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`` Report of Commission on the
Revision of Rates
OF
The Washtenaw Gas Co.
Ann Arbor, Michigan
July 1, 1918
V. H. LANE
H. E. RIGGS
R. K. HOLLAND
Commissioners
An Ordinance Regulating the
Sale of Gas in Ann Arbor
Passed March 5, 1917
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OF
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Ti 25
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C 73
tº 8,
LETTER OF TRANSMITTAL
To the Honorable, the Common Council of the City of Ann Ar-
º bor :
The Commission heretofore, and with your co-operation,
created to revise and fix rates for the sale of gas by the Wash-
tenaw Gas Company to the inhabitants of the City, herewith
transmits a duplicate of its report. -
The Commissioners have held many meetings since their
appointment and have carefully considered all matters involved
under their commission and have unanimously agreed in the re-
port submitted.
The conclusions of the Commission have been controlled by
the following fundamental considerations:
(I) The owners of a public utility such as that of a Gas
company, are entitled to a reasonable return on the capital actu-
ally and necessarily invested in it.
(2) This return should be such as to enable the owners to
maintain their property in condition to uninterruptedly and effici-
ently render its service and provide the essential additions and
extensions called for through development of new methods and
increased demands due to increase of the number of customers
and in the quantity of gas required to supply them.
(3) The consumer of the products of such utility is entitled
to get them at a price having a reasonable relation to the cost of
their manufacture and delivery.
(4) It is desirable, in order that unnecessary expense, an-
noyance and consequent dissatisfaction be avoided, that rates
be so adjusted as to provide for varying conditions controlling
operation, such as substantial fluctuations in the cost of raw mate-
rials and labor.
As a preliminary step the Commission investigated the opera-
tion of the rate obtaining under the old franchise over a con-
siderable term of years immediately preceding the 1st of Jan-
uary last, as well as what would have been the results of opera-
tion in these years had the rates provided in the new franchise
been in force.
This investigation satisfied the Commission that by reason
of conditions prevailing during a large part of 1917 the Company
operated at a loss and must continue to operate, if at all, at a
BUREAU OF GOVERNMENT
ºrvººrt's rºº ºr HIC AN
— 4 —
much more serious loss, in 1918, due to the conditions now pre-
vailing, if the rate under the new franchise were put into effect.
With the results of this preliminary investigation showing
a revision of rates necessary, and with the foregoing fundamental
propositions in mind the first step of the Commission was the
determination of the actual values of the property investment.
The Commission here took nothing for granted but as the result
of careful, actual and detailed inspection of the physical prop-
erties, compiled an inventory of them, and fixed on definite value
upon each unit. - !
No consideration was given to so-called intangible elements
such as, “franchise” and “going concern” values.
It was recognized, however, by the Commission, that it is
necessary that there be invested by the owners of such a public
utility as the Gas Company, something more than sufficient to pro-
duce the physical properties which constitute the plant. There
must be also sufficient of fluid capital to enable the company to
carry a stock of raw materials and supplies beyond that necessary
for its operation from day to day, in order to insure its patrons
against inconvenience, if not actual suffering, caused through in-
ability otherwise to secure them for immediate use.
The results of this portion of the Commission's investiga-
tion and resulting judgment is found in the “Summary” on page
I5 of the Report.
The total valuation made as of January Ist, 1918, including
working capital, is $825,74O.O.O. Working capital is fixed, after
full investigation of the factors necessarily involved, at 5% of
the value of the physical properties, or at $38,449.OO.
Having so determined the valuation upon which the Com-
pany is entitled to earn a return, the question next considered was
the rate of such return.
It is a general proposition, universally recognized, that the
rate of return should bear a more or less definite relation to the
risks involved in the venture in which the capital is invested.
The greater the risk the greater the return to which the investor
is entitled, and so the less the risk the less the return with which
he should be satisfied.
Since the plan fixing rates which the Commission has determ-
ined upon eliminates in great measure the risks of the investment
the Commission has fixed the rate of this return at that rate which
is the average of that paid upon its funded debt. As conditions
now exist this is 5%.
– 5 —
Having so determined the rate of return to which the Com-
pany is entitled it is still necessary to determine a rate for the
sale of gas which will produce this return. If all the factors in
this problem were constant, if the costs of materials and labor,
deterioration of physical properties due to wear, obsolescence and
natural decay, and the cost of needed improvements and exten-
sions, if these all were uniform from year to year it would be a
simple matter to fix a rate which would produce this return.
It is precisely because none of these factors are constant that
the problem becomes increasingly difficult.
The aim of the Commission has been to devise a plan for rate
determination which will be flexible, subject to easy adjustment
to meet varying conditions affecting operation, and yet one in
which the determination of that rate is controlled by such rules
as that injustice cannot result to those affected by it.
In a business with the monopolistic features of that of a
gas company as ordinarily operated in our municipalities, if there
were unrestricted power to fix its own rates the natural tendency
would be to fix them at a figure higher than would be necessary
to produce a reasonable return on the investment.
As a check on this tendency the Commission has, after very
thorough investigation and experimentation, established a sliding
scale of rates from which, or from some rate intermediate to those
given and so fixed, rates shall be chosen by the Company at the
beginning of the year as the rates for the sale of gas for the year.
It is permissable, however, that the rates may be changed during
the year if experience in the early part of the year shall show
that the wrong rate has been selected.
The plan contemplates that a rate will be chosen which will
enable the Company to pay all its operating expenses, take care
of depreciation and obsolescence, pay the fixed return on the in-
vestment and have a surplus. It is the operation of the plan upon
this surplus which is its most characteristic factor. Accompany-
ing the table of varying rates is a corresponding one of per-
centages for the division of this surplus between the company and
its consumers. This table of percentages for division gives the
Company all of the surplus when the rate for gas is lowest and
the consumer all of the surplus when the rate chosen is the high-
est. The proportion of the surplus divided between the Company
and its consumers varies proportionately between these two ex-
tremes according to the rate chosen. There is always the incen-
— 6 —
tive on the part of the Gas Company to lower the rate in order
to increase its proportion of the surplus.
The scale of rates fixed upon and the corresponding table of .
percentages for revision is found upon page 19 of the Commis-
sion's Report.
The effect of its operation as applied to the business of the
years IQI3 to 1917 inclusive and to a year, assuming conditions
through the full year were those obtaining in the last half of
1917, is given in a table on page IQ of the Report.
It should be noted that a considerable portion of the expenses
of operation are more directly proportional to the number of
meters than to the amount of gas delivered through them. Such
are expenses of service connections, installing, maintaining re-
moving and reading meters, billing, complaints and the like.
These considerations have led the Commission to fix a flat charge,
which experience of the Company in the past shows will take care
of this class of expense. It is fixed at 30 cents per month per
meter.
It is apparent also that the other overhead expenses per 1,000
cubic feet of gas delivered are less when a large amount of gas is
delivered to a single consumer through a single service than when
delivered to many. This fact has influenced the Commission to
fix a primary and a secondary rate, dependent upon the amount
of gas taken, the division being on 5,000 cubic feet. Those taking
5,000 cubic feet or under per month paying the primary rate and
those taking in excess of 5,000 cubic feet per month paying the
secondary rate for the excess.
In order to secure the just and efficient operation of the plan
it is essential that accurate and detailed records of the business of
the Company be kept, and kept in such form that the necessary
information be available to discover the necessary factors to en-
able the fixing of the rates and making of the division of the sur-
plus.
Directions are found in Section VI of the Report beginning
on page 20, for accomplishing this end.
The Commission has also developed a formula for ascertain-
ing the proper rate to be charged and for ascertaining the respec-
tive shares of the surplus as between the company and its con-
sumers. This formula is found on page 31.
In Section VII of the Report are found full instructions for
putting the plan in operation.
