ETHICAL PRINCIPLE IN PHYSICAL VALUATION 159 



writers on the subject of valuation for rate making. It is sometimes 

 held that depreciation should be deducted from the original cost as 

 reproduced. Whether valuation, up to the point of considering deprecia- 

 tion, has been according to the method of cost-new or not, it is quite 

 clear from a statement of the principle of user's interest that deprecia- 

 tion should not be deducted. If an assumed case is considered, this will 

 be seen at once. Suppose a public utility has been paying all obligations, 

 meeting all charges for operation, repair and maintenance, providing 

 annual allotments to such amortizing funds as may be practicable, and 

 making a "fair return," and no more, to the investors, at any rate 

 whatever to the user. Providing there has been no accumulation of 

 surplus, the utility has been doing no better than should be expected of 

 it. Suppose now that owing to any cause at all, maintenance can not be 

 such that depreciation is checked or offset. Or suppose that elements — 

 really a large part of many properties — that can not be practicably 

 amortized by annual allocations, require replacement. If no surplus has 

 accumulated and no more than a "fair return" has been made to 

 investors, it is apparent at once that the rate to the user has been too 

 low. The user has not been contributing, in his innumerable, continu- 

 ous, small payments, an adequate part of the cost of operations. We 

 have seen that the user is the residual investor. Indeed, this fact makes 

 his ethical right to consideration particularly strong. The "fair rate" 

 that he must pay is not fixed, but the " fair return " to the producer is 

 first assured, and the user is then called upon to contribute what is re- 

 quired to operate the property. If the user is not compelled to pay a rate 

 sufficient to provide for depreciation and consequent replacements, the 

 funds must be secured elsewhere, and this means that new investors come 

 in to whom there must be paid a fair return on a sum equal exactly to 

 the depreciation. 



Before leaving this question of depreciation, it might be well to treat 

 it from an entirely different point of view, in order to establish un- 

 doubtedly the fact that it must be met by the user. Dr. L. I. Hewes, 

 chief of economics and maintenance, of the United States Office of 

 Public Eoads, has introduced the term " absolute maintenance " in con- 

 nection with the upkeep of highways. As an annual matter, it is only 

 an accounting term. It can not, in most cases, be practically applied 

 each year, for it means maintaining the road in its originally improved 

 condition without deterioration. It includes the charges for resurfacing 

 that occur at the end of a period of years. These charges are distributed 

 equally over the years since construction or last resurfacing, and, together 

 with the annual charges for ordinary repair and maintenance, constitute 

 the annual absolute maintenance charges. There can be no depreciation 

 charged off against the property if an absolute maintenance charge is 

 made. 



