tenance. Wages constitute nearly all items of traffic expenses, the largest single item being operators' wages. This amounts to about 76 per cent of the total. On December 31, 1921, there were 23,769 traffic employees. All this labor is considered skilled labor and the rate of wages paid is comparatively high. In 1922 no change was made in the wage schedule.

Up to 1920 there had been difficulty in securing traffic employees, especially operators, but at the present time the company admits there is much less difficulty. The traffic labor turnover was much greater in 1919 and 1920 than in 1921, the actual loss in labor being less in 1921 than in either of the two years mentioned. This indicates that an increased business was done in 1921 with a smaller force. It is not urged here by anyone that the wages paid are higher than they should be for the class of work performed, or that unnecessary employees are engaged.

It is apparent that the tendency in regard to traffic expense at present is toward a higher efficiency and a decreasing per station cost. There is no evidence of any immediate need for an increase in traffic expenses and the condition of the labor market is such that the company can now secure employees in adequate numbers. The experience in 1922 bears out these statements. The increasing availability of machine switching, particularly in New York city, should also tend to lower operating costs.

Commercial Expenses.

Commercial costs are ordinarily figured on a per station basis, and generally increase with station growth. Some large factors in commercial expenses are publicity and advertising, and the expenses incidental to the printing of directories. Much study was given these subjects by the Commission.

Publicity and Advertising.

The New York Telephone Company in 1921 spent $274,428 for advertising. It estimated that such expenses would be $300,000 for 1922. The first six months of 1922, however, showed expenditures of $228,392.75, so that continuing the year with the same average expenses for advertising will result in expenditures for 1922 much above the estimate. An analysis of company advertising for the past six years shows that about 60 per cent is newspaper advertising, and that the newspaper advertising covers publicity calculated:

1. To increase the volume and field of the company's business. 2. To explain rate changes.

3. To instruct subscribers in the mechanics of the use of telephone apparatus.

4. To meet the company's employment requirements.

This Commission is convinced that reasonable public announcement of changes in telephone equipment or in character of service, issuance of directories, and necessary instruction in the use of

telephone mechanism, are necessary and proper for a public utility, but that advertising to justify rate increases or to defend the company's legal position in litigation is not justifiable when paid out of revenues. Publicity expenses should be materially

reduced in 1923.

Directories.

Without a detailed review of the great amount of evidence and number of exhibits relating to this subject, the following recommendations are made:

(a) That all New York State directories except the New York City, General Suburban, Westchester District, Albany, Buffalo, East Aurora, Lockport and Syracuse be printed with a two column page instead of the three column page now used.

(NOTE: The directories mentioned were excepted because the number of pages now in each would, with a two column set-up, make so large a book as to be almost impossible to handle or use.)

(b) That all advertising matter contained within the body of the printed listings in the directories be discontinued, to the end that no advertising matter appear on pages of the directory having subscribers' listings, except at the top or bottom margin of said listings.

(NOTE: The subdivision of the New York City directory into two books, either alphabetically, by exchanges, or into business and residence listings, must be soon considered. It is also apparent that two issues instead of three for New York city, bringing the practice in line with that in the balance of New York state, should be had after 1923.)

(See Appendix III for study on frequency of directory issue.)

These changes in advertising practice and directory set-up will involve expense, but are demanded in the interest of the convenience of subscribers.

General and Miscellaneous Expenses.

General and Miscellaneous Expenses include items of General Office Salaries, Supplies and Expenses; Legal and Insurance Expenses, together with those arising out of Accidents and Damages; the expenses of the Relief Department and Pension system, and minor miscellaneous expenses.

The item of Relief Department and Pension expense is almost twice as much as any other item, amounting in 1921 to over $960,000. Owing to its cost, considerable study was made of the benefit fund and pension system plan, and its results so far as the New York Telephone Company was concerned. Appendix IV gives a summarized statement of such study and the conclusions reached. So far as the amount of expenses connected therewith, this Commission is of the opinion that the plan works to the advantage of the company and the company's subscribers. The cost to the company, if it carried compensation insurance, sickness, and accident insurance for employees, would undoubtedly be much greater than under the present plan. Very little change

in General and Miscellaneous Expense items items can fairly or intelligently be made.

Uncollectible Operating Revenues.

We see no reason why future Uncollectible Operating Revenues should be less than the average figures for the past few years.

Taxes.

The taxes paid for 1922, based on actual payments for the first six months, amount to about $5,100,000. If anything, taxes for 1923 will probably be higher, although estimated growth in stations may take care of some increase. Not much change in this expense item can be expected except the natural increase due to taxes on 1922 additions to the property.

Rent Expenses and Deductions.

Miscellaneous Deductions.

We find no reason in the record here why reduction should logically be expected or that any large increase is necessary in these items.

