the United States, in a recent decision, has ruled definitely the necessity of public service corporations safeguarding their stockholders and the public by making ample reserves to prevent the waste of the investment in the property required for the use of the public. A portion of this decision and a few others bearing on this subject are given below.

"A 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 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." 1

1 Knoxville v. Knoxville Water Co., 212 U. S. p. 13 (1909).

"A tramway company lay down a new tramway. Of course the ordinary wear and tear of the rails and sleepers, and so on, causes a sum of money to be required from year to year in repairs. It may or may not be desirable to do the repairs all at once, but if at the end of the first year the line of tramway is still in so good a state of repair that it requires nothing to be laid out on it for repairs in that year, still, before you can ascertain the net profits, a sum of money ought to be set aside as representing the amount in which the wear and tear of the line has, I may say, so far depreciated it in value as that sum will be required for the next year or next two years. It appears to me that you can have no net profits unless this sum has been set aside. When you come to the next year, or the third or fourth year, what happens is this: As the line gets older the amount required for repairs increases. If you had done what you ought to have done, that is, set aside every year the sum necessary to make good the wear and tear in that year, then in the following years you would have fund sufficient to meet the extra cost." 1

"Depreciation should be met out of the earnings and should be charged to operating expenses. In no case should it be charged to the construction account, or be met by the proceeds of the sale of stocks or bonds, or other forms of fixed capital liabilities. This, at least, is the general rule and holds good except perhaps as a temporary expedient under abnormal conditions." 2

"Depreciation is, properly speaking, an operating expense and should be charged or treated as other operating expenses. A plant, that is not earning enough to meet depreciation, is a losing proposition." 3

96. Current repair and maintenance. An undertaking is entitled to a return sufficient to pay a fair return upon the true value of its investment in property useful to the public after paying reserves for depreciation and proper operating expenses. Operating expenses include not only the salaries and wages of all employees and other well established costs involved in the production of the

1 16, Ch. D. 347n (1879).

2 Wisconsin Commission, Vol. II, p. 154.

3 Ibid., p. 406.

utility sold, but also the costs of the material and labor required to maintain all plant units in efficient and successful operation.

This expense for maintenance must be distinguished from the cost of renewals, although for certain classes of repair work the actual dividing line is frequently difficult to draw except by a more or less arbitrary ruling. A general rule which can be safely followed is that, where plant is in any way renewed or replaced, the cost of labor and material consumed in such work must be defrayed from the reserves for depreciation. Where there are no such renewals or renewals are of a trifling nature, the cost should be considered a portion of the operating expense under the head of maintenance.

In reality the distinction between cost of renewals and cost of maintenance, or, as they are frequently called, the "cost of current repair," is more or less theoretical rather than practical. This distinction has been the cause of many misunderstandings and controversies. The explanation of these controversies probably lies in the fact that, in many of the older plants of large undertakings, there are many short-lived elements of relatively small value, the replacement of which, on account of wear and tear, obsolescence or inadequacy, is of almost uniform yearly occurrence. The uniformity and regularity with which such renewals are made, it is argued, places the cost of renewals in the same category as current repairs, and a distinction between the cost of renewals to be paid from depreciation reserves and the cost of current repair and maintenance to be treated as an operating expense, is unnecessary. But the facts are that plants contain some units of considerable cost and of a life greater than the average lives of most of the other units. When the renewal of these expensive units becomes necessary, there will be required sums of money much greater than would

be needed for the up-keep and normal renewals of other years. Such abnormal drains upon the treasury of the undertaking can be avoided, if, during the life of the unit, there had been set aside each year a sufficient sum to aggregate, at the time of the renewal, the original cost of the unit. In this way the abnormal demands of some years for means to make the necessary renewals of the plant are met by the contributions to the depreciation reserve fund made during a number of preceding years.

Possibly another way of looking at this question may make this clearer. An undertaking, upon the best judgment of its experts, finds that, for the up-keep of its plant and for the renewals of unserviceable units, there is need each year of contributions from income of, let us say, 12 per cent of the plant cost. The costs of small repairs and renewals, which it finds necessary to make during this year, are charged against this reserve fund, as well as the costs of units that have to be replaced that year. It is possible that during that year 10 per cent of the cost of the plant is spent for these two purposes, thus leaving 2 per cent of the 12 per cent reserved remaining unexpended. This 23 per cent remaining this year is held in funds or otherwise as a depreciation reserve to help defray the costs of renewals which in some later years may be greater than could be met by the 12 per cent usually reserved each year. Further, the necessity of treating the costs of renewals as a definite item of expense and making reserves to defray such costs is very conspicuous in the case of a new plant which may not reach, for many years, such a condition as was cited above where the sum of the costs of maintenance and renewals was substantially uniform year by year. During a term of years until renewals have to be made with a fair degree of regularity, current repairs and maintenance will be necessary, but as there is no actual immediate demand

for money for renewals, appropriations for that purpose from the yearly income might not be made as they should. It is with the object of emphasizing the necessity of providing for future rather than possible present demands, that the distinction between current repair, an annual operating expense, and renewals, a charge against a fund designed to make such cost a uniform annual expense in operating the undertaking, is made.

97. Salvage value. From what has been said above it will be understood that the investment of an undertaking in many units of plant is wasting; that, when a renewal is required, the cost of the original unit must be removed from the plant account as an asset and the cost of the replacing unit entered as a portion of the cost of the plant. Moreover, it has been explained that the cost of the original unit must be recovered by an amortization, in the form of reserves made annually, in such a way that the original cost of the unit will be on hand in the reserve funds when the renewal has to be made.

The above statement is not strictly accurate, for the reason that expense may be incurred in removing the old unit from the plant and, in many cases, the old unit may have some value as scrap or second-hand material. The difference between the scrap value of the unit and its cost of removal is the salvage value of the unit. Salvage may be positive or negative depending upon whether the scrap value exceeds the cost of removal or not.

Clearly it is the difference between the original cost and the scrap value of the unit that is the wasting asset of the undertaking represented by the unit. This figure represents the sum of money which must be acquired, through the depreciation reserves, to make good this loss in the value of the investment resulting from the removal of the unit at the time when it has to be replaced.

98. Wearing value. — This loss of capital represented