United Rs. & Elec. Co. of Baltimore v. West

234 other was time, any worth other one sum,” cents “

them said: That question is Mrs. upon based Spalding’s one-sixth of a ownership lease 25 cents per ton. That question entirely an different one from the one asked me by Mr. Zane. require It a good would deal of calcu- lation and certain assumptions as how fast that ore would shipped. Then require discounting it would against present those assumptions to value. That cal- culation would and I time, take can not answer that without it working out.” The other gave two no estimate of such value.

The judgment of the court below must be reversed. The cause will be remanded the District Court for further proceedings conformity with this opinion.

Reversed. took no part Me. in the consideration Justice Butler or decision of this cause.

UNITED RAILWAYS AND ELECTRIC COMPANY

OF WEST, BALTIMORE CHAIRMAN, v. et al. CHAIRMAN, WEST, UNITED RAILWAYS et v. al. AND ELECTRIC COMPANY BALTIMORE. OF Argued Nos. and 64. October January 1929. Decided

For another decision of the court be- low, stage case, at an earlier see 155 Md. 572. McHenry Charles Howard and Charles Mar-

Messrs. H. kell, Henry Mr. Waters brief, on the with whom was Electric of Balti- Railways Company & for The United more. Raymond

Messrs. S. Tingley, Williams and Thomas J. with whom Mr. John H. Lewin was on the brief, Public Service Commission Maryland. of. delivered of the opinion the Justice Sutherland

Mr. Court. (No.

The first of these an 55) titles and the appeal, (No. 64) second cross-appeal, from decree Court of Maryland. case from Appeals The arose an order of the state Public Service Commission limiting rate of passenger fares charged by United Rail- ways and Electric Company carrying passengers over its lines in the City of Baltimore. The company, by its appeal, attacks the commission’s order as confiscatory. seeks to raise the cross-appeal question whether the amount for annual allowed depreciation the company should be value upon present calculated of the com- pany’s its property upon cost.

Upon application to the company commission, made in for an in fares, increase the commission an passed order an making increase, but not to the extent sought. Thereupon, suit was brought a state circuit grounds court on that the rate fixed commis- was confiscatory sion the annual allowance upon was calculated a wrong basis, namely, cost, instead of upon present value depreciable prop- erty. The an court, opinion, circuit able sustained upon both company grounds, enjoined the en- forcement of commission’s order. On appeal, of appeals upheld court the view circuit court respect of depreciation, but held the rate of return not confiscatory. Md. 572. the Thereupon, commission increased the in allowance accordance with the the decree of and adjusted rate fare to court necessary the extent to absorb the increased allowance. A second and suit an to appeal the court of fol- appeals lowed, and that court a decree, entered 157 Md. sustaining the action of commission; is that and it decree is here for which review.

The facts, so far as we find.it to necessary them, review are in not The dispute. company since 1899 has owned and operated all the street in railway lines City Baltimore. present capital Its structure consists of (cid:127) $24,000,000 of stock, common $38,000,000 ordinary bonded indebtedness, $14,000,000 in- perpetual come bonds redeemable at the option company after 1949. automobiles, Due to the use of increased total number of carried passengers has some time steadily decreased, the number during while carried “rush hours” has increased. This resulted in an has increase of in expenses proportion the whole number of passengers carried, since equipment, etc., must be maintained men sufficient to care for the employed “ increased business of the rush hours,” notwithstanding their productiveness reduced during hours de- creased business. Since the war operating expenses have if quite almost not doubled.

The present value of the used property was fixed at $75,000,000, commission and this amount was ac cepted question by both in parties without state cir in cuit court and the court of appeals. Included in this valuation in $5,000,000 easements the streets of Baltimore. The court of had appeals held in another and case, Comm., Miles v. Serv. earlier Pub. 151 Md. an easements constituted interest real estate the rate their making up and that base value should in the present included. commission case, ac the amount in the cordingly,- included valuation and made no the item courts upon below, attack where it ' in dispute. as matter not The item is passed now for the commission challenged by Court, counsel this are like objections suggested, the valuation other it necessary for the first We do find wise time.' challenge objections, for, or these if they consider this too In the substance, they come late. ever possessed therefore, further of the we case, accept, consideration $75,000,000 for all as it was the valuation purposes, and accepted and acted commission upon parties, courts below. the com- rate of fare permitting

The commission fixed cent, per valuation; to earn a return of 6.26‘ on this pany itself and, concerned, so far as No. 55 is the case resolves into the whether that return so inade- simple question in a quate deprivation property as result violation of law clause of process due the Fourteenth Amend- In answering question, ment. . fundamental to be observed is that of a principle property publié devoted to utility, although public service and im- awith is still pressed public interest, private property; neither the of that nor corpus property the use thereof constitutionally can be taken for a compulsory price just falls below the measure of which compensation. One no less than the is confiscation other. is a fair return within

What this principle cannot be by invoking settled decisions of this Court years made ago based conditions upon radically different from those which prevail today. problem is one to be tested primarily by present day conditions. Annual returns upon enterprise, like capital wages of employees, cost of maintenance related expenses, have in materially country over. creased This is common knowledge. upon A rate of return capital invested in street railway ,and public other lines utilities which might have been no years ago a few proper longer furnishes a safe criterion present for the or the either future. Lincoln Gas Co. v. Lincoln, 250 U. S. 268. Nor can a rule be laid down apply uniformly will to all which sorts of utilities. What fair return for one be a may may inadequate for an upon other, depending circumstances, locality and risk. Co., Willcox v. Consolidated Gas U. S. 48-50. The general recently rule has been stated Co. v. Bluefield Comm., Pub. Sen. U. S. 692-695: “ What annual rate just will constitute compensation depends upon many circumstances and must be deter- by mined the exercise aof fair enlightened and judgment, having to all regard A facts. is public utility relevant- return, entitled to such rates as will it earn permit to a on the value of the property which it employs for the convenience of the public equal to that generally being made at the in same time and the part same general the country on investments other business undertak- ings which by are attended corresponding risks un- and but it has no certáínties; right constitutional- profits to such as are realized or anticipated highly profitable enterprises speculative or ventures. The return should be. reasonably sufficient to assure in the confidence financial the soundness of and utility should be adequate, under efficient economical and management, to maintain and its and support credit enable to raise it the money neces- for sary discharge the proper its A public duties. rate may return be reasonable one time and become too high by or changes affecting too low opportunities for the market investment, money and business conditions generally.

[*] ^{[*] [*] [*] [*]} into result of past oper- “Investors take account ations, years, determining when especially in recent an they which will invest -such undertak- upon terms ing. irregular uncertain income makes low Low, prices utility higher the securities and rates by interest be demanded investors. fact that to not insist company may a matter constitutional as applied be made rates to right up by that losses past to credit, future tends weaken present being compelled utility .protected against fact In to it. rates tends confiscatory support to serve for has been rate return that the shows this case the record inquiry time of the up long a through period low involved.” the commission here given in a case is fair return What will constitute It demonstration. mathematical of exact capable which con- about or less of approximation matter more of its discharge in the The court may clusions differ. must issue deter- of confiscation duty constitutional in the exercise ability best its mine amount “ judgment as independent enlightened of a fair, Ben Valley Co. Avon and facts.” Ohio v. both law Pub. Serv. 253 U. S. Co. v. Borough, Bluefield Comm., 692; Lehigh R. R. v. pp. 689, Valley supra, Commissioners, 278 U. S. in the record to effect that is much evidence the

There in the capital induce the investment of enter order to company compete successfully enable the to to prise money market for to finance its *a net operations, the by the valuation fixed the commission should return upon 8 1920 per company far from cent. Since the has be not $18,000,000, time to time some upon from which borrowed obliged average been an rate of interest pay rang it has 7 and has been per cent., well this the ing experience over lines the railway quite generally. street valu Upon of an allowance fixed, ation with for calculated to that the valuation, upon with reference and then pre for rates, company years 1926, scribed 1920 to inclusive, obtained a return of little than 5 both more per-' cent, just annum. It is manifest that per compensation a for utility, requiring for efficient service skillful public as management well as use of prudent and plapt,' subject public rates are regulation, whose is more on' mere than current interest investment. Sound busi requires ness that after all management paying expenses aside the for operation, setting necessary-sums of depre 26-2

ciation, payment of interest dividends, and reasonable there should still remain something to be passed to the surplus account; a rate return which does not admit of that being done is not to assure sufficient confi dence in the financial utility soundness to main tain its credit and it enable raise money necessary proper discharge public its In duties. this view cent, a matter, return of per 6.26 clearly inadequate. In the light recent decisions of this Court and other Federal it decisions, certain not rates securing cent, cent, return of per or even 8 per on the value 7½ would not property be necessary to avoid conf iscation.1 But this we need decide, since the com from pany sought itself the commission a rate it which appears would return of produce cent., about 7.44 per the same time insisting that such return fell being short of adequate. Upon the present record, we are of opinion that to enforce rates less producing than this would be confisca tory and due process violation clause Fourteenth Amendment.

