§ 464. Supersession due to consolidation-Wisconsin Railroad Commission, 1911. In re Application of the La Crosse Gas and Electric Company for authority to increase its rates, 8 W. R. C. R. 138, 172, decided November 17, 1911, the Wisconsin Railroad Commission discusses the question as to what consideration should be given in valuations for rate purposes to property value that has disappeared owing to the consolidation of competing companies. The Commission says that: The applicant has advanced the idea through its written argument that were the values of public utilities fixed solely on the reconstruction value of the plants as they exist at the present day, it would be a mistake for any company to consolidate the physical properties of its various plants in the endeavor to secure better and cheaper operating conditions, because in making such consolidations, severe losses of purely physical value inevitably occur. The applicant declares that this loss of physical value must be justified by decreased operating costs and did the owners of the property neglect or refuse to make such consolidation, as would be the tendency if the principle were established that only physical property should enter into valuations for rate-making purposes, the eventual rate which the public would have to pay for service would be still further increased by reason of increased operating and maintenance costs of a considerable amount of inefficient apparatus. Without attempting, at this time, to enter into a discussion of what elements properly enter into the value upon which rates should be based, it seems advisable to consider for a moment the applicant's argument in this connection, for its unquestioned acceptance may lead to untenable conclusions. The company's contention appears to rest upon the assumption that all physical construction costs and all costs of operation are proper elements upon which rates should be predicated, and that a utility is unquestionably entitled to a return for all its operating expenses and earnings on at least the reconstruction cost. That this is in the main true under normal conditions, will not be denied, but if the costs of operation are high because of unusual inefficiency of operation, or if the investment is high because of equipment and work clearly unnecessary, it is apparent that equitable rates can not be based thereon, and when excessive operating expense and duplication of equipment go hand in hand, it does not seem necessary, as the applicant contends, to justify reduction in the physical value by reduction in operating expenses. Under these circumstances, a reduction of either or of both is in itself justified and is the demand of normal conditions. High operating expenses may be the result of poor management, so also may be high investment. Again, they may be due to unusual circumstances during some period of the plant's life. These facts must, when possible, be taken into consideration in determining what a utility is entitled to receive for conducting the business. $465. Casualty. Property may be injured or destroyed by various casualties. Rolling stock may suffer from collision or other accident. Bridges may be washed away by flood. Poles or buildings may be destroyed by storm. Loss from certain casualties may be covered by insurance. The fire hazard may be covered in this way. Other casualties are similar in effect and may be treated and provided for in the same way as functional depreciation. The fortuitous character of casualty and of functional depreciation is the element that differentiates them from physical depreciation. $480. General. CHAPTER XX Annual Depreciation Allowance 481. Should cover physical and ordinary functional depreciation. 482. Maintenance accounts include certain renewals. 483. Allowance in rate case for depreciation already accrued. 484. Accrued depreciation-Washington Supreme Court in Electric Railway Rate Case, 1911. 485. United States rule as to depreciation allowance in assessing corporation income tax, 1911. 486. Wisconsin Railroad Commission-Discussion of annual allowanceSinking fund method-Maintenance accounts. 487. New York Public Service Commission-Maintenance account includes many renewals-Sinking fund method-Functional depreciation. 488. Allowance on sinking fund plan rejected in Louisville, Ky., Telephone Rate Case, 1911. 489. Depreciation must be deducted to determine net income-New York courts in Franchise Tax Cases. 490. Sinking fund plan rejected by New York court in Tax Case, 1911. 491. Allowance for functional depreciation-New York courts in Tax Cases. 492. Three per cent. depreciation allowance required by Massachusetts statute for municipal lighting plants. 493. Six per cent. allowance in Chicago Street Railway Assessment Case, 1902. 494. Allowance in New York Street Railway Tax Case, 1909. 495. Twenty per cent. gross receipts of street railway prescribed in Capitalization Case-New York Commission, 1912. 496. Three per cent, allowance in Savannah Street Railway Fare CaseGeorgia Railroad Commission, 1912. 497. Five per cent. allowance in Columbus Ohio Electricity Rate Case, 1906. 498. One per cent. allowance on sinking fund basis in Des Moines, Iowa, Water Rate Case, 1910. 499. One and seven-tenths per cent. allowance on sinking fund basis in Cedar Rapids, Iowa, Gas Rate Case, 1909. 500. Two per cent, allowance in Chicago Gas Rate Report by W. J. Hagenah, 1911. 501. Allowance in San Francisco Water Rate Case, 1911. 502. Three per cent. allowance on straight line basis in Irrigation Rate Case, 1911. 503. Seven and three-tenths per cent. annual allowance-Massachusetts telephone appraisal for rate purposes, 1909-Discussion of depreciation. 504. Seven per cent. allowance in Oklahoma Telephone Rate Case, 1911— Allowance to cover only current replacement declared inadequate. 505. Seven per cent. allowance in Louisville, Ky., Telephone Rate Case, 1911. 506. Missouri Supreme Court in Telephone Rate Case, 1911. 507. Ten per cent allowance in Arkansas Electricity Rate Case, 1911. 508. Depreciation allowance refused by California court, San Diego, Cal., Water Rate Case, 1897. 509. Depreciation allowance refused by Iowa court in 1902 but approved in 1909. 510. Depreciation allowance apparently refused by United States Supreme Court in 1903 but recognized in later cases. $480. General. Though the determination of the annual allowance for depreciation is not strictly a part of the valuation process, it is often an essential preliminary in valuations for condemnation or taxation and is also a necessary complement to a valuation for rate making. When a property or franchise is condemned for public purchase, probable net earnings are usually an important and sometimes a controlling factor (see § 669). Net earnings cannot be determined until there has been a proper deduction for depreciation. This is clearly established by the opinions of courts and commissions, which are quoted at length below. Various methods of measuring depreciation have been discussed in Chapter XVII. Each of these methods also involves a corresponding method of meeting the annual depreciation requirements. In discussing the uniform investment cost method, § 401, it was necessary to indicate the general theory on which the annual allowance for depreciation should be computed, so that it will be unnecessary to repeat the discussion in this connection. § 481. Should cover physical and ordinary functional depreciation. The annual depreciation allowance should cover all physical depreciation accruing during the year and also the average annual loss from ordinary functional depreciation. By ordinary functional depreciation is meant such part of the total loss from inadequacy and obsolescence as can be foreseen with reasonable certainty. When a complete supersession of the entire plant will occur cannot be foreseen and for purposes of rate making or public purchase this complete supersession hazard may perhaps best be considered in determining the fair rate of return. So long as the hazard is thus adequately allowed for the manner in which such allowance is thereafter accounted for is immaterial for the purposes of rate making or public purchase. It may be treated as a reserve or it may be paid out in dividends. The loss when it occurs must be borne by the owners and if there is no reserve or an insufficient reserve the loss must be suffered directly by the owners. This subject is discussed more fully under Functional Depreciation, § 452. § 482. Maintenance accounts include certain renewals. In an article on the appraisal of the Spokane and Inland Empire Electric Railroad System, Henry L. Gray, Engineer to the Public Service Commission of Washington, states that: 1 It is admitted that a plant should earn a return sufficient to provide a fair profit on the investment over and above its operating expenses, which include the actual cost of operation and repairs and maintenance due to depreciation, As a matter of fact, however, the ordinary maintenance accounts of railways will include both repairs and at least some of the depreciation. Hence it is usually unfair to add to the actual operatp. 696. 1 Engineering and Contracting, December 27, 1911, |