Depreciation and Amortization Expense.

Exhibit No. 347, T-102, submitted by the State shows the relation of Depreciation Reserves to Fixed Capital for each of the years 1910 to 1921:

Exhibit No. 347, T-104, shows the relation of Fixed Capital to the credits and debits to Depreciation Reserve during the same period:

Average
Book

Fixed

Capital

including

Land

* Excluding amortization of " Other Intangible Capital."

† Excluding $1,822,363.18 allocated to property sold Rochester Telephone Corporation.

Annual expenses of depreciation continue as the physical plant of the company is consumed or suffers a shortening of its useful service life through the action of any or all of the factors causing retirement of telephone property. Depreciation accounts differ from operating expense accounts in that the exact amount of depreciation expense can not be ascertained until after the unit of plant has been retired and the length of its life, the cost of removal, and the salvage recovery are known. Annual expense of depreciation is, therefore, analogous to the setting aside monthly of certain amounts to meet taxes which will be due and payable in a lump sum at the end of the year. It would not seem logical for a company either to make a profit or suffer a loss as the result of overestimating or underestimating in advance the amount of such future expenses.

The testimony here is that it is better to allow too much for such uncertain future expenses such as depreciation, than to allow too little, and the parties claim to have allowed a reasonable margin in their estimates of future depreciation over and above the probable actual requirements of the company.

Assuming this to be correct, it will then be true in either case that depreciation reserve will ultimately be accumulated in excess of that required to meet the expenses or loss of investment incident to the retirement of the company's property. As to the treatment of this excess amount in the depreciation reserve, however, the parties differ. The New York Telephone Company claims, in effect, that a liberal margin above probable actual requirements should be allowed in annual depreciation rates, and that accumulations of depreciation reserve have no bearing on the fair value of the company's property for rate making purposes. This contention leads to a misconception of the actual earnings of the company.

It was contended by the city and State that the Reserve for Accrued Depreciation should be regulated in such a way as to limit it to an amount reasonably in excess of the probable actual requirements but that this excess should not be allowed to increase indefinitely. The only practical way to so adjust the Reserve for Accrued Depreciation to the company's needs, appears to be through the medium of the annual rates for expenses of depreciation.

Because of the fact that the true amount of the current expenses of depreciation can only be known after the physical property concerned has been retired, it follows that the best criterion of an excessive or inadequate annual depreciation rate is the balance in the Reserve for Accrued Depreciation from year to year, compared with what should have been set aside based on the company's actual experience.

And that the relation of the company's existing depreciation reserve to this normal or required reserve, as based on actual experience, is the best evidence as to whether the company has, in the past, been setting aside annually excessive amounts for

depreciation and whether the present depreciation rates are too high or too low.

Annual depreciation rates are based upon the average life of plant and salvage recoverable from plant retired. Both of these factors are subject to change from year to year. The life of any unit of physical property is, when that property has been retired, an unalterable fact. The most probable length of average life for property still in service is, however, a quantity which changes from year to year with differing physical conditions, altering methods of the company, changes in municipal regulation, methods. ť engineering, development and improvement in apparatus and materials, quality of maintenance, amount of use, the rate of growth of business, and other conditions too numerous to mention. The annual allowance for expense of depreciation is necessarily based, not only upon the average life of property already retired which is an established fact, but upon the most probable life of the plant now in service. The salvage to be expected in the future will vary from year to year under the action of numerous factors among which are the length of life of the plant, the amount of re-use of units removed from service, improvements which render plant obsolete and lower its sale price, changes in wage rates affecting the cost of removal, changes in material prices which control the junk value, etc. The fact that both the average life and the net salvage may change from year to year, makes it essential that the estimates of the annual depreciation rates and of the proper amount of depreciation reserve be revised as often as is necessary to make proper allowances for altering conditions. With the records of the operations of the company in the past as a background, estimates of the most probable length of average life and net salvage for the immediate future can be reasonably made.

The company's method of treating depreciation, however, seems to require that estimates of future conditions be made covering the entire remaining life of plant now in service and such plant as is placed up to the time that another revision of the depreciation rates is made. Moreover, since the accumulated depreciation reserve at any time is, according to the company, a matter of past history, errors due to incorrectly estimated depreciation rates are irrevocable and can never be corrected.

This is an entirely unwarranted and illogical method of dealing with a current expense account which is, as has been pointed out, subject to variation from time to time. This is particularly true, since any estimate of average life or salvage covering a period in the future as long as the total remaining life of plant now in service, embraces the possibility of many errors.

We are therefore brought to the conclusion that depreciation rates should be fixed for a period not longer than a few years; that annual rates should be based on the experience of the company as to the average life of its plant and the salvage recoverable, so modified as to take full and complete advantage of avail