THEORETICAL DEPRECIATION 
 
 A menace to the public and the investor 
 
 by 
 
 George N. Webster 
 
 New York 
 
try 
 
THEORETICAL DEPRECIATION 
 A menace to the public and the invest<Mr 
 
 The most serious menace to which investors in the 
 securities of pnbKc service corporations are exposed 
 to-day results from their failure to comprehend and to 
 combat unsound and destructive theories of valuation, 
 which, when employed in the determination of the value 
 of their properties for purposes of rate regulation, op- 
 erate to confiscate a very substantial percentage of their 
 investment. 
 
 The term "confiscate" is used advisedly. If an in- 
 vestor has expended, for example, $100,000 in plant and 
 equipment devoted to the public service and has rendered 
 service therewith for a number of years at legal rates, 
 yielding a legitimate return upon his investment and 
 nothing more, and has collected from his patrons nothing 
 representing a return to him of his investment or any 
 part of it, and if his property is then appraised and, as 
 the result of the method employed, is found to have a pres- 
 ent value of say $70,000 and the rates he is permitted 
 to charge are adjusted so as to yield a return on only 
 $70,000, then his investment, to the extent of $30,000, has 
 been confiscated. 
 
 When it is considered to what extent owners of prop- 
 erty are protected by federal and state constitutions, 
 federal, state and 'municipal laws, municipal and police 
 regulation and a vast legal machinery, against the con- 
 fiscation, expropriation, seizure or theft of their prop- 
 erty and by what simple means these agencies of protec- 
 tion may be invoked in behalf of the individual or cor- 
 poration, it is amazing to observe the extent to which 
 property is confiscated under the guise of rate regula- 
 tion, with hardly a protest being raised by the victims. 
 They are bewildered by reiterated protestations that jus- 
 
 494105 
 
tice must be done to investors, in the very opinions which 
 destroy, in part, their investments. 
 
 Furthermore, when it is considered that the adoption 
 of these methods has already resulted in the confiscation 
 of hundreds of millions of dollars invested in public 
 utility properties, and that its general adoption would 
 result in the confiscation of several billions more, it would 
 appear as though it were high time for those whose inter- 
 ests are thus threatened to bestir themselves in defense 
 of their properties and for those who are clothed with 
 authority and power to determine rate cases, involving 
 a consideration of the element of property, to inform 
 their minds as to the fundamental economic facts, which 
 are of paramount importance and which must be given 
 controlling consideration if the interests of the public 
 and of the investors are to be conserved. 
 
 No one will dispute the fact that the interests of the 
 investor and of the public are so interwoven and inter- 
 dependent that neither can be advantaged at the expense 
 of the other, nor exploited for the benefit of the other; 
 that each must share in the other's prosperity or adver- 
 sity and that they who hold to the contrary and whose 
 activities disregard this fundamental fact are either 
 short-sighted mischief-makers or demagogues. 
 
 Not a little of the pernicious activity which, for the 
 past ten or fifteen years, through drastic rate regulation 
 based on false theories of valuation, has been sapping 
 the vitality of our public service companies and paralyz- 
 ing their efficiency, may be attributed to German propa- 
 ganda, the mouthpieces of which have included certain 
 politico-scientific periodicals, of supposed respectability 
 and patriotism, at leiast one of which eliminated evidence 
 of its German connections in Berlin from its title page, 
 only when we declared war upon Germany. 
 
 The method of unsound valuation against which this 
 article is directed may be described briefly as the "cost 
 less depreciation" method. The "cost" may be ** original 
 cost, * ' * * average cost * ' or * * present cost. ' * The deprecior- 
 
Hon which is deducted therefrom and which may be said 
 to have its origin in the concept that used property is less 
 valuable than new property, is based upon the assump- 
 tion that used property becomes uniformly less valuable 
 during the period of its alleged life expectancy, starting 
 at one hundred per cent, value and ultimately reaching 
 zero value. The amount to be deducted is computed by 
 finding the ratio of the expired life to the assumed total 
 life and by applying that ratio to the "cost" ; the amount 
 thus obtained, deducted from ''cost," is supposed to 
 represent the ** present value." 
 
 The advocates of the depreciation theory would state 
 the formula in this way: A unit of equipment costs 
 $10,000; it had a life expectancy when installed of thirty 
 years; ten years have elapsed; ten years is one-third of 
 thirty years; one-third of $10,000 is $3,333.33; this de- 
 ducted from the **cost" leaves the ''present value" of the 
 unit of equipment as $6,666.67. 
 
 It is not conceivable that any one could give the sub- 
 ject of depreciation of the kind here illustrated serious 
 consideration without 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 Public Service Commissions, some 
 executives of corporations and some members of the 
 legal, engineering and accounting fraternities. They 
 have discovered thdt the question is not one of engineer- 
 ing, nor of accounting, but one of economics and finance 
 and the legal protection of property rights. 
 
 There are many engineers of honest intention who ] i^..v^ -i) 
 pretend, or even think, they have knowledge of this [ i ^ 
 
 subject, who while competent in the ordinary branches ' *^ 
 of construction engineering are utterly lacking in a real 
 and fundamental understanding of this dangerous fal- 
 lacy of "theoretical depreciation." 
 
The problem is, in fact, not one of engineering nor 
 is it one that engineering training fits an engineer to 
 properly understand. The same may be said of the ac- 
 countant and his training. The subject is one primarily 
 of applied economics and must be studied from the stand- 
 point of the mutual economic interests of the consumer, 
 and the investor. 
 
 There is much to learn and many pitfalls of false 
 logic and misleading partial reasoning to be avoided and 
 combated. So far as the honest engineer and accountant 
 is concerned, in great part his countenance of the error 
 has resulted from his assumption that the problems in- 
 volved are simple and through his acceptance of the 
 superficial conclusions of specious presentations. 
 
 Those who advocate it as a business — the professional 
 depredationists — are in a class by themselves. We will 
 speak of them later. 
 
 The most sinister support which the depreciation theory 
 receives may be traced to socialistic propaganda. Conced- 
 edly, the ultimate goal of socialism is state ownership of 
 all instrumentalities of industry. The immediate objec- 
 tive is state ownership of all public utilities, or state oper- 
 ation without ownership. The so-called "progressives" 
 in the Eepublican and Democratic parties co-operate with 
 the socialists in the attack on the immediate objective. 
 The socialists cannot expect to attain their ultimate object 
 of state ownership, or state operation without ownership, 
 of all industries and all property until they have first 
 brought under federal, state or municipal ownership or 
 operation all of the public utilities. For the accomplish- 
 ment of the latter, they have a perfectly definite, settled 
 program, viz.: the strangulation of public service com- 
 panies through rate regulation, service regulation and 
 taxation, to the point where the companies themselves 
 will seek relief, in public ownership, from absolute bank- 
 ruptcy and accept almost anything they can get for their 
 properties. One means to this end is to insist on fran- 
 chise requirements adapted to periods of lower prices, as 
 
in the case of the street railways. An equally eflScacious 
 operation is to exploit the theory of depreciation as a 
 means of reducing value of public service properties to a 
 bargain basis. That the application of the theory in any 
 particular instance results in immediate partial confisca- 
 tion is what commends it to them. They would confiscate 
 all of the property if they could do so. As this class, 
 however, constitutes but a negligible minority, it may be 
 assumed that its activities will not long delay the uni- 
 versal recognition of fundamentally and economically 
 sound principles in rate regulation. There are unmistak- 
 able signs that the country is exasperated by radicalism. 
 