Complaint also is made of action of the commission in abolishing the second fare zone established 1See, example, 388, Co. v. 258 S. Galveston U. Elec. Galveston, 400; 443; 262 U. S. Brush v. Galveston, Elec. Co. v. Fort Smith 627, 270 affirming per S.U. Co., Southwestern Bell Tel. curiam South 108; Tel. Co. v. Fort 294 Fed. Smith, Bell western Patterson affirming part U. S. Co., Mobile v. Gas Mobile Gas Co. v. 293 Fed. Patterson, Indianapolis McCardle v. Water note; Ottinger Brooklyn U. S. v. Co., Union Gas modifying affirming Kings 272 and Lighting U. S. Co., County (2d) 192, Prendergast, 7 F. Brooklyn Co. v. Gas Co. Union v. (2d) 628; Prendergast, 7 F. & Railroad Warehouse Commission v. 625, affirming 273 U. S. Duluth Duluth Street Co. Street R. R. Co. (2d) 4 Commission, 543; v. Railroad & Warehouse F. Minneapolis 830; Telephone v. 285 Rand, Fed. Co. v. Prendergast, New York 822, 826; F. (2d) Fed. 11 id., & New York Richmond (2d) Prendergast, Gas F. v.Co. Halethorpe line and on what is called the sub-

company theretofore ex- single a fare for the two fares stituting unincorporated community ly- is an Halethorpe acted. city. single a ing outside limits With Baltimore line, is not Halethorpe profit- the extension to fare, it of the rail- able, nevertheless, integral part is an but, if way system, enough it will be the commission shall to return readjust yield upon the fares as a fair so including Halethorpe line, If, as a whole. property, in doing so, choose, commission shall not to restore single the second but retain force the we fare, fare, to objection. no constitutional perceive a sought review of the question The commission both allowance, the annual respect depreciation by later, by for certiorari. The cross-appeal and, petition jurisdiction cross-appeal on the as well as question petition was post consideration certiorari hearing on the merits. We do not now find poned to necessary decide either matter. As the to amount of it to be allowed was contested throughout, be determined in necessary fixing element to rate closely and is related substance of fare to the case brought company’s appeal, here it well may therewith. In connection these considered circum nor certiorari cross-appeal neither necessary stances question. present for annual depreciation The allowance made by the upon based cost. The commission was court of appeals was erroneous that it should that this have been held The court’s present value. view of upon based the mat- the items of right. expense One of plainly ter was to be and deducted is the amount necessary ascertained continuously worn out so as property impaired, restore nearly level practicable maintain it as as the same amount for the set service. The efficiency public aside periodically depreciation for this is the purpose so-called cannot be Manifestly, allowance. this allowance limited original if values because, have cost, advanced, is allowance sufficient to maintain the level of “ efficiency. utility entitled that from earn to see ings the value unim kept invested is property paired, any so that at end of given years term original investment it remains as was beginning.” at the Co., Knoxville v. Knoxville Water U. S. 13-14. This naturally expenditures calls equal the cost of the worn equipment out at the time of replacement; and this, for all practical purposes, present means value. It is the settled rule of Court this that base rate present value, and would wholly illogical it to adopt a depreciation. rule for As Supreme different Court Michigan, Utilities Telephone Co., Commission v. “ 228 Mich. has 658, 666, aptly said: If the rate base is present fair value, depreciation then as base to de preciable property is same thing. There is no prin a ciple to sustain that holding utility may earn on the fair present of its property value devoted to public serv ice, but' that it must accept public and the must pay de preciation book cost or investment regardless cost present fair value. We repeat, the.purpose of permit ting charge is to compensate the utility for property consumed in service, the duty of the commission, guided by experience in making, rate is to charge spread fairly this over years the life see property.” And Southwestern Bell Tel. Co. v. Pub. Comm., Serv. 262 U. S. 288; Georgia Railway & P. Commission, e v. Railroad 262 U. S. 625, 633. Co. injunction We conclud an should have been granted against the commission’s order.

No. 55. Decree reversed cause remanded proceedings not with inconsistent this for further opinion. No. Cross-appeal dismissed. de- Certiorari nied. Mr. Brandéis, Justice dissenting.

Acting under the direction of the Court of Appeals, Public Service Commission Railways v. United & Electric Co., 155 572, Md. on entered, the Commission November 28, 1928, an order permitting Railways the to increase its rate of to fare 10 cash, cents four tokens for 35 cents.1 was Railways United & Electric That order sustained in West, Co. v. 70, 157 Md. and the Railways has appealed to this The Court. claim that the order its confiscates fare property because will the fixed to yield, according cent, no more estimates, the than 6.26 per upon the are value. There several why assumed I reasons think the order should held valid. .cent,

A per net return 6.26 upon present the value railway a street property enjoying a monopoly oldest, largest in one of the and richest cities on the At- seem lantic Seaboard would to be compensatory. More- over, the return is in fact if estimated much larger, Railways’ 1 The of fare on the lines rate had 5 been cents until 1918; applied authority Then it for to “purely increase its fares as during emergency period a war of war conditions”. Six granted: since January been cents on 7, increases have 6 1919, Re Co., 1919C, 7; & P. Rys. Elec. U. R. cash, United to 7 cents four cents, September 30, 1919, on Rys. for 26 Re tokens United Elec. & 1920A, Co., 1; 31, to a flat cents on R. December Re P. U. 1920A, Rys. Co., cents, & P. R. Elec. U. to 8 United two tokens May cents, Rys. on Co., for 15 Re United & Elec. P. U. R. 1924D, when, August 1, rate of fare This was on 713. present

Railways application with filed the Commission the for flat a original In thereon 10 cent fare. its decision the Commission au cash, cents, fare of 9 cents three tokens for 25 Re thorized a United Rys. Co., 1928C, provide & P. R. the additional Elec. U. 604. To concerning required by Appeals revenue the decision of the Court cash, depreciation, the Commission then raised the fare 10 cents 1929A, cents, Rys. Co., four Re United & P. tokens for Elec. U. R. Railways seeking 180. is still to secure flat 10 fare. The a cent by. protected Railways The had order of the Commission been from jitney 1928C, competition. P. 632. See U. R. It is 6.70 followed. I are which deem applicable rules cent, rule base, valuing prevailing the rate per if, applied. base is from rate which franchises eliminates cent, in lieu of the deduction also, it is if per And 7.78 amount Appeals, Court of by ordered an annual depreciation fixed, the method by either according commonly ap- to the rules charge computed method, some alternative at business, plied railway of this experience proves long sum which the it. adequate been have

First. adopted by Commis plant value by it $75,000,000 base fixed sion the rate was as case, 9, 1926, on March modi valuation decided separate of the Court of Appeals,2 to directions fied, pursuant Re United review, and not before us February 1, 1928, Co., P. & Electric Railways 1926C, 441, U. R. P. U. R. $5,000,000 in total repre Included this is 1928B, 737. Railways’ sénting placed upon the value the so-called “ yield If are the estimated they excluded, easements.” would be increased .44 by per the Commission by found net estimated is, earnings, $4,691,606 That the cent. base, a rate 6.70 $70,000,000 per on cent. yield, would “ Counsel contended that since these ease The People’s ” merely privileges gratuitously granted are to ments the county and Railways by municipal franchises the various street cars the operate public highw tracks and lay to excluded from the they should be rate base when ays,3 is confiscatory whether order considering the violation This alleged Federal Constitution. error of federal the may valuation be considered on this law appeal. by the rate allowed the Commission For, is attacked on the return on property assumption only 2 Comm’n, Miles v. Public 151 Md. 337. Service “ ” 3 part privileges granted by A small of these easements are fran operate portions street cars on chises the streets which the public streets, only other at intersections with uses

257 Ry. American States v. United Compare 6.26 cent.4 per Wilson, Co. v. Tool Union Co., S. Express 425, 435; 265 U. 107, U. S. Fed- under void alleged to be a rate order is Where question confiscatory, eral Constitution because included be should specific property whether a class law, not state by to be determined the rate base is is sufficient return Whether the law. the federal by but not concern does which question the state law is under or inade- adequacy solely with are concerned us. We federal guarantees the return under quacy rate con- prescribed determining In whether law. Constitution, franchises are under Federal fiscatory such plant, except in valuing the included not be State, or a to the political actually paid as were amounts for the grant. consideration Cedar thereof, as subdivision 223 U. S. Rapids, 669; Light Co. Cedar Gas v. Rapids Moines, Des 238 U. S. 169; Gas Co. v. Des Moines Galveston, v. 258 U. S. Co. Galveston Electric Commission, & v. P. Co. Railroad Railway Georgia lay pipes 632.5 Franchises to tracks U. S. like franchises streets, to conduct the business as a

public utility are donations to a property corporation, profit may They of which made. are priv- the use to utilities enable them to ileges granted employ their opinions Commission’s and orders proceeding- in the valuation referred, to pleadings printed in the several part are are as in this the record case. 5 Westinghouse Mfg. Electric & Tramway Co. v. Also Co., Denver City (2d) 285, 302, County affirmed sub nom. 3 Denver v. F. Tramway Co., (2d) 23 Denver Public Utilities Commission v. 287; F. Capital Co., Traction (2d) 17 673, 675-6; F. Capital City Re Tele graph Co., 1928D, 763, P. U. R. 766, (Mo.); Tracy Re Gas Co., 776 1927C, 177, (Cal.), P. R. 181 U. Re Southern Pacific Co., P. R.U. 1926A, 298, 303; Re Potomac Electric Power Co., P. U. R. 1917D, No case has 680. been found which accepts 563, the rule laid down by Appeals. the Court of property in the public service and make out profit such As use property. stated Hampshire New “ all such franchises, rights and statute, privileges being ” “ granted only public justly interest are not sub- ject capitalization against the public.” ” “ Had easements been called franchises it is prob- able value that no would been have ascribed to them for rate-making purposes. For Maryland public utilities law, in common with the statutes of many States,7 forbids capitalization franchises! calling But these privi- ” “ easements leges does differentiate them for rate from purposes ordinary corporate franchises, when apply- Federal ing the Constitution. In none of the cases ex- franchises from cluding value was plant any distinction respect, in this made, ordinary between corporate fran- chises and franchises to use the public streets, although many of the cases involved privileges the latter type. 1926, Hampshire 10, 2, 24, p. 6 New L. Vol. ch. § —P. 1913, 2328(b), p. 811; 7 Arizona—Rev. Stat. § California —Public Law, 52b, Deering Codes Supp. Utilities & Gen. L. 1925-1927, § Act Comp. 6386, 52(b), p. 1811; 1919, 1, 4290, Stat. Vol. p. § § Idaho — 1221; 1929, 11a, 36, p. Illinois —Cahill’s Rev. Ch. 2047; Stat. In § 3, 12763, 1926, p. Ann. 1258; Maryland— diana —Burns’ Stat. Vol. § Bagby’s Code, 1924, 1, 23, 381, 832; Ann. Art. p. Vol. Missouri— § 3, 10466, 10484, 10508, Vol. pp. Rev. 1919, 3262, 3279; Stat. 3245, §§ ch, Comp. 1922, p. 321, Stat. amended L. 676, 1925, § Nebraska — Hampshire 141; 2, 1926, 241, p. New L. Vol. 10, 943; ch. New § —P. Jersey 1911-1924, Supp. Comp. 2, Cum. *167-24, p. Stat. Vol. — 2886; 1923, 49, New York—Cahill’s Cons. L. ch. 101, pp. 1746, §§ 1759; Supp. §§55, 82, pp. 282, 283; ch. 49, Pennsylvania— (West Co.) 18095, p. Pub. Stat. 1920 1745. Some of statutes, § prohibiting capitalization franchises, addition to specifically direct that no franchise shall rate-making be valued for purposes: 1927, 8315, p. 1076; Iowa —Code 1923, Chap. Minnesota —Gen. Stat. § p. 683; p. 733; §4823, §5304, Supp. North Comp. Dakota — Laws, 1913-1925, 13B, §4609c37, p. 969; eh. p. §4609c40, 614-23, Code, Ann. Ohio—Throckmorton’s 614-46, 614-59, §§ Vol, Stat, pp, 156, 160, 164; 1, 184, 15,p, 1446. Wisconsin —

