are swept away. Whatever individuals may do by private contract to modify existing rates of interest, the legislature has no compulsory power in the matter. While, by reducing the rates, the value of the stockholders' property may be reduced, in that less dividends are possible, and that power of the legislature over property is conceded,- yet, if the rates are so reduced that no dividends are possible, and especially if they are such that the interest on the mortgage debt is not earned, then the enforcement of the rates means either confiscation, or compelling in the lan guage of the supreme court, the corporation to carry persons or property without reward.2

PITNEY, V. C. IN LONG BRANCH COMMISSION v.
TINTERN MANOR WATER CO.

I have intimated that the defendant ought not to expect, at the start, a compensatory income such as that stated by Judge Williams in the Supreme Court of Pennsylvania, and by the Supreme Court of Maine, above cited, but I do think they ought to get at the start a moderate rate of interest, say 5 per cent. on their investment after paying all expenses of operation and maintenance and a moderate allowance for depreciation in value

This latter item as applied to the water mains is slight.

If originally laid of iron of proper quality and properly coated on the interior, they are practically immortal. They are, however, liable to diminution in carrying capacity, due to the growth on the interior of tubercles of rust. This is an unascertainable quantity, which varies materially with the quality of the iron, the character of the coating, and the characteristics of the water.

The fire hydrants, steam pumps, boilers and filters, and buildings certainly do depreciate in value each year to an appreciable extent over and above the amount which may be expended upon them for reasonable and ordinary repairs. Mr. La Monte put this deprecia tion at 5 per cent. on all the mains and hydrants. I think that too

2 See Chicago, M. & St. P. Ry. Co. v. Smith (1901), 110 Fed. 473. Compare Minneapolis & St. L. R. R. Co. v. Minnesota (1902), 186 U. S. 257, 266; San Diego L. & T. Co. v. National City (1896), 74 Fed. 79, 87; Missouri Pac. Ry. v. Smith (1895), 60 Ark. 221, 242.

1 Only an extract from the opinion is here reprinted.-ED.

Held:

1.

2,

great, and fix it at 1 per cent. on so much of the $847,000 as is represented by the material so subject to depreciation, Just what proportion of the whole that represents must be a mere estimate; with insufficient data I put it at $600,000.

It follows that the net income which the defendant ought to receive at the start from Long Branch should be 5 per cent. on $847,000, which amounts to $42,350, and 1 per cent. on $600,000, making $6,000, and a total of $48,350.

To this must be added the costs of maintenance and administration including ordinary repairs and taxes. Mr. La Monte had made up and submitted and been cross-examined upon a very careful estimate of those items showing the amount to be $30,000. I have carefully scrutinized it and believe it to be a fair and just estimate. Allotting two-thirds of this to Long Branch, we have it charged with $20,000 a year.

This seems a large sum, but it must be borne in mind that the works must in their size and operation be gauged to the highest population in the crowded season, and to the extravagant use in which Long Branch indulges for street sprinkling. Taking those matters into consideration, I do not find it oppressive.2

CEDAR RAPIDS GAS LIGHT CO. v. THE CITY OF CEDAR
RAPIDS.

144 Iowa, 426. 1909.1

LADD, J. . . . It appears that the company had charged off its books as depreciation in the value of its property due to use the following sums: $10,000 in 1902, $20,000 in 1903, $12,000 in 1904, $10,000 in 1905, $13,000 in 1906. In computing the expense of distribution, the plaintiff's accountant, as said, included these items, while the defendant's accountant allowed for depreciation of property $.05 per 1,000 cubic feet of gas manufactured. This would make a difference in manufacturing and distributing gas sold in 1905 of $.0714 per 1,000 cubic feet, and in 1906 of $.0816. There can be no doubt as to the justice of some allowance for depreciation. A public service corporation is under no obligation to sac

2 "The conditions in no two cities may be alike, and it seems reasonable to say that questions as to telephone rates may in large measure be local questions to be determined upon factors, among which the most important may be (1) the cost of the plant; (2) the cost of operation and maintenance; (3) the amount of taxes and other dues exacted by the local gov ernment; and (4) the rapidity of deterioration due to climatic or other causes. Cumberland T. & T. Co. v. Memphis (1908), 183 Fed. 875, 877. 1 Only one point from the opinion is here reprinted. ED.

rifice its property for the public good. Nor is it bound to see its property gradually wasted by wear and decay without making provision for its replacement. It is entitled to earn enough not only to meet the expenses of current repairs, but also to provide means for replacing the parts of the plant when these can no longer be used. "It is entitled to see that from its earnings the value of the property is kept unimpaired, so that at the end of any given term of years the original investment shall remain as it was at the be ginning. It is not only the right of the company to make such 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 displacement 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." This situation ought not to be brought about either by the payment of excessive dividends or the omission to exact proper prices for the output. Mayor, etc., of Knoxville v. Knoxville Water Co., 29 Sup. Ct. 148.