 Those who have been impressed by the theory have 
 been beguiled by false analogies. They have been led to 
 liken a railroad system, representing an investment of 
 millions of dollars and composed of a myriad of units of 
 plant and equipment, to an article of furniture, a suit of 
 clothes or some other familiar object, and to believe that 
 as the used table has lost some of its value so the used 
 railroad has lost some of its value; that railroad-fares 
 should be based upon 'Walue" so conceived and that a 
 used railroad should charge a lower fare than a new rail- 
 road. The fact that the analogy, however plausible, is 
 fallacious to the point of absurdity has eluded their 
 understanding. 
 
 The analogy is false because it assumes, in respect of 
 an instrument employed in producing a service, that its 
 age affects the value of the service rendered and the price 
 which should be charged therefor. The falsity of the 
 assumption becomes at once apparent when it is consid- 
 ered that the individual, as the possessor of a chair and 
 table, and the railroad company as the possessor of rail- 
 road plant and equipment, are, in a sense, in the same 
 position in regard to their respective properties. In both 
 cases, the properties, by performing their respective func- 
 tions, enable their owners to render service. The func- 
 tioning, under the direction of the railroad company, of 
 the railroad plant and equipment, enables the company 
 
6 
 
 to supply a railroad service. The functioning of the chair 
 and table, as office furniture, enables the individual to 
 render service to his clients. He can transact just as 
 much and just as important business at an old desk as a 
 new one ; the age of the chair he sits on is no criterion of 
 his service efficiency nor of the value of the service he 
 renders; not being a furniture dealer, the comparative 
 value new and second-hand, of his office furniture, enters 
 not at all into the determination of any of his business 
 transactions, nor of the amount of the bills he renders 
 for his services ; and nevertheless he accepts, offhand, the 
 proposition that the railroad-fare he pays should be de- 
 pendent, in a measure, upon the age of the upholstery of 
 his seat in the train, even though he may be unable to 
 detect from any visual examination whether it is one year 
 old or ten. 
 
 When the services of a professional depredator are 
 retained by a municipality, it is in order that by the 
 exploitation of his theory of depreciation a reduction in 
 rates may be effected, not because the service has in any 
 way deteriorated but solely because the plant and equip- 
 ment employed in rendering it, while in every way as 
 good as new and functioning just exactly as well and 
 possibly infinitely better than when it was new, is de facto 
 not brand new. 
 
 The professional depredator refers to the plant and 
 equipment as second-hand and disingenuously inquires if 
 second-hand plant and equipment is worth as much as new 
 plant and equipment. The answer is decidedly yes. Di- 
 vorced from its earning capacity, a new plant would be 
 only a heap of junk. Coupled with an earning capacity 
 based upon the recognition of sound economics, justice 
 and common sense, the second-hand plant and equipment, 
 in operation, is worth substantially more than a corre- 
 sponding amount of new plant and equipment. Aside 
 from the advantage of having a market for its product 
 and an established business, such a plant has "found 
 
itself,*' all the kinks have been ironed out, the plant 
 organization has been perfected, and it is working a great 
 deal more efficiently and economically than a new plant 
 could possibly work. 
 
 In substance, the professional depredator assigns to 
 the various units of plant and equipment a second-hand 
 value and then blandly asks if the value of the whole can 
 be greater than the sum of the parts. This specious prop- 
 osition disregards the obvious facts, (1) that the invest- 
 ment of the owners is in the plant as a whole, (2) that the 
 investment is not made for the purpose of creating a 
 museum of second-hand plant and equipment but because 
 it has to he made in order that the investors may render a 
 perpetual service in accordance with their franchise, (3) 
 that the investment remains intact until it has been repaid 
 in part or in whole and (4) that there has never been any 
 contract or agreement between investors and their pa^ 
 trons for the repayment of any part of the investment 
 in plant or equipment in service. 
 
 The modus operandi of the professional depredator, 
 as stated, is to guess at what he terms the ''life ex- 
 pectancy" of the plant and equipment in service and 
 having computed the percentage of ' ' e^gire^JJilfiL" he 
 uses the same percentage to compute ** expired value." 
 He does not like to say ' ' expired investment. ' ' He avoids 
 the use of the word investment because he knows it will 
 tangle him all up. He does not want to be asked to ex- 
 plain what he means by expired investment or what has 
 become of the expired investment; or to explain how 
 an investment can expire. These things embarrass him. 
 He sticks to value, because he knows that value is an elu- 
 sive and ambiguous term and that there is less likelihood 
 of some one pinning him down to admitting that he 
 doesn't know what it means, than there is of some one 
 pinning him down to an admission that an investment 
 can not expire. He knows nothing about accounts and 
 less about engineering. In order to perform, he has to 
 have a figure to start with. If, with the help of an ao- 
 
8 
 
 countant, lie can get the original cost of the property, he 
 uses that and calls it "reproduction cost," although he 
 knows it is nothing of the kind. If an engineering valua- 
 tion new is presented to him he wiU generally accept it 
 and call it too ''reproduction cost." He is not particu- 
 lar. All he wants is a principal sum on which to use his 
 depreciation method. From either he will deduct a per- 
 centage corresponding to his guess as to the percent- 
 age of the "expired life" of the property. He will, for 
 example, guess that the life expectancy of the property 
 is thirty years. He will guess that ten years of the life 
 expectancy have expired. That equals thirty-three and 
 one-third per cent. Therefore, the present value of the 
 property is equal to the reproduction cost less thirty-three 
 and one-third per cent. In order to appear really scien- 
 tific, he calls his present value the rate base! Like a priest 
 of some mystic cult, he signifies the exclusiveness of his 
 special learning by the liberal use of a new and terrify- 
 ing terminology He displays weird mathematical dia- 
 grams, covered with wriggling, portentous lines like a 
 robed sooth-sayer who surrounds himself in his darkened 
 chambers with the mummery of outlandish alembics and 
 astronomical charts. Thus these learned assassins of 
 values impose upon city councilmen and public service 
 commissioners and furnish a basis for what they are in- 
 clined to believe or what they deem it necessary to their 
 political fortunes to believe, and, gathering their fees, de- 
 part. From the decisions of councilmen and commission- 
 ers, there is an appeal to the courts on the law, but not 
 always on the facts. Value is a matter of fact. The 
 courts are unanimous in holding that value, in a rate 
 case, is not ' ' exchange value. ' ' What kind of value is it 
 then that is not exchange value and yet can be expressed 
 in doUars and cents? The best that judges can do is to 
 say that "value is not a matter of artificial rules and 
 formulae but is a matter of judgment." Neither the 
 courts, nor the commissions, nor the alleged experts nor 
 anybody else knows what that value is, about which they 
 talk so solemnly. 
 