259 The Appeals Court of and the Commission in- were “ ” by the fluenced fact that the so-called easements were taxed. in the This fact does justify including them 8 taxed; rate franchises are Corporate frequently base. and for although taxed, are not valued rate purposes. Georgia & P. Commis- Compare Railway v. Railroad Co. “ ” from differ sion, 278 Fed. The 242, 244-5. easements that, under ordinary technicality franchises only is, the law streets for right use the Maryland, to fran- ordinary taxation real purposes, property, whereas chises are personal property. fixed, in

Second. The which Commission amount original depreciation charge its report, the appropriate as cent, of was is 5 the estimated $883,544. That sum per arriving method of gross Referring revenues. Commission there said: charge amount “ might logical it be more Commission believes that upon for depreciation to base the annual allowance rather than reve- upon gross cost of depreciable property, gross deprecia- revenues and nues. The relation between is a indirect while there relation tion and direct remote of' the amount piece cost and property between the aside for its use. consumption to be set ought that allowance which Commission has However, the this made cent, revenues, gross 5 has depreciation, per for well current and retire- fairly depreciation provided Moreover, twilight there a broad zone . . ments . maintenance, may it well between impropriety) the maintenance (and any without a certain extent provide has been used account in the Any gross . increase revenues . depreciation. from an increase fares would increase the resulting for depreciation be set aside that would amounts 594; 6 Wall. Savings Coite, Cream Society For v. Wheat Co. v. 253 U. Forks, Roberts & Co. v. S. Emmer Grand Schaefer S.U. son, deciding

maintenance.”9 Without this allowance that, was Court of inadequate, Appeals as a held law, depreciation charge matter should be based upon the then value as depreciable property dis tinguished cost; from its and directed the Commission to revise its accordingly. estimates Pursuant to that direc tion, the Commission in its added, supplemental report, $755,116 to was, the depreciation charge. The addition I think, ordered by the Appeals Court under misap prehension the nature and function of the depreciation charge. And, considering adequacy of the return under the Federal Constitution, the estimate of the net earnings should accordingly $755,116, increased which, on the rate base of $70,000,000, would 1.08 add cent, to the estimated return. per Appeals

That the Court of erred in its decision becomes the nature and clear when purpose of the depreciation analyzed are and the charge methods of its determining are considered. proper amount The annual account of a or railway, street other business, is designed show the acquaint or and to profit loss, those with the interested condition of the business. To be true, the account must reflect all the operating expenses incurred within the ac- One of counting period. these the wearing out of Minor which have plant. parts, short lives and are con- wholly within the replaced sumed are year, as a part of Larger repairs.10 plant current units, unlike supplies, do 604, 1928C, 637, 640, P. U. R. 10 Compare Operating Classification of Operating Revenues and Expenses prescribed by of Steam Roads Interstate Commerce Com mission, p.2, issue of Instructions No. prac 31. As to Special (Bell telephone companies system), testimony tice see on re hearing Telephone Depreciation Charges, and Railroad 118 I. C. C. Docket Nos. 14700 L. Woodford, G. March (Printed by pp. American Co.), & Tel. Tel. 52-3. They single, accounting period. within a wear out many useful for varying lives, remaining have service some period the "end of some years. Experience teaches that at physically out of time most will wear units, too, of these outlay If the initial or cease to be useful in the service. account the annual entirely disregarded, for such units is initial and the operation will not reflect the true results hand, this the other may If, be lost. investment ex- operating as of the expense part is treated original - purchased, unit was penses year plant which not re- will again the account replaced, retired or was Eor one operations of operation. flect the true results year expense prop- then with an which is will be burdened use. longer of erly chargeable against a much period gen- of a it is Therefore, ascertaining profits year, in the of to erally apportion operations deemed the necessary wear- expense a of total incident the year that the part made commonly ing plant. apportionment of This is out by depreciation charge.11 means of a in if de- urged Railways is the that the base used

It the- of termining property a fair return on use its what is the to be used logically is the then base present value, the charge charge for "determining depreciation the —a pres- also be the consumption plant of service—must 11 monthly depreciation charge is annual or The or allowance the year’s equitable expense apportioned of the amount thus as the share by many yearly charge is con plant. of ultimate retirement of monthly depreciation A is a cerns allocated in instalments. reserve depreciation charges peri bookkeeping classification which the are separately odically depreciation fund maintained credited. A fund is a charged depreciation deposited. periodically are in which amounts necessarily depreciation A dees not connote existence of reserve Depreciation, Principles Applica separate Saliers, fund. E. A. (1923) 80; Stevenson, Principles A. tions Paton R. A. W. 491-505, Accounting (1918)

ent value of the I property consumed.12 Much that said about valuation in Southwestern Bell Tel. Co. v. Pub. Comm., Serv. U. S. 289 and St. Louis & O’Fallon R. Co. States, v. United 279 U. S. to the applies depreciation charge. But acceptance of the doctrine Smyth v. Ames does that require) depreciation not charge' be based an- present plant. value of an For, nual depreciation charge is not a measure actual of the consumption plant during year. No such measure yet has been invented. There is no in the regularity de- velopment of depreciation. It does not proceed ac- any cordance with mathematical law. There nothing is in business or in experience, training experts, which say enables man to to what extent life im- service will be paired by operations single of a year, or of a series of years than less the service life.13 12If charge consumption measured actual plant, logic might this conclusion seem forceful. It should be pointed out, therefore, that, apart developed from the text, fact in the that the charge consumption does measure the actual of plant, the- specious. contention is A investing long-lived business man plant expect does not to have its value returned to him in instalments cor responding to the loss service continuing life. The most that a railway may expect business like that, a street at the end of the life, service it shall be reimbursed with the then original value investment, replace or with plant. funds sufficient to As will be presently, shown there no assuming basis for either value original of the replacement investment or will, the cost at the end of life, equal approximate present the service or the value. See note . infra “13 Depreciation physical public of units used in connection .with or, any utilities, indeed, industries, with proceed other does not in ac any with cordance . regularity mathematical law. . . There is no in development increasing repairs; of the for need there no is regularity progress depreciation; in of but, in order to a devise plan laying reasonable for year year aside allowances from to to make good depreciation accrues, provide as it and to for accumula salvage equivalent tion a sum cost less a of to of unit the time retired, theory depreciation progress is some of it must assumed be a con intended, a like plant railway, Where street effi is maintained at a level of tinuing constant operation determine whether ciency, possible definitely it is rarely in or not life has fact a particu its service lessened within of of like that an year. lar The life a expectancy plant, unusual re be fact because of may greater, individual, end of a than pairs causes, particular year other at the And where it known beginning.14 it at the even is was within that been of service life lessening there has some accuracy it is never to determine with year, possible of life been fact, what the unit’s percentage has, service of charge consumed. Nor it essential to aim the so that fact be known. The main purpose this should is that of the rate of charge irrespective depreciation through contributions, by shall annual produced, there life an depreciable the end of the service of the plant, net equal expense amount total retirement.15 its Eng. may on which such allowances be based.” 81 Am. Civil Soc. op. (1917), 1311, Compare Saliers, cit., A. Transactions 1462-3. E. p. 132. note companies) (the they have our valuation work railroad 14 “In position depreciation no exists in a railroad consistently taken the that efficiency.” per Proposed in 100 cent property which is maintained Telephone on Report Interstate Commerce Commission .Rail August 15, 14700 and Depreciation Charges, Docket No. road . 1929, p. 20 depreciation accruing dependent, where contend “that 15 Some upon lapse time, use, amount and upon but extent it is charges provide equal annual in unscientific to charges correspond should be made to stallments, and these with charges By relating the to units of of time. units of use rather than charges spread more of the will be the burden use, they contend that alternating advantage carrier,' of the over financial equitably, to the Proposed Report Inter light heavy traffic.” periods of Commission, supra, p. practices note state Commerce year’s respect laying-the railways to the manner of differ street lay. percentage depreciation reserve. Some fixed contribution mile; revenues; per number car some some a of cents gross upon the Though depreciable the cost of the ex- percentage plant. fixed 264

To that end it is necessary only that some reasonable plan of distribution be adopted. Since it impossible to as- is certain percentage what of the service life in consumed any it year,16 is either assumed that depreciation proceeds

at some average (thus rate accepting the approximation to fact customarily obtained through process aver- aging) or charge the annual is fixed any without regard to the rate depreciation.

