with depreciation, but the following words may be quoted to emphasize the importance and propriety of this contribution from the public.

"It is not only the right of the company to make such a provision, but it is its duty to its bond and stock holders, 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 stock. 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 overissues of securities, or of omission to exact proper prices for the output, the fault is its own."

This decision clearly establishes the only principle that is capable of yielding the stability of service and rates which is essential for the good of the public as well as the stockholders of the undertaking. It is manifest that if a company could obtain only a fair return upon its investment and, following the former decision, was obliged to make its reserves from such return, not only would the property be ruined but no money would be invested in undertakings where such an exaction was enforced. The return allowed may be 6, 7 or 8 per cent of the value of the property invested, but the needed reserves, in many cases, would be as high as 8, 9 or 10 per cent of the same investment.

183. Obligation of public utility undertaking to the public. -It must be recognized by public utility undertakings that they have been given by the public certain rights and privileges; that, instead of building and operating the plant itself, the public has allowed the under

taking to take or use property and in most cases this privilege has been extended to it alone; that virtually its plant is a municipal property built and operated for the public good but with the money of private individuals; that in return for these privileges the undertaking must give the public good and modern service at reasonable rates; that the rates are reasonable when they yield a gross income sufficient to pay proper and liberal operating expenses, an ample installment toward the depreciation reserve funds and a just and liberal return to those who have risked their money in the undertaking; that this return shall be based upon the value of the property in use and useful to the public; and that the reserves for depreciation shall be conserved by the undertaking for the purpose for which they were contributed, i.e., to make good portions of the property as they become no longer serviceable.

There are two features only of these obligations of public utility undertakings which are not self-evident. One is that the undertaking, in order to maintain a fair rate of return upon funds originally invested in the property, must keep the value of their property unimpaired at all times. The other is that the reserves for depreciation, although the property of the undertaking, were contributed to it for a specific purpose and can be used only for that purpose.

184. Maintenance of the value of the stockholders' investment. An undertaking, which has invested its money wisely and properly for the purpose of supplying the public with a needed service, will find that the value of the property, in most cases, will depreciate, owing to the limited tenure of life of many of its elements. This gradual diminution in value can be made good by the depreciation reserves, so that there will be always in hand property of the value of the stockholders' invest

ment, represented either by plant value or plant of reduced value and depreciation reserves, equal to the amount by which the value of the plant has been reduced. So long as this total value of the property is maintained the rate of return can be based upon the original investment.

Unfortunately, the fairness of the principles above outlined are not apparent in many cases, owing to questions arising from the treatment of the depreciation reserves held by the undertaking. This subject is of fundamental importance and is one of the features involved in valuations of properties which needs most careful discussion.

The depreciation reserves obtained by the undertaking from the public are not immediately needed for the replacement of plant but are held by the undertaking for this purpose. In some cases these reserves are invested in outside securities drawing interest and, in other cases, are invested in needed extensions of the plant of the undertaking.

The difficulties which are frequently present in the minds of those considering this subject are: first, as to the justice to the public of an undertaking being allowed to earn a full return upon money contributed by the public, and second, if the undertaking is obtaining a return in the form of interest on the depreciation reserves which it has invested in outside securities, as to whether it is right to oblige the public again to pay to the undertaking a return upon this fund.

The first of these difficulties is removed when it is appreciated that the public pays a full return only on the money invested in the undertaking. The value of the plant represented by that investment may diminish, but the original investment was made in good faith by the stockholders of the undertaking and they are entitled to a full return upon that investment so long as the under

taking can produce the service desired and, at the same time, show that there is sufficient property in hand to produce the same character of service indefinitely. It is true that a portion of the property which the undertaking possesses is of the nature of depreciation reserves, obtained from the public, but these reserves are not used by the undertaking to enhance the amount of their investment and so advance the rates, but rather, as directed by the courts, to maintain the value of the investment unchanged and, thus, bring about the uniformity in rates, capital and return essential to the well-being of both the public and of the undertaking.

This holds true whether the reserves for depreciation are invested in outside securities or invested in needed extensions of the plant. In each case the value of the original investment is maintained and the undertaking can obtain a return for its stockholders on that value only. When the reserves are invested in plant, the amount which has been invested in plant, its replacement cost, may exceed by a large amount the value of the original investment, but, if the reserves have been properly made, the then value of the property will be the amount invested in the property by the stockholders and it is upon that amount only that a return to the stockholders can be made.

The second of these difficulties also is removed when it is appreciated that the return to the stockholders is based only upon their investment, provided there is at all times property equal to their investment in the hands of the undertaking. If the reserves are invested in outside securities drawing interest, the annuity paid by the public toward the depreciation reserves need not be as great. The return obtained from these invested reserves may not have been segregated and made a part of the depreciation reserves, but shown as a portion of the gross income

of the undertaking. Such a practice may lead to accounting difficulties, but can result in no unfairness to the public as the undertaking can earn only a fair return upon its "then" property and it will be necessary to transfer the surplus earnings to the depreciation reserves to make the then value of their property equal to the value of the original investment.1

The same line of reasoning holds good when depreciation reserves are invested in plant, provided that it is clearly recognized that, in such a case, the question of a return upon the depreciation reserves is a mere fiction, as the public in the long run contributes the entire original investment. The undertaking can pay its stockholders only the fair return upon the original investment, provided it has property then equal in value to that

amount.

185. Treatment of depreciation reserves. The second feature of the obligations of a public utility undertaking to the public is a proper recognition and treatment of the depreciation reserves. The undertaking must recognize that, fundamentally, the depreciation reserves are contributions made to the undertaking by the public for the specific purpose of maintaining the value of the investment in property in use or useful to the public. The depreciation reserves are the property of the undertaking, not to be disbursed, however, in any way the undertaking sees fit, but only in such a way as will insure to the public, which has contributed the money, the continuation of the service at unchanged rates.

The full significance of the treatment of depreciation reserve funds is brought out most clearly when the present value of a property is considered in a case of condemnation or sale. In order to obtain full justice to the

1 Under modern standard methods the above complication would not