—7—
'The Commission cannot forbear to state that in every step of
its work it has had the fullest co-operation on the part of man-
aging officials of the Gas Company. Its properties and all busi-
riess records have been freely opened for inspection, and in every
way the Commission most courteously treated. Through its in-
vestigation and consequent familiarity with the business of the
Company and its conduct, under the management of its present
officials, the Commission is led to the irresistible conclusion that
Ann Arbor may well desire the continuance of that management.
All of which is most respectively submitted.
VICTOR H. LANE,
HENRY E. RIGGS,
RAY K. HOLLAND,
Dated, July 1st, 1918. Commissioners.
Report of the Commission for the Revision of
the Rates of the Washtenaw Gas Co.
SECTION I
ORGANIZATION OF THE COMMISSION
On March 5th, 1917, the Common Council of the City of
Ann Arbor, Michigan, passed an ordinance granting a new
franchise to the Washtenaw Gas Company and repealing an ordin-
ance passed September 2nd, 1889. This ordinance was submitted
to the electors of the City of Ann Arbor and voted upon on
April 2nd following, when it was carried by a vote of 589 in ex-
cess of the necessary three-fifths, and on April 5th the Common
Council declared the franchise adopted. By its terms this new
franchise was to go into effect January Ist, 1918, and to be in
force for a period of twenty years.
Section five of the ordinance fixes the rates and discounts that
may be charged and allowed for the service of the company. This
section also provides as follows: “At the instance of either party
hereto a rate revision under this franchise may be had at any
time, said rate revision to be made by a Public Utility Commission
if one is in existence in the State of Michigan at said time. If
a Public Utility Commission does not then exist, said revision
shall be made by a Commission to be created as follows: The
Council of the City of Ann Arbor shall appoint one member and
the Gas Company shall appoint one member and a third member
shall be appointed by the Justices of the Supreme Court of the
State of Michigan. Said commissioners to be persons versed in
work of this character. The expenses of said commission shall
be borne by the party applying for said rate revision.”
Almost contemporaneously with the passage of this ordin-
ance the United States entered war with Germany, and before
January Ist, 1918, the date set for the going into effect of the new
ordinance and rates, labor conditions, the cost of coal, and the
price of all supplies had so changed as to cause the Washtenaw
— IO —
Gas Company at once to request the appointment of a Commis-
sion, to consider and revise the rates under the provisions of sec-
tion five of the ordinance.
This Commission was constituted as follows: The Common
Council of the City of Ann Arbor appointed Mr. Ray K. Hol-
land, Consulting Engineer, of Ann Arbor; The Washtenaw Gas
Company appointed Mr. Henry E. Riggs, Professor of Civil
Engineering at the University of Michigan, and the Justices of
the Supreme Court of Michigan appointed Judge Victor H.
Lane, of the Law School of the University of Michigan. The
Commission so constituted organized by selecting Judge Lane as
Chairman and has held meetings as necessary over a period of
more than three months, during which time investigations of the
physical property, accounts and records of cost of manufacture
of gas have been carefully examined.
SECTION II
THE COMPANY'S REASONS FOR ASKING FOR A
REVISION OF RATES
At the first meeting of the Commission certain statements of
the results of operation during the year 1917 were presented by
Henry W. Douglas, General Manager of the Gas Company, and
at this time the commission was given full access to all books,
records, audits and statistics of the company, and to a valuation
made in 1911 by one E. G. Pratt, a consulting engineer of Chi-
cago, together with statements of additions and betterments from
the date of valuation.
A brief recapitulation of conditions which led to the request
for revision of rates is submitted as follows:
COA1, AND CokE PRICES
* Increase
IQI5 1916 I917 I915-1917
Coal, per ton. . . . . . . . . . . . . . . $2.90 $3. I34 $6.554 126 %
Coke, per ton . . . . . . . . . . . . . . 5.75 5.40 9.50 65.2%
Tar, per gallon . . . . . . . . . . . . O3 . O3 .03
Ammonia, per lb., NHs . . . . . . O8 .08 .08
Av. cost of delivering Coke
(Feb.) . . . . . . . . . . . . . . . . .60 I. OI
— II —
f * WAGES OF EMPLOYEEs
Jan. 15 Jan. 15 Jan. 15 Jul. 15 Increase
I915 1916 1917 1917
Works—Stoker . . . . . . . . . $2.18 $2.26 $2.66 $3.30 51.3%
Works—Day labor . . . . . . 2.00 2.00 2.50 3.00 50 %
Works—General . . . . . . . . 2.66 2.96 3.30 3.5I 32 %
Works—Supt. . . . . . . . . . . 4.00 4.33 4.66 5.33 33 %
Shops—General . . . . . . . . . 2.76 2.97 3. I5 3.60 30.5%
Shops—Supt. . . . . . . . . . . . 3.05 3.28 3.42 3.87 26.8%
Office—Average . . . . . . . . . 2.65 2.82 2.99 3.4I 28.6%
Street . . . . . . . . . . . . . . . . . . 2.28 2.52 2.88 26.3%
SECTION III
EFFECT OF THE OPERATION OF THE RATE FIXED
IN THE NEW FRANCHISE
The effect of these increases in cost was made the subject of
extended study. Costs of production were analyzed by the Com-
mission for each year from 1906 to 1917 inclusive. It is found
that the gross manufacturing cost remained fairly uniform, be-
tween $.50 and $.60 per thousand feet, from 1906 to 1916, when
it rose to $.68 for the first six months of 1917 and to $1.01% for
the last half of 1917. In the same manner cost of distribution,
selling expense and general expense are affected, so that the
total gross cost of producing and distributing gas, per thousand,
increases from between 75 to 85 cents in earlier years to 94 cents
for the first half of 1917 and to $1.284 for the last half of 1917.
It becomes apparent on full analysis of the Company's sales and
costs that an application of the rates provided for in the new
franchise, to the business of the year 1917 would have resulted in
a loss. sº
A very full study of the past business of the company, and an
application of the new rates to the volume of gas sold in the
past, assuming various conditions of business, convinced the Com-
mission that if IQI'7 conditions continue, or become worse, the
company could not continue to operate except at a serious loss if
the new rates should be put into effect. The Commission there-
fore advised the company to continue the use of the old rate with
the understanding that the determination of the Commission
should recommend the proper adjustment. This adjustment is
hereinafter provided for. (See paragraph F of Section VII.)
SECTION IV
STUDIES OF RATES AND OF SYSTEMS OF RATE
MAKING
In attempting to fix a new rate, the Commission has had
in mind the following ends as being desirable of attainment:
(a) A flexible system of rates which could be adjusted up
or down to meet the changing conditions materially affecting
operation. Such a sytem, if properly determined, should obviate
the frequent appointment of commissions for revision under the
terms of the contract.
(b) Provision for a reasonable return to the company at a
reasonable cost to the consumer during the periods when costs
are high, but which will make it advantageous to the company
to reduce the rates as conditions become normal. In other
words, the Commission have sought to determine a system which
would give the company a larger return and a greater percentage
of profit as the rates for gas are decreased.
The Commission has considered the plan of the London
“sliding scale,” and the various modifications of the English plan
as considered in Massachusetts. Very full data as to these plans
may be found in the report of the special committee of the
Massachusetts Legislature of 1906; The Report of the Board of
Gas and Electric Light Commissioners of the Boston Consolidated
Gas Co. Rates, March, 1916; Public Regulation of Gas Companies
in Great Britain and Ireland, by Nathan Matthews, September,
1915; and in the General Laws of Massachusetts relating to the
sale of gas and electricity, I914.
The London sliding scale is an automatic and interdependent
adjustment of the price of gas to the consumer and the rate of
dividends to stockholders whereby for every decrease or in-
crease in price of gas, the stockholders are permitted an increase
in the rate of dividend on stock issued. It rests on the theory that
the desire of stockholders for greater dividends will prove a stim-
ulus to increased skill and efficiency in management,
To apply this scale there must be established a base or stand-
ard price of gas, a base rate of dividend and a ratio upon which
the increase or decrease in price shall effect the rate of dividend.