The depreciation is an charge allowance pursuant made to a plan of distribution of the total expense net of plant It retirement. is a bookkeeping device introduced exercise of practical to judgment serve three purposes. preserves It integrity of the investment. Compare .the Knoxville Co., v. Knoxville Water 212 U. S. 1, It 13-14. to distribute equitably throughout serves the several years of the only service expense life retirement plant which is of reasonable capable ascertainment —the known cost less the estimated value. salvage And it enables interested, through applying those plan distribu- as is ascertain, nearly possible, as tion, actual finan- year’s operation. of the Many cial results methods of the amount are calculating used.17 The allowance expenses the several charges operating years and according to the vary method aggregate adopted.18 none of these fixing methods the deprecia- But under an made to attempt percent- determine the charge tion consumption plant falling within age of actual -a par- terms, contemplated pressed charged the amount be different See, g., based e. Re may in fact on cost. Elizabethtown Water 1927E, Co., P. U. R. 16 Telephone testimony rehearing Deprecia and Railroad See supra, Crunden, 21, (Printed A. B. March Charges, note 1928 tion Co.), 108-9; pp. Maltbie, American Dr. M. R. & Tel. Tel. June 1928, transcript, p. 1396. note See infra. note See infra. the years of less than any period year ticular or within service life.19 device,known as depreciation the

Third. business in adopted widely been not have charge appears Its century.20 this beginning the of America until after Wherever by many use still resisted concerns.21 stoutly original on the depreciation based charge adopted, changes When the great of the to the owner. plant cost led in some levels incident to the World War price “This supra, p. 132: Sabers, op. cit., 11, E. note at A. 19 See account into (reducing balance), . . . does take method occurs, or the rapidity the actual -with which either any may modifying their influence factors which show various consider objection methods, other is common to ab Since this time. probably choice.” will lead to a ations 20 recognized depreciation expressly Court a ease in which this The first v. part expenses is operating Knoxville wance as allo Co., 13, in 1909. In earlier 1, 212 U. S. decided Knoxville Water Compare Co. cognizance not taken of it. Union R. was cases Pacific 420; Kansas States, United 402, United 99 U. S. States v. v. Pacific 459; Diego Jasper, Town Co., 455, Land & Co. v. R. 99 S. San U. Lincoln, 439, 446. also Lincoln Gas v. 223 U. 189 Co. S. S. See U. railways, Railway Among the Milwaukee Electric 349, street 363. by adopting Others Light pioneer became the it in 1897. & Co. Ry. 169-70; England, Journal In 1905. 687-8. followed Street charge depreeiaton had hastened adoption of the been tax law. and Inland Revenue Act provision in the income Customs 1849, provided 12. Acts c. 191, c. 1878, 15, 41 Vict. Massachusetts § required give report full informa of railroads should that the'annual depreciation beyond renewals, road and “Estimated viz: tion on buildings, engines bridges, and cars.” also Act c. 251. But See Massachusetts, States, depreciation elsewhere in the as United customary among except respect charges railroads, have not been pursuant prescribed by equipment, to the rule the Interstate Commerce Commission Depreciation Charges, Telephone Railroad 118 I. C. C. See Report August 15, 301-303; Proposed supra, note Depreciation Utility of Public 5-12, Proper p. Riggs, H. E. 17 - (1922) ties 78-92. question basing charge practice wisdom the Chamber of United original cost, Commerce States warned men against fallacy depart- business from ing accepted basis.22 And has been warning that “ recently repeated: any When the cost of an less asset, salvage has been value, recovered, depreci- process ation stops, consumer has for that paid particular —the item service. There are who those maintain obligation of the consumer is one rather of replacement,— building building, According machine machine. to this view depreciation should be on replacement based cost rather than actual replacement theory cost. The sub-' stitutes for certain something cost, and the actual definite, a of cost reproduction and highly speculative which is conjectural requiring frequent and It, moreover, revision. seeks to establish for expense one of basis computation fundamentally from different other used expenses of doing business. on Insurance is charged basis of actual not on premiums paid, the basis prob- of able three premiums years hence; rent the amount on not actually paid, problematical on the rate of the next lease, salaries, light, heat, power, supplies’are charged all at actual, upon not a future As contingent cost. one ‘ writer has expressed it, The fact that cannot plant be replaced at the same cost, only more, but at much has nothing with the cost of only do its but with product, of product cost future subsequent turned out by plant,’ As product goes through it your factory should burdened with not costs. expired, anticipated, Charge depreciation upon any salvage.”23 actual cost less “ ” pamphlet Depreciation 22 See a 15, 1921, issued on October Department (now the Fabricated Department Productions Manufacture) of the Chamber Commerce of the United States. “ pamphlet Depreciation, See Costs,” Treatment in Production by Department Manufacture, Chamber Commerce of issued States, United 512 (May, 1929), p. No. In the Foreword it is presenting said: “In this treatise depreciation, we have drawn of public been, practice has today, and ever Such is are prepared Their statements accountants.24 .accord estab-. well which are accounting principles ance with By uniformly applied. accepted and lished, generally co-operation had the have resources, own but only on our also engineers accountants.” and many manufacturers, industrial 132; (1905) C. Maufacturing B. Costs, 24 (1904) Hall, H. L. C. Keeping Evans, Cost 75-98; (1911) Production, H. A. Bean, Cost of Gilman, W. Management, 30-5; Walton and S. S. Scientific and 63-70; Business) F. E. (11 Auditing Modem and Cost Accounts Auditing Montgomery, (1913) Webner, Factory 171; H. Costs, R. (1915) (1921 634; H. 317-39, ed.) 1, p. F. Theory Practice, and Vol. (1916) 46-51; Accounting, 42, Principles and Practice of Cost Baugh; 81-9; (1918) Application, Accounting and Burden Scovell, H. Cost C. 279; Railway R. B. C. Adams, Accounting, H. American 99— 202; (1920) 99-209, Accounting Theory Practice, Kester, and Vol. Compilation Management, and Berndt, Costs, Their Use I. A. 74-5; Hodge Principles Accounting, F. 101-6; McKinsey, J. 145-54; (1921) Accounting Auditing, Public Vol. Sherwood, Costs, 294-304; Eggleston Robinson, Business DeW. C. and F. B. Armstrong, Costing, G. of Industrial D. E. S. Essentials 169— 2.d.(3); (1922) Burchell, Accounting, I,3, Industrial Series No. A. 219; (1923) Bennett, 212-34, P. M. Accounting, G. E. Advanced Accounting 119-22; Atkins, Executives, Industrial E. Cost J. Principles 82-3; (1924) Borton, Accounting Methods, Cost J. H. Management Through Accounts, 304-14; Bell, Auditing, Bliss, W. H. 232-40; Accounting Cobb, Factory Keeping, H. and Cost P. Shoe 232-40; Couehman, Sheet, 22-3, 49-56, 201-3; C. B. Balance Dohr, Accounting Theory Practice, 378-87, 380; J. L. and Cost Kilduff, Auditing Accounting 380; and Handbook, F. W. E. L. Principles 14; Kohler and Auditing, P. of Pettengill, W. W. B. 112— Lawrence, 308-10; Accounting, Manning, Cost Elements A. B. Accounting, 80; Cost Scovell, Cost, 4; C. H. AAs F. E. Interest 83— Webner, Factory 227; (1925) Overhead, D. F. Morland and R. W. McKee, Accounting Industry, 43-53; (1926) Petroleum R. E. Foundry Accounting, 240-3; Belt, Eggleston, Auditing Cost DeW. Procedure, 319-20; (1927) Bell, Accounting, Practical S. 130— Budd Wright, Interpretation T. A. and E. N. The of Accounts, 195, 251-63, 253; Hatfield, Accounting, 145-6; (1928)? H. R. C. R. Boland, Industry 158-9; Shoe Gregory, Accounting, H. E. Account ing Reports in Business Management, 158, 164-6; Heming W. H.

those accustomed to read the .accounting language depreciation charge is understood as meaning the appro priate contribution for year that to the required amount good make the cost of the plant which must ultimately be retired. On basis, public .accountants certify investors and bankers the results of operation, whether public utilities, or of manufacturing or mercantile con cerns. Corporate issued, securities are bought sold, and and vast loans are daily, made reliance upon statements so prepared. The compelling logic of facts which led busi ness men to a depreciation introduce led them charge has to continue to base it on the original cost the plant despite great changes the price level incident to the War. Basing World charge on cost is a rule prescribed or recommended by those associations of men who have had occasion since the World business subject.25 War to consider the way, The 13-20; National' Financial' 12, pp. Statement Interpreter, § Prochazka, Accounting Finding G. A.- and Cost for the Chemical Industries, 11; (1929) Church, Manufacturing A. H. Costs and '206— 205ff; Accounts, 5, Montgomery, Auditing (Revision by R. H. W. J. Graham), 116-9; Sanders, Accounting,; T. H. Industrial 144-5. See Depreciation, Principles Saliers, Applications (1923) E. A.' 410, 425. At the Fourth International Cost Conference of the National Association of Cost Accountants held Buffalo, Y., N. Sept. question 10-13, depreciation charges whether should debated; original replacement be based on cost or value was On a “ ” nearly vote at the close of the debate original all rose in favor of 1923, pp. cost. N. A. C. Yearbook C. 183—201 at 201. The rule is England. the same in Newman, E. W. Theory and Practice Costing (1921) Association, National Meeting Coal Annual Chicago, May Report Suggestions of Committee on Standard 21— System Accounting Analysis of Costs of Production, see also Reed, B.W. Coal Accounting, 1922, p. Mine 119-126; Bituminous (Manufacturing Midland Club Chicago) Confectioners, Official Cost Accounting Finding Plan, and Cost 1919, p. 43; Typothetae United America; Finding pp, Cost System, Standard 4, 7, Treatise On Business men took the naturally plant cost, as that . is they how other articles treat consumed operation The plant, undepreciated, commonly is carried on books at it cost; and is retired at cost. The net profit Accounting System Practical Printers, p. 15, for 1921, The Stand ard Boob Finding by on Cost Koch, published by A., E. J. U. T. of pp. 14, Accounting System Treatise Printers, Standard for 13— With Finding 1920, pp. the Standard Cost 44^- System, Interlocking 45; Tanners’ Council: Accounting System Uniform for Cost Harness Leather Division Tanning Industry, officially adopted of the 1, 1921, p. 31, System Dec. Accounting Uniform for Cost the Sole Belting Leather Division Tanning Industry, p. 31, 1921, Accounting System Uniform Cost Kip, for Calf, and Side Upper; Glove, Bag, Strap; and Patent Leather Divisions of Tanning Industry/ pp. 35, 1922, 48, Accounting Uniform Cost System for the Goat and Tanning Cabretta Leather Division of the Industry, 1922, p. 27; National Retail Coal Association, Merchants Complete Accounting System Uniform Merchants, for Retail Coal 120, p. Account The Associated Knit Manuf Underwear A— America, acturers of Cost Control for Factories, Knit Underwear 1924, p. 52; National Knitted Outerwear Association, Inc., Cost Accounting Manual for the Knitted Industry (by Outerwear W. 1924, pp. 18-20; Lutz), American Drop Forging. Institute, Cost Committee, Drop Forging Essentials 1924, pp. Accounting, 36-7; Rubber America, Inc., Association of Manual Budg of Accounts and etary Industry, by the Rubber Accounting Control Committee, pp. 70, 71, 75, 82; Packing Accounting, by House Com Accounting mittee on Institute of American Packers, Meat 1929, p. 325; Accounting Throwsters, Cost by issued Commission Throwsters’ Division of The Association America, Silk Inc., 1928, pp. 29-30; Accounting Cost for Broad Weavers, Silk issued The' Silk Broad The Silk Association' Inc., Division of America, pp; As replacement 44-A5. there stated: “The use of cost as a been, depreciation charges basis for has eliminated due to the follow o ing Depreciation charged" reasons: 1. t manufacturing cost capital absorb the reduction in value of through assets the effect represent use and It does not time. an accumulation for pur pose acquiring assets in the replacement future. 2. The cost theory impractical require because it .would a constant revaluation assets, unlikely is, any It furthermore, manufacturer would by commonly ascertained transaction a business

