having been provided for repairs, it was held that the whole amount necessary could not be charged to a single year, but only the proportionate amount." 79 § 367. Capitalization of past depreciation. That depreciation is an actual cost to be included in the annual charges of a corporation is shown in a striking manner in a late decision of the United States Supreme Court 80 to the effect that it must be provided for from year to year out of annual earnings, and cannot be ignored for a long period and then capitalized. The problem as presented to the court, and the solution of it, is so well stated in the opinion of Mr. Justice Moody that to paraphrase it would be inexcusable. "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 its 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 Rates, Western Case, 20 I. C. C. R. 307. 79 A railroad may properly accumulate funds to meet obsolescence, unless this charge is taken care of in maintenance. In re Advances in 80 Knoxville v. Knoxville Water Co., 212 U. S. 1, 53 L. ed. 371, 29 Sup. Ct. 148. 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." 81 § 368. Payments into sinking fund. The suggestion is made in one case that a provision out of current earnings for a sinking fund is proper. In Brymer v. Butler Water Company 82 already quoted, it was said that out of income might be set aside a "suitable sinking fund for the payment of debts." On the other hand, in the recent case of Houston & Texas Central Railway Company v. Storey,83 it was held that a railroad company would not be allowed to earn an amount sufficient to provide a sinking fund for the discharge of its indebtedness in addition to paying the interest thereon. It is indeed very questionable how far it is true that a public service company should be allowed to include in its annual charges a percentage sufficient to provide for the redemption of its bonds in so far as these bonds represent cost of construction.84 To adopt such a policy would make the generation during which these bonds are being paid off buy the railroad to that extent, and yet after that it 81 Where a public service corporation raises more money in a particular year than is required for actual depreciation, it cannot carry the excess to capital for the purpose of estimating the amount on which it is entitled to pay dividends. Louisiana Railroad Comm. v. Cumberland Telephone 82 179 Pa. St. 231, 36 Atl. 249. 84 See Dan Diego Water Co. v. San Diego, 118 Cal. 556, 50 Pac. 633. would be hard to say that the next generation could demand carriage free of fixed charges. The startling truth seems to be, therefore, that a public service company should not any more expect to pay off its bonded indebtedness than to return the subscribers the subscriptions on their stock. The bonds should be refunded as they fall due, the interest remaining a fixed charge; and the stock should remain outstanding, only reasonable dividends being distributed to it. What the law secures is a return on the capital invested, not a return of it. But if the bond issue represents some expenditure not resulting in everlasting addition to the plant utilized, this may properly be provided for by an installment purchase. Such financial arrangements as equipment bonds are justifiable whereby the amount which the bond issue represents is sunk by periodical payments 85 with the same result as an installment purchase. § 369. Amortization of franchise rights. 86 Where a franchise for a limited period is granted to a public service company, it may perhaps be proper to deduct from gross income a sufficient amount to sink the value of a secured franchise which will disappear at the end of the period, since the value of the plant is annually depreciated by that amount. In Milwaukee Electric Railway v. Milwaukee, recently cited, the court said: "There is much force in the argument of counsel that consideration should also be given to the factor of depreciation by amortization of franchises, as all the franchises in question terminate in the year 1924." In certain of the schemes now much in favor in bargaining between a municipality and a public service company, it is provided that the works shall be constructed at the expense of the public service company and operated by it as its own for a fixed period, at the end of which time the subway, or 85 Compare Milwaukee Electric Ry. Co. v. Milwaukee, 87 Fed. 577. · 86 87 Fed. 577. whatever it may be, thus becomes the property of the municipality free of payment. It is obvious that in such a case the public service company must be allowed to sink the cost of such works from sums set aside from annual earnings by some process. Topic D. Operations of Consolidated Properties § 370. Complications in case of systems. If the business carried on by the public service company covers a large territory, the difficult question arises whether the system is to be taken as a whole or whether each locality is to be taken by itself. Additional complications are added to the problem when it is shown that the present system is the result of a consolidation, more or less integrated, of several properties; then the question becomes whether each of these original constituents is to be taken by itself in rate regulation or whether all are to be taken together as before. The consideration of this matter of the consolidation of companies belongs of course to those who are writing of the law of corporations in general. Still it may be pointed out that the present railway systems are almost invariably consolidations of various constituent companies, and that these constituent companies are almost always left in existence after the consolidation. (1) The commonest form of consolidation is perhaps by a long term lease given by the constituent road to the operating company. (2) Another equally usual is for the consolidating company to hold all or part of the stock of the constituent companies. There are, of course, two other types of combination, one less integrated than either of those just mentioned, the other more consolidated than either. (3) Thus the only bond between the railroad companies may be some traffic agreement or pooling arrangement whereby each company is left as an independent unit; (4) there may be complete consolidation, the new corporation taking over the constituent companies out 87 right, these companies going out of existence. It is obvious that the problem proposed for discussion in this chapter does not arise in the third and fourth types described, since, in the third, each road still remains the operating unit, while in the fourth it is plain that the new company is the sole operating unit. Whatever difficulties there may be will occur in the first and second cases. Like most questions of rate regulation, this question may arise in one of two ways: one aspect of it will be whether a railroad company operating leased lines or held lines is justified in treating its system as a whole; the other side of the question will be whether such an operating company can be required at all to consider its system as a whole in making rates. 88 § 371. Divisions as integral parts of the whole system. It must, however, be insisted upon as the usual solution of this problem that the railway system shall be treated as an entirety. By this conception every division is as much an integral part of the whole system as the different portions of the main line are. And the contention is that it is not proper to segregate a division and fix rates for it upon the basis of its own finances taken by themselves, although some slight scope may be given to such considerations. This general principle was well expressed, and the reasons establishing it were well set forth, in an early pro 87 The general rule is that systems shall be treated as units. Union Pac. Ry. v. U. S., 99 U. S. 402, 25 L. ed. 274, reversing 13 Ct. of Cl. 401; Chicago, Milwaukee & St. P. Ry. v. Tompkins, 176 U. S. 167, 44 L. ed. 418, 20 Sup. Ct. 336, affirming 90 Fed. 363; Minneapolis & St. L. Ry. v. Minnesota, 186 U. S. 257, 46 L. ed. 1151, 22 Sup. Ct. 901, affirming 80 Minn. 191, 83 N. W. 60; Ames v. Union Pac. Ry., 64 Fed. 165; Atlantic & P. Ry. v. U. S., 76 Fed. 186; Milwaukee Electric Ry. Co. v. Mil waukee, 87 Fed. 577; Interstate Com. Comm. v. Louisville & N. R. R., 118 Fed. 613. 88 But see Chicago & G. T. Ry. v. Wellman, 143 U. S. 339, 36 L. ed. 176, 12 Sup. Ct. 400, affirming s. c., 83 Mich. 592, 47 N. W. 489; San Diego L. & T. Co. v. National City, 174 U. S. 739, 43 L. ed. 1154, 19 Sup. Ct. 804, affirming 74 Fed. 79; Louisville & N. Ry. v. Brown, 123 Fed. 946; Steenerson v. Gt. N. Ry., 69 Minn. 353, 72 N. W. 713. |