There is a wide divergence of opinion as to the amount that should be set aside for depreciation, but all the witnesses concede that their estimates are without data as a foundation, though the elements to be taken into account are enumerated. As contended, scarcely two parts of the plant will cease to be useful at the same time. Some will last but a brief period, while others may be serving their purposes for more than a century to come. Some stress is put on the possibility of enlargement and of the necessity of replacing parts with others adequate to meet increased demands, but there is no reason to think that the income will not keep pace with the extensions or enlargements. In other words, profits on the additional sales of gas will in all probability yield an adequate income on the amounts expended for the expansion of the plant. Should replacement of some of the machinery now in use prove necessary because of new inventions, this in all probability will be owing to the economy which may be effected thereby in production, and again the saving may be expected to yield a fair return for the new investment. Moreover, the rate fixed by this ordinance is not necessarily perpetual, but subject to such changes by the governing board of the city as shall be essential to meet the contingencies of the future. The expert accountant who testified in behalf of defendant allowed 5 cents per 1,000 cubic feet of gas manufactured for depreciation, and another, who had made a study of

Note:- Larms is making public pay
than enough to
to give

лине

a

Keed!

1. What
co. entitled

to earu.

• fair riture & is making public replace equipment also.

Held:

Contrary

to abone Cass.

Best.

the durability of different material, testified that if 1.7 per cent. of the value of the plant were put into a sinking fund drawing annual interest at 4 per cent. per annum, this would produce enough to replace the plant in 30 years. The amount allowed by the accountant approximates this percentage of the value, and we are of opinion that in view of the evidence adduced it will prove adequate for replacement of the different portions of the plant when this shall become necessary. Appellee insists that the average cost during the past five years should be adopted. This, including depreciation, would be $.6404 per 1,000 feet. Another item is not to be overlooked, and that is the probability that in the future the company, in view of this investigation, will be required to pay its just portion of the burdens of taxation. What the increase shall be cannot be told in advance, but it is likely to be enough to offset any decrease in the cost of fittings. The cost of gas production during the years 1905 and 1906 was much higher than for the years previous. This was not owing to the increased cost of fuel. The accountant of defendants testified that the cost of manufacturing and distribution, including allowance for depreciation, was $.57 per 1,000 cubic feet in 1902, $.5935 in 1903, $.6375 in 1904. This increase in cost was due in large part to the increase in the fittings account, such as installing stoves, meters, and the like. In 1902 there was a profit in this account of $283.99, in 1903, an expense of $972.80, in 1904 an expense of $39.60, in 1905 of $6,758.89, and in 1906 of $5,943.83. This increase of expense of fittings, etc., over profits on the sale of stoves, etc., is not satisfactorily explained. There is no reason for thinking so large an outlay as in the last two years will be required in the future, and the probable decrease therein may safely be allowed to offset probable increase in taxes. Upon an examination of the entire record, we are satisfied that the cost of manufacturing, distribution, and of making collections should not exceed $.6812 per 1,000 cubic feet at the time the ordinance was enacted.2

2 In Cedar Rapids W. Co. v. Cedar Rapids (1902), 118 Iowa, 234, 263, the same Court said:

POFFENBARGER, J. IN COAL AND COKE RAILWAY CO. v.
CONLEY AND AVIS.

67 W. Va. 129. 1910.1

There are only two items in the statement of expenses that might possibly include money that ought not to be deducted from the income for the purposes of the bill. They are the items designated "Maintenance of Way," amounting to $127,059.01, and "Maintenance of Equipment," amounting to $166,207.64. Under these two headings, there might be included the cost of improvements upon the roadbed and track and of new

Keedior additional rolling stock. It is easy to see how a railroad com- Caut

/

pany, if permitted to include such costs in what are designated as charge expenses of Maintenance of Way and Maintenance of Equipment, and other improvements, could absorb all, or a large portion, of casts its earnings in the cost of betterments of its property and be in a of mainterese position in almost any year to say it is not earning a fair return of way &

on its investment. The cost of betterments is obviously capital invested, and, if taken out of the earnings of the road, ought to

be regarded, for the purposes of a case of this kind, as a part of the operating Expenses.

the net earnings

Railroad Co. v. United States, 99 U. S. 402, 420. It is not properly chargeable to operating expenses. On the contrary, it is net profit earned. Of course the railway company may do what it pleases with its profits, but if it sees fit to devote them to the improvement of its road, or the building of branch lines, instead of declaring dividends or paying interest on its indebtedness, it cannot be heard to say it has not earned them. Some criticism of these two items in the statement is found in the discussion of both the bill and the evidence, but we do not think the Court could say, upon the demurrer to the bill, in view of the amount invested, that they are out of proportion. The magnitude of the cost of maintaining a new railroad in a mountainous section of the country, as well as that of maintaining the efficiency of rolling stock, is obvious to all. This railroad is 183 miles long and, exclusive of rolling stock, cost something over $5,000,000.00, while its rolling stock, owned and leased, cost something over $1,500,000.00. For ten months the cost of Maintenance of Way amounted to only about two per cent. of the amount invested in the railroad, and of Maintenance of Equipment to only about eleven per cent. of the value of the rolling stock. The charge for general expenses is comparatively light, being only $32,290.11 for that time. It is impossible that extravagant and disproportionate sums could have 1 Only an extract from the opinion is here reprinted.- ED.