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I .~.:~;~J ~ ~I;'' I' N~~~~~~~~~~~~~ '. /.:'!.', ** *' ~ '''., ', ^ -: 4 t I I} I I,X,\ — ~~~~ ~ ~~~~~~~I i_ FI n~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Ir 1; ~c~ ~ — 5; e&:!lia J~i-: — I: i c ~; IiI L. I' i bj. ILi:.,.i 1::; 1,; I-t I i.L:;:*: ~~i ~-~~;c;i, i-X The Merchants' Association of New Y< BOARD OF DIRECTORS: J. HAMPDEN DOUGHERTY, THOMAS H. DOWNING, GEORGE L. DUVAL, - JOHN C. EAMES, - CHARLES R. LAMB, - WM. A. MARBLE, - HERMAN A. METZ, - DANIEL P. MORSE, - WM. H. MCCORD, - GUSTAV H. SCHWAB, HENRY R. TOWNE, - GEO. FRED'K VIETOR, CLARENCE WHITMAN, Dougherty, Olcott & Tenney, R. F. Downing & Co., Beech6, Duval & Co., - - Vice-Pres. The H. B. Claflin Co., J. & R. Lamb, - - - Vice-Pres. R. & G. Corset Co. H. A. Metz & Co., - - - Pres. Morse & Rogers, Post & McCord, Oelrichs & Co., - - Pres. Yale & Towne Mfg. Co., Vietor & Achelis, - - - Clarence Whitman & Co., - 27 William St. - 13 William St. - 2 Broad St. Church and Worth Sts. - 59 Carmine St. - 395 Broadway - 122 Hudson St. - 134 Duane St. - 44 East 23d St. - 5 Broadway - 9 Murray St. - 66 Leonard St. - 39 Leonard St. OFFICERS: PRESIDENT: CLARENCE WHITMAN. VICE-PRESIDENTS: GUSTAV H. SCHWAB, JOHN C. EAMES, WILLIAM A. MARBLE. TREASURER: GEORGE L. DUVAL. SECRETARY: BUSINESS MANAGER: S. C. MEAD. HENRY D. DUMON EDITOR AND STATISTICIAN: FREDERICK B. DE BERARD. COUNSEL: JAMES B. DILL, FRANCIS S. HUTCHINS, ATr'Y. 3 IT. 189069 GENERAL TELePHONE COMMITTEE: J. CRAWFORD McCREERY, CHAIRMAN. J. D. CRARY, F. E. KINSMAN, J. HAMPDEN DOUGHERTY, THOS. McCARTHY, JOHN C. EAMES, H. A. METZ, THOMAS M. HILLIARD, WM. JAY SCHIEFFELIN, FRANKLIN H. KALBFLEISCH, FREDERICK B. DE BERARD, SECRETARY. SPECIAL TELEPHONE COMMITTEE: CLARENCE WHITMAN, CHAIRMAN, JOHN C. EAMES, J. CRAWFORD McCREERY, HERMAN A. METZ, FREDERICK B. DiE BERARD, SECRETARY. ENGINEERING ADVISORS: WESTINGHOUSE, CHURCH, KERR & CO. ACCOUNTING ADVISORS: THE AUDIT COMPANY OF NEW YORK. 5 I INTRODUCTORY. N April, 1904, The Merchants' Association took up with the New York Telephone Company the matter of telephone service and charges in this city, with a view to bringing about a reduction of rates, in case it were found that the existing rates were excessive. In a lettter addressed to The Merchants' Association, under date of April I4th, 1904, Mr. U. N. Bethell, General Manager of the New York Telephone Company, defined his Company's attitude in these words: "We are always pleased to have a fair and intelligent inquiry made into the telephone conditions in this City and the other great cities of the world, the results invariably being helpful to us in removing prejudices and misunderstanding. I feel confident that a thorough study of the subject will lead you to the conclusion that our system is not surpassed for adequacy and efficiency, and that it is a credit to this city. I am equally confident that you will find, considering the quality of the service rendered, and the scope of the system, that our rates are reasonable in amount, and that the plan of charging each patron in accordance with the amount of service rendered to him is rational and equitable." Several conferences followed, atwhich the following understanding was reached: Ftir5t-That The Merchants' Association should appoint a special committee of representative men of the highest standing, charged with the duty of making an exhaustive examination of the whole subject. tgotha-That the New York Telephone Company should give the representatives of The Merchants' Association all reasonable assistance in the proposed inquiry, and afford every necessary and proper facility for intelligently prosecuting the work. Tfirtb-That The Merchants' Association should publicly and in sufficient detail report the conditions of fact developed by the inquiry, with the conclusions of the Committee and the reasons therefor. In accordance with this preliminary agreement, the President of The Merchants' Association in November appointed the following: 7 TELEPHONE COMMITTEE. J. CRAWFORD MCCREERY, Chairman. J. D. CRARY, F. E. KINSMAN, J. HAMPDEN DOUGHERTY, THOS. MCCARTHY, JOHN C. EAMES, HERMAN A. METZ, THOMAS M. HILLIARD, WM. JAY SCHIEFFELIN, FRANKLIN H. KALBFLEISCH, FREDERICK B. DE BERARD, Sec'y. This Committee proceeded to gather information respecting telephone rates and conditions in other cities of the United States having a population of 50,000 or more, with a view to comparing the rates charged for telephone service in those cities and in New York. It was found that the charges in New York were apparently higher than in any other city, that there was competitive service in a number of cities; that the rate charged for the competing service was apparently less than that charged for the Bell service; and that, in some instances, the introduction of competition had apparently caused a reduction of the local Bell Company's rates. The Committee was, however, advised by its consulting experts that the relative capital investment and operating costs of telephone plants vary materially, according to varying physical conditions, their capacity for effective service, and the extent of the inter-communication provided for. The Committee concluded, therefore, that a comparison of the rates prevailing in various cities afforded no sound ground for a conclusion as to the reasonableness of rates in any particular I city; but that the reasonableness or unreasonableness of the charges in any city could only be determined by an analysis of the actual conditions of installation and operation, and the amount of the investment necessary under those conditions, in such city. At this stage the Committee made a report recommending that the Association confer further with the officials of the New York Telephone Company. For this purpose the President of the Association appointed the following SPECIAL