loss of in expenditures receipts the gross from deducting fully Business men realized them. in producing curred might more or be replacement for requirements, that realized they But also original cost. less than eco account reflect depreciation to make the attempt entry upon entail changes and would conditions nomic defeat conjecture and .which would prophecy of new fields in which experience For no basis there is purposes. its a renewal or replacement, whether predicting can justify or future will cost more year in some falling substitution or more or less than present, it would less than acquired. it was unit when cost a of practice using depreciation men’s The business original plant on the cost deter based charge of particular year or losses a has abun profits mining encouragement. The practice official sanction dant and by the Interstate Commission was' prescribed Commerce when, cooperation with the Association 1907,26 Railway. Accounting Officers, rule, it drafted the American in force,27requiring is still railroads to make which steam plant years its 3. The the same ten after construction. rebuild charge product represents depreciation absorbed in the cost of the present manufacturing facilities and' cannot charge the use of be in the acquired assets to future. The any have with connection charge equipment new and moré efficient to be on higher may perhaps, by and, acquired in offset the future manufacturing per logical It general cost unit. is not reduction present expenses cost elements make the all other base (P. 45.) depreciation.” exception one in the ease of 26 Expenses by Operating as the Inter Classification Prescribed 10-12, Commission, 1907, pp. Third state Revised Issue, Commerce 38, 44-51. 27 Operating Operating Expenses Classification Revenues and by Commission, Commerce Roads Prescribed the Interstate Steam Id; Cf, 61-8, 1914, pp, Special 8, p. Issue of Instructions 59,

271 an depreciation charge annual on equipment. It has been by the Federal consistently applied in assess Government net ing taxes on income corporate profits;28 the tax determining officials several States net profits individuals and corporations.29 income it 1911, Since has been applied by Bu the United States reau of the Census.30 Since it 1915, been recommended has Stat; II,

28 Actof 3,1913, 16, B, Oct. 114,167, c. States United § Regulations 33, 5, Internal Revenue 129-146, No. p. Jan. Art. 69-73; Sept. 8, 1916, 6(a), Act of c. 5(a) and 39 Stat. §’ (Revised 759, 760, Regulations 1918), pp. 80-82; No. Art. 159-165, (Revenue Act 1918), 214(a), (8) of Feb. Act e. par. §18, 234(a), par. (10), (7) (9), 1057, & 1067-8, 1078, Regu & 40 Stat. § 45, 161-171, pp. 62-66; lations Art. 136, Act 23, 1921, of Nov. c. (8) 214(a), par. (10), (7) & 234(a), par. (9), and 42 & Stat. § § 227, 241, 255, Regulations 256, 78; 62, 161-171, pp. Art. Act 240, 74— 2,1924, 234, 214(a), par. of c. (8) (9) par. June (7) & and 234(a), § § (8), 253, & 284-5, Regulations 65, 43 Stat. 270-1, 161-171, pp. Art. 54-58; 26, 1926, 27, of Feb. 214(a), par. (8) (9) Act c. & and § (7) 234(a), par. (8); (Part & 2), 9, 27, 42-3, Regulations 44 Stat. § 69, 161-170, pp. Art. 56-60; May 1928, par. Act of 29, 23, c. 852, § (k) (1), 114, 791, 818, Regulations & 113 & 45 800, 821, 74, Stat. § 201-210, pp. Art. Revenue, 51-56. also Bureau Internal See of Bulle “F,” Depreciation tin Tax, (1920) 18; Income and Obsolescence Out Study Depreciation by For of Maintenance, prepared and line the Bureau (1926). of Internal Revenue 29N. McLaren Butler, 1929, L. & V. K. California Tax Laws of 117ff; (Personal) Prentice-Hall Tax Massachusetts State Service paragraphs p. 13875-7, 13559; Mississippi 1926-28 Income Tax Law (Issued by 1924, 12(a) (8), of Commission), Regulations State Tax § 52-3; (1925), 8, pp. No. 1 Art. New York State Tax Commission 136— Bureau, 22 (1922), 171-6, p. 35-6, Income Tax Manual Manual Art. 33-4, (1925), 171-6, pp. 25 Art. G. C. H. Personal Income 1928-29, 4511, 2793; Tax, par. p. Harper, Digest A Oregon G. R. of the State Regulations (1924), 18; Income Tax Act Wisconsin Tax Service (Henry Inc.), 1929, 1, Nelson, pp. B. Vol. 163-4. Systems arranged by Accounts for Uniform Water Supply, Census, Bureau of American U. S. Works Water Association (1911) Others by Since 1917 Agriculture.31 Department

by the Federal by it 1916, adopted In was of Mines.32 Bureau de concerning Commission recommendations Trade In it 1917, was to manufacturers.33 issued preciation Administration,34 Fuel the United States by prescribed 1918, by In Department.35 Ordnance by War In it 1921, pre Board.36 was Air Craft Production it Commission;37 and by Federal Power scribed 1923, In it was revised rules of 1928.38 continued in the section Interstate adopted of tentative conclu report in the Commerce Commission charges submitted to the concerning depreciation sions 178, 1, 1915, Agriculture, Bulletin March Department of S. 31 U. Methods, 13-14; 236, Bulletin pp. Organization Business Cooperative Cooperative for Farmers’ Ele May 1915, System Accounts 1, A Accounting May System A for 16; 225, 7, Bulletin vators, p. 1915, Associations, May 1916, 362, 6, A Cooperative p. Bulletin Fruit Primary Elevators, p. 17; 590, System for Bulletin of Accounts Grain Organiza System Accounting Shipping Fruit A Feb. System Accounting A for Cotton Gin tions, 23; Bulletin p. 7 23, 2 neries, . Interior, Mines, Department of-.the Bureau Bulletin Accounting Producers, 1917, pp. Technology 43, for Oil Cost Petroleum Accounting, 1920, p. 26. Paper 250, Metal 111-112; Technical Mine 33 System of a Cost Fundamentals Commission, Trade Federal July Manufacturers, 1, 1916, 12-13. 34 System Administration, A of Accounts for Retail Coal Fuel U. S. Dealers, Nov. 1917, p. 17. 1, 35 Ordnance, 2941, Department, of The Chief of Form Office War “ ” Pertaining Contracts, 27,1917, pp. June Definition of Cost 9-11. Ruling 28, May

36 Production, No. 3, General Bureau of Air-Craft Rulings Department 1918, Finance the effect Board original plus depreciation must be based on cost contracts that in cost “ reproduc on depreciation be based the cost and In no case shall op. cit., p. Saliers, 11, note 56. prices.” E. A. present tion See 37 Regulations Governing Administration of the Fed Rules (1921), Regulation Act eral Power 16. Water 38 Regulations Governing Administration of the Fed- Rules and (1928), Regulation pp. 16, Act Power 31-36. eral-Water

