168 VALUATION, DEPRECIATION AND THE RATE-BASE
out (6 per cent per annum interest being again used for purposes
of illustration) will be 38 per cent as shown by the formula on
page 93.
In other words, the remaining value of the 20 generators
(cost less depreciation, as ordinarily noted) will be about 62
per cent. No purchaser would include the 20 generators in his
valuation of the property at more than 62 per cent of their
aggregate cost; but he would, nevertheless, and with reason,
expect to be allowed to earn interest on 100 per cent of their
cost new, claiming rightfully that he is entitled to the same
rate of income return on unexpended annual replacement incre-
ments as he is entitled to earn on the rest of his invested capital.
He will justify this claim by pointing out that the earnings on
any accumulated replacement fund are not available for any
other use than the replacement of worn-out property; that such
earnings do not, therefore, represent income; and that it is for
this reason he is entitled to have the aggregate annual replace-
ment allowance, together with accumulated interest, treated as
interest-bearing capital.
California Law Restrictions upon the Depreciation Fund. —
In this connection attention may be called to the laws of Cali-
fornia (Statutes of 1grz, First Extra Session, Ch. 14, Sec. 49),
which prescribes that the Railroad Commission (having the
duties of a public service commission):
“ may from time to time ascertain and determine and by order
fix the proper and adequate rates of depreciation of the several
classes of property of each public service utility. Each public
service utility shall conform its depreciation accounts to the
rates, so ascertained, determined and fixed, and shall set aside
the moneys so provided for out of earnings, and carry the same
in a depreciation fund, and expend such fund only for such
purposes and under such rules and regulations, both as to
the original expenditures and subsequent replacement as the
Commission may prescribe. The income upon investments of
moneys in such fund shall likewise be carried in such fund.”
It is here apparently recognized that the depreciation fund
should be used for the sole purpose of replacing worn-out parts
