POSSIBLE PROCEDURES IN FIXING RATES =]
and that in regulating rates, consideration need be given only to
the amount of capital reasonably and properly invested without
any deduction for depreciation.
The earnings, in other words, to be adequate, must include
at least operating expenses of every character, a proper allow-
ance for present and prospective replacements (so-called current
depreciation) and a reasonable income computed at the proper
interest rate on the invested capital.
Comparison of Sinking Fund and Equal Annual Payment
Methods. — Enough has already been said to show that the
so-called Sinking Fund Method of procedure, when no distinc-
tion is made between actual and probable life, is exactly equiv-
alent in its results to the Equal Annual Payment Method. The
former, in which the rate-base is roo per cent of the invest-
ment, involves a single computation of the annuity which at
compound interest will amount in the probable life term to
the capital invested in any article. The latter, under which
accrued depreciation is deducted from the investment, requires
a re-estimate of the current amortization (depreciation) incre-
ment from year to year and a new annual estimate of accrued
depreciation.
Amount of Amortization or Amount in the Replacement Fund.
— If under any method of procedure the owner of a plant of
numerous parts and all possible ages is required to place all
sums earned as “ depreciation ” or earned to meet “replacement
requirements ” into a special fund, and the depreciation or re-
placement requirement has been actually earned from the begin-
ning, the amount of amortization accomplished out of such
a fund or the theoretical balance on hand, after meeting all
current replacement requirements, will be as follows:
Under the Straight Line Method of estimating amortization
for old plants of full growth, the theoretical accumulation should
be 50 per cent of the investment in perishable property — this
accumulation is independent of the interest rate and this fund’s
earnings are of no concern to the rate-payer.
Under the method of estimating the “accrued obligation to
167