COMMITTEE. CLARENCE WHITMAN, Chairman, JOHN C. EAMES, J. CRAWFORD MCCREERY, HERMAN A. METZ, FREDERICK B. DE BERARD, Secretary. As a result of the conferences which followed, a definite agreement was reached with the New York Telephone Company as to an equitable basis of rates, the Company consenting to open its books and to supply the Committee with all neces8 sary details of investment, gross earnings, operating expenses, and net earnings, as a preliminary to a readjustment of rates upon the agreed equitable basis, if such adjustment should be warranted by the facts disclosed by the investigation. The Special Committee thereupon caused an examination of the Telephone Company's accounts to be made by the Audit Company of New York, and further examined personally, and through experts, into such financial and operating details of telephone management in this and other cities as were germane to their purpose. Following this examination, the New York Telephone Company, in conformity with the agreement, prepared and put into effect new schedules of rates, adjusted to the basis accepted by the Special Committee and the Company as equitable. Therefore, in accordance with the agreement, the Special Committee reports herewith in detail the results of its examination, with its conclusions and the reasons therefor. 9 REPORT OF AN INQUIRY INTO THE TELEPHONE SERVICE OF NEW YORK. To the Board of Directors of The Merchants' Association of New York. YOUR Special Committee, appointed in February last to confer with the officers of the New York Telephone Company as to the reasonableness of the rates for telephone service in this city, reports as follows: After numerous interviews with Mr. U. N. Bethell, General Manager of the New York Telephone Company, and later with various operating officials of that and other telephone companies, and after careful study of a very complete collection of statistics and official documents relating to telephone rates and conditions in other American cities and in the principal cities of Europe, and a thorough discussion of all questions arising, your Committee has reached certain conclusions which, with their reasons, are set forth below in their logical order. II I. AGREEMENT AS TO BASIS OF REASONABLE RATES. (gomparison of fatesf of lariousi (!Iitiesi 3hnurtlsitrt irause of Varying (Ionititnts. NQUIRY in all American cities having a population of more than 50,000 shows a wide variation in the rates charged for telephone service. A superficial view of the question of telephone rates is that a comparison of such rates in different cities would give correct deductions as to the reasonableness of rates in any given city. A closer examination of the subject, however, shows that such comparisons are quite deceptive. On careful consideration of thewhole question, it becomes evident that both the general conditions and those peculiar to the telephone business differ so widely in different places that a bare comparison of rates can only be misleading and inconclusive. As is well known, outlays for labor, rent, taxes, real estate charges, etc., vary widely in different cities and countries, those in America being much higher than those in Europe, and in America those in large cities much higher than those in small cities. It is impossible here to enter into all the details regarding the many and wide differences which exist between the telephonic conditions of different cities. The subject is an extremely complex one, and the difficulty is to find factors in different places which are similar, so great are the variations in almost any item which may be selected for comparison. For example: There are differences in the quality, range and quantity of service rendered, and particularly in the methods of charging for the service. There are differences also in the number of subscribers who take different grades of service. In the eighty American cities having a population of over 50,000 the ratio of residence telephones to the total number of telephones varies from 15 per cent. to 71 per cent.; of party line telephones to total telephones from 4 per cent. to 84 per cent.; of private branch exchange telephones to total telephones from I per cent. to 41 per cent.; and of extension telephones to total telephones from 4 per cent. to 13 per cent. Another striking difference in conditions peculiar to the telephone business between large and small cities should be mentioned. In a small city a single central station suffices for prompt intercommunication between two or three thousand users or individual stations. A single switchboard and single operator completes each connection called for, and, the area served being comparatively limited, the wire-mileage is relatively small. In large cities such simple conditions 12 do not, and in the very nature of things cannot, exist. For example, in the Borough of Manhattan, seventeen central stations are required. Each of these must not only provide for interconmmunication between the individual stations directly attached to it (the average number being over 8,ooo), as in the case of the single central station in a small city, but must also provide for prompt intercommunication with sixteen other central offices and over 140,000 individual stations outside its district. Thus, each central station, beside the equipment required for service within the district, must have sixteen distinct auxiliary cable systems connecting it with sixteen other districts. Every new central station that is added compels every existing central station to install additional connecting central office apparatus and an additional connecting cable system to afford intercommunication between every district of the entire system. This connecting plant,and the labor required to maintain and operate it, are not represented by any corresponding factors in a small city having but a single central station.