 .rm 
 
Even upon so violent an assumption as that of a man 
 who has invested $10,000, in a non-competitive enterprise 
 of definitely limited life of say ten years, at the expira- 
 tion of which period his plant and equipment, still in 
 perfect working order, must be scrapped, it could not 
 by any process of reasoning be demonstrated that the 
 price charged for the service rendered could be reduced, 
 at any time during the period, because, forsooth, his 
 plant was older at the end of the first year than when he 
 started and became progressively older until it was 
 scrapped. The reason is obvious. In this case, which, 
 as will be shown, bears no analogy whatever to a public 
 service company, if the investor is to come out whole, 
 he must collect, in his rates, in addition to the cost of his 
 service, (1) interest on his investment, uniformly, during 
 the entire period, and (2) an annual sum which at com- 
 pound interest will, at the end of ten years equal' the 
 amount of his investment. In the case of a public service 
 company, however, there is no reason or justification for 
 thus amortizing in whole or in part the investment in 
 plant and equipment. 
 
 The world is expanding. This country is expanding 
 more than any other. There are centuries of expansion 
 before it. Then why dream of amortizing investment in 
 public service companies! Almost without exception 
 they are growing not shrinking. It will be time enough 
 to talk of amortizing investments in them when, if ever, 
 there are signs of shrinkage. 
 
 The consideratioUr^f age enters no more into the ques- 
 tion of the rates of a public service company, which is 
 able to and does render the service it was organized to 
 render, than does the age of a taxicah, or of its driver, or 
 of the clothes he wears, 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 efl&ciently. It is trans- 
 portation the passenger is buying — and he expects to pay 
 
10 
 
 uniformly for a uniform service, regardless of the age of 
 the equipment. 
 
 Nor does a lawyer or a physician expect to regulate 
 his fee by the age of his oflBce furniture, as one might 
 think he should from the arguments of the professional 
 depreciator. 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 womout overalls. Both do a uni- 
 form day's work for a uniform 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 what a liar he 
 was making out of the professional depreciationist. 
 
 The fraud which would have been perpetrated upon the 
 public if the theory of "depreciation" which is being 
 exploited as a profession by demagogues and impostors, 
 had been adopted by public service companies years ago, 
 when they were starting in business, would have been 
 on a par with the fraud which these charlatans now un- 
 dertake to perpetrate upon the companies. This would 
 be true even if there were such a thing as life expectancy 
 in plant and equipment. But there is no such thing. 
 Aside from what may be deemed to be the wearing parts 
 of a complete system, including such small units as rails, 
 ties, poles, gas and electric meters,**«tc., retirements of 
 units for wear and tear do not occur. They have, there- 
 fore, no determinable life. The date when, if ever, they 
 will be withdrawn from service because of obsolescence 
 and inadequacy cannot be even approximated, because the 
 date and character of future inventions and of the de- 
 velopment of the community cannot be foretold. 
 
 The so-called "depreciation'* theory involves the 
 creation of a useless reserve. In the case of the Brook- 
 lyn Edison Company before the New York Public Service 
 
11 
 
 Commission for the First District, a very thorough de- 
 tailed appraisal was made of the Company's property, 
 and the Commission's engineer demonstrated that under 
 the so-called theory of straight line depreciation, the com- 
 pany wonld acquire a depreciation reserve, on a property 
 amounting to twenty-four millions of dollars, of some- 
 thing over eight millions of dollars, which would never 
 be used or useful to the company or the consumer. The 
 methods and figures were set forth clearly in the testi- 
 mony in the case. Such a reserve is construed by profes- 
 sional depredators as evidence either of the repayment to 
 the investor in the utility of a part of his investment, 
 through the medium of the rates which he charges for his 
 service, or of an investment on the part of the patron, 
 through the same medium, in a part of the plant and prop- 
 erty employed by the utility in the public service. The 
 first theory would be urged where the volume of business 
 done by a utility was stationary ; and the second would be 
 urged where the growth of the business involved addi- 
 tional investment equal to or exceeding the amount 
 accrued in the so-called "depreciation reserve. '* 
 
 Even where no "depreciation reserve" whatever has 
 been created, the professional depredators argue that 
 one should have been accumulated and that failure to do 
 so is evidence that the property has been "milked" 
 through excessive dividends. 
 
 The fact that the so-called "accrued depreciation 
 theory" will not stand the test of application to the 
 future is evidence that it cannot be applied to the past. 
 It cannot be demonstrated, for example, that from the 
 standpoint of either the rate-payer or the company it 
 would be a good theory to impose upon the patrons of 
 the new public service company. Thus considered, the 
 glaring inconsistencies of the theory become at once 
 apparent. It can be proven clearly and conclusively that 
 a so-called "depreciation reserve" actually and know- 
 ingly created at the expense of the public, by such a 
 company, if such a thing were possible, could not serve 
 
12 
 
 any useful purpose either to the company which collected 
 it or to the rate-payer who paid it in addition to the 
 actual cost of the service he received. It would be of no 
 advantage to the company, because (among other 
 reasons) it would add nothing to its investment upon 
 which it would be allowed to earn a return. It would be 
 of no advantage to the rate-payer, because it would add 
 to his rates, without giving him, as an individual (and 
 he must be considered, in this connection, only in his in- 
 dividual capacity), anything in return for his money; 
 he would get title to nothing in the way of property, and 
 the fact that future rate-payers might benefit from the 
 amounts exacted from him would not interest him in the 
 least. 
 
