ing and maintenance accounts an estimated annual allowance for all the depreciation.

In Lincoln Gas and Electric Light Co. v. City of Lincoln, 223 U. S. 349, decided February 19, 1912, the United States Supreme Court reversed the decree of the Circuit Court and remanded the case with a direction to refer it to a skilled master to report findings. The case involved a gas rate fixed by ordinance and the decree of the Circuit Court upheld the validity of the rate. Justice Lurton in delivering the opinion of the Supreme Court discusses the annual depreciation allowance and points to the necessity for an exact determination of all expenses for renewals and replacements included in operating expense before it is possible to determine the amount of any additional annual allowance required. Justice Lurton says (at pages 360, 363):

The appellant further claims that the sum of $8,000 deducted from the net income, as a permanent protection against future depreciation in the value of the plant, is too small, and should be much larger. . . .

The question as to what sum, if any, upon the facts of this case should be annually deducted from the net income as a permanent maintenance or replacement fund, is novel and presents a grave problem.

Conflicting expert evidence has been introduced presenting radically different theories as to the necessity, character and amount of such a fund, and as to how it should be created, preserved and expended. Some of this evidence puts the sum to be annually deducted and set aside as a permanent fund at five per cent. upon the value of the plant at the time of deduction. It is obvious that if this view is sound there will be little or nothing of the net income left for distribution among shareholders, and no basis for legislative rate reduction now, and none likely until such time as the income from the permanent fund will keep up the plant. The work of reconstructing and re

placing old parts by new in a plant of this kind must, in the very nature of things, be going on constantly. Heretofore it seems to have been so well and continuously done that the value of the plant as a whole has suffered less than one per cent. per `annum if the total depreciation be distributed through the more than thirty years of operation. So far as can be now seen, reconstruction and replacement charges have, up to the present time, been borne by current revenue, with the result that the revenue remaining in the single year of 1907 showed a net surplus of $73,851.83, a sum large enough, if distributed to shareholders upon the basis of the value of property engaged in the business as claimed by appellant, to have paid a dividend of ten per cent., and about fifteen per cent. upon the valuation settled by the Circuit Court.

There is no finding as to the extent of the application of the revenue of 1907 to reconstruction or replacement, as distinguished from current repairs and operating expenses. It is, however, plainly inferable that the revenue of that year was used to the extent necessary. If, in the past, reconstruction and replacement charges have been met out of current expenses, the fact must be taken into consideration, both when we come to estimating future net income and in determining what sum shall be annually set aside to guard against future depreciation. This doubtless influenced the court below in settling upon the amount of $8,000 as a sufficient annual appropriation of income as insurance against future depreciation. But if the constantly recurring necessity to do reconstruction or replacement work was in 1907 met out of the current income of that year, thereby diminishing the net income, the fact should be given weight in estimating future net income; otherwise there will be a double deduction on that account, first, by paying such charges as they occur, and thereafter by a contribution out of the remaining income for the same object.

The facts found are not full enough to at all justify this court in dealing with this problem of a replacement fund.

There should be a full report upon past depreciation, past expense for reconstruction or replacement, and past operating expenses, including current repairs. We should be advised as

to the gross receipts for recent years, and just how these receipts have been expended. Then the amount to be set aside for future depreciation will depend upon the character and probable life of the property and the method adopted in the past to preserve the property. It can be readily seen that the amount to be annually set aside may be such as to forbid rate reductions because of the requirement of such a fund. The matter is one first for a skilled master, who should make a full report upon the value of the property, the receipts and the expenses of operation and the sums paid out on reconstruction and replacements, and in dividends in recent years.

§ 483. Allowance in rate case for depreciation already accrued. The question sometimes arises whether in case the company has not in the past made adequate allowance for depreciation and consequently certain depreciation has accrued which will have to be met by renewals in the future, the company should in a rate case be granted a larger annual allowance for depreciation than it would otherwise be entitled to. As a general rule this claim should not be allowed. The costs properly chargeable to one period should not be transferred to the consumers of another period. This is well expressed by the New York Public Service Commission in Re Queens Borough Gas and Electric Company, 2 P. S. C. 1st D. (N. Y.) —, decided June 23, 1911. Commissioner Maltbie in delivering the opinion of the Commission says:

It has also been suggested that as the company did not set aside until recently a sufficient amount for depreciation, the rates should be fixed so high that depreciation in past years may now be made good. Prudent management unquestionably requires that if allowance has not been made in past years for depreciation, it should be made up from earnings as rapidly as possible. But the question is, whether present and future consumers should be taxed to pay the bill. The record does not show that the earnings were not sufficient to allow deprecia

tion to be set aside and yet yield a fair return upon value; and if the stockholders have received what should have been used to meet depreciation, the consumers are not at fault.

§ 484. Accrued depreciation-Washington Supreme Court in Electric Railway Rate Case, 1911.

Puget Sound Electric Railway v. Railroad Commission, 64 Wash., 117 Pac. 739, 748, decided September 16, 1911, is an interurban railway rate case. The court sustained the rates fixed by the Railroad Commission of Washington. The court sustained the Commission's allowance of 25% of the gross receipts for annual depreciation and replacement, as against the claim of the company that this amount would not in fact meet the renewals and replacements required in the immediate future. The court held however that the traffic of the future should not be required to bear the burden of deterioration already accrued. Judge Morris in delivering the opinion of the court says (at page 748):

Assuming the same volume of business to continue, and adopting the gross earnings from freight and passengers for the year 1909 at $648,547.75, as shown by the report of that year, the commission found that 25 per cent. of these gross earnings. or $162,136.94, should be charged to operating expenses to cover depreciation and replacement. This item is attacked by appellant, it claiming that it should be allowed at least $180,000 for this item.

We have carefully and with painstaking attention gone over the evidence submitted upon this point, and as a result we are satisfied that, after making all proper allowances to reach an estimate of this character, the amount found by the commission is as nearly correct as it is possible to determine. Appellant contends in this connection that the commission has entirely lost sight of the fact that during the next few years money will be required for renewals in excess of the average annual revenue, occasioned by the fact that the railway has heretofore

been unable from its revenues to set aside an annual renewal fund upon which it can then draw for necessary replacement.

(1) It is unquestionably true that the railway company is not bound to see its property gradually deteriorate in value and earning power without making provision out of its earnings to keep its usefulness unimpaired; and that it can properly charge an annual sum to care for necessary depreciation and waste, and have such sum allowed in any determination of what is a proper return upon its investment to be approximated in fixing its rates of carriage. But we cannot concede that in so doing it can make the traffic of any future year or years bear all the burdens of the deterioration of past years. Each year should carry the burden of its own wear and tear, and thus, when renewals become necessary, the burden is equally borne by all contributing features. As we read it, the Supreme Court of the United States has so held in Knoxville v. Knoxville Water Co., 212 U. S. 1, 14, 29 Sup. Ct. 148, 152, 53 L. ed. 371, where, in treating a like question, it is said: "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 overissues of securities, or of omission to exact 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." Accepting, therefore, the contention of appellant, that it is shown that from $140,000 to $160,000 will be required annually for the next three to five years for renewals and replacement, such an expenditure will not be made necessary by the deterioration and waste of those years alone; but the conditions necessitating renewals and replacement are the result of the years of wear and tear that have gradually taken place since the operation of the road first began, and each year contributing to such a condition should be charged with its proportionate share of the burden. That 25 per cent. of the earnings is a sufficient sum to be set aside each year as a depreciation and renewal fund is clearly established by the testimony; and, had this sum been