the rules prescribed by the Commissions for the treatment of retirement of property, and the regulations prescribed for the so-called "Depreciation" account.

DIFFICULTIES WITH "FIXED CAPITAL" ACCOUNT

In practically all of the Commissions' classifications of accounts is found an account designated "Fixed Capital," the text of which usually reads as follows:

.........

"Charge to this account all the Fixed Capital of the accounting person or corporation devoted to electric operations as such capital stood at the close of..........(effective date of commission's classification). Such charges shall be made at the figures at which such capital was carried on the books of the said person or corporation on that date. When any capital included in such account is retired from service, the amount of depreciation or other amortization thereon applicable to the period subsequent to..........(effective date of commission's classification) shall be charged to account No...... 'Accrued Amortization of Capital,' proper account shall be taken of any salvage, and the remainder of the amount originally charged to capital shall be concurrently charged to the Corporate Surplus or Deficit account or equivalent account carried on the books on..................(effective date of commission's classification) unless there was carried on the books at that date a reserve to cover retirement of capital from service, in which case the said concurrent charge shall be made to such retirement reserve account. If the amount at which the said capital in service on... . . . . . ....(effective date of commission's classification) and subsequently retired from service, was included in the said account is not disclosed on the books and records of the accounting person or corporation and is not within the knowledge of such person or corporation or officers or other employees thereof, it shall be estimated, and such estimated amount shall be treated as is above directed for the actual amount, the fact of estimation being stated in the entry.

Considerable difficulty has been experienced in carrying out the instructions contained in this account, as Commissions have usually required in connection with making a new classification of accounts effective, that all of the sub-accounts of fixed capital be closed into a fixed capital account; and that, upon any of the capital included in the fixed capital account being retired, the amount at which it has been charged therein be credited to the fixed capital account. If the corporation is unable to determine from the books and records the exact cost, it is permitted to make an estimate of the original cost. The rule as prescribed by this account makes it necessary, when retiring property, to

obtain the date on which the property was put in service. If prior to the adoption of the Commission's classification of accounts, then the original cost of the property retired must be credited to the fixed capital account; if subsequent thereto, it must be credited to one of the sub-accounts of the fixed capital account prescribed by the Commission.

There would be no difficulty in carrying out the rule if no changes were made in any building, structure, facility or unit of equipment from the time of its installation to the time of retirement. But it will be readily realized that a majority of electric companies reached their present stage through piecemeal development over a period of years; and in order to carry out the rule it would be necessary to tag and index each individual part of every building, structure, facility or unit of equipment in the entire system. This it is practically impossible to do.

Perhaps the difficulties referred to above could best be brought out by an illustration of what occurs in actual practice. A switchboard is about to be abandoned. The initial installation was made twenty years ago, ten years prior to the date the Commission's classification became effective. During the twenty years of usage additional panels, instruments and miscellaneous equipment were added, changed and removed. Now the question arises, what part of the board and equipment as it stands today was erected prior to the time the Commission's classification became effective? To have kept records of the many transactions occurring during the twenty-year period would certainly have been expensive and burdensome, and even then it is doubtful if the information would be reliable. Another instance is that of the overhead distribution system. We do not believe there are any companies that keep their records in such a way as to enable them to determine at any time when various parts of the overhead line equipment were installed. Such a record would necessarily mean an enormous office expense, and even then we doubt very much whether the information would be of any value when the time came to abandon a part of the overhead system and make a separation of the equipment as before and after the adoption of the Commission's classification.

Many companies operating under State Commissions' classi

fications of account have been compelled to follow the rule as prescribed. In most cases, the apportionment is based upon an estimate, and such estimate is usually based upon the memory of some individual. As time goes on, this problem will become more difficult and the estimating process less reliable.

RECOMMENDED ACCOUNT

Your Committee therefore recommends that the following account be included in the National Electric Light Association's classification of accounts, and after its adoption that the National Association of Railway and Public Utility Commissioners be urged to approve its substitution for the present "Fixed Capital" account contained in the Commissions' classifications:

PLANT INVESTMENT: Charge to this account all the plant investment of the accounting person or corporation devoted to electric operations as such investment stood at the close of.......... (date of the adoption of the N.E.L.A. standard systems of accounts). Such charges should be made at the figure at which such investment was carried on the books of said person or corporation on that date. Hereafter, charges for all additions, betterments, renewals and replacements of plant investment devoted to electric operations, and credits for all withdrawals, shall be classified among the following accounts:

(Here follow sub-accounts.)

If the sub-accounts of plant investment of the accounting person or corporation at the date of the adoption of the N.E.L.A standard classification of accounts are substantially in the form prescribed for such transaction subsequent to, or if the balances then representing the accounting person or corporation's property can be accurately allocated to the subaccounts of Plant Investment as provided for, such allocation may be made instead of closing the balances of these sub-accounts into Plant Investment.

