up to its former standard, or perhaps to even a higher standard of operation, they are properly a part of the operating expenses of the road, but when they add to the earning capacity of the property, and therefore to its value, they are in the nature of a permanent improvement. Assuming that the stockholder is only entitled to exact from the public a certain amount for the performance of the service, he clearly has no right to both receive that amount in dividends and add to the productive value of his property.' § 361. Betterment out of income. In the famous Rate Advance Cases of 1910, it was contended that rates should be enough to enable carriers not only to pay their current operating expenses, their fixed charges, a reasonable dividend, and to maintain their properties at the present state of efficiency, but also to make improvements and additions to those properties of a permanent character. Those who opposed an increase in the rates answered that improvements of this character, which add to the permanent value of the property, ought not to be paid from the current returns of the railroad, but should rather be made out of new capital. But the Commission, pointing to the recent decisions, which have not been considered, said that it would appear that both the Court and the Commission were committed to the proposition that in fixing a fair return upon railroad property, for the purpose of determining whether a given advance is reasonable, the railway ought not to treat as a part of its operating expenses the cost of permanent improvements or extensions; and this must of necessity mean that the rates should not be sufficient to allow both the payment of dividends to stockholders and interest to bondholders and an additional sum for the purpose of improving and increasing the value of the property. Theoretically, this would seem to be just. Therefore, it must be realized that generally speaking the policy of the Commission now seems to be that each generation may well be required to bear its own burden, and the stockholder should not obtain both an adequate dividend upon his stock and an addition to the value of his property.69 Topic C. Depreciation Requirements § 362. Allowance for depreciation. In general an annual charge to meet the depreciation in the value of the plant by use seems proper. This is again something which cannot be decided by general rules as to a standard percentage, but is a matter to be determined by careful investigation into the character of the particular plant.70 It is now seen that the question of depreciation is too difficult for offhand estimation. The courts have, as yet, usually contented themselves with saying that some fair per cent should be allowed. Undoubtedly, in the future, such expert evidence of the amount of the probable depreciation in the particular plant will be relied upon. Concrete viaducts, for example, apparently suffer a very slight depreciation, while a railroad equipment depreciates comparatively fast. The probabilities are that sufficient allowance is not being made for the physical depreciation that the usual equipment used in most public services undergoes, to say nothing of the intangible fall in the value of the present equipment due to change of fashion. A well-conducted company may indeed see to it that provision is made for the renewal of equipment which is obviously deteriorating; but few indeed are making under present conditions provision against the slow but sure depreciation of the plant as a whole. Now that it is becoming recognized in the de 69 Advances in Rates, Eastern Case, 20 I. C. C. 243. See also the Five Per Cent Cases of 1914, showing that the Commission is still disinclined to permit earnings to be made to go into betterments of the property. 70 See Long Branch Commission v. Tinturn Manor Water Co., 70 N. J. Eq. 71, 62 Atl. 474. See also Wilkes-Barre v. Spring Brook W. Co., 4 Lack. L. News, 367. cisions that such allowance is a proper operating cost, more attention will doubtless be paid to this vital matter.71 § 363. Types of depreciation. The phys It is the theory of the Commission that the accounts of cost of construction should contain no factor of obsolescence; when a thing goes out of service, its value should be written off on the books. There are various types of depreciation which must be dealt with in connection with every enterprise of the character under discussion. ical depreciation such as the wearing out of equipment is obvious.72 Indeed, depreciation of this sort can be almost exactly determined by those of experience in the respective lines. Then there is at the other extreme, functional depreciation due to the supersedure of equipment, which is still physically fit to do the work for which it was designed. But no one can tell with any confidence what per cent of risk there is from year to year of developments in a given art, which will make it necessary to scrap existing equipment. What it would mean to the accounts of the railroads to have to throw away passenger cars which still have perhaps twenty years of estimated life and substitute steel equipment, is something which it would be staggering for them to face. A certain obsolescence is to be looked for, however, and an allowance should be granted for making it good. But that changes are likely to affect all parts of the system equally is as improbable as that all parts of the equipment should have uniform wear.73 71 See Twitchell v. Spokane, 55 Wash. 86, 104 Pac. 150, 24 L. R. A. (N. S.) 290. See also Grand Haven v. Grand Haven W. W., 119 Mich. 652, 78 N. W. 890. 