the Commission be warranted in adopt-
ing a theory against which virtually every Court,
regulatory commissioner, economist and financier,
who has given it careful and thorough consider-
ation, has ruled unqualifiedly, and which the
Commission may not legally enforce after it has
adopted it. We protest against any action by
this Commission giving to this obsolete and dis-
credited theory any manner of support.
When the question of the form and substance
of the regulations to be prescribed under Section
20 reaches the stage of discussion and hearing by
and before the Commission, we shall be glad to
be advised of any opportunity to participate in
such a discussion, to the end that no fictitious
inclusions in the operating expenses of carriers
may be permitted to augment avoidably the trans-
portation costs which our companies must in
turn pass on to their many consumers.
Eespectfully submitted.
KOBEKT A. CAHTER,
WILLIAM L. RANSOM.
table: of cases
PAGE
Ames vs. Union Pac. R. R. Co. (C. C.)
(64 Fed. 178, 179) 65
Ben Avon Borough vs. Ohio Valley Water
Co. (P. U. R. 1918 A, page 161; see,
also, 253 U. S. 287) 72
Bonbright vs. Geary (210 Fed. 44) 67
Brooklyn Borongh Gas Co. vs. Pub. Serv.
Comn. 1st Dist. (17 N. Y. St. Dept.
Repts., page 81) 105
Consolidated Gas Co. vs. Newton et al.
(267 Fed. 231) 32-36, 55, 80
Consolidated Gas Co. vs. City of New
York (157 Fed. 849) 63
Contra Costa "Water Co. vs. City of Oak-
land (113 Pac. 668) 70
Cotting vs. Kansas City Stock Yards
(C. C.) (82 Fed. 854) ...' 64
Cumberland Telephone & Teleg. Co. vs.
City of Louisville (157 Fed. 637, 650;
212 IT. S. 414) 69
Ex Parte 74 (Before Interst. Com. Comn.) 23, 24
Havre de Grace & P. Bridge Co. vs. Tow-
ers (103 Atl. 319; P. U. R. 1918 D,
page 484) 93
Hoffman vs. Elmira Water, Light & R. R.
Co. (P. U. R., 1920 D, page 266; P. U.
R. 1921 C, page 409 ; N. Y., 2nd Dist.) 107
Kansas City Southern Ry. Co. vs. U. S.
231 U. S. 423) 13, 17, 51, 56, 57, 92, 93
Knoxville Water Co. vs. Knoxville (212
U. S. 1) 34, 45, 47, 48-55, 56, 57, 67, 68, 69
II
PAGE
Lincoln Gas Co. vs. Lincoln (223 U. S.
349) 48
Milwaukee -El. Ey. & L. Co. vs. Milwaukee
(P. U. E. 1918 E, page 1 ; Wise.) .... 98
Minnesota Eate Case (230 U. S. 352) .... 34, 46
Murray vs. Public Utilities Comn. (150
Pac. 57 ; P. U. E. 1915 F, page 436) . . 95
Nashville C. & St. L. Ey. Co. vs. U. S.
(269 Fed. 351) 36-43
New York & Queens Gas Co. vs. Newton
et al. (269 Fed. 277) 26-32, 52, 80
Pacific Gas & Electric Co. vs. San Fran-
cisco (U. S. Dist. Ct.; No. Dist. of
Cal.) 26,71
Pioneer Telephone & Telegraph Co. vs.
Westenhaver (290 Okla. 420) 71
Pioneer Telephone & Telegraph Co. vs.
State of Oklahoma (167 Pac. 995) .... 71
Public Service Comn. of Washington vs.
Kelso Water Co. (P. U. E. 1919 E,
page 206) 99,100
Ee Arkansas Light & Power Co. (P. U. E.
1920 D, page 775; Ark.) 100
Ee Binghamton Light, Heat & Power Co.
(24 N. Y. St. Dept. Eepts., page 651) 106
Ee Campbell Bros. Water Co. (Idaho P.
S. Comn. ; February 25, 1921) 98
Ee Gardiner Electric Lt. & Water Co. (P.
U. E. 1920 D, page 821 ; Mont.) 101
Ee Increased Freight Eates (58 I. C. C.
220) 43
Ill
PAGE
Ee Medford Gas Co. (P. U. R. 1919 E,
page 707; N. J.) 99
Ee Mineral Point Public Service Co.
(P. U. E. 1919 A, page 795 ; Wise.) ... 98
Ee New York State Eailways (P. U. E.
1921 C, page 496; N. Y., 2nd Dist.) . . 107
Ee Pocatello Water Co. (P. U. E. 1915 F,
page 436 ; Idaho) 95
Ee Wood Eiver Power Co. (P. U. E. 1921,
page 531 ; Idaho) 96
San Diego Land Co. vs. Jasper (C. C.)
(110 Fed. 714) 64
San Diego Land Co. vs. National City
(174 U. S. 757) 64
Sandpoint vs. Sandpoint W. & L. Co.
(P. U. E. 1915 F, page 4B4; Idaho) . . * 96
Smyth vs. Ames (169 U. S. 546) 64
Spring Valley Water Co. vs. San Fran-
cisco (252 Fed. 979) 70
Stanislaus Co. vs. San Joaqnin Co. (192
U. S. 201) 64
Willcox vs. Consolidated Gas Co. (157
Fed. 849; 212 U. S. 19) 58-67
jn- •;v;v
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