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ON S
SE AND PUBLIC
UTILITIES
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YOUNGSTOWN CHAMBER OF COMMERCE
*.
March 9, 1916
Address by -
Mr. NATHANIEL T. GUERNSEY
* , General Counsel
American Telephone and Telegraph Company

















*
.
COMMON SENSE AND PUBLIC UTILITIES.
The general and almost universal interest in matters
relating to public utilities is entirely legitimate. It is
the normal, natural result of their very intimate and
direct relation to the comfort, convenience and well-
being of the public at large and of every individual mem-
ber of the community.
This interest has manifested itself, especially within
the last few years, in the enactment of laws which have
created commissions having more or less extended juris-
diction over these utilities. These laws may be taken as
the concrete expression of the verdict of the public that
some regulation is requisite and that local regulation has
been a failure. Another conclusion on the part of the
public that finds very general expression in these laws
is that it is not for the public interest to have two pub-
lic utilities attempting to furnish the same service to
the public in the same local field. This involves not only
duplication of facilities, but also a more or less general
duplication of charges. Moreover, it is common experi-
ence that the normal results of such a condition
are, first, controversy, second, insolvency, or near in-
solvency, with corresponding impairment of service and
public inconvenience, and finally, consolidation.
A law providing for regulation by the state was en-
acted in Ohio in 1911. It contains ninety paragraphs
which fill twenty-seven closely printed pages. Its scope
2
is very broad. The jurisdiction of the Ohio commission
includes railroads, telegraph companies, telephones, elec-
tric light for light, heat and power, artificial gas for the
same purposes, natural gas for the same purposes, the
transportation of natural gas and oil, water companies,
heating and cooling companies, messenger companies,
signaling companies, and street and interurban railway
companies. -
While the commission law is necessarily elaborate
in its provisions creating the commission, defining its
jurisdiction, and providing the procedure for the exer-
cise of its powers and for the enforcement of its orders,
the fundamental things in which the great body of the
public is directly interested are simple. .
There has been too much talking upon this question
and too little thinking about it, or perhaps to be more
accurate, the people who have done the talking have
been theorists without the knowledge from practical ex-
perience that is essential to sound thinking, while the
people who have had this experience and have done the
thinking, have talked too little. I should like, disregard-
ing the technicalities which surround the matter, to dis-
cuss with you some of the simple fundamental things
which your sound common sense will recognize as matters
that should be clearly understood if the satisfactory rela-
tions between the utilities and the public which we all
desire are to be maintained on a sound basis.
The Fundamental Rights of the Public,
The first step toward understanding the situation is
a clear comprehension of just what are the rights of the
3
public. They are defined with commendable brevity in
your Ohio statute. I believe that everything which it
includes is embraced in the statement that what the pub-
lic is entitled to is good service that shall be adequate
and comprehensive, without unjust discrimination, at
reasonable rates. -
Good service defines itself.
By adequate and comprehensive service, it is in-
tended to describe a service that is as extensive as is
commercially practicable so that the service may be
available wherever the cost is not so great as to be pro-
hibitive. Gas mains and water mains, and in a less de-
gree electric light lines, cannot be extended so as to
serve every member of a sparsely settled community.
Such a service would cost more than it would be worth.
The facilities for every public service should keep up
with, and a little in advance of, the public demand for
the service. So far as it is not prohibited by cost, the
service should be available to everyone.
Freedom from unjust discrimination has always
been a legal right and is something which a people ac-
customed to liberty and fair dealing demands as a mat-
ter of course. -
Finally, the public is entitled to and demands rea-
sonable rates. Also, it is my personal opinion that the
very large majority of the public is willing to pay them.
I believe that the majority of the public is willing to be
and intends to be fair and honest. -
- Machinery to Enforce These Rights.
The commissions are nothing more nor less than the
machinery provided by these laws to see that these
4
rights are not infringed and to protect some of the
rights of the utilities as well.