 For a concrete example, consider the history of the 
 average gas company: It is organized, capital raised, a 
 plant constructed, the latest and best types of apparatus 
 installed therein, and mains, services and meters in- 
 stalled on the district to be served. Do the projectors 
 visualize the plant and equipment in which their capital 
 is invested as moving relentlessly towards the scrap-heap 
 as humanity marches from the cradle to the grave ? Ver- 
 ily they do not. Do they construe the situation as de- 
 manding that they begin, at once, to collect from their 
 consumers, in the rates, over and above the cost of the 
 service and a fair return on the investment, the invest- 
 ment itself or any part of it? Such a thing was never 
 attempted or even dreamed of. They look upon the 
 permanency of their plant and equipment as second to 
 nothing ever created by mortal hand. They know that 
 there will be wear and tear which will involve repairs 
 which, as they are made, will and should constitute a part 
 of the current cost of the service. They know that such 
 cost, as a matter of practice, is not, and should not be, 
 collected in advance, for the obvious reason that the 
 earnings for each year should bear the burden of the 
 maintenance expenditures for each year, otherwise the 
 statement of results of a year's operations, in so far 
 
13 
 
 as the revenue and expenses are concerned, is dis- 
 torted; that to exact from rate-payers, during a given 
 year, aa amount in excess of the expenditures for main- 
 tenance for such year is ''robbing Peter to pay Paul,'* 
 that is, if the amount thus exacted is used to pay for 
 future maintenance and if future patrons benefit there- 
 by; that if it is not so used, such an exaction results in 
 the creation and maintenance of a reserve which will 
 be forever useless for the purpose of making replace- 
 ments, which is the purpose for which it was alleged to 
 have been created ; that to deal with maintenance costs as 
 they occur is to deal with facts, but that to attempt to 
 anticipate them is to embark upon an uncharted sea of 
 idle fancy and speculation. They take no heed whatever 
 of future obsolescence or inadeqaacy, for two reasons: 
 first, because not being clairvoyant, they cannot foresee 
 when, if ever, obsolescence or inadequacy in respect of any 
 unit of plant or equipment is going to occur, and, second, 
 because, being business men, they know that when, if 
 ever, obsolescence or inadequacy does occur, it will result 
 from an advance in the art or a development of the busi- 
 ness which should and will, itself, take care of the loss 
 involved in the displacement of the retired unit of plant 
 or equipment. They know, therefore, that there is no 
 economic ground upon which they could demand from 
 their patrons a return of their investment or any part 
 of it. They know, furthermore, that they could not col- 
 lect it if they attenipted to do so, for two reasons : first, 
 that the public would object to paying for the service any 
 amount in excess of the cost of it plus a fair return on 
 the investment necessary to render it ; second, because an 
 attempt to build up a business with a rate thus burdened 
 with a purely fictitious and uneconomic charge, would 
 result in failure and bankruptcy. 
 
 What actually occurs may be described as follows : 
 Assume the case of a gas company, starting business 
 in a small and growing municipality. 
 
14 
 
 It has been organized in response to an urgent de- 
 mand on the part of the community for a supply of gas 
 for illuminating, domestic and commercial purposes. 
 
 Its organizers are citizens having some money to in- 
 vest and some credit. 
 
 The territory is canvassed and as many contracts for 
 service are made as can be obtained. 
 
 A franchise is obtained, a consulting engineer is 
 called in, and estimates are made of the probable present 
 consumption and what may be reasonably expected in 
 the way of annual increases therein. 
 
 A price is fixed which, it is estimated, will ultimately 
 yield a return upon the necessary investment. The in- 
 vestment in land and manufacturing plant is of necessity 
 based upon aii estimated future demand substantially 
 greater than that which can be expected to be realized at 
 the outset. 
 
 A distributing system is installed, which covers the 
 more densely populated section of the municipality. 
 
 The business of supplying gas is begun under condi- 
 tions which make it impossible for the company to re- 
 cover all of its operating expenses. 
 
 Then comes a period of discouragement. The com- 
 pany is in financial stress. All the anticipated business 
 may not have been realized (it seldom is). A receiver- 
 ship is discussed. Temporary loans, to meet payrolls 
 and bills for materials and supplies, obtained from those 
 who have already sunk capital in the enterprise, tide the 
 company over this critical period of its career. 
 
 By vigorous canvassing and judicious extensions, the 
 utilization of the property is increased, so that the gross 
 revenues exceed the operating expenses and leave a bal- 
 ance toward over-due fixed charges. 
 
 The plant and distributing system being new, the 
 maintenance charges are comparatively negligible. 
 
 As business grows without proportionate additional 
 investment of capital, net earnings increase; likewise 
 
15 
 
 the cost of maintenance through repairs and replace- 
 ments begins to be a factor in the cost of operation. 
 
 By the time the company is fairly on its feet and is 
 able to pay a return upon the money invested in it, the 
 cost of maintaining the property by repairs and renewals 
 has become normal. In other words, it has reached an 
 average annual relationship to the company's gross earn- 
 ings, and such relationship thereafter will vary but 
 slightly. That is to say, a sum representing a given per- 
 centage of the gross earnings (which may be expressed in 
 terms per thousand cubic feet of gas sold) will suffice to 
 keep the property in a high state of service efficiency. 
 
 The foregoing is what happens in actual practice and 
 is a true picture of the early history of practically every 
 utility. 
 
 Had the company undertaken at the outset to collect 
 from the public a rate which would have included a re- 
 turn to it of half, or any part, of its capital within a 
 given number of years, it would have gone bankrupt, 
 unless its patrons, aware of its intention so to do, en- 
 joined it from charging a rate for its service which in- 
 cluded such return or repayment of its capital. 
 
 It is impossible to imagine a utility so situated at- 
 tempting to collect from its patrons, during a period 
 when it was struggling for existence, a useless reserve 
 which could be construed, upon final analysis, as nothing 
 else than a return to it of a part of its investment, or 
 that it would be permitted to do such a thing. And if, 
 up to the time it had gotten upon its feet and was meet- 
 ing, out of its gross earnings, all of its current require- 
 ments for the maintenance and upkeep of its property, 
 it had collected no such reserve, what excuse would exist 
 thereafter for its undertaking to do so? 
 
 Thereafter, normal and reasonable rates for gas will 
 be such as to enable it to meet its operating expenses, 
 to maintain its property by renewals and replacements 
 when necessary, and to earn a fair return upon its invest- 
 
16 
 
 ment. Such being the case, the accumulation of a reserve 
 would involve an unreasonable increase in its rates. 
 
 Does any one imagine that it would be permitted, 
 much less ordered, to increase its rates for the purpose 
 of creating a useless reserve ? If nothing may be properly 
 collected for that purpose, then it is obvious that no 
 deduction may properly be made from its investment; 
 in other words, no depreciation exists in respect of its 
 property. 
 
 Investors, as a class, engage in public service enter- 
 prises because they deem them to be not only profitable 
 but permanent. Money put into railroad construction, 
 for example, can never be withdrawn. To unmake a rail- 
 road would restore no amount of cash to those who con- 
 structed it. It would require the expenditure of almost 
 as much money in the unmaking as in the making — if not 
 more. The same is true of gas-mains, electric-conduits 
 and all sub-surface structures required in the distribu- 
 tion of gas, electric, telephone, telegraph, steam and 
 water service. It would not pay to dig them up. Simi- 
 larly, there can be no recovery of money invested in 
 plant and equipment. There is no considerable market 
 for second-hand plant and equipment. Therefore, were 
 it not for the permanent character of the public service 
 business there would be no public service, because no 
 investor would embark in it as a business. Assured, as 
 he has every reason to be, of the permanence of the 
 business, he looks, with equal reason, for a fair return 
 on his investment. In other words, he expects to col- 
 lect enough for his service, in excess of the cost of ren- 
 dering it, to cover not only bare interest on the amount 
 of his investment but a reasonable margin of profit 
 besides. The cost of rendering the service includes, of 
 course, the cost of maintaining his plant and equipment 
 in efficient operating condition by repairs and renewals, 
 as well as the cost of amortizing the investment in plant 
 and equipment displaced from time to time in order to 
 effect improvements and economies made possible by 
 
17 
 
 the advance in the art of rendering the particular service 
 in which he is engaged. In the exercise of his right to 
 earn a fair return upon his investment, he is entitled to 
 and should receive the protection of the courts. 
 
