The conditions under which public service utilities operate demand that they be absolutely maintained.[1] Obviously, it is from gross receipts that all maintenance charges must come. It is financially unsound to use investment funds merely to maintain, and if the user is rightly expected to pay a rate that will, after meeting the "fair return," straight operating expenses, interest, taxes, etc., provide a balance sufficient absolutely to maintain the property, that means that there can occur no depreciation to be deducted, and if annual maintenance charges are less than absolute, and depreciation occurs, it is not to be deducted, because the user has contributed less each year than he rightly should. He has been postponing a part of his payment.
If the depreciation is not taken care of by the user, then the producer may relinquish a part of his "fair return" in order to provide for replacement, and we find our depreciation producing a deficit. We are now ready to consider another controverted matter, called sometimes the deficit theory.
This problem can be attacked in exactly the same manner as depreciation, keeping always in mind our ethical principle, which involves the user jointly with the producer as parties having material interests and mutual obligations in the conduct of public service utilities. In establishing the justice of the deficit theory, the fact previously stated, that the user is the "residual investor," is of greatest force. If business under the usual conditions of developing enterprises is insufficient to meet all operating charges, pay interest, taxes and insurance and furnish a "fair return" to the investor, under practical conditions existent, a deficit is the result. As rates could not, as a practicable measure—and can not, even under the system projected—be adjusted during the development period so as always to produce sufficient gross revenues to meet all demands, the user can not, from his own contributions, provide the necessary further funds. His managers—the producers—either advance the funds for him, or, in other words, forego a part or all of their "fair return," or secure such advances from outsiders. In either case, the user must assume the interest charges. It is not desirable that funds be secured from outside sources if the accumulated "fair returns" are in themselves sufficient to meet the demand, so generally such sums are foregone by the producers as are necessary to meet all charges, and true deficits are incurred. The user, as we have seen, must assume the interest charges on additional funds, if such are secured from outside. Similarly, he must assume the interest charges in the shape of a "fair return" on the deficits covered by the producer. The plain way to ac-
- ↑ This does not consider that some utilities work at full efficiency after about 25 per cent, depreciation due to "normal wear," but the argument is not affected, as absolute maintenance must follow from the point at which permissible depreciation stops.
