As to obsolescence;

              52 HASKINS & SELLS July
As to Obsolescence
THE past has heard much talk of obso­lescence.
Definitions of depreciation
usually include it as an element thereof.
Admittedly it has been difficult to measure.
Notwithstanding such difficulty the ele­ment
has been recognized generally.
Something of a jolt therefore may reason­ably
be felt when some court comes forth
with a decision, in effect, that there is no
such thing, as happened in the case of
Pacific Gas and Electric Company vs.
City and County of San Francisco. In
this case the court failed to allow an ade­quate
return for obsolescence of equipment
caused by installation of more efficient
patented devices. But the Supreme Court
of the United States came to the rescue of
accounting theory when, on June 2, 1924,
it reversed the decision of the lower court.
A statement of the case and quotations
from the decision follow:
"The company is the sole producer and
distributor of gas in the San Francisco
district. By municipal ordinances the
company was directed to supply gas at
not more than 75 cents per thousand
feet. Claiming that this rate would not
yield a fair return, the company brought
suit. The suit was referred to a master
who recommended dismissal of the suit.
The court below affirmed the master's
report. The master applied the 'modified
sinking fund method,' involving an esti­mate
of the life of the property and an
annual allowance for future replacement
on a 5 per cent. compound interest basis.
In this connection the master said: 'It
is assumed that loss of plant units by obso­lescence
and inadequacy, as well as by
physical decay, can be forecast with sub­stantial
accuracy and provided for in
advance of abandonment and replacement.'
The company objected to this method,
insisting that depreciation should be ascer­tained
upon consideration of the definite
testimony of competent experts who made
estimates on observed conditions. The
company claimed that in order to lower
the cost of production it became necessary
to abandon certain valuable property
under conditions not reasonably suscep­tible
of anticipation. The company also
claimed that the master failed properly to
appraise certain patent rights through
which manufacturing costs had been
greatly reduced and that he failed to make
proper allowance for the successful use of
such rights.
"In reversing the lower court, the
Supreme Court said in part: 'Obviously,
under the theory accepted below, appellant
worsened the situation for rate making
purposes when it reduced the cost of manu­facturing
gas. Introduction of successful
patented inventions enabled the public
authorities to lower the rate base and
gather all the benefits. The operating
plant, made capable of producing gas at
smaller cost, was declared less valuable
than before. The result indicates error