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 depreciation, 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 depreciation 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, continuous, 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 required 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 undoubtedly 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 Roads, has introduced the term "absolute maintenance" in connection 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.