The commission laws have not created new rights
either in the public or in the utilities. The four funda-
mental public rights which have been discussed, namely,
good service, adequate and comprehensive service,
service without unjust discrimination and at rea-
sonable rates, and the rights of the utilities to charge
compensatory rates and to manage their property with-
out interference so long as the rights of the public are
respected, are none of them created by these laws, but
are all of them old rights.
The primary function of the commissions is to keep
themselves advised as to the situation. It is not their
function to interfere until there has been an infringe-
ment of the rights of someone. Provision is made for
reports by the utilities, showing in great detail the re-
sults of their operation. Provision is made for filing
rates with the commissions so that they and the public
may know just exactly what rates are charged, having in
mind not only reasonableness, but unjust discrimination
as well. Provision is made for notifying them of any
change in the situation. Provision is made for super-
vision of the accounts. All of this is for the purpose of ,
keeping the commissions advised so that they may be in
a position to determine whether any of these funda-
mental rights are being violated. If they are, it is the
duty of a commission to act. If they are not, no affirma-
tive action upon the part of a commission is either neces-
sary or justifiable.
5
This indicates very clearly what the attitude of the
commissions should be. They should bear in mind these
important fundamental things to which practically every
power of the commissions is referable; they should be
jealous in their insistence that these rights be recognized;
but where they are recognized, where the utilities are
respecting the rights of the public, the commissions
should give like respect to the rights of the utilities.
There should be no regulation merely for the purpose of
regulating. The utility which recognizes the rights of the
public should be made secure in its own rights.
Some of the Things Which the Commission May Not Do.
While the power to regulate is perfectly well estab-
lished and is not questioned, it is also established that
the power to regulate is not broad enough to include the
power to manage. Management is something that goes
with ownership. The right to manage is inseparably
connected with responsibility for the results of manage-
ment. Commissions may not undertake to manage. If
they could, it would be imperative that they be held re-
sponsible not only to the public, but to the investors, for
the results of their management, whether they were
good or bad. Moreover, commissions which aspire to
manage must assume the burden of management which
requires the determination of important questions in ad-
vance. They may not wait until after the event and base
their conclusions upon the facts as they exist then. Man-
agement must determine questions before the event, and
must stand or fall upon the correctness of such deter-
6
minations. Commissions, if they are to assume to exer-
cise the powers of management, must exercise them in
the same way and must assume the same responsibilities.
In general, there should not be great uncertainty
whether any specific matter presents a question of man-
agement or a question of regulation. Cases will, how-
ever, arise where there may be honest differences of
opinion as to whether they fall on one side of the line or
the other. They may be readily disposed of, if the par-
ties will have in mind that the real justification of com-
missions and the expense they entail is the protection
of the public rights which have been mentioned. A prac-
tice that will accord to them all the power they need,
and will not attempt to usurp powers they do not need,
will work out a practical result that no one may very
seriously condemn.
|What Regulation Cannot Do.
Granting the broadest powers of regulation, and
granting further that regulation may usurp the func.
tions of management, there are some things which can-
not be accomplished by regulation or by management,
or by legislative acts. There are certain fundamental
economic laws that are permanent and persistent and
effective, which cannot be overthrown. Whenever regu-
lation, either through the action of a commission or by
direct legislative enactment, attempts to go contrary to
these laws, regulation will suffer, the public will suffer,
and the utilities will suffer, and the public will ultimately
pay the bills, but these laws will remain unimpaired
and effective.
7
One of the things which is determined by these funda-
mental economic laws is, what is a fair return. One of
the most common misapprehensions with reference to
regulation by commissions is that commissions have the
power to say what is a fair return, that is, what money
invested in public utilities may earn. A very little con-
sideration is sufficient to demonstrate to anyone that this
is a radical misconception. No public utility is ever a
completed investment. That is nowhere illustrated bet-
ter than in a growing city such as Youngstown. Since
1900, the population of Youngstown has multiplied itself
by three. Your street railroad service, your interurban
railway service, your telephone service, your water serv-
ice, your gas service, your light service, and every other
service which you have, has been compelled to meet this
increase in population by a corresponding increase in in-
vestment, and as your city continues to grow, this in-
vestment will have to keep pace with it, if you are to
have the service to which you are entitled and which
I am sure every one of the utilities wishes to furnish
you.