 The amount which he collects in excess of the cost of 
 rendering the service, is his profit, to be disposed of as 
 he may see fit. That is to say, he may pay it out in divi- 
 dends or carry it in a surplus account or segregate it 
 and carry it in a reserve account, or he may do all three 
 of these things. The profits which he does not take out 
 in the shape of dividends he may employ in the acquisi- 
 tion of additional plant and property; and when thus 
 employed, they become an investment of his in the same 
 degree precisely as does the cash represented by the com- 
 pany's outstanding capital stock and obligations. He 
 expects to have this investment maintained, without im- 
 pairment, out of the rates which he collects for his 
 service. 
 
 The rates which an investor charges for his services 
 include nothing which may be construed either as a return 
 to him of any of his investment or as a sum advanced 
 to him by his patrons to be invested by him for their 
 account in plant and property. No investor has ever 
 been a party to such an understanding; and it cannot, 
 therefore, be assumed that, without his knowledge or 
 consent, amounts were included in his rates for either 
 of the purposes named. The reasons for this are ob- 
 vious and will be elaborated later. 
 
 On the other hand, the point of view of the public — 
 that is to say, the patron of the investor — is as simple 
 as the point of view of the investor. He is a buyer of 
 service. He pays for it a price which he understands 
 represents two things, first, the cost of rendering the 
 service, including the repairs and renewals of the plant 
 and equipment employed in rendering the service, and, 
 second, a profit to the investor. So long as that profit is 
 fair and reasonable, i. e., equal to a fair and reasonable 
 return on the investment, he is not interested in the 
 
18 
 
 disposition that is made of it; that is to say, he is not 
 interested in whether it is all paid out in dividends, or 
 whether part is paid out in dividends and part set aside in 
 surplus and reserve accounts and invested in additional 
 plant and equipment. He knows that an investment of un- 
 divided profits in plant and equipment is in the nature of 
 a short cut amounting to the same thing as a payment 
 of all the profits in dividends and a re-investment involv- 
 ing an issue of securities and that the difference between 
 these two methods is one of form and not of substance. 
 He does not consider that there is included in the rate he 
 pays for the service he receives any amount representing 
 
 (a) a return to the investor of a part of his investment or 
 
 (b) an investment on his own part in some of the prop- 
 erty employed in rendering the service which he receives. 
 Being satisfied that the rate which he pays covers the 
 two items heretofore enumerated, viz: the cost of the 
 service and a reasonable profit to the investor, he would 
 not consent (if he were consulted) to have such rate 
 increased in order that there might be included therein 
 an amount designed for either of the other purposes 
 named. Therefore, there is no ground on which to base 
 an assumption that, without his knowledge and without 
 any intent on his part, there was ever included in the 
 rates which he paid for the service he received any 
 amount in addition to the cost of the service and a fair 
 profit to the investor. 
 
 Notwithstanding the manifest absence of any knowl- 
 edge or intent, on the part of the investor or his patron, 
 to engage at any time in any such preposterous trans- 
 action as is alleged to have been in effect, we have never- 
 theless in this so-called ** depreciation theory," a theory 
 by which its advocates attempt to establish a division 
 of the property operated by a utility between that which 
 is owned by the company and that which is owned by 
 the public. According to these professional depre- 
 ciators, the company may earn a return upon so much 
 of the property as the depredators are willing to con- 
 
19 
 
 cede belongs to the company; but upon that portion of 
 it which they allege belongs to the public, no return may 
 be earned. It is to be hoped, however, that we have not 
 yet reached the stage, in this country, where title to 
 property may be disputed upon so flimsy a pretext. 
 
 Even if it were deemed advisable that henceforth, as 
 a matter of policy, an investment should be made by the 
 public in properties operated by utilities, through the 
 medium of the rates charged for the service, it is difficult 
 to conceive how such a policy could be made effective. 
 It would be necessary, for example, that the policy should 
 become universal. It would then be necessary to ascer- 
 tain by inventory and appraisal the value of the property 
 of every utility in the country. Eates for service would 
 have to be increased universally, so that there might be 
 included therein a percentage designed to apply either 
 toward the purchase of existing plant and property or 
 toward the purchase of plant and property to be acquired 
 thereafter. Thereafter, the amount thus invested might 
 be known; but how about the property in which invest- 
 ment has already been made ? 
 
 In view of the fact that all plants would be acquired 
 by utilities in their own names, how would the title there- 
 to become vested in the public? The rate-payers of yes- 
 terday are not the rate-payers of today and the rate- 
 payers of today are not the rate-payers of tomorrow. 
 Why should the rate-payer of today pay for something 
 which is to be owned by the rate-payer of tomorrow? 
 In which of the various classes of property required by 
 a utility would the public prefer to have its investment 
 made, and for which class of property would the utility 
 itself have a preference? It is but necessary to consider 
 these few questions to establish the absurdity of the 
 whole proposition. 
 
 Furthermore, there is not the remotest possibility that 
 the public, if fully informed, would lend its approval to 
 such a hare-brained proposition. 
 
20 
 
 The effect of the propaganda of the professional depre- 
 dators and of the decisions of some courts and commis- 
 sions which have appeared to sustain it, have been to 
 render investors uneasy. 
 
 Those who are already in are not going in any deeper, 
 and those who are not in will stay out until this propa- 
 ganda has had its final quietus. This attitude on the 
 part of investors is a distinct and palpable public dis- 
 advantage. Confidence in the stability of their invest- 
 ments is indispensable to the ready flow of capital to 
 meet the public demand for increased and improved 
 service and for the development of vast territories at 
 present without railroads, gas, electric, telephone or 
 telegraph service. Is it not the time to call a halt on 
 the activities of men whose principal aiin in life appears 
 to be to impair the investments in properties devoted 
 to the public service and whose usefulness is on a par 
 with that of the Russian Bolsheviki? 
 
