A public service undertaking is bound, in virtue of the franchises it has received, to give to the public the best service that can be offered and at as low a cost as may be consistent with the public needs. The development of the art, upon which most utilities are dependent, has been gradual in the past and it is probable to continue into the future. Under such conditions it is frequently necessary to replace an existing unit before the number of years, assigned to it on the basis of its physical life, has been attained.

Thus there are two considerations involved in obsolescence, improved character of service and increased efficiency. Both of these considerations must be ever in the mind of the engineer when making his estimate as to how far this factor of obsolescence may enter to affect the life of any plant unit.

Unquestionably there will be always some uncertainty attaching to the estimate made by the engineer as to the limit of the life of a unit to be expected by the operation of the factor of obsolescence. Moreover, there can be no question but that the accuracy of the forecast will depend very largely upon the familiarity of the engineer not only with the developments, which have taken place in the past in the special art involved, but with the weaknesses of the present plant equipment and the probability of such defects being overcome within the physical life of each unit by improvements and inventions. But these uncertainties should cast no doubt upon the importance of a careful and expert forecast of the effects of obsolescence upon the lives of the several plant units. It cannot be denied that obsolescence, in the past, has entered in a very large number of cases to limit the serviceable life of many units of plant and there is no reason to suppose that similar conditions may not arise in the future. No undertaking would be wise in assuming that

all of the plant could be retained in service until it had been worn out completely. However, with each succeeding year of the life of the unit, this uncertainty becomes less, so that, in most cases, at the time of an appraisal, usually some years after the plant units have been in service, there is sufficient information at hand to be able to tell with reasonable accuracy whether or not the limit of life due to obsolescence will be less than the physical life and to assign some definite figure with this consideration in mind.

In the case of most public utilities, the problem of obsolescence is not as difficult of solution as it may seem to those who are not specially expert in the art. With by far the larger number of classes of units, those most familiar with the art know the units which will be able to serve their entire physical life, and what classes are so uneconomical or otherwise defective that some improvement must be expected. But, even for this latter class, there is always the question of the economical time when the change should be made and still further there is the probability, especially with the larger utility undertakings, of some time elapsing before it is wise or possible to make a replacement of all units of the plant. It is not usual that such changes can be made in a wholesale manner. Thus, taking the case of a telephone switchboard, a new form may be developed to-day but it would require many years before a general change could be made of all switchboards in the system. Changes of this character must be made slowly and carefully in order that no interference with the service should take place and, in any wise replacement of older switchboards by newer forms, it is probable that obsolescence would have only a small effect as a limitation upon the physical life of apparatus of this character.

123. Inadequacy. Definition. A third factor tend

ing to shorten the lives of plant units is "inadequacy," which, as the term implies, is the condition arising from the growth of the business and from the consequent necessity of replacing smaller units by larger ones.

While this factor is unquestionably one which has been the reason for shortening the lives of many units, particularly in communities where the increase in activities has been rapid, and although it has been recognized by the courts as one of the factors which should be considered in determining the probable lives of plant units, yet in some respects it seems to be somewhat different in character from either "wear and tear" or "obsolescence." There appear to be three main classes of conditions which tend to introduce this factor of inadequacy, first, a change in financial policy; second, engineering economy; and third, unexpected development.

124. Inadequacy. Changes in financial policy. — That changes in financial policy have been the cause of the rejection of many plant units as too small, will be apparent if the past history of many of our public utility undertakings is reviewed with this thought in mind. It will be surprising to note in what a large proportion of the cases where units have been replaced for the reason that they were of inadequate size, the cause can be attributed directly to a lowering of the rates for service or to the introduction of some special rates to attract new classes of customers. It is here contended that inadequacy based on such a reason is not the inadequacy recognized by the courts as justification for the assignment of a shorter life to units and the consequent imposition of larger reserves to be contributed by the earlier subscribers to the service afforded by the utility. The burden, which such a change in policy necessarily imposes, should be borne largely, if not wholly, by those who are to be benefited directly by the change. Thus, if a gas company,

with mains of sufficient size for the usual supply of gas, should offer new and lower rates for some particular purpose which necessitated the replacement of the half worn existing mains by larger ones, the inadequacy thus produced and the decreased life of the older mains is not a legitimate limit to be imposed by inadequacy to the life of the original mains. It is, on the contrary, a special case, in which the loss in the otherwise remaining value in the original mains forms a portion of the cost incident to the new service, the rates for which should be made sufficiently high to amortize this loss.

This feature of inadequacy becomes of special importance in cases of the sale of the property of public utility undertakings. The buyer may have in mind to take advantage of conditions not available to the original owner or to form a combination with some other similar enterprise. The buyer, in such cases, would contend that many of the units in the plant which he wishes to acquire are of inadequate size for his new purposes and, as a consequence, should be considered as having completed their years of serviceable life. The seller, on the contrary, would contend that the units were adequate for the successful operation of the plant on the lines originally contemplated for a number of years to come and, therefore, could not be considered as unserviceable. These two contentions would be reasonable and logical were the present value to be determined for the property of a private undertaking. An owner of a private undertaking may endeavor, as far as may be possible, to write down the value of his plant, through large reserves for depreciation, so that at all times the existing value may be what could be obtained for the plant primarily as scrap, should he be forced to sell. But the case is entirely different when the value of the property of a public utility is involved. The conditions are entirely altered by the fact that the interests

of the public are involved. Thus, in the sale of a public utility, there are the interests of three parties at stake, the buyer, the seller and the public. If the officers of a public utility undertaking had reason to expect even a remote probability that their property might be taken by condemnation and that it might be considered as inadequate due to a change in conditions beyond their control, clearly it would be their duty to make "inadequacy" a controlling factor in shortening the life of the plant and by so doing oblige the public to pay such higher rates as would amortize, through the annual reserves for depreciation, the entire cost of their plant within the years that the plant remained under their control. But such a condition should not arise. A public utility undertaking has obtained special rights and in return it must give to the public the best service with a minimum total cost to the public for such service. When such an undertaking has performed its duty faithfully, the public is bound to respect the fact that the undertaking has incurred certain hazards and risks for its benefit in extending the number of years of useful life as far as was safe in order that the cost of the service to the public might be made as low as possible.

In a case of sale, therefore, if it can be shown that inadequacy as of the date of transfer could not have been proved, if the original undertaking had been permitted to continue along the lines of development originally wisely and properly planned, the change in policy contemplated by the buyer cannot be given as a reason for a reduction in useful life due to inadequacy. The buyer must pay the value which still exists in each unit, arising from the years of serviceable life which each unit would possess had no change in policy or management arisen. Should the buyer, having paid more than scrap value for units which he deems inadequate for his new