273 companies by- and carriers railroads, telephone steam of the Interstate 20,§ 5 water,39 pursuant paragraph Act, Transportation 1920.40 as amended Act, Commerce 1926, prescribed by it was Commis On November 2, Depreciation Charges, 118 Railroad Telephone sion original cost charge A based C. 295. C. I. commis utility uniformly applied by public been has determining income, net when several sions States rate-making purposes.41 expected, past Depreciation Section, Report Accounts, of the Prelim Bureau of Charges Investigation Depreciation in Connection with Steam inary Conclusions and Recommendations of the Tentative Roads Charges, Depreciation Regulation for the of Such No. Docket Section Telephone Companies, Aug. 1923, pp. 11-13; 23, Same 15100, 6, 14700, 10, 1923, pp. No. March' 18-21. Docket 456, 1920, 91, 41 28, Act of c. Stat. Feb. Co., Telephone 1929B, 390, P. Illinois —Re Middle States U. R. P, Co., 403, 408; 396; Dixon R. Re Vermont 1929B, Re Water U. 1929B, Exchange Co., 415; Re Telephone 411, & R. East St. P. U. 1928A, 57, 68; Co., R. Re Pekin Interurban Water P. U. Louis & 276; 1928C, 266, Kinloch-Bloomington Co., P. R. Re Water Works U. 142; Co., Indiana —Re Home Tel. Co. of Tel. P. 1927E, 135, U. R. 445, 455; Logansport Re County, 1928A, R. Home Tel. Elkhart P. U. 1925A, 240, 1928E, 714, 725; P. Co., Co., R. Re Butler Tel. U. R. P. U. Co., Ry. 242, 1927C, 800, 804; P. U. P. R. Minnesota —Re Duluth R. U. Capital City Co., P. 1927A, R. 41, 52, 55; Missouri —Re Water U. Telephone Co., 1928C, 436, County 1928B, P. R. 460-1; Re Clinton U. 41, Co., 1925D, 57; 807; City 56, P. 796, Capital Re Water U. R. Valley 200; 1928C, 193, P. R. Platte Tel. U. Corp., Nebraska —Re 472, 477; Co., Co., 1928D, Re Madison Re Meadow Tel. Tel. Grove 389; Jersey Co., 385, Elizabethtown Water 1929B, P. U. R. New —Re 1923A, Co., 349, 366; P. 39, 63; R. 1927E, R. Re Coast Gas U. P. U. 538; 1920D, 529, Utah —Re New York—Baird v. U. Burleson, P. R.. 655, 665-7; Co., 1927A, Big Spring P. U. Wisconsin —Re Electric R. 1920D, 428, Light Co., 433-5; U. & P. P. R. Wisconsin-Minnesota Ry. Light Milwaukee, 1918E, R. & v. P. U. Milwaukee Electric Co. Telephone Co., 1928B, 434; P. R. 58; but see Re Wisconsin U. Allegheny Virginia Co., 1928B, P. R. Cumberland & Gas U. West —Re Clarksburg Light 1928B, 80; Co., P. 322- Re & Heat U. R. Pittsburgh Co., 1927D, 851; Re R. & W. Va. Gas P. U. basing men's practice In 1927 the business Fourth. Court by this was charge applied cost depreciation a fed Ludey, 295, 300-301, S. v. U. States in United “ allow amount of the case, saying: income tax eral aside should be set is the sum which for depreciation ance that, use end order at the year, for the taxable “ 230, 1928E, We Co., 221, Tel P. Hill U. R. Rock Carolina —Re South only rea- property possible is the of- opinion that the cost aré of Depre- depreciation can be calculated. authority upon which sonable to not a reserve equalize retirements and is a reserve ciation original cost, upon based A rate replacements. equalize upon reproduc- ; intelligent guess but based an even, is more than little original speculation. the known With the blindest kind of tion costs salvage and life engineer’s of its service estimate unit and ail cost of a guess accuracy To might be reached. semblance of value, some . . . venture enough who would salvage is bad but its life and value service twenty years there- reproduce it ten or guess it would cost to what keep the invest- Depreciation reserve is intended after. . . . varying future.” the hazards of but not to insure ment level “ said: The case Commission report in the instant In its second by followed retirements at cost is that plan providing for regulatory commis- utility Commission and the Interstate Commerce juris- by states, all other utilities under most of the sions of 180, 1929A, R. of this Commission.” P. U. diction following of accounts required in the The cost basis is classifications System of Ac- Commissions of: Colorado—Uniform prescribed 351, pp. light power utilities, 1915, account no. counts for electric System 775, pp. 67-68; of Accounts for 29-30, no. Uniform account 56-57; p. pp. 351, 28, 77&, no. gas utilities, 1916, account no. account utilities, 1920,-account no. System Accounts for water Uniform 65-66; 25-26, '775, pp. 351, pp. account-no. California —Uniform 54-55; pp. telephone companies, for Classification Accounts 1913, 1919, 29; gas cor- corporations, pp. 15, account no. for water 14— 29, p. 15; corporations, 1919, porations, 1915, account for electric no. p. 15; System 29, Connecticut —Uniform of Accounts for account no. 180, p. 17; Georgia companies, -1922, account no. water —Uniform telephone 1920, pp.- 6-7, System account of Accounts companies, p. 16; System no. Idaho —Uniform of Ac- 12, p. account no. 402, pp. 92-93; corporations, account account for water counts account'54, light power companies, p. for electric W6, ful in life of plant business, aggregate (with value) sums set aside the salvage will suffice to pro 42 I original vide an amount to the cost.” of equal know Constitution, in Federal or in nothing the decisions of Court, this us in reject, which should lead determining rule by net sanctioned universal profits, practice of men governmental departments. For, business whether the more expense plant can be consumption 29, 215, p. System Accounts for 95; account p. Indiana —Uniform 82; 370, p. 52, 335, p. for utilities, account account 1920, water 297, p. 73, p. 46; utilities, 1920, 309, account account electric for p. heating utilities, 1920, 22, 18, p. 35; 118, account and account for 1913, pp. 52-53; System of Ac railways, Kansas —Uniform electric companies, p. 4; telephone 1920, class D Massachusetts— counts for gas System companies, 1921, of Accounts for and electric Uniform pp. p. E678, p. 118, 27-28; also G678, account Minnesota —Uni 96, telephone System companies D, of Accounts for- class C and form accounting 52, 1918, 360, pp. 24-25; circular no. account Missouri— telephone System corporations; for class D. of Accounts Uniform 22, 1918, pp. 9-10; General Order No. Public Service Commission 'gas utilities, 1913, Classification of Accounts for Montana —Uniform 20-21, 35; (undated pp. 1919), electric utilities but after pp. .for 42-43; telephone utilities, 1913, pp. 22, 35; 25, for water utilities 1919), 42; (undated railways, 1913,-26, 41; but after for street 26, gas Hampshire Classification of Accounts for utilities, New —Uniform Accounting 2, 1914, 220, p. 88, account Circular No. pp. account 53-4; Jersey System New of Accounts for light, electric —Uniform power 215, pp. utilities, 1915, 26-27, heat and account account railway (the p. p. for street traction utilities, or accounts Capital” called “Accrued Amortization here are and “General ” “ “ ” Depreciation Depreciation Amortization instead of Reserve and “Expense”); Pennsylvania Account” or Classification of —Uniform by A, 1928, motor for common carriers Class ac vehicle, Accounts 179, p. 31-32; B, 1928, 179, p. 26; C, 1928, count class account class n practice found p. No has been about the informatio .the States not listed. Railways position must hereafter assume the anomalous classing $755,116 operating expense additional' as an in its report Commission, part and as to the its income tax income, its net returns,

nearly approximated by using charge based on original or one upon cost based fluctuating present by problem solved, reasoning, values to be' by legal not but practical judgment exercise of on facts based Duluth, and business Cf. Groesbeck South experience. v. Ry. Co., Shore &c. 250 U. 614-15. The practice S. original an using depreciation charge annual based cost43 taxa determining investment, when purposes or the tion of a regulation, profits business, net adopted ignorance of the upon property, return was ren Ames, rule That Smyth decision, v. 169 U. S. 466. public of 1898, general employment dered antedates the accountants;44 also the introduction general antedates The here a practice making depreciation charge. of the of Maryland of of here under decision the Court of Appeals Hopkins State rel. v. Southwestern review, as well as ex Co., Michigan Bell ‘Utili Tel. Kan. 23645 and Public 115 Co., 228 State Tel. Mich. Michigan ties Commission v. the rule 658,46 all Court reaffirmed were decided after this. 43 acquired property original known, is not when cost When must, base involving purchase, some other way unusual not in some Original cost, always a one. as of But it is stable taken. course, Compare Reve opinion bases. includes other such stable used in this 113, 791, 1928, May 1928, 852, 45 29, of ch. Sec. Stat. nue Act of Act 27, 26 and salvage cost is the less the realized original at retirement.” Also May record, 1, pp. 1923, 12, Proposed 13, Report August of 14; Preliminary Report.of p. Depreciation Section, Docket No. supra, pp. note 6-7. 48 Telephone In Depreciation and Railroad Charges, 118 I. C. C. 295, 344, the Commission “It agreed by said: is deprecia all that be primarily upon tion should based original the cost accounting to the company of the unit of' property question.” in petition In the for rehearing by filed the Presidents’ Conference Valuation, Committee on “ stated, however, p. it was 15: Consideration given should be to the question of accounting whether depreciation, as the order conceives it, upon be original should estimated the basis of present cost of value, ...” A similar statement is for made the first in time the petition rehearing by for filed New lines, p. the York Central 5. for a No method perversion

It is of this device. business in yet charge the of amount of ascertainment the the if be taken vented is workable values fluctuating present Every as the basis. known contemplates, method thp a is of dependent accumulation or credit fixed upon, of in a of The distribution given years. number amount plant charge jus expense expressed depreciation the year’s' by tified as to approximation to fact the doer' which plant by applying is obtained consumption are if trine of values averages. fluctuating present But base to which original there is no stable substituted cost thereby of For process averaging applied. can be charge only fixing depreciation involved in a stable factor r may value yea present would be eliminated. Each at the replacement different. The cost of termination be composite of the of the service life the several units or use a life cannot be foretold.49 To- as measure depreciation charge a based year’s consumption plant conjectúre substitutes fluctuating present values require would the consumer system Such experience. for an assumed which today pay operating expense - may has been which never arise. never incurred charge frequently likened to life The life annual reserve insurance. premium legal years depend future will part, In and values the several costs this, can know upon-the general price As to even the economist level. general price level has fluctuated nothing, how the save heretofore year periods rising prices ever been year; and have from falling prices. in the sev by periods But cost and value followed depend part upon gen years future will factors other than eral year general price every if price, level for future level. Even eral impossible predict still be reasonable known, it would with were replaced, unit to be re accuracy cost or value then the then level, higher general price part despite a For newed or retired. costs, economies intro might at smaller reason of procurable changes in the methods and means duced in its manufacture Excess Income of Louis & O’Fallon performing the work. See St. C,C, I, 3, 29, Co., R. the agreed on an calculated value insurance premium of plant the known cost comparable to human —not life— The fluctuating unknown unknowable. a value, to insurance a problem comparable field of life presented em- large here involved. the Despite experience that in the relative mortality bodied tables- and the standard mor- there the simplicity problem actual presented, found to from for which tality vary widely was so that had their found to provided, the rate was premiums injustice either to the in- work serious the insurer in bankruptcy sured. transaction resulted sometimes in his which the.insurer; securing profits sometimes in his the extortionate; receiving only were and rarely, compensation fair for the service rendered. Be- intended more the every attempt approximate nearly cause' required proved justice amount of was premium futile, found insur- sought system strictly the mutual system premium ance. Under that the made charged is clearly ample; part proves which not to have been enures form of benefit to him paid needed some who it. instead of Similarly, if, applying Smyth rule of v. the rate base a were Ames, utility fixed at the amount prudently invested, the inevitable errors incident to esti- life mating plant service and net expense consumption in injustice never result either to utility could or to community. if amount set aside for For, depre- inadequate and proved ciation investment of new capital necessary, utility permitted would be became to earn if on the new And capital. return the amount set aside proved be excessive, the income from reserve operate would as surplus credit to reduce charge which the rates must earn. If capital injustice ever Railways should suffer from adopting cost the basis for calculating as the depreciation plant be an it will unavoidable charge, applying incident of Smyth rule of valuation v. Ames. This if it risk, exists, escaped by basing cannot be charge present suggested entirely For being value. this besides escape, instinct of either certainty injustice with conjectural, community to the or of Railways. The possibility injustice deciding such as it did in us, admonishes commerce, questions concerning constitutional interstate 1, Packing Haydel, 10, 278 U. S. Co. v. Foster-Fountain Ass’n, U. Federal 273 S. Paper Trade Comm’n v. Pacific Washing Timber 52, 64, taxation, Mountain Co. v. ton, Carter, U. S. 37, 243 252 219, 237; U. v. S. Shaffer ante, Minnesota, p. & 55; Farmers Loan Trust v. Co. intensely regulation rate is an 204, day, decided this that matter. practical busi large and most officials, Public investors Fifth. .the depre