There must be no means of distributing profits except through
dividends, and there must be no dividends that are not dictated
by a sound business policy.
— I3 —
In England it is required that all additional capital stock be-
yond the initial issue shall be sold at public auction. This feature
was included in the Boston act, but has been inoperative. These
rate studies resulted in convincing the Commission that it might
be practicable to develop a plan which would fit the present em-
ergency at Ann Arbor, which would prove workable, which would
insure sufficient income to keep the plant in operation under the
worst possible conditions yet without increasing unreasonably the
cost of gas to the consumer, and would insure a prompt return to
lower prices just as rapidly as business conditions make it possible.
Attention was then turned to the development of such a plan, the
general scope of which is very briefly described under the fol-
lowing caption, and the details of operation of which are stated
at some length subsequently in this report.
SECTION V
PLAN FOR FLEXIBLE RATES
A—IN GENERAL
An outline of the plan is here submitted which will suggest
what is involved in it, and this is followed by statements explan-
atory of its leading features and of what the Commission has done
by way of determination of the factors which are to control in
its operation.
It is recognized that the present is a time of industrial un-
certainty and that no predictions can be confidently made either
as to amount of business that may be expected, or as to the cost
of doing that business. It is further recognized that it is highly
desirable that such public utilities as gas properties be not only
kept in operation during the war, but that the owners be required
to maintain the integrity of the investment in their properties,
and keep themselves in position to finance necessary extensions
and improvements.
B—VALUATION OF PROPERTY
Inasmuch as one essential feature of the plan proposed is to
insure a fair minimum return on the investment in property, as
well as a reasonable rate for gas to the consumer, the question of
— I4 —
valuation was important. As stated a valuation had previously
been made as of date of December 14th, 1911, which was placed
at our disposal. It was found, however, that very large expendi-
tures had been made subsequent to 1911 in extensions and better-
ments of plant, new mains, services and meters, and sundry other
property, while some of the buildings and equipment at the plant
had been destroyed or become obsolete. It was therefore decided
to prepare a new inventory, basing it on a checking of the old one,
with inclusion of new property and elimination of that which had
disappeared. Where the inventory lacked in detail to enable ac-
curate checking, these details were supplied by careful investi-
gation of the properties. This work was done by Messrs. Hol-
land, Ackerman and Holland, Consulting Engineers, as to the
surveys and measurements of buildings and plant, and by Pro-
fessor H. C. Anderson as to inspection and pricing of mechanical
equipment. The figures so finally arrived at were checked and
valuation fixed by Commissioners Holland and Riggs, and the
Commission adopted their conclusions. This valuation includes
no property not actually in use in the manufacture or distribu-
tion of gas in Ann Arbor and not essential to the management
and operation of the property; all investment in the gas systems
of Dexter and Chelsea are eliminated, all unused or abandoned
property is disregarded, and property of doubtful ownership, such
as the railroad side track, excluded.
High prices due to the present war period were not used in
fixing unit prices. Costs were taken which represented an average
of conditions prevailing from 1910 to 1915 inclusive, modified to
some extent by using actual cost to the company where that was
lower, and by including at actual cost, construction of the last
four years.
No attempt was made to fix arbitrary figures of depreciation.
The price placed on each item represents the Commission's judg-
ment as to the fair present worth of the particular unit of proper-
ty. considering its present condition and its use. In some instances
very heavy deduction has been made for depreciation while in
others no deduction has been made as the units in question are
accounted for by the method of direct replacement and should
be considered as worth their cost until replaced by a new unit.
Allowance to cover engineering, organization, administration, in-
terest during construction and contingencies was placed at 16%
which is in accordance with conservative practice. A summary of
the valuation including working capital, follows:
t Summary
Schedule I-Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,690
“ 2—Works Structures . . . . . . . . . . . . . . . . . . 95,937
“ 3–Gas Holders . . . . . . . . . . . . . . . . . . . . . . . 85,956
“ 4–Plant Equipment . . . . . . . . . . . . . . . . . . 99,381
& 4 5—Distribution System ... . . . . . . . . . . . . . 366,660
“ 6–Sundry Equipment . . . . . . . . . . . . . . . . . 40,943
& © 7—Office Buildings and Yard . . . . . . . . . . 45,530
“ 8–Tools, Supplies, etc. . . . . . . . . . . . . . . . 6,705
{{ 9—Horses, Autos, etc. . . . . . . . . . . . . . . . . 9,686
“ Io—Laboratory Equipment . . . . . . . . . . . . . 493
Physical Inventory . . . . . . . . . . . . . . . . . . . . . . . . . $768,981
Stores and Supplies, Merchandise . . . . . . . . . . . . . . I5,560
Arc Lamps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,750
Working Capital, 5% of value of Physical Equip-
ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,449
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $825,740
The considerations which determined the amount of work-
ing capital as fixed by the Commission are stated post VI-F-(b)-6.
This valuation represents in the judgment of the Commission, a
fair present worth of the investment in the physical plant and in
working capital, needed to carry on the business of the company.
No attempt has been made to compute any “going concern”
franchise or intangible value. Such values exist, and under
other circumstances it might be proper to give them weight, in
this case however, we have disregarded them.
It is proper to say in this connection that we find the property
of the company to be well and substantially built, up to date in
nearly every respect and well maintained, the property being fully
up to the best standards. It will compare favorably with the
best gas plants in the state.
C—THE RATE OF RETURN
This rate of return is to be computed on the total invest-
ment including working capital. It is recognized fully by the
Commission that in competitive business, or in business where a
considerable hazard is involved and where there are losses dur-
ing the early years of operation, a much higher rate of return on
the total capital investment, is permissible than under other condi-
tions. And it is true that a considerably higher return ought to
— 16 —
be expected in normal times from a gas plant in a city like Ann
Arbor than might reasonably be expected under present condi-
tions.
The rate of return from such properties depends greatly
upon circumstances and locality. The amount of risk in the
business is a factor to be taken into account, the less risk, the
less right to any unusual returns. In this case because the Com-
mission reports a plan which eliminates, or at least largely reduces
the risk, the minimum rate of return is fixed at the average rate at
which the funded debt is carried for that year. This provision
becomes a virtual guarantee of such return to the Company. No
matter what conditions prevail the Company is to have a rate
which will care for its operating costs and produce this minimum
return on its capital investment. One purpose of providing this
guaranty is to insure the ability of the Company under all cir-
cumstances to maintain the integrity of the property of the utility,
its improvement and extension as the public demand may re-
quire, and to protect its bond holders.
D—BASE OR STANDARD RATE FOR GAs
Both the franchise expiring December 31st, 1917, and the one
going into effect January Ist, 1918, provided certain rates per
thousand feet of gas with a discount of 25 cents per thousand
on all sales if payment is made on or before the tenth
day of the month. Inasmuch as the Commission continues the
same method, of charging at a higher normal rate, and of allowing
the discount, the discussion of rates for the sake of clarity will
be in terms of net rates, that is the nominal rate less the 25%
discount. To illustrate, the rate of $1.25 per thousand, less dis-
count, is $1.00 and is so referred to.
Omitting any extended discussion of the subject of past rates
in Ann Arbor or the effect of the rate fixed in the ordinance of
March 5th, 1917, and without submitting in detail the charts used
and showing the effect of applying the new ordinance rates to
the business of any of the last five years, it may be said that the
Commission's study shows that the new rate fails to provide an
adequate return, there being two points in which it cuts seriously
into the income provided under the old rate, namely, in the reduc-
tion applied to gas prices for users between 1,000 and 5,000 feet,
and in the application of the lower rate to all gas used. The effect
of these two items, the new rate being applied to the business of
the year 1915, is a loss of $8,300 income from consumers using
– 17 —
between 1,000 and 5,000 feet of gas, or, for this group, a loss of
8% of the total. After very full consideration of the effect of
franchise rates, and of the percentage of consumers in each group,
it was decided to adopt, as a base rate the discounted prices of
$.95 per thousand for the first 5,000 feet of gas, as a so-called
primary rate, and $.77% per thousand for all gas used in excess
of 5,000 feet, as a so-called secondary rate. The chart on the fol-
lowing page will illustrate graphically the relative prices for gas
under the old and new franchises and under the Commission's
plan.
