true if the appraisal is made for a case of sale. The purchaser is buying a partially worn plant, a plant which he may argue is second-hand, but it is an assemblage of units furnishing a service to the public which the purchaser undertakes to continue to give. Buyer and seller agree upon the present age of the several plant elements as well as upon the number of years the units can be retained in service, i.e., the life less the age. It is thus seen that there have been removed all of the attributes usually attaching to second-hand plant or material. The plant units are to be retained in their present position until the end of an agreed period. There is no expense of removal or adaptation to new conditions, and, as far as may be humanly possible, all uncertainty as to the usefulness of second-hand apparatus has been removed by the agreement of experts of necessarily differing views as to the length of time it is wise and proper to retain the units of the plant in service.

Thus the engineer's problem is reduced largely to a determination of the years of remaining serviceable life in the several units of which the plant is composed. Usually the age of the units can be determined without difficulty or controversy. With the age known and with an agreement as to the years of remaining life, the total life of each unit of plant has been found and the engineer's portion of the problem of determining depreciation has been solved.

113. Interest of public in operation of public utility.— A second consideration, which is usually lost sight of in the valuation of a public utility, needs to be fully appreciated, and that is that a public service undertaking has been given certain special rights and privileges and, in return, the undertaking must conduct its business in such a way that the best service or product is afforded with the least expense to the public. It is the question

of least expense to the public which requires special consideration in this connection.

For the utility furnished by the public service undertaking, the public must pay a proper rate of interest upon the invested capital, the salaries and wages properly attaching to the operation of the enterprise, a fair and reasonable profit as well as the cost of current maintenance and repairs and proper sums to be set aside each year to defray the cost of the replacement of the plant or portions of the plant when they can be retained no longer in service. The first three of the above sources of expense need not be discussed in the present connection. The last two items of expense, current maintenance and repairs and depreciation, are the two directly involved in a determination of the depreciation of a property.

These expenses are direct contributions made by the public to enable the undertaking to give it the best service not only at the present time but in the future. The rights of the public demand that the sum of these two items should be kept as low as possible consistent with a modern and high grade product. The demand for making the sum of these two items a minimum has an important influence in the work of the engineer in determining the life which should be assigned to the different units of plant.

As

114. Interest of public in depreciation reserves. a corollary to the question discussed in the last section is the fact that the public has a direct interest and right in the reserves which are contributed by them for the special purpose of renewing the plant when it becomes unserviceable and are held by the undertaking for that specific purpose. It will be found, frequently, that officers of undertakings are in the habit of considering reserves for depreciation as money earned through their own good management and, as such, a portion of the property of

the undertaking. Reserves, thus set aside, are unquestionably a portion of the property of the undertaking, but the fact must not be lost sight of that the money thus set aside came from the public in the form of higher rates than would have been required otherwise, and that the public has paid such higher rates for the sole purpose of guaranteeing for themselves a continuation of the service of the utility with high grade apparatus and plant. The reserve fund, therefore, while belonging to the undertaking, belongs also to the public which actually has contributed it. The undertaking must hold such funds for the benefit of the public as well as for itself, and the reserves for depreciation can be used properly and legitimately only for one purpose,- for maintaining the value of the investment in perishable property unimpaired.

The truth of the above contention has become so well understood and established that it would be unnecessary to emphasize it in this connection were it not for the fact that its full significance has not been appreciated sufficiently by the officers of undertakings or by experts. They fully recognize that the reserves for depreciation should not be distributed as dividends to the stockholders, but, when a question of value for rates or for sale arises, they are in doubt as to the proper treatment of this fund or of the plant which may have been acquired with this fund. The reserves for depreciation, being, virtually, funds of the public, held in escrow for plant renewals, cannot be considered as a part of the property of the undertaking upon which the undertaking can demand a return nor, in the case of a sale, can such reserves be held back by the seller as his property; the reserves must be transferred to the buyer, who then becomes responsible to the public for the proper expenditure of such reserves in replacing plant which has become unserviceable.

115. Maintenance and depreciation reserves. There is another feature which requires definition in order that the subject of depreciation may be fully understood. It is the distinction which must be carefully made between the cost of maintenance and the cost of renewals. The expenses to which an undertaking is put in making the small repairs necessary to keep a plant in a high state of efficiency has nothing to do with the depreciation reserves. It is a current expense incident to the operation of the plant and as such may and should be taken from income. The cost of maintenance for each class of property may not be uniform throughout its life; in fact, in some cases, it is greatest when a plant element is new and, in a large proportion of cases, it is of increasing magnitude for each year of increasing age.

This question of cost of maintenance, the cost of keeping up the efficiency of a plant or a plant element may have an effect upon the life of the unit, as it may be shown that the increased cost of maintenance would justify the renewal of the unit, but it can thus have only an indirect effect upon the depreciation.

The reserves for depreciation are designed only to keep the "capital" of the undertaking unimpaired, and, as a consequence, are to be used only to defray that portion of the expense of renewal as was represented by the original capital cost of the unit.

116. Importance of "life" in a determination of depreciation. It is seen from the above considerations that the "life" of each unit of plant is of fundamental importance in a determination of its deterioration or depreciation. Its life may depend upon a number of considerations which will be fully discussed later but, in whatever manner it may be decided eventually that a plant depreciates in value between the time it was put into service and the time of its renewal, the life, the years of useful

service, is the same and is the one and most important controlling factor.

117. Life of a plant unit. -Some clearness in the presentation of this subject can be obtained by making a distinction between the actual physical life of the unit and its serviceable or useful life.

The physical life of a plant unit is the number of years that it could be retained in service and furnish substantially the same character of service as it was designed to afford.

The serviceable or useful life is the number of years during which, for economic or public considerations, it may be considered wise to retain the unit in service.

In very many cases the physical life and the useful life may be the same. In others, the useful life will be less than the physical life.

Clearly in no case will the useful life be greater than the physical life.

118. Physical life. The physical life of a plant unit is the number of years that the unit can be retained safely in service without introducing any hazard to the uniformity of the service which the unit is called upon to perform. Such hazards, as may occur, arise from a loss of strength in the unit due to wear and tear or to decay resulting from the years of service. Thus the strength of a pole, used to support overhead wires, diminishes as time goes on by the decay of the wood, of which the pole may be made. The pole has a physical life from the time it was set up to the day when the pole becomes so weakened by decay that it must be replaced in order to remove the hazard to the continuity of service which arises from 'the possibility of the pole falling in case of high wind or an overload of snow or sleet. Or in the case of an electric car upon a tramway, the car may require occasional repairs but the physical life of the car will