 The so-called ** depreciation theory" begins with 
 imaginary premises, progresses through academic maun- 
 derings and emerges as pure nonsense. It has not a 
 leg to stand on in public policy, economics, finance or 
 common sense. Nevertheless, so plausibly has it been 
 presented and so active has been the propaganda in its 
 behalf that some courts and commissions have accepted 
 it as the law and gospel of utility valuation. It has 
 even been accepted and availed of by some public service 
 companies, the result, it must be assumed, of a super- 
 ficial consideration of the whole subject of plant main- 
 tenance and upkeep. Some members of the engineering 
 fraternity who by training or study are neither econo- 
 mists nor financiers but who have been impressed with 
 the magnificent vocabulary of this new pseudo-science, 
 have swallowed the bolus whole. Other engineers who 
 have studied the questions and who have not been im- 
 pressed by the claims made for this new elixir of life, 
 have rejected it altogether. One State Commission has 
 
•21 
 
 already reversed itself in this regard and has eliminated 
 from its accounting system any recognition of the theory. 
 
 An inspection of the plant and equipment of an operat- 
 ing company, at any time, would disclose nothing more 
 respecting the life expectancy of the units thereof than 
 an inspection of it at the time the company started busi- 
 ness. It would disclose, however, in respect of the wearing 
 parts of such plant and equipment, including such small 
 parts as rails, ties, poles, gas and electric meters, etc., 
 that at some time, more or less remote, as the case might 
 be, repairs and replacements would have to be made to 
 make good wear and tear. But just as the current in- 
 come is taking care of similar current repairs and re- 
 placements, the future income will take care of future re- 
 pairs and replacements, as they become necessary. To at- 
 tempt to keep plant and equipment always in a condition 
 as good as new would be wasteful and extravagant. It 
 would add immeasurably to the cost of the service without 
 producing any compensating advantages to the rate- 
 payer. In other words, the service condition of a plant 
 and equipment may be as good as new without the plant 
 itself being in a condition as good as new. It adds noth- 
 ing, for example, to the serviceability of a structure to 
 paint it more often than is economically necessary. It 
 adds nothing to the serviceability of a machine to replace 
 a wearing part that is still giving as good service as a 
 new part would give„ 
 
 At any time, an engineer may discount — ^not accurately 
 but approximately — the ultimate cost of the repairs and 
 replacements of working parts, including small units, 
 which a physical inspection of a plant and equipment 
 discloses will have to be made in the near or remote 
 future. He may estimate the cost of replacing a rail, 
 he may make a more or less wild guess as to the date 
 when it will have to be replaced, he may adopt some 
 rate of interest; and with these three factors and an 
 interest table, he may determine the present sum of 
 money which, at the given rate of interest, wiU be the 
 
22 
 
 amount which it will ultimately cost to replace the rail. 
 He may make a similar computation with respect to a 
 gas-meter or a pole supporting electric wires. But when 
 he has done so, he has determined nothing as to the 
 investment in the property. The condition of the par- 
 ticular units of plant and equipment on which he bases 
 his computation is only a temporary one. It is a mere 
 incident of plant and equipment operation. It possesses 
 no economic significance whatever. As the sum com- 
 puted will be paid out of the rate collected from the 
 rate-payers, as repairs and replacements mature, it may 
 be described as an "unmatured obligation" of the rate- 
 payers to reimburse the company for maintenance of the 
 plant and equipment, through the medium of the rates 
 which they pay for the service they receive. There is 
 no more reason for collecting such expense in advance 
 than there is for collecting this year the salaries and 
 wages to be paid two or three years hence; and as a 
 matter of business practice, it is never done. 
 
 The fact that, as a matter of accounting practice, some 
 companies have a repair suspense account or a renewal 
 and replacement suspense account to equalize the annual 
 charges against the earnings, for repairs or renewals, 
 is, of course, a matter of no consequence whatever. Such 
 accounts at any given time may be either debit or credit 
 accounts. 
 
 Since there is no sound basis in public policy, law, 
 economics or finance for collecting, in advance of the 
 necessity for using the money, a so-called ** depreciation 
 reserve," it follows that, where no such reserve has been 
 created, the investment remains unimpaired. It may 
 even be assumed, in cases where, under a mistaken con- 
 ception of the problem of plant maintenance or under the 
 compulsion of commission order, a ** depreciation re- 
 serve" has been created, that nevertheless the invest- 
 ment remains intact. In order to sustain the contrary, 
 it would have to be affirmatively shown that the reserve 
 actually constituted a return directly or indirectly of 
 
capital to the investor or that it actually represented an 
 investment on the part of the rate-payers, with their 
 knowledge and consent and with the company's knowl- 
 edge and consent, in plant and equipment bought by the 
 company, paid for with its money and to which it holds 
 an indisputable vested and legal title. It would have 
 to be shown that the earnings, during the period the 
 reserve was accumulating, plus the reserve itself, con- 
 stituted more than a fair return, in fact an exces- 
 sive and illegal return, on the actual investment. The 
 mere fact that the reserve was created through operat- 
 ing expenses instead of through income account is not 
 controlling. Economic facts cannot be disturbed by the 
 mere incidence of bookkeeping. Accountants are neither 
 financiers nor economists. Questions of property rights 
 cannot be determined by the entries they make in their 
 books. In other words, the substance of the question 
 cannot yield to the form which the accountant has 
 chanced to observe in making his book entries. If by 
 any other process of reasoning the investment may be 
 concluded to have become impaired, then it is evident 
 that property, which may not yet be taken by the direct 
 action of the syndicalists, may be taken indirectly by 
 ingenuous sophistries. 
 
 An investor's property represents his investment and 
 is in fact his investment. It is immaterial that on the 
 other side of his balance sheet his investment is repre- 
 sented by given amounts of capital stock, funded and 
 floating debt and surplus and reserves. The aggre- 
 gate of these, corresponding with the aggregate of his 
 assets, indicate his hook investment, which may or may 
 not be his actual present investment. In other words, 
 if the land he owns has substantially enhanced in value, 
 its enhanced value measures the amount of his invest- 
 ment therein. It is not necessary that he should sell it 
 and buy it again and credit the increment in value to his 
 surplus account in order to determine his actual invest- 
 ment. The courts of this state have so definitely decided. 
 
24 
 
 The Supreme Court of the United States has ruled that 
 the present value is the controlling consideration in 
 respect of all property. While it is obvious that there 
 is no economic difference between the land and plant 
 to which an investor holds title, it is still a question of 
 policy whether, as to plant, a claim should be set up for 
 recognition of the present investment therein, when pres- 
 ent unit costs are deemed to be abnormal and temporary. 
 
 The question really hinges on whether an investor in 
 plant and equipment devoted to the public service is in a 
 different class from an investor in real estate, merchan- 
 dise or salable commodities, in that he may not realize on 
 the increment in the value of his property, by being al- 
 lowed to earn a return upon such increment, however it 
 may have been created, during the period that it may be 
 shown to exist, but is forever confined to his original 
 investment upon which he is entitled to earn a fair 
 return ; in other words, whether any injustice is done the 
 user of the service if the rate he pays at any given time 
 provides a fair return on the investment in the property 
 devoted to his service, measured by the cost of repro- 
 ducing the plant and equipment at that time. 
 
