$364. Authorities refusing to allow depreciation. There are, however, a few cases in the State courts which refuse any allowance for depreciation among the annual charges; but the matter of depreciation has been in late years so well understood that these cases have no importance to-day. In one case the argument was this: "We see no reason why plaintiff, in addition to operating expenses, repairs, and other ordinary charges, should be allowed to reduce the apparent profits by deductions for a restoration or rebuilding fund. The setting aside of such a fund may be a good business policy, and, if the company sees fit to devote a portion of its profits to that purpose (though as we understand the record, no such fund has yet been created), no one can complain; but it is in no just sense a charge affecting the net earnings of the works. To hold otherwise is to say that the public must not only pay the reasonable and fair value of the services rendered, but must, in addition, pay the company the full value of its works every 40 years-the average period estimated by plaintiff for all time to come.' The answer to this line of argument plainly is that those who devote their property to the service of the public should be fairly assured that not only are they to have the return on their investment which they would get elsewhere, but that their capital will at all times be secured from impairment. 99 75 § 365. Renewal of equipment to offset depreciation. The equipment of the road must be renewed from time to time; and an expenditure of the proper proportionate amount in each year for new equipment is a proper annual charge. So in Milwaukee Electric Railway and Light Company v. Milwaukee," it was held proper to buy yearly 74 Redlands, L. & C. D. Water Co. v. Redlands, 121 Cal. 363, 53 Pac. 791. 75 Cedar Rapids Water Co. V. Cedar Rapids, 118 Iowa, 234, 91 76 87 Fed. 577. If a company in setting aside funds collected for de and charge to annual expenses a sufficient number of cars, with motors and complete electrical equipment, to keep up the necessary standard of equipment. It may aid one to appreciate the nature of the problem and the method of its solution to cite from the expert testimony adduced in that case and adopted by the court: "In reference to the element of depreciation, the witness Beggs gives the following explanation: 'I think experience has demonstrated that the utmost life that can be expected from the best roadbed that can be laid to-day would be, at the outside, ten or twelve years, when it would have to be almost entirely renewed. The Milwaukee Company is in that condition to-day, because of the different periods that their track went down, and due to the fact that it was not all put down at one time, and it must now of necessity commence to lay about 12 miles of track annually, being about one-twelfth of its total mileage; and will be required, whether they wish to or not, to lay that amount annually hereafter, and will thereby be keeping their tracks fairly up to the standard. The same applies, I might say, to the equipment. In my estimate I have calculated that the Milwaukee Company must do this year, which, as a matter of fact, it is doing, what it did last year,-in other words, put on not less than 20 of the most modern, bestconstructed equipments, thereby keeping its standard up to the minimum as it has now, of 240 equipments; because I think it is fair to assume that the average life of the double equipment, taken as a whole, will not exceed twelve years, the life of the motor being somewhat less than that, and that of the car we hope may exceed it possibly several years, I mean the car bodies, but that, in the main, we hope that we will get an average life of twelve years out of them. So, taking 20 equipments an preciation beyond current replacements immediately necessary invests them in its own plant, these items, it seems, should be separately handled and the company should not expect a profit thereon as for capital devoted to the service of the public. § 364. Authorities refusing to allow depreciation. There are, however, a few cases in the State courts which refuse any allowance for depreciation among the annual charges; but the matter of depreciation has been in late years so well understood that these cases have no importance to-day.74 In one case the argument was this: "We see no reason why plaintiff, in addition to operating expenses, repairs, and other ordinary charges, should be allowed to reduce the apparent profits by deductions for a restoration or rebuilding fund. The setting aside of such a fund may be a good business policy, and, if the company sees fit to devote a portion of its profits to that purpose (though as we understand the record, no such fund has yet been created), no one can complain; but it is in no just sense a charge affecting the net earnings of the works. To hold otherwise is to say that the public must not only pay the reasonable and fair value of the services rendered, but must, in addition, pay the company the full value of its works every 40 years-the average period estimated by plaintiff for all time to come. The answer to this line of argument plainly is that those who devote their property to the service of the public should be fairly assured that not only are they to have the return on their investment which they would get elsewhere, but that their capital will at all times be secured from impair ment. 1975 § 365. Renewal of equipment to offset depreciation. The equipment of the road must be renewed from time to time; and an expenditure of the proper proportionate amount in each year for new equipment is a proper annual charge. So in Milwaukee Electric Railway and Light Company v. Milwaukee," it was held proper to buy yearly 74 Redlands, L. & C. D. Water Co. v. Redlands, 121 Cal. 363, 53 Pac. 791. 75 Cedar Rapids Water Co. V. Cedar Rapids, 118 Iowa, 234, 91 76 87 Fed. 577. If a company in setting aside funds collected for de and charge to annual expenses a sufficient number of cars, with motors and complete electrical equipment, to keep up the necessary standard of equipment. It may aid one to appreciate the nature of the problem and the method of its solution to cite from the expert testimony adduced in that case and adopted by the court: "In reference to the element of depreciation, the witness Beggs gives the following explanation: 'I think experience has demonstrated that the utmost life that can be expected from the best roadbed that can be laid to-day would be, at the outside, ten or twelve years, when it would have to be almost entirely renewed. The Milwaukee Company is in that condition to-day, because of the different periods that their track went down, and due to the fact that it was not all put down at one time, and it must now of necessity commence to lay about 12 miles of track annually, being about one-twelfth of its total mileage; and will be required, whether they wish to or not, to lay that amount annually hereafter, and will thereby be keeping their tracks fairly up to the standard. The same applies, I might say, to the equipment. In my estimate I have calculated that the Milwaukee Company must do this year, which, as a matter of fact, it is doing, what it did last year, in other words, put on not less than 20 of the most modern, bestconstructed equipments, thereby keeping its standard up to the minimum as it has now, of 240 equipments; because I think it is fair to assume that the average life of the double equipment, taken as a whole, will not exceed twelve years, the life of the motor being somewhat less than that, and that of the car we hope may exceed it possibly several years, I mean the car bodies, but that, in the main, we hope that we will get an average life of twelve years out of them. So, taking 20 equipments an preciation beyond current replacements immediately necessary invests them in its own plant, these items, it seems, should be separately handled and the company should not expect a profit thereon as for capital devoted to the service of the public. nually, you would keep to your standard of 240 equipments, which is absolutely necessary to maintain-to operatethe Milwaukee Street Railway. I mean cars complete, with motors and complete electrical equipment.'" "7 § 366. Fund to repair depreciation. 77 This line of argument is well met by that advanced by Sir George Jessel, Master of the Rolls, in the case of Davison v. Gillies.78 The by-laws of a tramway company required a "contingencies fund" to be set aside before the payment of dividends; and the court held this proper: "A tramway company lays 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 a fund sufficient to meet the extra cost. Where, however, the line had worn out without a proper fund "It may be said here in passing that the courts have supported the requirements of the Commission that while so much of the renewal as represents betterment may be treated as capital added, the cost of the superseded property shall be written off as depreciation. Kansas City So. Ry. v. United States, 231 U. S. 423, 34 Sup. Ct. 125. 78 16 Ch. D. 347n. |