THE RATE-BASE AND DEPRECIATION 7 
“ The refusal of the commission and of the lower court to hold 
that, for rate-making purposes, the physical properties of a 
utility must be valued at the replacement cost, less depreciation, 
was clearly correct.” 
The court in these various decisions shows its embarrassment 
resulting from the attempt to use value and not the reasonable 
legitimate investment as the rate-base. The court fails, also, 
to indicate that intangible values in excess of investment are 
created by adequate rates and that such values cannot exist 
unless the rates produce a net income in excess of a fair interest 
rate on the legitimate investment. The legitimate investment 
is usually best determined on the basis of actual cost of recent 
investments and on the reproduction cost of older items at the 
best available approximation of current normal prices of labor 
and materials. In the determination of normal prices considera- 
tion should be given to the prices which have prevailed in years 
recently past (generally 2 to 5) and also to the causes, if they can 
be identified, of the recently past and current trend of prices. 
The fundamental requirements when rates of public utilities 
are to be fixed may now be restated as follows: 
The rates should produce an income adequate: 
1. To meet operating expenses (here used in the narrow sense 
not including interest). 
2. To amortize properly estimated unavoidable losses during 
the development period of the business (i.e., the cost of 
establishing the business). 
3. To amortize losses from fortuitous events. 
4. To amortize the remaining value of property discarded 
because of obsolescence. 
5. To yield an ordinary interest return on the capital legiti- 
mately invested (to be estimated at current normal prices 
or from records of actual recent investment, undiminished 
by depreciation). 
6. To cover ordinary hazards of the business. 
7. To cover a fair allowance for management. 
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