ACCOUNTING FOR DEPRECIATION

The treatment of the accounting for Depreciation will bring forth more discussion and consume more time than all of the remaining accounts in the process of effecting a national standardization. At the time the N.E.L.A. classification was being prepared, the subject of Depreciation was referred to a subcommittee of the Public Policy Committee of the Association, and its report was submitted at the Philadelphia Convention in 1914. The report reads as follows:

"TO THE PUBLIC POLICY COMMITTEE OF THE

NATIONAL ELECTRIC LIGHT ASSOCIATION:

"Your sub-committee appointed to consider a form of statement to cover the proper treatment of what is usually called "Depreciation," which the Accounting Committee may be authorized to use in its Uniform System of Accounts, begs to report as follows:

"It has given careful consideration to the many aspects of this question which should be considered in taking cognizance of the renewals and replacements of property due to the many causes from which they may arise and the provision against unusual casualties and contingencies, all of which should be provided for in the accounts of a public utility.

"Your sub-committee has found it most difficult to prepare a full and complete statement on this subject which would be applicable to all cases, owing to the different conditions under which the companies are operating, the wide divergence of expert opinion as to the proper treatment of the subject from an administrative as well as accounting standpoint, and the necessity of providing against a wrong interpretation being placed upon the provision which the utility may make to take care of these charges against the revenues of the companies.

"There appears to be a general acceptance of the proposition that these charges should be taken care of, but there is lacking a consensus of opinion as to the proper method or even the underlying principles to be followed in taking care of them. It is not deemed appropriate to enter here into any extended discussion of the various phases of the subject or to discuss in detail here the various theories which have been advanced by economists, managers, engineers and accountants as to the methods that should be followed in the practical accounting treatment of these phases of the utility companies' operations, but a simple statement has been attempted, which it is believed will properly protect the utilities and the interests of their stockholders, and at the same time safeguard the public against the consequences which are likely to follow from a neglect to give this subject proper consideration and adequate expression in the accounts of the operating companies.

"After careful consideration of this subject from every possible viewpoint, your sub-committee recommends that the Executive Committee authorize the Accounting Committee to refer to the question of Depreciation in its standard system of accounts in accordance with the following

statement:

"1. Reserves should be created by means of a contemporaneous charge to Operating Expenses to provide funds to defray the cost of

(a) Necessary renewals and replacements of property retired from service due to normal causes or to obsolescence and inadequacy, the result of advances in the state of the art, improvements in efficiencies, etc., etc.

(b) Casualties caused by fire, flood, earthquake, insurrection, riot or

any other disaster not covered by insurance, and for contin

gencies.

"2. The average annual cost of renewals and replacements of property

should be based on as many years of actual experience as possible. The reserve necessary for uninsured casualties and contingencies cannot be accurately determined in advance. Each company must determine the amount of its own reserve for these purposes.

"3. The amount of the reserve should not necessarily lie idle in the banks nor should its use be limited to outside investments, but on the contrary it should preferably be invested in the property when required. If needed for the purposes of extensions of the business it should be available. The raising of additional capital can thus be deferred until such time as the renewal is required for which the reserve was created, when the cash from the new securities can be applied to restore the fund previously invested in new property.

"4. The words 'depreciation' and 'amortization' should not be used in connection with the accounting systems of public utilities. Depreciation means (1) to lessen the price of, lower the rate of; (2) to sink in estimation, fall in price or value, become of less worth. Amortization means to wipe out, to extinguish. No company desires to wipe out or extinguish its property. On the contrary, its sole aim is to maintain the productive and operating efficiency of its property at its maximum by renewing parts displaced for any cause.

"The following rules should accordingly be followed in the treatment of these charges in the Uniform System of Accounting under the appropriate classification headings:

OPERATING EXPENSES

"Classification: General and Miscellaneous.

"Sub-Account: Renewal and Contingent Expense.

"Charge to this account at monthly intervals the monthly proportion of the average annual cost of renewals and replacements of tangible property; and the amount estimated to be necessary to provide a reserve to cover the cost of extraordinary casualties and contingencies.

"The amount so charged should be concurrently credited to the reserve account 'Renewal and Contingency.'

LIABILITIES

"Classification: Operating Reserves.

"Sub-Account: Renewal and Contingency Reserve.

"Credit to this account such amounts as are charged from time to time to 'Renewal and Contingent Expense' to provide for the renewal of tangible property at the expiration of its useful life, and a reserve to meet the cost of uninsurable casualties and contingencies. When property is retired from service the original cost thereof should be credited