ETHICAL PRINCIPLE IN PHYSICAL VALUATION i6i 



complish this end is to include in the valuation for rate making the 

 accumulated deficits to date. 



We must not stop at this point, however, in our discussion of deficits. 

 The principle we are applying stands for fairness above all things ; it is 

 ethical in nature, recognizes rights and obligations which are mutual. 

 If a public service corporation has in the past paid huge dividends, 

 made distributions of stock, and then continued to pay dividends on 

 these paper values; or if future profits, speculative values, have been 

 capitalized and a return made on this capitalization, we are in the 

 opposite position from that involved in the accumulation of past deficits. 

 Early deficits incurred in the development period may long ago have 

 been wiped out. Perhaps surplus funds have accumulated and exten- 

 sions been made to the original property. In this case, the situation is 

 just as clear as in the former. The returns over and above accumulated 

 past deficits plus a " fair return " should be deducted from the cost-new. 

 In this case the producer has taken more than his "fair return" in 

 the past; the user has contributed more than his " fair rate." An adjust- 

 ment could be made by having the producer disgorge, but this is not 

 practicable, and the simple and obvious procedure is to permit the 

 producer to retain what he has received, which assmnably bears him 

 interest, and deduct it from that capital sum on which the user is to 

 provide a " fair return " in the future. 



We are now in a position to discuss surplus, and it will afford 

 another basis of attack on the problem recited just above. Surplus is 

 more easy of definition than most of the elements we have been dealing 

 with. It is the remainder of gross receipts after operating charges, 

 including taxes and insurance, absolute maintenance charges, interest 

 charges, and a " fair return " to investors, have been met. If it exists, 

 it can belong to but one party — the user. The producer should have no 

 benefit from it. The user is the residual investor, the " fair rate " is the 

 dependent function, the user is called upon to make good depreciation, 

 deficits, and to provide a " fair return." But if a surplus is accumulated, 

 the user at last finds something that returns to him. Either the " fair 

 rate" is subject to adjustment, or else the user can accept — and usually 

 would do so under practical conditions — extensions and improvements 

 in the utility. These added values should produce no increased returns 

 to the producer. 



If now we apply these principles to the conditions supposed above, 

 involving past unduly large returns to producers, we find that had the 

 parties concerned — the user and the producer — recognized their mutual 

 rights and obligations, and, in consequence, had none but " fair return " 

 been paid to the producer, there would have resulted a large accumulated 

 surplus. As we have seen, this belongs to the user, and if the producer 

 has appropriated it, he should return it, or the user should be relieved 