E—CHANGES IN RATES
Increases in rates up or down are provided for and to be
made in increments of five cents for the primary rate, and half
as much for the secondary rate, as will be more fully explained
later in this report. (See Sec. V-F.)
F—DIVISION of Surplus PROFITs
The mere fixing of a scale of rates which might be applied
from time to time as business conditions grow worse or better,
without making some further provision which would furnish an
incentive to the Company to adopt a lower rate at the earliest pos-
sible moment, would hardly prove satisfactory. Therefore in
connection with these rates a sliding ratio of division between
company and consumer of surplus profits in excess of the adopted
insured return, was discussed and its effects studied by the appli-
cation of various rates and ratios of division to the business of
the years 1913, 1914, 1915, 1916, 1917, and to the full year 1917
assuming pro rata costs as of the last six months. Upon this
basis it is assumed that when the yield from the sale of gas at the
rate fixed does not provide sufficient funds to meet the insured
return on the investment the rates shall be increased to such a
point as will provide the return, but at the end of the year a care-
ful accounting shall be made, and any surplus over the insured
return shall be divided between the company and its consumers.
The controlling principle of this division being that the higher the
rate for gas when the surplus accrued the greater the proportion
of that surplus to be divided to the consumer.
The following sliding scale of rates and proportionate di-
vision of surplus profits has by the Commission been determined
upon for the control of this division:
— 18 —
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— I9 —
Rates Division of Profits
Primary Secondary To Company To Consumer
$1.15 $0.87% O Ioo 7%
I. IO .85 12%% 87%%
I. O5 .82% 25 % 75 %
I . OO .80 37%% 62%%
.95 .77% 50 % 50 %
.90 .75 62%% 37%%
.85 .72% 75 % 25 %
.80 .70 87%% 12%%
.75 .67% Ioo 7% O
It will be readily seen from the foregoing table that there is
no incentive held out to the Company to increase the rates above
such as will produce the insured return, while every induce-
ment exists to lower the rates in order to secure the larger per-
centage of surplus profits. The application of these scales to
the actual business transacted by the Washtenaw Gas Company
over the years from 1913 to 1917 inclusive results in prices for
gas to the consumer as shown by the following table, in which
rates are given in cents per 1,000 cubic feet.
Application of Commissioner's Plan to Former Years
Year Service Primary Secondary
Charge in Cents in Cents
in Cents per I,000 per 1,000
cu. ft. cu. ft.
1913 . . . . . . . . . . . . . . . 3O 77.6 59.7
I914 . . . . . . . . . . . . . . 30 79. O 61.2
I915 . . . . . . . . . . . . . . . 30 78.5 60.9
1916 . . . . . . . . . . . . . . . 30 80.0 62.4
I917 . . . . . . . . . . . . . . . 3O 83.4 65.4
1917 (special) . . . . . 30 90.8 72.6
This table was computed on the basis of the actual expendi-
tures of each year and on the assumed distribution of amounts of
gas delivered at the primary and secondary rates as determined
from the analysis of Consumers Ledger for the year of 1915, and
the consumers net cost of gas is the result after receiving the cred-
its for the consumers share of the net income. The last line shows
the effect assuming the conditions obtaining in the last six months
of 1917 to have obtained through the whole year. The ser–
vice or connection charge in the above table is explained under
Section VI-D.
SECTION VI
ACCOUNTING METHODS
A—IN GENERAL
The accounts and records of the company have been so
kept that they are readily verified. An annual audit is made by
Price Waterhouse & Co., chartered Public Accountants, who for
Some years have carried in their reports a check of statistical data
as to the cost of production of gas per thousand.
In order to insure the working of the plan proposed certain
accounting rules must be observed, all of which are fully set
forth in a subsequent portion of this report. It leaves the admin-
istration of the plan to the company, subject to such provisions of
the new ordinance as are not modified by the report of this Com-
mission acting under the authority given it.
In developing the plan in detail it is necessary to define with
some care just what shall be treated as direct operating expense
and just what classes of property shall be included under the pro-
vision for depreciation. The propriety of such an inclusion has
been settled, and the exact rights of the company have been de-
fined by Mr. Justice Moody of the United States Supreme Court
in Knoxville v. Water Company 212 U. S. I (on page 13.) “Be-
fore coming to the question of profit at all the company is entitled
to earn a sufficient sum annually to provide not only for current
repairs but for making good the depreciation and replacing the
parts of the property when they come to the end of their life.
The company is not bound to see its property gradually waste
without making provision out of earnings for its replacement. It
is entitled to see that from earnings the value of the property in-
vested is kept unimpaired, so that at the end of any given term
of years the original investment remains as it was at the be-
ginning.” The Commission has attempted to differentiate be-
tween those classes of property, of short life, whose renewals
come with a fair degree of uniformity year after year, and
which can be charged direct to operating expenses without caus-
ing any serious fluctuations in the net income, and those classes
of long life which require the establishment of a special system
of accounting to equalize the charges to operating expense over
the years. In addition to this, the definitions of what shall be in-
cluded in various determinations of cost, and the methods of
treatment of the Dexter-Chelsea business are disposed of.
- 2 I —
B—PUTTING THE PLAN IN OPERATION
In general the plan proposed for gas rates requires that at
the beginning of each year a rate for gas sufficiently high to cover
the total deductions from the gross income be selected by the Gas
Company from one of the standard rates herein fixed as a price
for gas for that year.
At the end of the year, when the total amounts of the
gross revenues and of the deductions for operation and fixed
charges can be definitely ascertained, the net income is determin-
ed. The net income is divided between the Company and the con-
sumers in a ratio depending upon the price at which the gas should
have been sold to secure for the Company its operating charges
and the minimum rate of return hereinbefore fixed.
The share of the net income going to consumers is distribu-
ted to the individual consumer in proportion to the total amount
paid by him for gas during the year.
C—METHOD of DEALING witH THE CHELSEA-DExTER BUSINESS
The investments in the Chelsea-Dexter line and distribution
systems shall not be included in the total investment of the prop-
erty considered under this rate plan, nor shall any direct or in-
direct expense for the operation of these properties be included as
an operating expense of the gas properties considered hereun-
der.
The revenue obtained from the sale of gas from this Chelsea-
Dexter line to its consumers shall not be included with the gross
revenues above, but a charge shall be made and included with the
revenues for the gas delivered to this line at the Manufacturing
Plant at the net manufacturing cost of gas. When the amount of
gas taken by the consumers along this line becomes sufficiently
large to warrant the expense, a meter should be placed at the plant
to measure the total quantity of gas delivered to the line. Until
such time as this expense is warranted, the amount of gas de-
livered to the line shall be taken as being the total amount in-
dicated on all the meters of the individual consumers on the line,
plus 4% of that total, this addition being a reasonable allowance
for leakage in this line and the Chelsea-Dexter distribution sys-
tennS.
Under this plan the Chelsea-Dexter line is treated as a whole-
sale gas customer who owns its line up to the point of taking gas
from the Gas Company's Plant, and who pays for that gas at
the manufacturing cost of same and without profit, at the point of
taking.
— 22 —
* *
D–DETERMINATION OF THE STANDARD RATES FOR GAs
So-called Standard Rates for gas are adopted by the Com-
mission which fix the prices to be paid by consumers and make
them dependent in some measure upon the amount of gas taken.
As a part of the general plan the Commission has fixed a “Con-
nection” or “Service” charge of thirty cents per month for each
meter installed at the consumer's request. To this charge is add-
ed charges for gas delivered through the meters as follows: a
“primary” rate of $1.20 per thousand cubic feet for amounts up to
and including 5,000, and a “secondary” rate of $1.025 for each
I,000 cubic feet in excess of 5,000.
