Court of the United States, and the rule is now almost universally 60 provide not only for current repairs but for making good the depreciation and replacing the parts of the property when they come to the end of their life." Knoxville v. Knoxville Water Co., 212 U. S. 1, 13, 53 L. Ed. 371. 60 United States. Montana, W. & S. R. Co. v. Morley, 198 Fed. 991, 1004; Spring Valley Waterworks Co. v. San Francisco, 192 Fed. 137. Iowa. Cedar Rapids Gas Light Co. v. Cedar Rapids, 144 Iowa 426, 48 L. R. A. (N. S.) 1025, 138 Am. St. Rep. 299, 120 N. W. 966. Massachusetts. Selectmen of Danvers v. Com., 184 Mass. 502, 69 N. E. 320. New Jersey. Long Branch Commission v. Tintern Manor Water Co., 70 N. J. Eq. 71, 62 Atl. 474, aff'd without opinion 71 N. J. Eq. 790, 71 Atl. 1134. Oklahoma. Pioneer Telephone & Telegraph Co. v. Westenhaver, 29 Okla. 429, 38 L. R. A. (N. S.) 1209, 118 Pac. 354. Wisconsin. Miles v. People's Tel. Co., 166 Wis. 94, 163 N. W. 652. There should be deducted from the earnings sufficient to make good the depreciation of the plant and replace the deteriorated portions thereof when they become incapable of repair. Pioneer Telephone & Telegraph Co. v. Westenhaver, 29 Okla. 429, 38 L. R. A. (N. S.) 1209, 118 Pac. 354. It must be conceded that a wise and proper management of such a public utility as a telephone system requires and demands that a liberal sum should always be reserved from the earnings, whatever such funds may be designated, in order to keep the plant in a high degree of efficiency at all times and to provide for emergencies, but the company cannot deduct from its yearly earning five per cent of the total value of its property as a depreciation fund independent of operating expenses for repairs, etc., where the fund has been maintained for two years without any item of expense being incurred against it. Home Tel. Co. v. Carthage, 235 Mo. 644, 48 L. R. A. (N. S.) 1055, Ann. Cas. 1912 D 301, 139 S. W. 547. "Depreciation may be delayed, but it cannot be prevented. Ultimately every structure in complainant's plant will be worn out by use, wasted by action of the elements, broken by accident, abandoned in the development of the system, or displaced by newer and more efficient contrivances. In view of this fact, it was held in the 1908 case that complainant was entitled to an annual allowance to cover such loss. The highest courts have repeatedly declared this fact cannot be ignored in determining the value of property in rate cases. In Knoxville Water Co. v. City of Knoxville, 212 U. S. 1, 29 Sup. Ct. 148, 53 L. Ed. 371, and more recently in Contra Costa Water Co. v. City of Oakland, 159 Cal. 323, 113 Pac. 668, the lower court found the present cost of reproducing the plant, but failed to take into account the fact that an old plant is worth less than a new one. In each, the result was a reversal. It is impossible to measure accurately such loss until it has matured. When a machine is worn out, we know its original value is gone; but while the machine is in use the amount of deterioration is largely a matter of opinion. Here the difficulties of the problem are increased by the fact that a very large portion of the most valuable construction, such as pipes, masonry, and concrete work, are concealed in the ground or under water. Counsel for the city contend that no annual allowance for depreciation adopted, so as to include obsolescence 61 and inadequacy; 62 although at one time or another the courts of California 63 and Iowa 64 have refused to allow such charge. The statutes creating public service commissions often expressly provide for a depreciation fund and depreciation accounts, and limit its expenditure to such purposes and under such rules and regulations as the commission may prescribe. Pursuant to such statutes, the commissions generally have enacted rules prescribing a uniform classification of accounts, which provide more or less in detail the manner how such depreciation account or depreciation reserve shall be kept. The term "depreciation" generally means loss of value, in figuring the present value of the property; but depreciation as an expense of the business is generally held to mean the amount that must be regularly set aside to keep the original investment intact.65 However, no fixed rule can be laid down by the courts to govern the decision of what amount shall be allowed annually for depreciation of any property.66 should be given, because it has been made good by current repairs and replacements, charged to operating expenses, and paid out of the water rates. On the other hand, counsel for the water company stoutly maintain that the structural portion of the plant can not be reproduced for its original cost, and that its reproductive cost should not be diminished by reason of depreciation. However, complainant insists that it is entitled to an annual allowance for depreciation, and defendants believe true value cannot be ascertained, except by subtracting depreciation from present cost of reproduction." Spring Valley Waterworks v. San Francisco, 192 Fed. 137, 184. An amount should be allowed for depreciation notwithstanding the plant has been kept in a good state of preservation, and needed repairs, etc., have been fully made and chiefly charged to expense account. Lincoln Gas & Electric Light Co. v. Lincoln, 182 Fed. 926, 928. sulting from unforseen changes in the 62 Inadequacy is the condition re- 63 Redlands, L. & C. Domestic Water Co. v. Redlands, 121 Cal. 312, 53 Pac. 791, following San Diego Water Co. v. San Diego, 118 Cal. 556, 38 L. R. A. 460, 62 Am. St. Rep. 261, 50 Pac. 633. V. 64 Cedar Rapids Water Co. Cedar Rapids, 118 Iowa 234, 91 N. W. 1081. But see Cedar Rapids Gas Light Co. v. Cedar Rapids, 144 Iowa 426, 48 L. R. A. (N. S.) 1025, 138 Am. St. Rep. 299, 120 N. W. 966. 