As recently as 1910, the Central Union Telephone
Company marked the completion of its exchange here by
issuing a souvenir congratulating Youngstown upon the
fact that the exchange then just finished was as modern
and up-to-date and efficient as any telephone exchange
in the world. I know nothing about the equipment of
that exchange, but I know that at that time it had about
3,400 telephones, and I know that in the last two and one-
half months of 1915 there were added to the exchange in
Youngstown about 1,700 telephones, one-half as many
8
as the total number in 1910, and that the present number
of subscribers is over three times what the number was
in 1910. Without knowing anything about what was the
exchange in 1910, I know that its capacity would be ab-
solutely inadequate for what is demanded of the ex-
change today, and that the investment must have been
increased several times in order to keep pace with the
development and growth of this wonderful city.
The constant, persistent, important question that con-
fronts the management of a public utility is, how to
secure this new money; these additions to the plant
mean additions to the investment, and this means new
money. This money must be obtained in a competitive
market. There is a certain amount of money that is
seeking investment. There are certain investments that
are seeking this money. The men who own the money
will put it where, hazards and the other material con-
ditions being taken into account, it will afford them the
highest return. It is sheer and utter nonsense to talk
about a return for money invested in public utilities re-
latively smaller than what may be derived from other
like investments. This will be true so long as what we
call the law of supply and demand is effective. If I
were to offer to you some public utility securities and
at the same time should offer you some other securities
which were exactly as good but which would bring you
a higher return, you would not buy the public utility
securities. This is the condition which actually exists
and confronts the utilities every day when they are try-
ing to obtain money. They cannot go to the investor
and induce him to buy their securities unless they can
9
offer him as much in the way of profit and safety as he
may obtain elsewhere. The investor is the only man
who can say what he will take for his money. Other peo-
ple may think they know better than he does what he
ought to take for it, but when it comes down to the
final analysis, he is the man who will determine the
question.
These are the reasons why commissions have not the
power to say what money invested in public utilities
may earn. The only way in which the commissions can
influence the return is indirectly, through the character
of their regulation. Sound, business-like regulation
will tend to stability and to make the investment more at-
tractive, and therefore will tend to lower the return
which must be paid in order to induce money to go into
it. Regulation that is not of this character will have the
opposite tendency and its effect will be to increase the
cost of the service to the public.
What is a Reasonable Rate?
There are two cardinal factors which are the most
important factors in determining what is a reasonable
rate, or a schedule of reasonable rates. They are, first,
the cost of the service, including the cost of obtaining
the necessary money, and second, the value of the ser-
vice to the man who buys it. The application of a little
common sense will demonstrate the soundness of this
statement.
It goes without saying that no utility can, speaking
broadly, furnish service for less than it costs. It cannot
do this of its own motion, nor can it be compelled to do
10
it by the order of any commission or other public author-
ity. Rates may be prescribed which will not equal this
cost of the service, but the result will not be cheap serv-
ice. It may be cheap service for a little while, but
there will follow insolvency, then dear service, and in
the meantime, poor service. No one has ever yet made a
permanent success of an effort to obtain something for
nothing. The minimum factor then, in determining what
is a reasonable rate, is the cost of rendering the service,
which of necessity includes the cost of obtaining the
money.
The other factor is the value of the service to the con-
sumer. Speaking generally, it is just as impossible to
sell something for more than it is worth as it is to sell it
for less than its cost. The reason is the reason sug-
gested by common every-day experience, that people will
not pay for things more than they are worth. The price
must be low enough to make what the customer receives
worth more to him than what he pays, if he is to be in-
duced to buy freely. This value of the service to the
consumer marks the maximum beyond which reasonable
rates may not go.