A deduction of 25 cents per thousand cubic feet used both
at the primary and secondary rate is to be allowed in cases where
payment is made on or before the tenth day of the month follow-
ing that for which the bill is submitted.
Changes in the rates as above fixed for gas delivered are per-
mitted to meet corresponding changes in operating conditions.
Such changes may be made by increasing or decreasing the exist-
ing rates, the primary by five cents and the secondary by two and
one-half cents per I,000 cubic feet, the connection charge, how-
ever, remaining constant.
The so-called connection charge is designed to cover those
costs which are more directly proportional to the number of
meters than to the amount of gas used; such as those for meter
reading, billing, collecting, those incident to complaints by con-
sumers, to repairs upon, and operation and maintenance of, the
distribution mains, services and meters, and such as are incident
to the employment of the necessary office force and other help
to properly care for these items of business.
E—METHOD WHERE GAS IS DELIVERED THROUH “PREPAY-
MENT’’ METERS
There are installed in the city a considerable number of so-
called 25 cent prepayment gas meters. These meters are now on
a flat rate of $1.00 per 1,000 cubic feet, corresponding substan-
tially to the quantity rate for the first 5,000 cubic feet of gas under
the old franchise rate. These meters are capable of an adjust-
ment in increments of Io cubic feet, and under the rate plan pro-
posed, the Company may take care of this class of consumers by
adjusting the consumers' meters in increments of 50 cubic feet for
each 5 cents change in the the primary charge of the standard rate,
— 23 —
to insure a revenue sufficient to cover the monthly service charge
and for the gas used. The accounts of these consumers shall be
kept separate and at the end of the year credit them or collect
from them the difference between the amount actually paid by the
individual consumers and the total service charge plus the gas used
at the corrected rates.
F—METHOD OF ARRIVING AT “NET INCOME” OR THE AMOUNT OF
THE EARNINGS IN WHICH THE CONSUMER Is
ENTITLED TO SHARE
(a) Gross Revenues
Gross revenues shall be considered as all revenues accruing
to the Company from the operation of their properties in Ann
Arbor, including the revenues from the direct sales of gas in the
City of Ann Arbor; the sale of gas produced and delivered to the
Chelsea-Dexter line or to other towns and cities, if there be such ;
the profits, if there be any, and the deduction, if there be a loss,
in the handling of the non-operating properties such as the house
account, the office-building account and the like; together with all
miscellaneous revenues such as those accruing from the mer-
chandising business, forefeited discounts, interest on consumer’s
deposits and on bank balances if there be any.
The revenues from the sales of residuals such as coke, tar,
ammonia, and the like and from the monthly service charge shall
not be included as a part of the gross revenues but shall be applied
directly in discharge, pro tanto, of the manufacturing and distri-
bution cost of gas respectively.
(b) The Deductions to be Made From Gross Revenues
Under this heading are grouped all of the deductions cover-
ing operation and fixed charges of the Company. These will in-
clude the cost of manufacture, distribution and selling of gas; the
general expenses of the Company; the cost of merchandise and
supplies; an amount covering the replacement and renewal of
property; the amount of the minimum percentage of return to the
Company on the capital invested in the property, and on that re-
quired for a working balance, to which it shall be entitled before
there shall be any distribution of profits to the consumer, and the
amount of the deficit, if there be any, from the operations of
the preceding year.
The cost of manufacture, distribution and selling of the
residuals shall be included with these deductions unless they are
— 24 —
carried in a separate account and deducted directly from the
revenues accruing from the sales of residuals before the net
amount is deducted from manufacturing costs.
The details of the items included under these deductions fol-
lows:
(I) Manufacturing Cost
The manufacturing cost shall include the cost of gas coal, gas
coal labor and freight, bench fuel and labor, bench repairs, boiler
fuel and labor, purification material and labor, water gas oil,
water gas generator fuel, water gas boiler fuel, water gas labor,
water gas works repairs, water tax, works expense, works repairs,
and the salaries of the foremen and superintendents.
Practically all of the above items have been carried on the
Company's books for a number of years as separate accounts and
the Company may at its option carry these accounts under such
groupings as it may find desirable.
In the case of an item such as bench repairs and maintenance,
where the amount required may very greatly from year to year,
the Company may at its option in order to care for extraordinary
expense with least disturbance carry this as a separate account,
basing each year's charge on the number of cubic feet of gas pro-
duced, provided however that when the amount in this account
becomes more than enough to take care of the possible expendi-
tures from it in any one year the amount of money supplied to
it shall be reduced or the surplus of the account be transferred
to revent1e.
The net manufacturing cost per thousand cubic feet used in
computing the credit for gas delivered to the Chelsea-Dexter line
shall be the gross manufacturing cost as given above, plus the
renewal and replacement fund applicable to the manufacturing
plant which shall be taken to include the works structures, gas
holders and plant equipment, less the credit for the sale of resid-
uals, divided by the gross amount of gas generated during the
year in thousands of cubic feet.
(2) Distribution Cost
The distribution cost shall include the general distribution
expense, the complaint expense, the expense of so-called gratui-
tous work, the cost of setting and removing meters, the shop
expense and the cost of repairs and maintenance of distribution
mains, meters, and services.
— 25 —
(3) Selling Cost
The selling cost shall include the cost of advertising, solicit-
ing, materials and labor for making free connections, and in gen-
eral all expenses in connection with the acquisition of new busi-
ness in Ann Arbor.
(4) General Ea'penses
The general expenses of the Company shall include cost of
insurance, all taxes, debits for cash shortages or credits for cash
overages, office expense, officers salaries, wages of employees, in-
terest on floating debt, amount of bad and doubtful accounts,
and such expenses of the Company as are not otherwise allocated.
No salary or wage shall be paid to any person except for
services actually rendered and reasonably necessary to the efficient
operation of the Company. This shall not be construed as to
prevent the giving of such small so-called “bonuses” to officers or
employees of the Company as have been given from time to time
in the past in recognition of meritorious service. In no case shall
any officer or employee be paid for services an amount per an-
num in excess of two and one-half percent on the Company's
issued capital stock.
(5) Renewal and Replacement Fund
The primary object of this fund is to enable the Company
to renew or replace such tools and plant parts or units as be-
come useless through wear, obsolescence or other cause. It is
built up through setting aside such sums annually as will, when
invested in the property of the Company, or otherwise, be suffici-
ent for this purpose.
It shall be computed on the basis of a 5% annuity on the in-
vestment value of the several units of property respectively the
assumed life of the respective units of physical property being as
follows:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indefinite
Works Structure . . . . . . . . . . . . . . . . . . . . . . 30 years
Gas Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 years
Plant Equipment . . . . . . . . . . . . . . . . . . . . . . . 20 years
Distribution System . . . . . . . . . . . . . . . . . . . . 30 years
Sundry Equipment . . . . . . . . . . . . . . . . . . . . . 20 years
Office Buildings . . . . . . . . . . . . . . . . . . . . . . . 30 years
Tools and Supplies . . . . . . . . . . . . . . . . . . . . IO years
Horses and Auto Trucks . . . . . . . . . . . . . . . IO years
— 26 —
This fund is not intended to provide money for the ordin-
ary maintenance and upkeep of the properties in service nor for
bench repairs or other items of renewal, replacement or main-
tenance, where the probable life of the article is less than ten
years. Such expenses shall be taken care of as a part of the op-
erating costs.
A fund for this purpose has been carried by the Company
and amounted on Jaunary Ist, 1918, to $78,705.38 This amount
should be carried forward as the fund for Renewal and Replace-
ment and receive the annual additions from revenues as above
provided. When any piece or part of the property becomes
worn out or for any cause is permanently removed from service,
its value as junk shall be credited to this fund and the equip-
ment which is bought to replace it shall be paid for, to the extent
of the value new of the property removed, from this fund and
the balance of its cost shall be paid from new capital.
