4 VALUATION, DEPRECIATION AND THE RATE-BASE
principles looking to the fair treatment of both the rate-payer
and the owner has also been of benefit in a large way to the
factory, and to all the great industrial establishments of the
country, because it points the way to a closer approximation
of the actual cost of production, thereby establishing a better
basis for fixing the sale price of the output.
The discussions in the following pages are necessarily directed
mainly to the valuation of public service properties and to a
discussion of the procedure to be followed in determining what
are reasonable earnings, but the general fundamental principles
are equally applicable to the private concern.
Value must be ascertained when the ownership of property
is to be transferred from one person to another as in the case of
a sale; it must be ascertained when the property is capitalized
as a basis for the issuance of securities, and, too, for taxation
purposes. When rates or prices to be charged for service or
commodity output are to be fixed, it is necessary to know the
amount of capital which is properly invested — to know, in
other words, what the amount is which should be taken into
account as a ‘‘ rate-base.”
Depreciation and Withdrawal of Capital. — The practice is
altogether too common of treating every earned depreciation
allowance as equivalent to a withdrawal of invested capital
and of assuming that any of the various methods of estimating
present value are equitable, regardless of the past history of
the plant under investigation. So, too, there is sometimes a
too rigid construction of the generally recognized requirement
that only those parts of a property which are actually in use
or which are useful elements are to be considered in valuing the
property for rate-fixing purposes. This has occasionally worked
a hardship upon the public service corporation and may there-
fore be regarded as one of the factors which have caused a de-
mand for large allowances for all kinds of intangible and more
or less indefinite elements of value to offset losses and unpro-
ductive investments.
Every private industrial establishment, too, has its depreciation