nesses value of are convinced the practical results charge guide knowledge as a ciation make utilities to States operation. Many require public railroads, and electric gas some charge.50 such But most 50 1758; Stat. 9769, p. Arizona —Revised of 1928, Alabama —Code § Deering, 807; Gen. (Civil 9, 2325, p. Code), Tit. § California — 2721; Comp. 1921, 6386, p. L. Laws, 1923, 2, 49, Vol. Act § Colorado — 703; 2473, p. p. 1919, 2945, 928; Comp. Vol. 1, Stat. § § Idaho — 111a, 2045; Indiana— 1929, 29, p. Illinois —Cahill’s Rev. Stat. ch. § 1245; 12693-12696, p. Massa 1926, 3, Burns Ann. Vol. Stat. § 5A 268, p. 308, inserting new section 1921, 1, chusetts —Acts ch. § 1624; 1921, 2, 1921, p. Gen. Vol. ch. after L. L. Gen. 5, Mass. § 733, p. 1923, 5305, 57, 1818; Stat. 164, p. Minnesota —Gen. § § 1919, 5305, p. 1107; 1927, Mason’s Missouri —Rev. Stat. Stat. §§ § 3283; 3266, Constitu 10470, 10512, pp. 3250, Nebraska— 10488 and p. 96); Hampshire L. (Comp. 1922, New tion Art. Stat. 10, § —P. 936; Jersey 1911-1924, p. New 1926, 2, 240, 9, 11, Vol. ch. §§ — 2883; Ohio— Supp. Comp. p. *167-17(f), Cum. Stat. Vol: 50, p. Code, 161; 614-49 and Throckmorton’s Ann. §§ 614— Pennsyl Oregon Oreg. 6046, p. 2422; L. Vol. -§ —Olson’s 1742, 1752; (West Co.), 18066, 18146, pp. Pub. vania —Stat. 1920 §§ 3059a88(c), p. Supp., Code, 1926 Ann. Tennessee —Shannon’s § p. these statutes 1925, 196.09, 1550. Most of Wisconsin —Stat. depreciation separate of a Some require fund. maintenance concerns, deny the propriety and some other companies in charge.51 They any- annual making will serve rather making charge sist that such a the financial result than to aid in determining mislead current year’s They urge operations. cost of renewals by repair, whether maintaining plant, of the main replacements, should treated as a part large consisting account, systems tenance at least for continuous op diversified intended properties They level of requiring efficiency. eration and constant retirements, systems, replacements insist that, such equal to be and renewals attain a uniform rate and tend great no year; that, therefore, disproportion each years in the various expenses and operating revenues if for renewals results the whole made expenditure of op is treated as an any year expense replacements of of that the retirements are year property eration and They specific charge. in any not otherwise reflected re it to create a may special be desirable admit retir to cost of serve, company spread enable the the of large years, units over a series property certain of ing the upon op thus a burden preventing disproportionate a re a But that such single year. they say erations of a reserve. properly depreciation serve is not called retired, large a unit they Moreover contend that when some more it but has been worn out because not because of retire- found, the substitute has been efficient cost- power over Maryland, In only a the Commission’s require reserve. deprecia- accounting power require held include the methods is separate maintaining fund. See accounting, the of tion but Comm’n, Bridge Public 132 Md. de Co. v. Service Havre Grace Property supra; May, Carrier Consumed G. O. See note 208-14; R. A. Regulation Profits, 43 Operation of J. Ec. and Q. and Depreciation Charges Railroads Ransom, L. Carter W. depreciation section Utilities, a with the memorandum filed Public Commerce Commission of Accounts the Interstate Bureau (1921).

ment spread should over future, so that it fall may those upon gain who will benefit of the enhanced efficiency. Compare Kansas City Southern R. Co. v. United States, 231 U. S. 440-441. Under re method of placement accounting advocated the rail and others is no depreciation roads there charge no depreciation reserve. Operating are expenses charged directly with their replacements cost. This method retirements, does not concern itself with all only with but which are retirements replaced.52 Despite seemingly of a logic unanswerable depre- ciation its charge, they oppose adoption, urging the un- certainties inherent of service predetermination life and of salvage value, disagreement among experts equitable distributing as to the most plan among total net the several plant expense years service. They out that each in the point step process fixing charge difficulties, is beset with be- depreciation every cause the variables which attend determina- long tion The first is to estimate step involved. how Engineers remain in depreciable will service. plant calculate its life by ap- with certitude service composite “ 52 Amodification of the reserve method is the retire ” by ment reserve recommended the National of Railroad Association necessary and This Utilities Commissioners. reserve does not involve periodic charges specific operating expenses. this amounts to .To of operating charged reserve are are credited “such amounts as to the expense appropriated surplus, both, from to account . . or . by represented original cover the the excess of the retirement loss plus dismantling, salvage the capital cost cost of over value of fixed “ operating expense, retired from service.” To the Retirement Ex “ ” pense charged ap are amounts ... to addition amounts m propriated provide' surplus, against may fro to a reserve which original charged property be cost of all service, the retired from dismantling, salvage.” plus less Proceedings, cost of 37th Ann. Con 458; vention, pp. 441, 32nd 1920, Appendix Ann. Conv. 1, pp. 21, 76, 106, Appx. pp. 88.

283 the the averages concerning to data plying weighted several But their exactitude delusive. units. property life unit has individual the' dependent upon Each its obsolescence, exhaustion, inadequacy effect of physical the The of public requirement.53 physical and duration of use; the conditions largely upon depends life The process these be foretold. obsolescence cannot are con- is even Advances in the arts predictable. less at which would retirement being require made stantly with perpetual some even if the unit were endowed time, proceed do a life. But these advances physical The of invention progress uniform normal pace. conditions changing stimulated or retarded the ever by among other depreciation depends, charge adequacy The liberality practice things, particular concern’s upon the (1917), Eng. respect maintenance, Civil Transactions Soc. Amer. (1921) Theory Montgomery, Auditing H. And Practice Vol. R. depends part upon scope retire 1, p. It causes 625. opinion by proper scope, As what is ment to be covered it. (Bell telephone companies System) contend that widely. differs provided charge should cover all causes retirement not by extraordinary ordinary charges, including casualties maintenance charge I. C. insist like storm and fire. 118 C. Others presently any contingent include or unascer should not allowance changes art, require obsolescence, inadequacy, public in the tainable expense ments, extraordinary casualties, repairs or or of similar storm charge 118 I. C. others insist that character. C. 341. Still only lapse to wear and tear and should cover exhaustion due obsolescence, time, collectively superannuation, called but not inade opera quacy precipitate in their like, and the which are said to be Proposed Report of Interstate Commerce Commis tion. The Depreciation Telephone Charges, sion on Docket Nos. Railroad 15100, August 1929, pp. 27-28, defines in service value not restored as “the loss current maintenance consumption prospective and incurred connection with property against in the course of service from retirement causes by insurance, protected which carrier is not which are known operation, and whose effect can with be in current forecast accuracy.” approach to reasonable it Moreover, practical'

of business. is the embodiment produces inventions which obsolescence; and business determine more conditions even largely the time extent new to which inventions are in im- embodied proved The machines. march toward inadequacy, as dis- from tinguished obsolescence, is likewise erratic. protestants The that point out uncertainty is incident to the second also step process fixing the ap A propriate depreciation charge. unit plant rarely re mains service until consumed re Scrap physically. mains; accounted/for, and this must be since it is £he net expense of the exhaustion of plaint the depre which ciation is to charge cover. value scrap Such is often a very large factor the calculation of plant expense.54 probable salvage on the unit when retired at the must, end of service life therefore, its be estimated. But value future is never knowable. .its And, finally, the protestants show after the net expense plant consumption is thus estimated, there remains the task of equitably it distributing over the assumed service life—the allocation of the amount as charges years. of the several There many are recognized methods for calculating amounts, these each method hav ing and the advocates; strenuous amounts thus to be in the charged, aggregate as well as in the successive widely differ years, to the according method adopted.55 method, line straight aggregate Under of the years equals of the several net charges plant expense period life; whole service and the charge is the companies of telephone In the case salvage the value of the cent, high per runs as original recovered as 45 cost of the Testimony supra, property, Maltbie, pp. Dr. M. R. note 1459-60. 55Thus, $100, if a unit costs a service life years of 25 hap salvage value, per no rate is 5 interest charge cent., the the years. sinking method, same for all the Under fund of the aggregate charges several years less for the plant expense than net whole period; because year’s charge are deemed proceeds each to have continuously been invested interest and the compound assumed to obtained from balance is be interest accumu lations. Other distributing methods of the total charge still other in produce results the amount of the charges laid upon operating expense of the several years of service.56

We have no occasion to decide now whether the view taken by the Interstate Commerce in Commission Tele phone and Railroad Depreciation Charges, 118 I. C. C. comp protest or the of the railroads, gas and electric operating expenses depreciation in following each of the years would be: Saliers, op. cit., E. supra,

See A. note 148, 154, 161. 56Other methods reducing are: balance; annuity; compound in equal payment; terest annual cost; unit working hour.; sum-of-the year-digits. Saliers, op. cit., See A. E. 11, supra, note 129-179; R. B. Kester, Accounting Theory and (1918), Practice Vol. 150— Canning, J. B. The Economics of Accountancy (1929) 265-309; 81 Eng. Am. Soc. Civil (1917) Transactions 1463-1484.