In the event that after experience under this plan the fund
for renewals and replacements increases or decreases to a point
where the amount is unreasonable for a plant of this size the
annual charge to this account shall be decreased or increased re-
spectively. In no event shall any portion of this fund be con-
sidered as distributable to the stockholders.
(6) Return on Investment—Additions and Working Capital
The total capital investment shall be that shown in the in-
ventory and appraisal of this Commission made as of Jaunary
Ist, 1918, plus additions, made since such appraisal and plus
working capital. The minimum rate of return (Sec. V-C) will
be, under present conditions, five percent.
Additions to capital are being made continuously in the
form of extensions to the distribution system and to the works.
At the beginning of each year there shall be added to the physical
value of the plant of the preceding year the actual cost of the ad-
ditions made to it during that year plus 12% of the amount of
the cost of materials and labor used in the construction of such
additions. Charges covering the repairs, maintenance or re-
placement of the existing plant except so far as explained under
the heading of Renewal and Replacement Fund., shall not be
treated as “Additions.”
The 12% above referred to is intended to cover interest dur-
ing construction, and before production is affected by the addition
or extensions, engineering and administration costs, and a proper
— 27 —
proportion of the salaries of the general officers and employees
of the Company, for work done by them in connection with such
improvements but whose salaries have been wholly charged to
operating expense. The amount of the 12% shall be credited to
Operating Expenses. *
Under Working Capital is included the amount of money that
the Company must provide above its investment in physical pro-
perty to carry its business from the time of the purchase of
supplies and raw materials till it has received payment for its
manufactured products, including such amount as good business
management will require, to purchase and keep on hand a reason-
able amount of material for repairs, merchandising stock (on
which the gas consumer shares the profit) and a reserve supply
of coal and gas oil in excess of that required for operation from
day to day.
The estimated value of the residuals, (coke, tar and am-
monia), carried awaiting sales, have not been included with the
working capital, for while they represent at times a considerable
amount of money they have been taken care of so far as work-
ing capital is concerned in the money necessary to purchase coal
and labor.
An unreasonable restriction on the amount of the working
capital allowance would naturally result in a failure to carry the
reserve stock necessary to safeguard, so far as might be possi-
ble, the production and delivery of gas to consumers.
After full consideration the Commission is of the opinion
that an amount equal to 5% on the value of the investment in
physical property plus the amounts at cost of the stores, sup-
plies, merchandise accounts, (now carried as “Stores A, B, and
C”) and Arc Lamps, in this particular case is a reasonable allow-
ance for working capital.
(c) Net Income
(1) What to Bc Considered As
The term net income as used in these instructions for ac-
counting is the amount remaining each year after making the de-
duction described above from the total revenue from the sale of
gas which would have been obtained had the “corrected” rate
been charged during the year, plus the miscellaneous revenues. It
is this net income that is divided between the Company and the
COIT Stinner.
— 28 —
Particular attention is called to the fact that in obtaining this
net income for division the deducton is not made from the gross
revenues obtained by adding the miscellaneous revenues to the
actual revenues received from the sale of gas.
(2) Division of Net Income.
The division of the net income shall be made as follows:
When the net primary rate is $.95 per IOOO cubic feet the
Company and consumer shall share equally, and for each in-
crease or decrease of the net primary rate of 5 cents, the percent
of the consumer's share shall increase or decrease by I2% as
shown in the table under Sec. V-F. Proportional changes in
rates may be made and if made shall carry proportional change
in shares to Company and consumers.
This division gives the consumer all the net income when
the net primary rate is $1.15 per IOOO cubic feet and above, and
the Company all of the net income when the net primary rate
is $.75 per 1000 cubic feet or less.
SECTION VII
DIRECTIONS FOR OPERATION
A—In General
The proposed method of application of the plan for rates
is that the Gas Company should, before the beginning of each
year, make an estimate of the amount of gas to be sold in the
next ensuing year and of their probable operating expenses, that
these amounts be applied to the formula for rate determination
given post, following the discussion under “C” of this Section
VII, and that the rate be set at the first multiple of 5 cents above
the rate determined therefrom. This will provide insurance
against a deficit, the margin being about IO percent on the gross
reventies.
After setting the rate at the beginning of the year if, during
that year, it becomes evident by reason of change in conditions
or otherwise, that the rate set will not provide sufficient revenues
to provide for the deductions from revenues, provided for in
Section VI-F-b, the Company may increase the set rate to the
— 29 —
point which will insure that there will be no deficit at the end
of the year. In any event, the difference between what the Com-
pany charges as a set rate for gas and the amount they should
have charged to produce sufficient to meet the total of such deduc-
tion, is returned to the consumer.
During the year the Company shall keep their books in sub-
stantially the details now being used and shall have an audit of
them prepared by a competent and reputable auditor, at the end
of each current year. A copy of this audit so far as it pertains
to the determination of rates under the Commission's plan shall
be filed annually as made, with the Common Council of the City
of Ann Arbor. The costs of such auditing and computations
shall be taken care of as a general operating expense by the Gas
Company.
The auditor after having audited, corrected and certified to
the correctness of the book entries of the Gas Company shall
compute, or review a computation of, the total of gas sold con-
sumers under the primary and secondary rates, respectively, and
of the total deductions from the gross revenues as explained in
VI-F-b. He shall then insert the amounts so determined in the
formula for rate determination and obtain the “corrected” rates
provided for in VII-C. From the actual gross revenues shall
first be taken the total of the deductions so provided. From the
amount thus obtained shall be deducted the difference between the
amount of revenue produced by the rate actually charged during
the year and that resulting from the application of the corrected
rate. The resulting amount is the net income to be divided be-
tween consumers and the Company. The Company's percent
share is given directly by the formula and should be applied to
this net income. The portion of such net income going to con-
sumers plus the amount of the difference between the revenues
produced through the application of the rate actually charged and
that provided through the application of the corrected rate is the
total amount to be returned to consumers. Each of these steps
is given in the following detail,
B—DETERMINATION OF THE RESPECTIVE AMOUNT OF GAS SOLD
AT THE PRIMARY AND SEcondARY RATES
The amount of gas sold at the primary and secondary rates
respectively shall be obtained directly from records of the Com-
pany, which shall be kept in such form as to make possible a
ready determination of these amounts.
If there should be periods in which the accounts are not
segregated as is required above, it will be permissible for the
Company to classify their consumers in two groups—those tak-
ing 60,000 cubic feet of gas or less and those taking more than
60,000 cubic feet per year, (5,000 cubic feet per month). The
first group shall be assumed to have taken gas at the primary rate
and the second group shall be assumed to have taken 60,000 cubic
feet of gas at the primary rate and the amount in excess of 60,-
Ooo cubic feet at the secondary rate.
It is not intended that the latter method shall be the general
method of determination of the amounts of gas sold under the
different rates, but that it may be used until such time as the
Company is able to prepare new ledgers containing suitable rul-
ings to make possible and convenient an accurate determination
of the amounts of gas sold at the primary and secondary rates
respectively.
C——DETERMINATION OF CORRECTED RATE AND FORMULA FOR DE-
TERMINING THE COMPANY’s SHARE OF THE NET INCOME
To determine the rate it is necessary to provide that it be
such as would give to either the consumers or the Company a
maximum return, after the adjustment of the various factors to
conform with the one selected, the final result will be the same,
and for ease in arriving at a solution of this corrected rate it is
assumed that the corrected rate will be one giving the Gas Com-
pany the maximum net return. Under this condition, (and the
same would be true, with a change of constants, if a corrected
rate is chosen under which the consumer's returns will be at the
maximum), a formula is obtained by expressing the Gas Com-
pany's return in an equation containing one variable, and by dif-
ferentiating this equation to obtain the condition in which the
variable is at its maximum, we obtain a fairly simple formula for
determining the percentage representing the Company's share of
the net income.