To digress for a moment, it very likely has occurred
to you that there may be difficulty in determining this
value. There is, just as there is more or less difficulty
in determining the value of anything that is for sale.
The ultimate test is experience. It is safe to say that
where there is a schedule of rates which produces a good
development, so that the aggregate volume of the servi
ice is sufficient to meet the requirements and conveni-
ence of the community, and which produces a harmoni-
11
ous development, that is, a relatively normal develop-
ment in the various classes of the service, the prices
charged are less than the value of the service to the
consumer. And if with such a development these rates
produce a revenue which affords the utility a reasonable
profit, the rates are reasonable. º
Returning from this digression, between these two
limits, that is, the cost of furnishing the service, includ-
ing the cost of obtaining the necessary capital and the
value of the service to the consumer, lies the legitimate
field for regulation. With these two factors established,
there are a number of considerations which the ordinary
business man, and this is a business question, I think
will recognize immediately as material to the determina-
tion of the question. There are equitable considerations,
such as whether the business has been profitable or the
reverse. There should be taken into account the char-
acter of the community, what the prospects are as to its
development and therefore as to the requirements for
additional money, what the character of the management
has been, whether it has been good or bad, and is en-
titled to a premium or a penalty, what the character of
the service has been, and any special considerations
peculiar to the particular case that is under considera-
tion.
A clear comprehension of the two cardinal factors of
cost and value to which I have referred, and of their
effect upon the situation, with a reasonable considera-
tion of the other factors, ought to make it a compara-
tively easy thing to arrive at a schedule of rates that
will be fair to both the public and the utility, that is,
12
that will afford a profit to each of them, furnishing the
service to the consumers for less than it is worth, and
paying the utility more than its bare cost.
Co-operation.
The relation between the utilities and the public is
not unlike that which exists between an employer and
an employee. The public is the master—the utilities are
the servants. Unless the master has at heart the inter-
ests of the servants, and unless the servants have at
heart the interests of the master, it is impossible to ob-
tain the best results for either of them. This has been
demonstrated by common experience over and over
again. The difference between the interests of the util-
ity and the interests of the public, in so far as it exists,
is very closely analogous to the difference between the
interests of the master and of the servants whom he em-
ploys. While there is a diversity of interest of this
character, the situation is such that to further the inter-
ests of either, it is necessary to take into account the
interests of the other, so that both shall co-operate and
Work together harmoniously and loyally. This is just
as true of the public and the utilities as it is of the ordi-
nary master and servant.
No permanent advantage can accrue from unwar-
ranted attacks on public utilities, any more than a per-
manent advantage can accrue from unwarranted attacks
upon employes. There is no advantage that can arise
from mutual distrust. There is no advantage in mutual
ill will. These things are positive disadvantages from
13
every point of view. To obtain the best results, there
must be good will, there must be co-operation, and there
must be the mutual trust and confidence that can only be
created by being deserved. Each must recognize and
respect the interests and rights of the other.
Summary.
The fundamentals underlying regulation are, as has
been stated, simple. What the public wants is good ser-
vice, comprehensive service, free from unjust discrimi-
nation, at reasonable rates. The function of regulation
is to prevent the infringement of these fundamental
rights. Under the guise of regulation, the public may
not undertake the management of public utilities, nor
can it through regulation obtain the service for less
than it is worth. Reasonable rates are rates exceed-
ing the cost of the service and less than the value of the
service, which, within these limits, take into account
business and equitable considerations. Co-operation is
necessary to obtain the best results just as it is necessary
between employer and employe. Finally, the public
pays the bills. The cost of regulation is, in the ultimate
analysis, a charge against the service which the public
must pay.
If these few things are thoroughly understood, if
there be kept clearly in mind what the public wants, what
are the true functions of regulation and the limits upon
what regulation may do, and that good results must
come from co-operation and not from controversy, if
politics be eliminated and business predominate, regula-
14
tion will be worth more than it costs and will be a sub-
stantial benefit to both the utilities and the public. It
cannot benefit one unless it benefits both.