65 Hill v. Antigo Water Co., 3 Wis. Railroad Com. Rep. 623. 66 Cumberland Telephone & Telegraph Co. v. Louisville, 187 Fed. 637. "Just what amount should be allowed annually for depreciation of any property is difficult to determine Depreciation fund as part of capi- accurately. It can only be approxi tal, see 4541, supra. 61 Obsolescence is the condition re mated; and in so doing many things 3 So far as deduction of depreciation from income is concerned it must be provided for from year to year out of annual earnings and cannot be ignored for a long period and then capitalized.67 Stated the class and character of the property, its condition when placed in the plant, the location, the usage to which it is subjected, and, where electrical properties are involved, another element must be considered. The last decade has witnessed great progress in electrical sciences and appliances, and constant improvement is being made in electrical machinery and equipment of all kinds. Telephone instruments and equipments are no exception to this rule. Equipments that at any given time are regarded as adequate and the most modern are in a short time, because of new inventions and improvements, inadequate and obsolete, and must be discarded before they are worn out. This loss is in the nature of depreciation, and is usually classed as such. Dodgeville v. Dodgeville Elec. Light & Power Co., 2 Wis. Ry. Com. Rep. 392. In the foregoing case, the amount of annual depreciation in an electric light plant was involved, and held to be five per cent of the value of the property. In the opinion, it is said that the depreciation will vary from five to ten per cent, depending upon the circumstances of each case. We think, under the evidence in this case, that seven per cent of the reproductive value of the physical property is fair and sufficient to allow for annual depreciation, which amounts to the sum of $6,626.45. In so finding, we fix no arbitrary rate as amount to be allowed for depreciation in all cases wherein are involved telephone properties. The amount allowed in each case must, in a large measure, be determined by the facts therein." Pioneer Telephone & Telegraph Co. v. Westenhaver, 29 Okla. 429, 38 L. R. A. (N. S.) 1209, 118 Pac. 354. 67A water plant, with all its additions, begins to depreciate in value from the moment of its use. Before coming to the question of profit at all the company is entitled to earn a sufficient sum annually to provide not only for current repairs, but for making good the depreciation and replacing the parts of the property when they come to the end of their life. The company is not bound to see its property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept unimpaired, so that, at the end of any given term of years, the original investment remains as it was at the beginning. It is not only the right of the company to make such a provision, but it is its duty to its bond and stockholders, and, in the case of a public service corporation, at least, its plain duty to the public. If a different course were pursued the only method of providing for replacement of property which has ceased to be useful would be the investment of new capital and the issue of new bonds or stocks. This course would lead to a constantly increasing variance between present value and bond and stock capitalization a tendency which would inevitably lead to disaster either to the stockholders or to the public, or both. If, however, a company fails to perform this plain duty and to exact sufficient returns to keep the investment unimpaired, whether this is the result of unwarranted dividends upon over issues of securities, or of omission to exact in another way, unless in exceptional cases, depreciation properly chargeable to one period should not be collected from the customers of another period.68 What 69 § 4548. Rate of return to which corporation entitled. rate of return upon the investment will be considered reasonable or unreasonable by the courts is necessarily involved, at least to some extent, in most cases wherein rates are attacked as unreasonable. But no court of last resort has undertaken to say what per cent on the value an investment in a public service company should yield its owners in all cases. This is a question of fact to be determined in the light of the evidence in each particular case.70 "No given per proper prices for the output, the fault is its own. When, therefore, a public regulation of its prices comes under question, the true value of the property then employed for the purpose of earning a return cannot be enhanced by a consideration of the errors in management which have been committed in the past." Knoxville v. Knoxville Water Co., 212 U. S. 1, 53 L. Ed. 371. 