After determining the Gas Company's percentage of the net
income, the corrected rate for gas is readily obtained, since the
percentage of the Company's share of the net income has a fixed
relation to the rates for gas.
This formula is given in full on the page following.
— 31 —
/*Z/7/7//Z/A AO/P C0/ſ/PATC7A/7 G/7.5 /7/7Zr
4ez C = Cozzoazzy &re of zer Zzozze
A = Gaoss Žcome from sa/e 2, 223 &zeezé)
4 = 47°2%/c/27s 7?ozz7 2-zss Zzzzze (22.22%)
// = //3ce/Zzazeozºs / eye/zze
& = &as so/Z 27 Az”zzzzy /zé (27%z&zzº's 2/22/7)
& = &s so/Z 27° secozzazzy zzº. (27%zzº& 22z/?)
x = //,776er craºr 22,77°27′Zzy Żzzzzze
4e/222222 × 2.77&zzy
a = A^zzzzzy 22% for 223. Cz, cz/s)
7% Azzºzzazzy Zzzº. 2 = z*-ā z
Žor z = o av/eez 22 = //5T
22/7.7 2 = Zoo rºſe/7 27 = 7.5"
2/222av. Zaze
77° 32ca2zzy Zzzº - 32°. % % = 32.2 #
77°2 ſ = 267 -3oz £);
27& C = x(Z-4 -/M)
= z/a^2. ~/30-4)3, -4 2///
= x/7/3-#2)67, 7-(302. ****); —A -//
zºo//z 22 coſº, 2% Ascozzes
a = (Zºº. 2.323 &-4 -/M)x -(#3, -4%)x"
/ºr 7% cozz/2/2 27 2724.2/277&zzz zerº Zzzzzze, 327.
Že 7%-37° 22′-ºrazzºve 27 zºe Zºº eyezzzzz ze
zero 222/32/2 22- x.
# = z*z, **23-3-4-2-az-2/3%-3 3/z =o
a/
27% _ 2.33° rezº & 4 z^2
'e/2 2. 28% A. 34. Gr
D—DETERMINATION OF THE CONSUMER's SHARE OF THE NET
INCOME
The method followed in the determination of the Company's
share of the net income is equally applicable to the determination
of the consumer's share when the percentage of the share is taken
as IOO minus the percentage of the Company's share, except
that there is to be returned to consumers in addition to their share
of net income, the difference between the total received for gas
at the rate actually charged and what would have been received
had the corrected rate been used. A short way of determining
the consumers total share is to take from the actual gross reven-
ues, the deductions from revenue before described, following
which the Company's share of the net income as determined above
is deducted and the balance will be the consumer's share of the
net income.
This short method will give the same results as the determin-
ation of the consumer's share by the longer process of following
each step independently as above indicated for the determination
of the Company’s share.
E—DISTRIBUTION OF CONSUMERS' SHARE OF THE NET INCOME
The total amount of money distributable to the consumers
shall be proportioned among the individual consumers by first ob-
taining the percentage which this amount bears to the actual total
income from gas sales and applying this percentage to the total
annual amounts of the payments made by the individual con-
sumer for gas during the preceding year, and shall be distributed
within ninety days after the close of the year. The service charge
shall be excluded as an item of the “income from gas sales” for
the purposes of this distribution.
The amount so obtained for each consumer, who is taking
gas at the end of the year, may, at the option of the Gas Com-
pany be paid with the Company's check sent by mail to the last
known address. The mailing of such checks by the Company to
such last known address shall constitute a legal payment of such
refund to the consumer, or when the Company shall have determ-
ined the amount that may be due to consumers under the Plan
herein specified, the Company may give general notice by adver-
tisement published once a week for two successive weeks, in some
newspaper having a general circulation in Ann Arbor, that such
rate of refund or return to the consumer has been fixed, and all
consumers entitled to refund, who shall not have received or pre-
sented a claim for such refund to the Company within sixty days
shall be deemed to have waived their right to such refund or
return.
Consumers taking gas three months or less in any year and
not being customers at the beginning or closing of the year shall
not be eligible to receive consumers' dividends nor shall consum-
ers who are receiving gas at other than standard rates be entitled
to this dividend.
Shares to which otherwise such consumers would have been
entitled shall be passed as a credit to Bad and Doubtful accounts.
This treatment of the case of the short term consumer is based
upon the fact that the expenses incident to such service are pro-
portionally greater than in other cases.
F—APPLICATLON of RATE TO FIRST SIx Months of 1918
Under the provision of the franchise in effect January 1st
1918, the new rate provided therein was to have applied to all gas
sold in the City after January Ist, 1918. However, the Com-
pany applied for the appointment of a Rate Commission and
pending the Commission's report have, under its advice, kept in
force the old rate until such time as the adjustment could be
made.
The rate plan provided hereunder shall be put into immed-
iate effect and not later than thirty days after filing the same
with the Gas Company it shall decide upon and invoice gas to
its consumers under a new standard rate to be chosen accord-
ing to the provisions hereinbefore set out at length. At the end
of the year the same procedure shall be followed as is provided
for a full year under the new rates, in determining the corrected
rate applicable to the full year. It is recommended by the Com-
mission that the results of this procedure be applied to the busi-
ness of the full year in the division of surplus.
The Company shall then make its deductions from the gross
revenues and its share of the net earnings as hereinbefore pro-
vided and the balance shall be distributed, among the consumers
entitled, as hereinbefore indicated.
The foregoing is submitted as the report of the Commission
appointed to revise and fix rates for the sale of gas by the Wash-
tenaw Gas Company to the inhabitants of the City of Ann Arbor.
It is submitted in the belief that operation under its pro-
visions will result in justice as between the Company and its
patrons, and in the hope, that because it does, it may produce in
good measure that satisfaction on the part of all interested, so
much to be desired where a public utility is involved.
VICTOR H. LANE,
HENRY E. RIGGS,
RAY K. HOLLAND,
Commissioners.
Appendix
FRANCHISE GRANTED THE WASHTENAW GAS COM-
PANY MARCH 5, 1917, BY THE CITY OF
ANN ARBOR
An ordinance granting to the Washtenaw Gas Company, its
successors and assigns, permission to maintain and operate gas
works in the City of Ann Arbor, and to repeal an ordinance en-
titled “An Ordinance Relative to Gas Works,” passed September
2nd, 1889, approved September 4th, 1889, amended April 5th,
1893.
The Common Council of the City of Ann Arbor, ordain:
Section I. Subject to all the terms and conditions men-
tioned in this ordinance, consent and permission is hereby given
to the Washtenaw Gas Company, a corporation organized and
existing under the laws of the State of Michigan, and to its suc-
cessors and assigns, for a period of twenty years from and after
January Ist, 1918, to lay, maintain, operate and use gas pipes,
mains, conductors and service pipes, in the streets, alleys, high-
ways and public places in the City of Ann Arbor, for the purpose
of supplying and selling gas for all purposes, to the said city and
inhabitants thereof, and for conducting gas to supply neighbor-
ing cities and villages.
Section 2. Said Company shall supply gas at the rates here-
in specified, to all applicants not in arrears for prior bills, owning
or occupying premises on streets in which gas mains or conductors
are laid, and where said Company has not laid mains or con-
ductors, said Company shall lay mains within thirty (30) days,
or within such time as the Common Council may designate, after
due notice to said Company, in streets upon the petition of two
applicants who are owners or occupants of buildings, provided the
buildings on said streets average two buildings in every three
hundred feet of main pipe required to supply the same, and when
the Council shall have ordered such extensions, for every day
which said Company, or its successors, shall fail to comply with
such order to lay extensions, said Company, its successors or
assigns, shall forfeit to each and every person injured thereby
the damages sustained from the injury caused by said failure, the
same to be recovered in an action to be brought by the person so
injured against said Company. Said Company may require a
reasonable deposit from consumers who are unable to furnish suf-
ficient financial reference.