72 Re Advances in Rates, Eastern and Western Cases, 20 I. C. C. 243, 304. See also the inquiries made in the New England Investigation, 27 I. C. C. 384, as to whether proper allow ance for depreciation was made by the practices of these companies in substituting by purchases out of income new equipment, to take the place of those discarded. 73 See the Five Per Cent Cases of Aug. 2 and Dec. 18, 1914. See also the discussion in the St. Paul & P. S. Accounts of the impropriety of charging as depreciation of rolling stock only 1 per cent. § 364. Authorities refusing to allow depreciation. 74 There are, however, a few cases in the State courts which refuse any allowance for depreciation among the annual charges; but the matter of depreciation has been in late years so well understood that these cases have no importance to-day. In one case the argument was this: "We see no reason why plaintiff, in addition to operating expenses, repairs, and other ordinary charges, should be allowed to reduce the apparent profits by deductions for a restoration or rebuilding fund. The setting aside of such a fund may be a good business policy, and, if the company sees fit to devote a portion of its profits to that purpose (though as we understand the record, no such fund has yet been created), no one can complain; but it is in no just sense a charge affecting the net earnings of the works. To hold otherwise is to say that the public must not only pay the reasonable and fair value of the services rendered, but must, in addition, pay the company the full value of its works every 40 years-the average period estimated by plaintiff for all time to come." 75 The answer to this line of argument plainly is that those who devote their property to the service of the public should be fairly assured that not only are they to have the return on their investment which they would get elsewhere, but that their capital will at all times be secured from impairment. § 365. Renewal of equipment to offset depreciation. The equipment of the road must be renewed from time to time; and an expenditure of the proper proportionate amount in each year for new equipment is a proper annual charge. So in Milwaukee Electric Railway and Light Company v. Milwaukee," it was held proper to buy yearly 74 Redlands, L. & C. D. Water Co. v. Redlands, 121 Cal. 363, 53 Pac. 791. 75 Cedar Rapids Water Co. v. Cedar Rapids, 118 Iowa, 234, 91 76 87 Fed. 577. If a company in setting aside funds collected for de and charge to annual expenses a sufficient number of cars, with motors and complete electrical equipment, to keep up the necessary standard of equipment. It may aid one to appreciate the nature of the problem and the method of its solution to cite from the expert testimony adduced in that case and adopted by the court: "In reference to the element of depreciation, the witness Beggs gives the following explanation: 'I think experience has demonstrated that the utmost life that can be expected from the best roadbed that can be laid to-day would be, at the outside, ten or twelve years, when it would have to be almost entirely renewed. The Milwaukee Company is in that condition to-day, because of the different periods that their track went down, and due to the fact that it was not all put down at one time, and it must now of necessity commence to lay about 12 miles of track annually, being about one-twelfth of its total mileage; and will be required, whether they wish to or not, to lay that amount annually hereafter, and will thereby be keeping their tracks fairly up to the standard. The same applies, I might say, to the equipment. In my estimate I have calculated that the Milwaukee Company must do this year, which, as a matter of fact, it is doing, what it did last year,-in other words, put on not less than 20 of the most modern, bestconstructed equipments, thereby keeping its standard up to the minimum as it has now, of 240 equipments; because I think it is fair to assume that the average life of the double equipment, taken as a whole, will not exceed twelve years, the life of the motor being somewhat less than that, and that of the car we hope may exceed it possibly several years, I mean the car bodies, but that, in the main, we hope that we will get an average life of twelve years out of them. So, taking 20 equipments an preciation beyond current replacements immediately necessary invests them in its own plant, these items, it seems, should be separately handled and the company should not expect a profit thereon as for capital devoted to the service of the public. |