68 Goldfield Consol. Water Co. v. Public Service Commission of Nevada, 236 Fed. 979, 984; Puget Sound Elec. Ry. v. Railroad Commission of Washington, 65 Wash. 75, Ann. Cas. 1913 B 763, 117 Pac. 739. The business of any future year or years cannot be made to bear all the burdens of the deterioration of past years, but each year should carry the burden of its own wear and tear. Puget Sound Elec. Ry. v. Railroad Commission of Washington, 65 Wash. 75, Ann. Cas. 1913 B 763, 117 Pac. 739. 69 Home Tel. Co. v. Carthage, 235 Mo. 644, 48 L. R. A. (N. S.) 1055, Ann. Cas. 1912 D 301, 139 S. W. 547. On this subject, see generally 2 Wyman, Public Service Corporations, § 1131; Beale & Wyman, Railroad Rate Regulation (2nd Ed.), §§ 310337; extended note in L. R. A. 1915 A 5. 70 Willcox v. Consolidated Gas Co., 212 U. S. 19, 53 L. Ed. 382, 48 L. R. A. (N. S.) 1134, 15 Ann. Cas. 1034; Puget Sound Elec. Ry. v. Railroad Commission of Washington, 65 Wash. 75, Ann. Cas. 1913 B 763, 117 Pac. 739; Coal & Coke Ry. Co. v. Conley, 67 W. Va. 129, 190, 67 S. E. 613. "It will not do for the courts to say that the income, above all expenses, including taxes, on property devoted to the public service, must necessarily much exceed the rate of five per cent to avoid the charge of being confiscatory." Cedar Rapids Gas Light Co. v. Cedar Rapids, 144 Iowa 426, 48 L. R. A. (N. S.) 1025, 138 Am. St. Rep. 299, 120 N. W. 966. No fixed and unvarying rule has been or can be announced upon the subject, but each case must of necessity depend upon the surrounding facts and circumstances. Home Tel. Co. v. Carthage, 235 Mo. 644, 48 L. R. A. (N. S.) 1055, Ann. Cas. 1912 D 301, 139 S. W. 547. cent can be fixed by the court, as a rate to which the carrier is entitled as a matter of right [citing case]. It may use percentages to illustrate, but not as fixed measures. 71 The prevailing rate of interest on money loaned, the hazard of the business, the life of the property used, the reliance upon the constancy of a return, which depends largely upon the existence or probability of competition, are all proper matters for consideration, as well as many others.72 So the franchise, the earning power of money in that vicinity, and the hazards, moral and physical and otherwise, should vary from 4 to 8 per cent, besides that set aside for depreciation and maintenance. But there is and can be no rigid or inflexible rule as to the per cent to be thus earned." Des Moines Gas Co. v. Des Moines, 199 Fed. 204, 206. 71 Montana, W. & S. R. Co. v. Morley, 198 Fed. 991, 1009. 72 Home Tel. Co. v. Carthage, 235 Mo. 644, 48 L. R. A. (N. S.) 1055, Ann. Cas. 1912 D 301, 139 S. W. 547. "They are therefore entitled to a return upon their investment which approximates the rate of interest which prevails in other lines of industry in and about that part of Montana wherein their railroad is operated." Montana, W. & S. R. Co. v. Morley, 198 Fed. 991, 1007. "The waterworks company claims that certain other specific things, by name, should be allowed, either by way of enhancing the value of the property, or that which would be the same thing, by calling them hazards, and allowing such rates as would produce a reasonable revenue thereon. One of these is the fact that rates are subject, at any time, to change by the city council, subject to local prejudice, and without experience or training with reference thereto; the hazard that the city, at any time, can force an involuntary sale by proceedings of condemnation; the fact that the franchise cannot extend beyond twenty-five years, with no assurance VII Priv. Corp.-35 that it will be renewed; another competing plant may be allowed; the city may establish a competing plant; and other minor hazards. There can be no question but that some of these matters should be given consideration. The greater the hazard, the higher the rate of interest. A farmer who observes his contracts and pays his debts can get a loan at a low rate of interest by a mortgage on his farm. A man whose credit is not good, and who can only tender security of a doubtful character, must pay a high rate of interest. This has always been so, and always will remain so. The fact that the company's charter may be revoked by a forced sale, or that it may expire at the end of twenty-five years, and that it will be continuously kept in litigation, are all hazards, which in other business enterprises would increase the rate of interest that the borrower must pay, and justly entitles it to a higher rate of earnings than if its earnings were certain and fixed, and were in perpetuity or of long duration. But it is well-nigh impossible to point out just what particular hazard, and to what extent such a particular hazard, will increase the rate of interest, or will entitle it to a higher rate of earnings." Per in Judge McPherson Des Moines Water Co. v. Des Moines, 192 Fed. 193, 198. "Rates which, with efficient and economical management, yield a return equal to that received in other business ventures of similar character and attended with like risks, can |