The Telephone.
William M. Evarts is reputed to have defined a bore
as a man who insists upon talking about himself when
you want to talk about yourself. Notwithstanding the
obvious inference, I hope you will permit me to talk
briefly with reference to the Bell system, the public
utility with which I am directly connected.
It is just forty years and two days since the first tele-
phone patent was granted by the United States to Alex-
ander Graham Bell. The patent covered the transmis-
sion of vocal and other sounds by causing electrical un-
dulations in an electric current similar in form to the
vibrations of the air accompanying the sound to be repro-
duced. When what is now known as the Bell system ac-
quired this patent, it acquired only an idea. There was
no telephone art, or apparatus. Nothing had been de-
veloped through which it was practicable to use this in-
vention commercially. Progress in the art had not even
gone far enough to make it clear by what uses the in-
vention could be made most serviceable. It was neces-
sary, without the aid of experience or precedent, to as-
certain how this invention could be made of the great-
est value to the public, and to develop the entire tele-
phone art and apparatus.
In this work the Bell system in the United States has
been pre-eminent. What the English government dis-
15
carded as an interesting scientific toy, without practical
utility, has become not only a convenience but a neces-
sity wherever there are business and social intercourse
in the civilized world, and this has been done during the
lifetime of Dr. Alexander Graham Bell, the man who in-
vented the telephone, of Mr. Thomas A. Watson, who
received the first words transmitted by it, and of Mr.
Theodore N. Vail, who has done more than any other one
man to make this invention an efficient servant of civili-
zation. In his early work as the general manager of the
Bell system, Mr. Vail laid the foundation for its develop-
ment. In his later work on his return to the organization
as its president, he completed upon this foundation the
Superstructure which has made universal service a po-
tential fact in the United States.
A few figures will illustrate how far the United
States leads the world in the development of this first
American art, the art of telephony. There are now in
the Bell system, including its connecting companies,
more than nine million telephones. There are in all Eu-
rope just over four million telephones. The following
comparisons are interesting:
Number of
Per cent. Of all Telephones
Telephones in per 100 of
the World. population.
United States. . . . . . . . . 64.09 9.7
German Empire. . . . . . . 9.54 2.1
Austria. . . . . . . . . . . . . . 1.16 .6
Great Britain. . . . . . . . . 5.24 i 1.7
France. . . . . . . . . . . . . . 2.22 .8
There are in London and Berlin combined, about
414,000 telephones. Chicago has about 412,000 tele-
16
phones, almost exactly as many as London and Berlin
together. The population of London and Berlin is near-
ly 10,000,000. The population of Chicago is a little over
one-fourth that number.
If you will take the number of telephones in London
and add to that the number in Paris, and in Petrograd
and in Berlin, your aggregate will be less than the number
of telephones in the city of New York, and if you add
the Austrian capital, the total will only exceed the num-
ber of telephones in New York by about 2%%.
The number of Bell telephones in Youngstown is not
quite four times the number of telephones in Greece.
It is about one and one-third times the number of,
telephones in Portugal. Antwerp, with its population of
486,000 people, has two-thirds as many telephones as
there are in the Bell system in Youngstown. Liege, with
its population of 340,000, has less than one-half of the
telephones we have in Youngstown. Rome, with a popu-
lation of 539,000, has almost exactly the same number of
telephones as the Bell company has in Youngstown.
Odessa, with a population of 620,000 has two-thirds as
many as we have here. There are more telephones in
Detroit than there are in Italy. There are twice as
many telephones in Cleveland as there are in Spain.
There are nearly as many telephones in Milwaukee as
there are in Belgium. To return to Youngstown, there
are over three times as many Bell telephones here as
the total number of telephones in Bulgaria.
