42 VALUATION, DEPRECIATION AND THE RATE-BASE
the country, a revaluation may be necessary if the same stand-
ard of approximation to reconstruction cost is to be continuously
maintained. At any rate, the public utility commissions of the
country should see to it that useless work on these lines be not
demanded. It is their province to fix the standard in this
matter.
When rates are to be fixed, they are based on a forecast of
what the earnings should be. The exact result of charging for
the service rendered at any fixed rates cannot be known until
the rates have been in effect for a time. A deficiency in the
earnings is discouraging to the owner and makes him prone to
give inferior service. He may be forced into the courts and
will then incur legal and other expenses which in the end will be
paid by the consumer. An accumulating surplus, on the other
hand, should insure high-class service and can be used to safe-
guard the property against unforeseen accident and to make
sure of its proper upkeep without giving to the owner, in the
long run, any larger amount in dividends than he is legitimately
entitled to receive. If there be error, it should be on the side
of the adequate return, provided always that a limit is set to
the rate of return on the investment and to the compensation
for managing the business, and that the charge for the service
rendered be a reasonable charge.
Overhead Expenses
Cost Includes Overhead Expenses. — Overhead expenses
have already been defined. They include primarily the cost of
management, engineering, interest during construction, taxes
and insurance.
In the determination of “cost” whether the actual cost or
the estimated cost of reproduction, whether at present day
prices or at prices applying to a selected period or to a par-
ticular time, it will be essential to have due regard to the over-
head expense. It is not enough to be able to state item for
item what it would cost to reproduce each in its exact present
condition of serviceability, but proper account should be taken