 It is not proposed to elaborate upon this theme here. 
 SuflSce it to say that, in determining a reasonable rate or 
 in reviewing an established or prescribed rate, it is ob- 
 viously the function of the court or commission to deter- 
 mine the investment upon which a fair return must be 
 permitted. Whether this shall be the original invest- 
 ment or the present investment is for the court to deter- 
 mine. In either event, the investment must be deemed 
 to be unimpaired. 
 
 It is equally obvious that it is the function of the 
 engineer to inform the mind of the court as to facts and 
 not as to theories of economics or finance or rules of 
 law, about which an engineer, as an engineer, has no 
 expert knowledge or experience. The facts, as to which 
 the engineer is competent to testify as an expert, are 
 
25 
 
 the inventory of the plant and the original and present 
 investment therein. 
 
 The court will base its conclusion as to which invest- 
 ment it will adopt upon the circumstances of the case. 
 It is a matter for argument by counsel. 
 
 When an engineer, testifying in a rate case, expresses 
 his conclusions as to the extent of present liability to 
 make future repairs and replacements in terms of dimin- 
 ished value, he leaves his own jurisdiction to wander 
 in that of the economists. Before he can justify any 
 estimate of value, he must know what value is. Is the 
 depreciated value to which he testifies market value, or 
 exchange value? Is it value estimated by considering 
 what each depreciated item would sell for alone, or what 
 the whole plant would sell for altogether? Or is his 
 value estimated on consideration of potential utility and, 
 if it is so considered, is it utility to the owner as a means 
 of making money, or is it utility to the community served, 
 measured by what the community would rather pay than 
 lose the service and use the next best substitute? Is 
 there such a thing as *'use value" and such another 
 thing as "exchange value," or is exchange value, either 
 subjective or objective, the only kind of value there is? 
 Or is the engineer measuring "value for rate purposes" 
 and, if he is, what kind of value is it that is "value for 
 rate purposes?" 
 
 ^'SHiat has an engineer to do with the thousand and one 
 theories of what value is, and how shall he have the 
 hardihood to attempt to measure it before he knows 
 what it is that he is measuring? He may as well furnish 
 charts showing average lengths of the beaks and tails 
 of hippogrif s. 
 
 Engineering has to do with physical facts and measure- 
 ments of physical bodies. It concerns itself with costs, 
 both past and present. An engineer may testify as to 
 such costs ; but when he testifies that the value of plant 
 and equipment has decreased in some specified amount 
 or percentage, either because of assumed expiration of 
 
26 
 
 life of the units of which the plant is composed, or be- 
 cause maintenance, presently unmatured will, later on, 
 make it necessary to expend money, he is usurping the 
 functions of economists and courts. He is following 
 some academic ''method," without being able or com- 
 petent to explain why "half life half value" or similar 
 phrases, have more significance than the linguistic efforts 
 of a parrot. 
 
 On the other hand, an engineer may testify to the 
 amount of the investment, either the original or present 
 investment. If the books do not show it, he may esti- 
 mate it approximately. That is his true function. He 
 may estimate the probable original cost or the probable 
 cost of reproduction at present prices. He may express 
 the total as value, if he makes it clear that by value 
 he means costs, computed on one basis or another; but, 
 having made such an estimate of value, on the basis that 
 value means investment, he cannot properly reduce it 
 after shifting to the theory that value means ''what a 
 thing will sell for," or that it decreases proportionately 
 with a diminished store of potential utility. That is 
 precisely what he does when he blithely converts "con- 
 dition per cent.," into dollars and cents under the head- 
 ing "present value." 
 
 The investment stated by the engineer should not in 
 all cases purport to be the amount of the entire invest- 
 ment which is to be considered in a rate case. The New 
 York Court of Appeals has ruled, in the Kings County 
 Lighting Company case (210 N. Y. 479), "wholly apart 
 from the intangible thing called going business, the 
 reproductive value today of the physical property would 
 not necessarily include the actual and legitimate invest- 
 ment in tangible property which may have been entirely 
 replaced, not because of depreciation, but to meet ad- 
 vances in mechanical science, new conditions and increas- 
 ing demands not reasonably to have been foreseen at the 
 start. * * • In some manner and under some head- 
 ing a due allowance must be made for the investment 
 
27 
 
 in those elements." The engineer, if requested, may 
 properly testify as to the amount of such investment, 
 on the basis of cost of construction; but the matter of 
 adding such amounts to his estimate of the investment 
 value of property presently in use, or of disregarding 
 such amounts, is dependent upon other questions. Has 
 the amount of such investment been wholly or partly 
 amortized by the rates? This is a question of account- 
 ing. Should any amount not so amortized be added to 
 the rate base? That is a matter of law. 
 
 It is not too much to say that conclusions of engineering 
 experts have been accepted by courts and commissions 
 as based on facts wholly within the scope of engineering 
 science, whereas they are partly founded on opinions 
 as to economics, accountancy and law, although the whole 
 basis of opinion has not been perceived either by the 
 courts or by engineers themselves, and that no incon- 
 eiderable part of the difficulties with which public utili- 
 ties have been struggling have their origin in the ready 
 acceptance by courts and commissions of the opinion of 
 engineers as to matters in which they, as a rule, are not 
 qualified to testify as experts. 
 
 It is obvious that this subject is one which concerns 
 and should engage the serious attention of every investor 
 in public utility securities. It cannot be assumed, for it 
 is not true, that the matter is receiving the attention it 
 should from those whom investors have intrusted with 
 the protection of their interests. Bankers, attorneys, 
 engineers and accountants have, as a rule, given it but 
 scant consideration. Many have accepted the utterances 
 of doctrinaries as the last word on the subject. Account- 
 ing rules prescribed by Commissions, which are based 
 upon the acceptance of false theories, have been regarded 
 as controlling when they are not. 
 
 It is *'up to you," therefore, Mr. Investor, to see that, 
 in respect of your particular investments, you are re- 
 ceiving adequate protection. Do not wait until your com- 
 pany is confronted with a rate case to discover that with- 
 
28 
 
 out" your knowledge or consent a condition of affairs has 
 been established in the accounts of your company, 
 through the acceptance of false doctrines and economic 
 theories, which jeopardizes your interests and adds im- 
 measurably to the task of protecting your property from 
 confiscation. If an action is brought against your com- 
 pany to reduce its rates, see that only such lawyers, 
 engineers and financial experts are engaged to defend it 
 as have studied this subject and are familiar with every 
 phase of it and are prepared and qualified to protect their 
 clients' interests. 
 
