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Hr. E* 1* Sennett Item 6~c: (Mr* Hulsizer’s letter) Rental base decreased $Tli,66? due to reducing investment cost by the estimated depreciation reserve* Tables E, F, and Q set forth the retirement reserves deducted from the capital base figures in computing the water costs. Such treatment was made Independent of Mr. Charske’s letter of April Di, 1950. Some comments on this matter of using a depreciated rate base are believed in order. Since it is an extensive subject, some of the more important features ohly will be mentioned* Briefly, where the annual provision for depreciation is wade at a flat rate without consideration of interest (straight line basis), then the net amounts accumulated in the retirement reserve should be deducted before computing the interest or return. If the depreciation is set up on a sinking fund basis, and the customer pays only the annuity portion as the direct depreciation charge, then the return may be computed on the full undepreciated capital base. In the report, as well as in the billing, the depreciation charge made by the L.A.&S.L.R.R* Company is a flat percentage and, if the customer (L.V.L.&W. Company) is not to continue to pay interest on capital already returned through prior depreciation payments, then the net accumulated reserve must be deducted. The customer is not required to pay a return on what amounts to a capital returned through depreciation* Such is the essence of the U» S. Supreme Court decision in the Smith vs. 111. Bell Tel. Company and the Lindheimer cases. These case# have paved the way for the more recent Hope Hatural Gas case and many others involving the Federal Fewer Commission, which have all recognised the deduction for depreciation when set if on a straight line basis. In the railroad field of accounting, the Interstate Commerce Commission, as early as in the 1920 period, issued Dockets liiTOO and 15100 clearly recognising the requirements under straight line accounting. I, personally, have always been a strong advocate against the straight line method and the resulting depreciated base. I believe in the sinking fund basis. But, with all Federal Commissions and most of the State Commissions using the straight line method, and court decisions upholding the results from such practice, when such a method is used, it must be used consistently in both the provision in operating expenses and the treatment in the earning base. I do not understand the Supreme Court*® decision in the Brown Shoe Company to be contrary to the straight line thesis* If I understand the decision, it deals in large measure with the taking of depreciation for income tax purposes on donated property* There Is no donated property