286- - event was the For neither prevail.57 should anies an increase- justified directing Appeals Court of charge adequacy of a the allowance. of the in upon practice large measure dependent concern with to its maintenance account. respect dividual' Railways’ property The Commission found that was well maintained allowance to $883,544, charges, with usual maintenance would gether adequate at a constant level of effi keep property It on the ciency. further, found basis of Company’s charges that the previously allowed had experience, ” “ fairly well to care current depreciation served take of The' depreciation charge and was estab retirements. the in 1912 Railways was fixed by by lished and of it, cent, own-motion, gross at 5 of the per its revenues. The that rate had charge at been continued ever since and had year an yielded increasing each sum. gross For the rev In grown steadily. had the early enues they years, grew increase of through the number passengers of carried; the through repeated since in increases the rate of nearly every year, fare. In the had allowance exceeded for charges the retirements. After charging retirements, express opinion we Nor need an on the relation between a util ity’s depreciation reserve the valuation deprecia of the accrued property. Proposed Report tion of its See the of Interstate Com Commission, 14, supra, pp. note at merce 20-24. While it is true that depreciation charge does not purport the annual to measure cur the consumption may plant, rent actual of it be that the credit balance depreciation good reserve in the is evidence of the amount of accrued Telephone See New York Co. v. Prendergast, 36 F. depreciation. may (2d) depreciation It be so also that much of the reserve replacements has been used for or as not retirements should be utility’s present the of the property subtracted from value in deter theory base, that mining the on the the amounts thus rate contributed payment represent part property a for the by public the consumed Compare consumed service. Burns’ Ann. or to be Ind. Stat. 12693-12696, p. 1245. These matters (1926), Vol. are §§ as at to them in the case bar and no is opinion expressed. involved remained there reserve, the not, to replaced whether The allow $1,413,793. 1927, August 31, credit, on cent, of the estimated per to 5 $883,544 equal ance of allowance of this increase for 1928. The gross revenues greater proportionately, for 1914 was that for over Railways’ 1928 value increase of the than the 1914 value.58 over its property am- clearly thus charge $883,544 was

The estimated retirement expense plant year’s the share the ple as annual al- even if the But based cost. the actual correspond made to with could be lowance in the record to nothing there was plant, consumption to be consumed plant the part that the value of show any- amount. Nor there exceed that in 1928 would that findings $883,- record or show in the thing charges maintenance with the usual together construction, would methods improved under then prices prevailing, inadequate provide, and also required year, replacements reserve under the special plan contribution year’s railroads, before Interstate Com- advocated contrary, Company’s On Commission. merce present railway advances the street history59 that, by equip- new industry strongly indicate employing Railways could value,60 lesser the render more ment of at smaller Neither operating service costs. efficient any of made Appeals finding nor the Court court trial finding matters. The Commission’s that these 58 determining reproduction Company’s depre cost of the In applied figure property, the Commission an index of 1.54 to the ciable depreciation 1926C, 441, charge 464. R. If the P. U. 1914 value. 1914, $469,395, by figure, product multiplied the same index originally $160,676 made for The less than allowance 1928. required 1914, $7,500,000", proportional in plant since to additions charge $145,500. depreciation only in the of crease 59 Rys. Co., 1928C, 604, & Elec P. R.U. 633-4. See Re United 60 (1929) 693, 758, 831, Ry. Electric Journal 843. 73 See 288

$883,544 adequate should, was an depreciation charge been of therefore, accepted by Appeals, have the Court whether depreciation charge the sum allowed be deemed a properly so or be treated called, year’s as the contribution a special reserve to the usual maintenance supplement charges.

It management Railways is clear that cent, deemed 5 charge of ade- per gross revenues On quate. assumption paid that it dividends on the common each year through stock'in from 1923 1927.61 If the addition to the depreciation ordered charge Court of was Appeals proper for the year 1928, it should have also been made in the preceding years.62 Upon five such a recasting of the accounts, no profits were earned after 1924; there was no fund surplus from which dividends could have been legally. If paid the conten- tion now urged by the Railways is sound, the manage- ment misrepresented by its published accounts its finan- cial condition and the results of operation of the several years; paid it dividends in violation of law.63 Justice joins in opinion. Holmes this Mr. 61 Company The not, was of course, restricted depreciation to a cent,

charge per gross revenues. only That was the amount which the Commission adequate. deemed Company But was greater free to reserve a amount, paying without dividends, if it be greater lieved a was necessary. amount Bridge Havre de Grace Cf. Comm’n, Co. v. Public Service 132 Md. 16. depreciable value property in years each of the five preceding 1928 was almost equal constant and at least in 1928, 1928C, 604, 639, P. U. R. 1929A, P. U. R. 183. years In each of those annual dividends amounting $818,448 paid. surplus were The recorded the beginning of 1923 was $1,553,097.83. If the allowance contended for had been years, made in each surplus of those this been, wiped would have out in 1925 and there would have deficit, remained a payment after $416,568 1925, $1,027,837 dividends 1926,. $2,140,146 Instead, Railways reported surplus $2,005,473 at the Mu. Justice Stone. Opinion of said, Mr. Brandeis has both

I what Justice agree with of from the rate the excluding the base as to propriety franchise donated to the Rail value of the or easement to method of and with the ascer way Company respect I say But of this would further taining depreciation. word. of

I that as a result assume, present will purposes, Ames, of a Smyth deprecia- v. 169 U. S. function rate must be taken making purposes tion account of a fund for the of replacement be the establishment of or value of the rather than the restoration cost plant annually But amount plant what original investment. all will the ele- replace carried reserve be sufficient to at of a composite purchased ments various property times, they at out or varying price levels, as wear become law of fact. It is a obsolete, question, is a not of but must on the basis of a question pre- which be answered elements, salvage obsolete diction value will be replace character of articles which selected and their at necessary, them when cost replacement the time of replacement. question be answered

Obviously, priori cannot reasoning. Experience only tempered by our guide, of such facts and special consideration unusual modify circumstances as would tend to of ex- results the past embraces fifteen perience. Experience, which high price levels, experts, studies re- years- sulting the universally accepted practice account- 1925, $2,020,863 $1,588,823 at of 1926 end the end the end Moody’s (Public Utilities) 1929, of 1927. See Manual of Investments 375-6; pp. Utility 1929, p. declaring In Poor’s Public Section management dividends, necessity these did overlook depreciation. For, adequate provision for in the several rate oases before it insisted the Commission had that’ the allow- inadequate. ances were

ants and business economists, as recounted in by detail Mr. Justice Brandéis, have demonstrated that deprecia- tion reserve, calculated on the of cost,, proven basis has to be the most trustworthy guide in determining the required amount to replace, at the end of their useful life, the constantly shifting of a elements such property as the present. Costs of renewals during made present prolonged period high prices diminishing and_ replacement costs tend to offset the higher cost of replac- ing articles in purchased periods of lower I think prices. that should guided we be by experience that and practice in the of proof absence of any special circumstances show- ing that are they inapplicable to the particular situation with which we are now concerned.

Such proof, in the present case, is wanting. only circumstance relied on for a different basis of deprecia- tion, and one which is embraced that experience, is. the current high price level, which has raised the present reproduction value of the carrier’s property, whole, as above its cost. That, course, might be a controlling if consideration we dealing were with present replace- ments or cost, their present instead of replacements to made at various dates in uncertain future, articles purchased at different times in the past, varying price at levels. ButT say cannot that since prices at the present moment are high, a¡ as a result of post-war inflation, rate cent, of return which is sufficient to 7.78 per yield present reproduction value, after adequate depreciation based on cost the carrier’s property, confiscatory logic requires because prediction that the elements of petitioner’s years property cannot, to come, be renewed or replaced adequate with substitutes, at less than the present average cost of reproduction the entire prop- erty this the face of the facts that cost —and replacements in the fifteen past years has been for the present,, levels than at higher price that part most for depreciation Commission allowed the amount all replace- than more sufficient practice has been higher price period throughout requirements ment paid has declared Company that levels, and if this only earned were dividends which reserve, adequate. was necessarily level price say the-present

To is to substitute cost future replacement measure of true thought ought have I should which for a relevant fact of law which facts, other rule as are to be established Ames, and to be Smyth from v. follow seems expert opinion nor experience neither upon founded it can be In the case present in practice. be unworkable which would seem evidence disregarding only by applied fact to be ascertained. very establish persuasively FEDERAL COMPANY v. SHOE INTERNATIONAL TRADE COMMISSION. January 3, 1929. Decided Argued December

No. 42. Commission rules cited notes Commerce Interstate supra. 44 ac of providing for examination statute The first American by New York C. P. A. was enacted the use of the title countants and Saliers, p. 1326. edited E. A. Handbook, Accountants’ in 1896. 45 re the case was Special whom the Commissioner to In that case, opinion (printed Appendix to the of as an opinion in his ferred, stated p. 292), if the return is 271-322, at that Supreme pp. Court, the depre utility’s property, then the present of figured value on the Supreme Court figured. The did must also be so allowance ciation opinion. question in its not this mention 46 similar that made- a statement Michigan Supreme Court The case, did Kansas but in the Special Commissioner disturb of the Commission, court made no reference finding The of the presented. practical difficulties insurmountable 277 in Southwestern Bell Telephone v. Ames Co. v. Smyth Commission, Service Public U. 276. But since this S. decision, as before, companies the Bell have Telephone basing depreciation upon their persisted Charges Board Public cost original depreciable property, Co., York Utility Comm’rs. v. New Tel. S. 23, U. they And insisted that have order the Interstlftg Commerce requiring depreciation Commission a charge’ 118 I. C. C. so permit should be as to the con- framed accounting practice.47 tinuance that protest railroads, that proceeding, against basing charge was for the first on cost made time in in their peti- And rehearing. protest this only tions came from depreciation that charge who insist no those whatsoever shall be made.48 depreciation charge To as measure of the use year’s Consumption plant, at the same reject time cost as the original basis of the charge, inadmissible. 47Telephone Depreciation and Railroad Charges, I. 118 C. C. 301; testimony System on upon behalf of the Bell refigar Companies, ir.g, 20, 21, (printed by March American Tel. Co.), Tel. & pp. 6, 11-13; 98. See their brief original submitted . p. argument, “ 48: The amount expense is the cost of the property up; used is, it is dollars consumed. Therefore it

Case Details

Case Name: United Rs. & Elec. Co. of Baltimore v. West

Court Name: Supreme Court of the United States

Date Published: Jan 6, 1930

Citation: 280 U.S. 234

Docket Number: 55 and 64

Court Abbreviation: SCOTUS