 It was not the intention of the writer to cite any opin- 
 ions, either of courts, commissions, economists or en- 
 gineers, sustaining the views herein expressed. There is 
 one case, however, that of the Pocatello (Idaho) Water 
 Company, which so well illustrates the application of 
 sound economics, sound law and sound common sense 
 that he ventures to subjoin an extract from the opinion 
 of Public Utility Commissioner Ramstedt, which was 
 practically sustained by the Court, the opinion of the 
 majority having been overruled; an extract from the 
 opinion of the Court in that case, in which it was finally 
 decided that so-called ''accrued depreciation" should not 
 be deducted from the value of the properties of public 
 utilities; and an editorial comment on the case which 
 appeared in the New York Commercial. It may be 
 assumed, in respect of the first sentence of his opinion, 
 that Commissioner Ramstedt would qualify it in respect 
 of such units as are only displaced because of obsolescence 
 or inadequacy, and which, being composed of stone, con- 
 crete, iron and steel, would last as long as the walls of 
 Carcassonne. Stephenson's second locomotive was still 
 in use in 1911 (''Engineering and Contracting," October 
 11, 1911). The cast-iron water-pipes leading from the 
 river Seine to the fountains at Versailles, were installed 
 in 1658. The only repairs that have been necessary after 
 two and a half centuries of service is the occasional re- 
 placing of bolts ("Engineering and Contracting," May 
 
29 
 
 27, 1914). Rome is still supplied with water by an aque- 
 duct the construction of which was begun by Quintus 
 Marcius in 144 B. C. Tunis is now supplied by an aque- 
 duct 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 struc- 
 tures which have survived many hundreds of years of 
 useful service. 
 
 The italics are ours. 
 
 Extract from Commissioner Ramstedt's opinion: 
 
 "Physical depreciation, resulting from use, decay 
 and the action of the elements, is a constant factor 
 commencing simultaneously with construction and 
 ending with replacement. A person, having invested 
 his money in a continuous business enterprise for the 
 benefit of others, as in the case of the petitioner 
 herein, and in so doing having subjected his property 
 to the control of the state, from which control it can- 
 not be withdrawn, must always be ready and able to 
 meet the public demand and to replace the construct- 
 ive portions of his plant from time to time as they 
 wear out and decay. A person having embarked on 
 such an enterprise is justly entitled to compensation 
 to cover this depreciation in addition to a fair return, 
 over and above expenses, upon the reasonable value 
 of the property which he has employed for public use, 
 for the same reason that a laborer using his tools is 
 entitled to wages which will not only compensate him 
 for his services, but enable him to replace his tools as 
 they wear out. Allowance for depreciation cannot, 
 in my judgment, be considered as profit or an earning 
 factor in the business. The expenditure necessary to 
 make replacements at any time may exceed the 
 amount received up to that time to cover the cost of 
 such replacements; on the other hand, the cost of 
 making replacements, at a certain time may be very 
 much less than the amount received up to that time 
 to cover depreciation. The theory of allowance to 
 cover depreciation must be that in the long run the 
 owner will be reimbursed for the money which he 
 must spend in making replacements, which in the 
 
30 
 
 very nature of his business he must make from time 
 to time. The fact that the amount he has received 
 from the public at any time is either greater or less 
 than the amount which he has expended for replace- 
 ments, if the allowance for depreciation is correctly 
 computed, does not affect the returns to which he is 
 justly entitled on his original investment. He is 
 entitled to a fair return on his investment and to 
 hold the undepreciated property, or its equivalent in 
 value, which he has employed for public use. 
 
 ''The fact that in an investigation of the peti- 
 tioner's property, undertaken at this particular time, 
 for the purpose of fixing rates, it is found that the 
 market value of his physical property employed for 
 public use has depreciated $77,188.39, does not, in my 
 judgment, justify the Commission, in its determina- 
 tion of a fair value for rate purposes, to deduct the 
 amount of depreciation from the present estimated 
 cost of reproducing the property now, and thereby 
 reduce the earning power of his property. The peti- 
 tioner has undoubtedly in the past twenty years made 
 such replacements from time to time as the public 
 service demanded, and must at all times be prepared 
 to make such replacements as the public service 
 justly demands. The depreciation which we now find 
 in the physical value of the property is somewhat in 
 the nature of incumbrance which must be taken care 
 of sooner or later and without increase in rates by 
 reason thereof; in fact, a large portion of the im- 
 provements which under the order of the Commis- 
 sion, he is required to make within the year is really 
 replacements, and I cannot see how we can justly 
 decrease the earning power of his property by de- 
 creasing the investment on which he may earn a fair 
 return. Whenever the time comes when any great 
 amount of replacement is necessary, and that may be 
 at any time, he may be required to expend all that he 
 has ever received to cover depreciation and a good 
 portion of his earnings. ' ' 
 
 Extract from the Court's opinion: 
 
 "So far as the question of depreciation is con- 
 cerned, we think deduction should be made only for 
 actual, tangible depreciation, and not for theoretical 
 
31 
 
 depreciation, sometimes called 'accrued deprecia- 
 tion. ' In other words, if it be demonstrated that the 
 plant is in good operating condition and giving as 
 good service as a new plant, then, the question of 
 depreciation may be entirely disregarded." 
 
 Editorial from New York Commercial: 
 
 "Rate-making is based on the costs of operation 
 and maintenance and on the money invested in the 
 plant, no matter what may be the nature of the ser- 
 vice rendered to the public. It is usually easy to 
 estimate current expenses and income. The sticking 
 point is almost always the valuation of the plant of 
 any public utility. Its original cost may be proved 
 beyond dispute but the allowance for depreciation is 
 always a bone of contention. 
 
 "Why should a private corporation be asked or 
 forced to forego returns on money actually invested 
 because some years have elapsed? If a municipality 
 constructs a water system the ratepayers bear the 
 cost. If mistakes were made at the beginning the 
 bonds issued must be paid at maturity no matter how 
 the money was spent. Every great public work is 
 liable to contain some defect which must be replaced. 
 Human skill has never prevented all mistakes. The 
 engineers who dug the Panama Canal have been 
 powerless to stop the slides in the Culebra Cut and 
 dredging them out will add to the cost of the Panama 
 Canal unknown millions of dollars. If inventors and 
 engineers did not experiment we would make little 
 progress, and money so spent is not wasted though it 
 yield no direct profits. 
 
 "When a public utility company scraps old equip- 
 ment and installs improved machinery it serves the 
 public and should receive a fair return on all it spends 
 in this way. Physical depreciation is a constant fac- 
 tor and is balanced by repairs and replacements. 
 The Supreme Court of Idaho has reversed an order 
 of the Public Utilities Commission of that state by 
 disallowing a deductions from the value of a water 
 company's property of so-called 'accrued deprecia- 
 tion* which was theoretical and not actual, the plant 
 being in condition to give as good service as when 
 first constructed. The Court found that the company 
 
32 
 
 made snch replacements as were necessary to serve 
 the public and that an arbitrary decrease in the in- 
 vestment on which it was entitled to a fair return 
 was unjustified. The sum involved was $77,000, the 
 deduction of which would he equivalent to confisca- 
 tion without recompense. This case upholds the 
 right of investors to receive a return on money prop- 
 erly expended in the first place." 
 

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