i6o TEE POPULAR SCIENCE MONTHLY 



The conditions under which public service utilities operate demand 

 that they be absolutely maintained.^ Obviously, it is from gross receipts 

 that all maintenance charges must come. It is financially unsound to 

 use investment funds merely to maintain, and if the user is rightly 

 expected to pay a rate that will, after meeting the " fair return," straight 

 operating expenses, interest, taxes, etc., provide a balance sufficient 

 absolutely to maintain the property, that means that there can occur no 

 depreciation to be deducted, and if annual maintenance charges are less 

 than absolute, and depreciation occurs, it is not to be deducted, because 

 the user has contributed less each year than he rightly should. He has 

 been postponing a part of his payment. 



If the depreciation is not taken care of by the user, then the producer 

 may relinquish a part of his "fair return" in order to provide for 

 replacement, and we find our depreciation producing a deficit. We are 

 now ready to consider another controverted matter, called sometimes 

 the deficit theory. 



This problem can be attacked in exactly the same manner as deprecia- 

 tion, keeping always in mind our ethical principle, which involves the 

 user jointly with the producer as parties having material interests and 

 mutual obligations in the conduct of public service utilities. In estab- 

 lishing the justice of the deficit theory, the fact previously stated, that 

 the user is the "residual investor," is of greatest force. If business 

 under the usual conditions of developing enterprises is insufficient to 

 meet all operating charges, pay interest, taxes and insurance and furnish 

 a "fair return" to the investor, under practical conditions existent, a 

 deficit is the result. As rates could not, as a practicable measure — and 

 can not, even under the system projected — be adjusted during the de- 

 velopment period so as always to produce sufficient gross revenues to 

 meet all demands, the user can not, from his own contributions, provide 

 the necessary further funds. His managers — the producers — either ad- 

 vance the funds for him, or, in other words, forego a part or all of their 

 " fair return," or secure such advances from outsiders. In either case, 

 the user must assume the interest charges. It is not desirable that funds 

 be secured from outside sources if the accumulated "fair returns" are 

 in themselves sufficient to meet the demand, so generally such sums are 

 foregone by the producers as are necessary to meet all charges, and true 

 deficits are incurred. The user, as we have seen, must assume the inter- 

 est charges on additional funds, if such are secured from outside. Simi- 

 larly, he must assume the interest charges in the shape of a "fair 

 return" on the deficits covered by the producer. The plain way to ac- 



2 This does not consider that some utilities work at full efficiency after 

 about 25 per cent, depreciation due to "normal wear," but the argument is not 

 affected, as absolute maintenance must follow from the point at which permis- 

 sible depreciation stops. 



