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CHAPTER XXXIV

OPERATING EXPENSES

§ 1150. Real cost of operation.

Topic A. Cost of Performing Service

§ 1151. Cost of rendering service.

1152. Salaries paid to officials.

1153. Expenditures to get business. 1154. Current taxes.

1155. Outstanding loans.

1156. Interest payable.

1157. Dividends declared.

Topic B. Expenditures on the Plant

§ 1158. Expense of maintaining equipment.

1159. Losses due to accident.

1160. Betterments considered as maintenance.

1161. Replacement considered as repair.

1162. Renewal of equipment to offset depreciation.

1163. Permanent improvements should not be annual charge. 1164. New construction should be charged to capital account. 1165. A liberal policy desirable.

Topic C. Amortization Requirements

§ 1166. Depreciation now generally allowed.

1167. Full allowance still begrudged. 1168. Refusal to allow depreciation. 1169. Fund to repair depreciation.

1170. Capitalization of past depreciation.

1171. Payments into sinking fund.

1172. Sinking fund for municipal bonds.

1173. Amortization of franchise rights.

Topic D. Operations of Consolidated Properties

§ 1174. Complications in case of systems.

1175. System generally taken as a whole.

1176. Unprofitable portions of the line not considered.

§ 1177. Expenditures for different parts apportioned.

1178. Constituent companies operated under separate charters. 1179. Rent of leased portions.

1180. If rental becomes unjustifiable.

§ 1150. Real cost of operation.

The real cost of operation is not so easy a figure to determine as one might first suppose. Certain items of annual expenditure should obviously be included as annual charges, such as wages and supplies, provided that such expenditures have not been unreasonable. But as to other expenditures there is difficulty in deciding whether they should be included as current expenses or provided for out of new capital, such as replacements and betterments. Involved in this problem is the accounting permissible in allowing for depreciation and reparation. And in this connection the propriety of setting aside a sinking fund or providing against amortization should be considered. Altogether it will be seen that this is not a matter to be dismissed with the accepted rule that only proper annual charges should be deducted from gross income, while all expenditures for lasting improvements should be provided for from new capital.1

Topic A. Cost of Performing Service

§ 1151. Cost of rendering service.

Before there can be any question of income on the capital employed, the necessary annual charges must be met by the rates; and first of all the actual cost of service furnished. This involves most obviously the payment of wages, and the purchase of current supplies. The general principle was concisely stated by Mr. Justice Brewer

A waterworks company must make full disclosure of its earnings and expenses when it assails as confiscatory rates fixed by ordinance.

McCook Waterworks Co. v. City of McCook, 85 Neb. 677, 124 N. W. 100 (1909).

in Chicago and Northwestern Railway v. Dey:1 "Cost of service implies skilled labor, the best appliances, keeping the road-bed and the cars and machinery and other appliances in perfect order and repair. The obligation of the carrier to the passenger and the shipper requires all these." And in the Long Branch 2 waterworks case the Vice Chancellor recently allowed without discussion the estimate made for "the costs of maintainance and administration, including ordinary repairs and taxes." It should, of course, be said that it does not follow that in every case the company will be entitled to credit for all of its current expenditures. Reckless and unnecessary expenditures, not legitimately incurred in the actual operations of the company cannot be allowed.

§ 1152. Salaries paid to officials.

The salaries of officials must, of course, be paid, as part of the annual charges; but these salaries must not be fixed at an extravagant amount. If a group of stockholders who controlled a majority of the stock could vote themselves enormous salaries and deduct the amount from the receipts of the company before making a return to capital, the highest possible rates might be justified, and the rights of the public be ignored. This question was considered, and well discussed, by Mr. Justice Brewer in Chicago and Grand Trunk Railway v. Wellman: 3 “It is agreed that the defendant's operating expenses for 1888 were $2,404,516.54. Of what do these operating expenses consist? Are they made up partially of extravagant sal

135 Fed. 866, I. L. R. A. 744 (1888).

See also Brewer, J., in Chicago, M. & S. P. Ry. Co. v. Tompkins, 176 U. S. 167, 44 L. ed. 418, 20 Sup. Ct. 336 (1900).

