revising the system of rates established by public authority. 130.

Reasonableness of the schedule as a whole. -The reasonableness of the schedule as a whole depends upon whether it yields a fair return upon the capital invested by the proprietors of the service. This is largely a mathematical question governed by principles which may now be said to be well recognized.45 The public service company is entitled first of all to pay all its expenses of operation. These include not only the actual disbursements for operation in each year, but also certain annual charges which must be paid before any real profit is realized. Moreover, the company is entitled to gain a fair profit upon its reasonable capitalization. What constitutes a reasonable capitalization, and what is a fair return, are matters not altogether clear according to the authorities as yet. But, generally speaking, it may be said that by the present policy a total return will be allowed in normal cases sufficient to yield the company a net profit above proper charges equal to that which would be realized from any other business where the capital and the risk were the same.

46

131. Theories as to proper capitalization.-In order to decide upon what principles the amount of capital devoted to a public service, and therefore entitled to a return, is to be estimated, it is important to note the various theories which have been brought forward for determining what amount is proper.

45 Missouri K. & T. R. R. Co. v. Love, 177 Fed. 493.

46 Coal & Coke R. Co. v. Conley, 67 W. Va. 129, 67 S. E. 613.

47

Thus the outstanding capitalization is by a few still regarded as sacred, while at the other extreme are those who refer everything to what might be shown to be the bare cost of substantial reproduction at the present moment.48 But to most persons both of these standards seem essentially unfair, either to the company concerned or to the public served. And the real controversy it is submitted is between the two remaining theories, the original cost of the property in question to its owners, 49 or the fair value of the property at the present time.50 It will be seen that, although these amounts may sometimes nearly approximate each other, there is such an inherent difference between these cases that one or the other must ultimately be adopted in a particular case.

132. Fair percentage of return.-It is now generally conceded that a proper return upon the true value of the property devoted to the public use ought in all normal cases to be protected. If rates are so reduced by public authority as to leave no such adequate return, it is now said that the owners are in effect deprived of their property. It is not only a due consideration for the rights of others who have already invested their money in public services, but also an enlightened selfishness with a view to the future which dictates the present policy that a reasonable return upon the value of the property de

47 Consolidated Gas Co. v. New York, 157 Fed. 849.

48 Steenerson v. Gt. Northern Ry., 69 Minn. 353, 72 N. W. 713.

49 Brymer v. Butler Water Co., 179 Pa. St. 231, 36 Atl. 249, LEADING ILLUSTRATIVE CASES.

50 Smyth v. Ames, 169 U. S. 466, 18 Sup. Ct. 418, LEADING ILLUSTRATIVE CASES.

voted to the public service shall be protected by the Constitution.51 In determining the measure of return upon property devoted to public use, regard should be had to the character of the business, the locality and the risk, whether the return will be uniform and secure; whether the patronage is steady or fluctuating and quickly responsive to financial and commercial changes, interest rates-legal and contractual and the rates customarily sought and required in like investments in the locality; if a railroad, the character of the traffic, whether largely of a kind dependent upon uncertain conditions or so diversified that causes affecting part will not greatly affect the whole.52

133. What are operating costs.-A public service corporation should, therefore, be allowed to take from its public enough to give it a fair return upon reasonable capitalization over and above all operating expenses and annual charges. It is to a certain extent plain enough what are properly chargeable operating expenses. Wages and salaries, materials and supplies-these are allowed as matters of course unless there is a suspicion that they are being inflated.53 Rentals and insurance assessments and taxes are annual costs and must be taken care of out of present rates. No one will deny that current repairs should come out of current earnings; and everyone will concede that all new construction should be provided for by additional capital. There

51 Stanislaus v. San Joaquin, etc., C. & Irr. Co., 192 U. S. 201, 24 Sup. Ct. 241.

52 Simpson v. Shepard, 33 Sup. Ct. 729, LEADING ILLUSTRATIVE CASES. 53 Chicago & G. T. Ry. Co. v. Wellman, 143 U. S. 339, 12 Sup. Ct. 400.

remains the debatable ground of improvements and betterments. It is possible to prevent the company from allowing for anything of this sort out of annual earnings; but the more advantageous course for all concerned would seem to be to sanction any policy in this regard which any company may adopt, provided it is within the bounds of reason. Here as elsewhere it is a matter for the company to work out in the first instance for itself.

134. Annual charges for amortization.-There are other annual charges to be taken into consideration. In general, an annual charge for depreciation in value of the plant by use is proper. This is again a matter which cannot be decided by general rules as to a standard percentage, but is a matter of careful investigation into the character of each particular business. It is now seen that the question of depreciation is too difficult for offhand estimation. The courts have as yet usually contented themselves with saying that some fair per cent should be allowed.55 A well conducted company may, indeed, see to it that provision is made for the renewal of equipment which is obviously deteriorating, but few indeed are making under present conditions provision against the slow but sure depreciation of the plant as a whole. Now that it is becoming recognized in the decisions that such allowance is a proper operating cost, more attention will doubtless be paid to this vital matter. Sinking funds, however, are hardly

54 Illinois C. R. R. Co. v. Interstate Com. Com., 206 U. S. 441, 27 Sup. Ct. 400, LEADING ILLUSTRATIVE Cases.

55 Long Branch Comm. v. Tintern Manor Water Co., 70 N. J. Eq. 71, 62 Atl. 474.

permissible in public service.56 Those who raise capital to build plants put the property at the disposal of the public for a return upon that capital; they cannot expect a return of that capital disguised as a sinking fund.

135. Theories as to rate making.-Various theories as to the making of particular rates are still in vogue. Apparently the more lawyerlike persons would base all particular rates upon the cost of the service to the company, while the more businesslike persons would make the universal test the value of the service to the patron. Opportunists would leave the making of rates to competition, while paternalists would attempt to equalize the advantage to customers in making rates. However various they may seem, these theories as to the proper basis of rate making align themselves into two opposing groups. First: there is the legal which gives chief place to the cost of service.57 Second: there is the economic, which makes the value of the service the basis.58 There used to be these two schools as to the whole schedule, one maintaining that the total receipts which a public service company might take were limited by law, the other asserting that the corporations were entitled to what they could get out of the public. This matter of the whole schedule has so long been settled against economic freedom and in favor of legal restriction, that no one would reopen

56 Houston & T. C. R. R. Co. v. Storey, 149 Fed. 499, LEADING ILLUSTRATIVE CASES.

57 Kennebec Water Dist. v. Waterville, 97 Me. 185, 54 Atl. 6, LEADING ILLUSTRATIVE CASES.

58 Interstate Com. Com. v. Chicago Gt. W. Ry. Co., 141 Fed. 1003.