The telephone apparatus which has been developed
through the engingering department of the Bell system
is recognized as standard the world over. In every coun-
17
try in Europe, in every country in South America, in
every country in Asia, in every country in Africa, in
Australia, in the islands of the Pacific, wherever the tele-
phone is used in the world, there is adopted and used as
standard, telephone apparatus manufactured by the Bell
system or by manufacturing companies affiliated with it.
There is no country in the world outside of North
America which offers to the public a telephone service
which the people of the United States would tolerate for
a minute. There is no country in the world outside of
North America which appreciates what we mean when
we talk about good telephone service. No public service
commission which would permit in the United States the
telephone service given in Europe could last over night.
Twenty-four hour service is the exception. In some
countries, large proportions of the exchanges are only
open eight or ten hours out of the twenty-four. If you
wish to call a doctor, or the fire department, or the police
department in the night, you do not do it by telephone.
It is an exaggeration, but not to much of an exaggera-
tion, to say that the local service is not much more rapid
than cab service, and the long distance service not much
faster than railroad service. In Japan, if you wish to
have a telephone installed, you file your application,
which is taken up in its order, but, I have been told, there
is involved a delay of something like two years before
the telephone is installed. This delay makes the rights
under these applications valuable, and they are sold on
the exchanges.
The increase in the distance through which it was
practicable to commercially transmit speech, led to con-
18
necting the isolated exchanges into a great system, and
made imperative, if the service is to be good, stand-
ardized apparatus and operating methods; so that nor-
mally and naturally with the development of the art
there developed the organization necessary to make that
art of the greatest value to the public.
In the early days when Mr. Vail had the courage to
build a line from Boston to Lowell, about twenty-six
miles, they called it “Vail's Folly.” The National Geog-
raphic Society selected as the achievements to be hon-
ored at its annual dinner in Washington night before
last, what the Bell system has done under the leadership
of Mr. Vail in trans-continental and wireless telephony.
These great achievements are the cumulative result of
the patient, persistent, progressive efforts of a great
many men co-ordinated in a great organization.
The telephone stands for innumerable little things
which result in immense aggregates. The instrument is
insignificant, but during the time that the United States
was building the Panama canal, the investment on ac-
count of this utility was more than double the cost of that
work, and that work will be completed, but this invest-
ment will continue. The electric current sufficient to
operate one sixteen-candle incandescent lamp is sufficient
to furnish the current for transmission of speech for all
of the telephones of the United States, with nearly a
million over for good measure. The telephone service,
which is such an important factor in the business and
social life of Youngstown, is made up of nineteen million
calls per annum, hardly one of which is important
enough to be mentioned. e
19
The Bell system is not satisfied with what it has ac-
complished. It has already given to the people of the
United States the best telephone service in the World. *
It has already given them the most comprehensive tele-
phone service in the world. In the United States there
are 9.7 telephones for each 100 of population, that is sub-
stantially one telephone for each 10 persons. In Europe,
there is .8 of a telephone for each 100 persons, that is
substantially one telephone for each 120 persons. In the
United States, transcontinental telephone service is a
fact. Commercial service exists today between some
point in each state and some point in every other state.
The Bell system has demonstrated the practicability of
wireless telephony by transmitting the human voice by
wireless telephone, in combination with the ordinary cop-
per circuit, from New York to San Francisco, and from
Washington to San Francisco, to the Hawaiian Islands
and to Paris. But the Bell system is not satisfied. Its
ideal is a universal system which shall offer a telephone
to every man in the United States who has any use for
it, at a price that will make the service attractive to him
and which will be lower than the price of like service any-
where else in the world. Its ideal is to make it not only
possible, but commercially easy, for each one of these
telephones to communicate with every other telephone
in the United States, and to make the character of the
service between these telephones, whether it be local ser-
vice or long distance service, everything that is possible
in the way of promptness, efficiency and courtesy. It
cannot accomplish this ideal without the good will and
co-operation of the public and of the commissions repre-
senting the public.
UNIVERSITY OF MICHIGAN
III.iii.
O
3 9015 08011 4534