2 Long Branch Commission v.

3

Tintern Manor Water Co., 70 N. J.
Eq. 71, 62 Atl. 474 (1905).

See also the opinion of Savage in
Brunswick & T. Water Dist. v.
Maine Water Co., 99 Me. 371, 59
Atl. 537 (1904).

3143 U. S. 339, 36 L. ed. 76, 12 Sup. Ct. 400 (1892).

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aries, fifty to one hundred thousand dollars to the president, and in like proportions to subordinate officers? Surely, before the courts are called upon to adjudge an act of the legislature fixing the maximum passenger rates for railroad companies to be unconstitutional, on the ground that its enforcement would prevent the stockholders from receiving any dividends on their investments, or the bondholders any interest on their loans, they should be fully advised as to what is done with the receipts and earnings of the company; for, if so advised, it might clearly appear that a prudent and honest management would, within the rates prescribed, secure to the bondholders their interest, and to the stockholders reasonable dividends." 1

§ 1153. Expenditures to get business.

A public service company can no doubt expend a reasonable amount in advertising. Perhaps it may be said that reasonable advertising is for the benefit of the customer. But it seems to be agreed that large commissions cannot be given by a public service company to those who get it business. For money spent in efforts by one company to secure certain business in preference to another company benefits the company only, not the customer, and it is not just that the customer should be forced to pay it. In the case of Pannell v. Louisville Tobacco Warehouse Company, a case involving the reg

1 This quotation is included with approval in the opinion of the court in Tucker v. Missouri Pacific Ry. Co. (Kans.), 108 Pac. 89 (1910).

According to a recent decision, a court will take into account the increased cost of labor by reason of the reduction of hours. In re Arkansas R. R. Rates, 168 Fed. 720 (1909).

2

In St. Louis & S. F. Ry. Co. v. Hadley, 168 Fed. 317 (1909), the court refused to take it into consideration as against a legislative reduction of rates that the companies would be compelled to reduce the wages of their employés.

2113 Ky. 630, 68 S. W. 662, 23 Ky. L. Rep. 2423 (1902).

ulation of rates of tobacco warehouses, Mr. Justice Hobson said: "We know that the larger the fee, the more the warehouseman can afford to pay out to get the trade; and it is not the policy of the law that the warehousemen should be allowed to charge a large fee against the shipper, in order that he may be able to spend a portion of it in securing the trade. To illustrate: If the fees were so large that the warehousemen could give half of them to get the business, it is manifest that this would lead to practices that ought not to be encouraged, and would be a hardship on the tobacco raiser, which the statute was designed to prevent." 1

§ 1154. Current taxes.

Taxes for the year are obviously a proper annual charge. Overdue taxes for past years paid during the year are just as obviously not to be regarded as an annual charge.2 Upon the policy for the State to pursue in taxing public service companies in general and railroads in particular, there is and may be much difference of opinion. Such companies should, of course, be taxed upon their tangible property at its locus, and this is generally done. But upon the question of whether there should be a high franchise tax opinion differs, although it is now recognized that such taxes are constitutional enough. It may be pointed out, however, that if too heavy a franchise tax is levied upon a railroad company, it is bound in the end to react upon the rates which the railroad will charge the public, as the payments made for taxation requirements are obviously annual charges.3

1 Compare United States v. Delaware L. & W. Ry. Co., 152 Fed. 269 (1907).

2 See Southern Pacific R. R. Co.

v. Railroad Commrs. 78 Fed. 236 (1896).

See Long Branch Commission v. Tintern Manor Water Co., 70 N. J. Eq. 71, 62 Atl. 474 (1905).

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