BOOK REVIEWS Atwell, William H.-A Treatise on Federal Criminal Law Procedure Bush, Coleman Hall-Uniform Business Law Clarke, Fabius M.-The California Law of Corporations 506 181 85 181 Ehrich, Manfred W.-The Law of Promoters 85 508 Fuller, Hubert Bruce-The Act to Regulate Commerce Construed by the Supreme Court 180 Guthrie, William D.-Magna Carta and other Addresses 358 357 Harvey, Richard S. and Bradford, Ernest W.-A Manual of the 269 Honnold, Arthur B.-A Treatise on the American and English 357 Hopkins, James Love-Trademarks and Tradenames and Unfair 509 Husband, Richard Wellington-The Prosecution of Jesus: Its 358 Lobingier, Charles Sumner-The Evolution of the Civil Law 270 270 Stetson, Francis Lynde and others-Some Legal Phases of Corporate Financing, Re-organization and Regulation Thurston, Edward S.-Cases in Quasi Contract 507 357 California Law Review Volume V NOVEMBER, 1916 Number 1 Methods of Estimating Depreciation in Valuation of Public Utilities for Rate E VERY property engaged in the public service will be composed of property which does not depreciate, land for example, in the normal instance, and property which does depreciate in value through physical deterioration or functional changes. I cannot do better than quote Mr. Adams,1 "'Depreciation' means the shrinkage in value of properties because of deterioration from use and because of enforced abandonment by reason of functional changes and obsolescence. For purposes of illustration, an iron pipe laid underground, through a gradual process of physical deterioration fails in the course of a period of years and must be replaced by a new one. For purposes of illustrating what is meant by 'functional depreciation' the growth of a city frequently makes necessary changes in the method of distributing the water, calling for the abandonment of pumping stations on certain sites and the construction of others elsewhere. The pumping station of this particular property located in 1904 *The opinion of H. M. Wright, Esq., Standing Master in Chancery, in his report in the case of Contra Costa Water Company v. City of Oakland, pending in the District Court of the United States for the Northern District of California, Second District, discusses many questions of interest respecting the basic principles of rate regulation. Through the courtesy of Mr. Wright we are enabled to print a portion of his opinion dealing with the matter of depreciation. 1 Quoting from the transcript in the case (p. 99). and 1905 at the Broadway Reservoir is an illustration in point. This pumping station was built subsequent to 1900, was in use in 1904 and 1905, and two years thereafter it was entirely abandoned and another one built in its place on another site. As an example of depreciation through. obsolescence one may cite pumping machinery, which, though it may after many years of use, be in excellent working condition, may have become obsolete and no longer economical of use, leading to its enforced abandonment and replacement by machinery of greater capacity or of better economy in steam consumption. In speaking of depreciation one should carefully distinguish between the two general classes ordinarily designated as matured and unmatured depreciation. Matured depreciation relates to structures that have wholly failed and must be replaced or abandoned, or to properties which have entirely failed through functional changes or obsolescence. Unmatured depreciation is shrinkage in value of properties and structures not new, but still serviceable in use and which will in the course of time have to be abandoned or renewed. Matured depreciation represents total shrinkage in value because of the structures' having served out the entire period of their usefulness. Unmatured depreciation represents shrinkage in the value of structures because they have partially served out their total period of usefulness." It obviously follows that if a water works is to have a fair return for its service to the community, the rates charged must afford a revenue from operation sufficient to make good this inevitable depreciation in value of certain of its elements, as well as other costs of operation, plus the profit which induces the operation. Depreciation is thus, for any future period, a problem in cost accounting. That this apparent fact, now generally admitted, was not always understood is shown by the decisions of the Supreme Court of California in Redlands Water Company v. Redlands, and San Diego Water Company v. San Diego,3 where an annual return in the rates for depreciation was denied. In the latter case Mr. Justice Garoutte said:" "Such a thing is all wrong, for it results in the consumers of water buying the plant and paying for it in annual installments." 2 (1898), 121 Cal. 312, 53 Pac. 791. 3 (1897), 118 Cal. 556, 50 Pac. 633. 4 Id. p. 583. On this basis, the owner of a plant costing $100,000 with an assumed life of twenty years would receive income on his investment for the life of the plant, and would then be out his investment save for its scrap value. This would be like satisfying a loan by paying interest on it. It is only within the last few years that methods of accounting for depreciation in relation to the problem of rate fixing have been the subject of thorough study by those most competent to speak. The impetus to that study seems to have been the decision in Knoxville v. Knoxville Water Company. I am assured by counsel that in this case certain opposing theories have for the first time been presented for judicial determination. Certainly the exposition of these questions in the record, both by the witnesses, engineers of high standing and fitness, and by counsel has been most exhaustive and able. The law on this question may be considered as fairly well settled by the decision in Knoxville v. Knoxville Water Company®. It would be interesting to consider that case at some length with reference to the specific facts there disclosed, and to certain possible limitations on the generally received doctrine of the case. It is not here necessary. That case may be considered to stand for the following propositions, namely: That the depreciated value of public service property is the proper rating base for determining fair return; that the rate-payers must pay for the depreciation of public service property; and that such a company is entitled to earn its depreciation annually as the depreciation accrues. In the Minnesota Rate Cases, the court disapproved the master's action in finding that the depreciation which had in fact happened was more than offset by appreciation, and thus adopting the cost of reproduction new as his rating base. The property in question was a railroad, and here, as in the water works of the Knoxville case, the court held that the extent of existing depreciation should be shown and deducted, saying: "It must be remembered that we are concerned with a charge of confiscation of property by the denial of a fair return for its use; and to determine the truth of the charge 5 (1909), 212 U. S. 1, 53 L. Ed. 371, 29 Sup. Ct. Rep. 148. 6 Supra, n. 5. 7 (1912), 230 U. S. 352, 456, 57 L. Ed. 1511, 33 Sup. Ct. Rep. 729. |