Section 3. The said Company shall do no injury to any
street, avenue, alley, park or public Square, nor to any shade
trees, nor in any manner disturb or interfere with any electric
conduits, or with any water, gas or other pipes nor with any public
or private sewer, now or hereafter laid or constructed by any
authorized person or corporation, and shall fully indemnify and
save harmless the City of Ann Arbor from any and all claims for
damages which said city might be made or become liable to pay by
reason of the construction, making, laying or operating of said
pipes, mains, conductors, or service pipes, or the giving or allow-
ing of the license, right and privilege hereby granted. All pave-
ments and streets through which pipes are laid, shall be promptly
repaired or replaced at the expense of the Gas Company as may
be ordered by the Board of Public Works, or their successors,
having supervision of streets of said city.
Section 4. The main pipes of this Company, to be hereafter
laid, shall be placed in that part of the streets, alleys, or public
places, as shall be designated by the Common Council or its duly
authorized agent. Said Company shall, before the work begins,
file with the City Engineer supplemental maps of all proposed
extensions of the mains and pipes.
Section 5. Said Company shall not charge nor receive any
higher rate than the following for gas furnished through one
meter to any consumer within the city limits:
For the first one thousand feet used in any one month through
one meter, $1.25 per thousand feet; for the next one thousand feet
so used, $1. IO per thousand; for more than two thousand feet
and not more than five thousand feet, so used $1.Io per thousand
for all gas consumed; for the next five thousand feet so used
$1.05 per thousand; for the next forty thousand feet so used,
$1.00 per thousand; where over fifty thousand feet of gas is
used per month, $1.00 per thousand for all gas consumed.
All the above subject to a discount of twenty-five (25) cents
per thousand feet if payment is made on or before the tenth
day of the month following that in which gas is consumed, mak-
ing the net rate as follows: $1.00 per thousand feet for the first
one thousand feet used in any month per meter; $.85 per thousand
feet for the next one thousand feet so used; $.85 per thousand
feet for all gas consumed where more than two thousand feet and
not more than five thousand feet are so used; $.80 per thousand
feet for the next five thousand feet so used; $.75 per thousand
feet for the next forty thousand feet so used; $.75 per thousand
feet for all gas consumed where over fifty thousand feet are so
used. If less than five hundred feet of gas is used in one month
through one meter, a minimum charge of fifty (50) cents may be
made. Provided, that if said Company shall furnish gas to con-
sumers outside of said city at a lower rate than the ones herein
specified then said rate or rates to said outside consumers shall
become the rate or rates under this franchise.
At the instance of either party hereto a rate revision under
this franchise may be had at any time, said rate revision to be
made by a Public Utility Commission if one is in existence in the
State of Michigan at said time. If a Public Utility Commission
does not then exist, said revision shall be made by a Commission
to be created as follows: The Council of the City of Ann Arbor
shall appoint one member and the Gas Company shall appoint one
member and a third member shall be appointed by the Justices
of the Supreme Court of the State of Michigan. Said Commis-
sioners to be persons versed in work of this character. The ex-
penses of said Commission shall be borne by the party applying
for said rate revision.
Section 6. All service pipes shall be maintained by said
Company to the lot line of the consumer. Said Company may
charge for furnishing and laying service pipes from the lot line
to the meter at the cost thereof.
Section 7. Gas furnished under this franchise shall have a
monthly average calorific value of Five Hundred Seventy-Five
(575) Gross British Thermal Units and a minimum calorific value
of Five Hundred Twenty-Five (525) Gross British Thermal
Units.
Section 8. The City of Ann Arbor, may, when it desires,
appoint a Gas Inspector, whose duty it shall be to inspect the
quality of gas from time to time, and determine whether its
quality is that required by this ordinance. It shall also be his
duty to inspect and test meters used by the Company and he may
require said Company to remove any such meters to be tested and
deliver the same to him. Said inspector may perform such other
Service as the City of Ann Arbor may require, and which is not
in any manner inconsistent with the provisions of this ordinance.
Section 9. Should the State of Michigan enact a law creat-
ing a Commission having jurisdiction and regulatory powers over
Public Utilities, the regulatory powers of this ordinance, in-
cluding the matter of rates, shall be subject to such and to the
rules of said Commission at the instance of the City or the Com-
pany.
Section Io. This ordinance shall continue and remain in
force for the period of twenty (20) years from and after Jan-
uary Ist, I918.
Section II. The said Washtenaw Gas Company shall, with-
in five days after the approval of this ordinance, file in the office
of the City Clerk, its assent to and written acceptance of the con-
ditions and provisions of this ordinance. The filing thereof shall
be held as the undertaking of said Company to be governed by,
observe and carry out in good faith, each and every one of the
provisions, terms and conditions of this ordinance. Such accept-
ance is, however, subject to the approval of the qualified electors
of the said City of Ann Arbor, as provided in Section 18 of this
ordinance.
Section I2. The City of Ann Arbor shall, at any time after
five years, have the right to purchase all of the works, apparatus,
mains, pipes, meters, supplies and other property, and the busi-
ness of said Company, its successors and assigns, then existing
as an entirety and lying within the limits of Said city, at a valua-
tion and upon terms and conditions which shall be fixed by a
Board of Arbitration to be constituted as hereinafter stated; pro-
vided, that said City shall give to said Company, its successors
and assigns, six month's notice, in writing, of its intentions to
make such purchase, and at the expiration of said period shall
proceed with and complete such arbitration. Said Board of
Arbitration shall consist of three members who shall be ap-
pointed by the Justices of the Supreme Court of the State of
Michigan. The City shall not be bound to purchase property or
equipment being outside of or used exclusively for supplying con-
sumers outside of said city. In arriving at a fair price at which
said purchase shall be made by said City, the said Board of Arbi-
tration shall not take into consideration the value of this franchise
or grant, or severance damages. The price, terms of sale and
terms of payment agreed upon by said Board of Arbitration or a
majority of the members thereof, shall constitute the basis of said
sale and both the City of Ann Arbor and the Washtenaw Gas
Company shall be bound to abide thereby. The members of said
Board so to be appointed shall be men versed in work of this
character. The expenses of said arbitration shall be borne equally
by the parties to this contract.
Section 13. This ordinance shall be of no force or effect un-
less it is accepted by said Washtenaw Gas Company within the
time and in the manner above provided.
Section 14. For every violation of any of the provisions of
this ordinance not herein otherwise provided for, said Company
shall forfeit and pav to the City of Ann Arbor the sum of One
Hundred Dollars ($1oo.oO), to be recovered in an action in any
court of competent jurisdiction. Provided, however, said City
may disregard any other penalty herein provided and may at its
option, by ordinance, repeal the franchise and rights herein grant-
ed for any misuse or non use or any other failure to comply with
the terms of this grant.
Section I5. Said Company shall file an annual report with
the City Clerk of said City and said City may prescribe the forms
of accounts and may at any time audit and examine the accounts
of said Company, its successors and assigns, and may prescribe
such other rules and regulations as it may deem expedient which
do not impair the rights hereby granted.
Section I6. The terms and conditions herein contained are
intended to have the same binding effect upon the successor and
assigns of the Washtenaw Gas Company as fully and completely
as they pertain to and bind said Washtenaw Gas Company.
Section 17. This ordinance shall take effect and be in force
on and after January Ist, I918, at which time an ordinance en-
titled “An Ordinance Relative to Gas Works,” passed Septem-
ber 3rd, 1889, approved September 4th, 1889, amended April 5th,
1893, shall become void and of no force and effect.
Section 18. Within ninety (90) days after the passing of
this ordinance and its acceptance by the Washtenaw Gas Com-
pany, it shall be the duty of the Common Council to submit this
ordinance to the qualified electors of the City of Ann Arbor for
approval in accordance with Section 25 of Article 8 of the Con-
stitution of the State of Michigan. - .
Made and passed in Common Council this 5th day of March,
A.D. 1917. -
Attest: I. G. Reynolds, City Clerk.
THE ANN ARE or PREss