* In view of these variable factors it is impossible to select any item of plant, which may be intelligently used, in reducing costs or charges in various places to common terms. Moreover, the telephone message varies greatly in cost in different places, for the reason that the amount of plant involved and the amount of labor required to make the message effective necessarily vary, and,therefore,the message cannot be taken as a proper unit for making comparisons. Indeed, in the opinion of the Committee, there is no common factor or unit of measure by means of which, through comparisons with other cities, sound conclusions as to the reasonableness or unreasonableness of the telephone rates in any given city can be reached. It is obvious that the fairness of the rates of charge in a specific city must be determined by the fair cost of service in that city, and not by the rates of other cities where the conditions are never identical and seldom equal. tair (IIst of rrutite. This Committee holds that the fair cost of service to the consumer should comprehend: (A) Operating outlays necessary to the highest efficiency, including an ample allowance for replacement, and (B) A reasonable return on the actual investment necessary to fullest efficiency of service, including a fair allowance for contingencies. * In relation to the relatively greater increase in cost of equipment and operation per telephone consequent upon an increase in the number of telephones in a particular exchange, see Appendices: (A): (Page 41) "Extracts from Statement of Lord Stanley, Postmaster General of Great Britain." (B): (Page 42) " Extracts from Report of Commission of the Imperial German Post Office." (C): (Page 43) " Extracts from Report of the Mayor and Aldermen of Amsterdam." (D): (Page 44) " Statement of Mr. Bouton, President Maryland Telephone and Telegraph Co." I3 Amount of Nerrssary 3neBrtmrnt. In its analysis the Committee dismissed from consideration the stock and bond issues of the company, and sought only to ascertain the fair value of the property and the amount of working capital actually necessary to the efficient conduct of its business. In considering the items to be included as the necessary investment of the New York Telephone Company, the following were accepted: Telephone Equipment, Supplies, Real Estate, Cash, Subway Securities, Accounts and Bills Receivable. The telephone equipment, consisting of switchboards and other central office plant, telephone apparatus at individual subscriber's stations, underground and aerial cables, poles, fixtures, wires, and other physical property actually used in the rendering of telephone service, and the current assets or working capital of the company, such as cash, supplies, accounts and bills receivable, were included for obvious reasons. The company places a conservative valuation upon its plant, and by regular and liberal charges for depreciation prevents any book inflation in that asset. As to the reasonableness of the valuation of the plant, the Committee at first undertook to verify the amount shown by the books of the company by resorting to official documents showing investment per station in other great cities, but was compelled to abandon its effort in this direction because of the extreme variation in the conditions in different cities already referred to. The figures representing the investment in plant were, therefore, tested by reference to the reports and advices from its technical advisors, and were found to be reasonable and conservative. Real Estate. It has been questioned whether the value of real estate holdings should properly be included in the capitalization necessary for telephone development. The reasons for its inclusion are strong, and seemingly conclusive. Buildings of a special type are required for the efficient and economical operation of a telephone system. There are distinct advantages in having the buildings of the various central stations as nearly as possible alike in their arrangement and construction. Fireproof buildings are indispensable to prevent interruption of service by firea contingency which would entail most serious inconvenience upon patrons. In many quarters of the city it is impossible to rent suitable places. The buildings must be specially located with reference to telephone centres, and often in localities not eligible for manufacturing or other commercial purposes. When once located, I4 the central office becomes a point of concentration for the underground conduit and cable system, and cannot be re-located without immense cost. In fact, suitable quarters cannot be rented, and buildings especially constructed and located cannot find a ready or profitable use for other purposes. Therefore, it is very desirable, if not absolutely indispensable, that the Company own the buildings occupied by its central stations. Because of these considerations, the New York Telephone Company owns all the premises it occupies in the city except a few minor offices in the outlying sparsely settled districts, as, for example, in the old village of Westchester, now a part of New York City, and has constructed thereon fireproof buildings of the highest type, specially arranged for the conduct of a telephone business. This Committee believes, therefore, that the investment in real estate is an essential part of the capitalization necessary to the safe, efficient and economical management of the telephone system in this city. Oubuati *nruitir0. The wires of the New York Telephone Company are by law required to be carried through underground conduits, except in some sparsely settled sections of its territory. Under the Act of I885,a single company was required to construct all necessary conduits, and rent space therein to any company operating electric wires. An independent conduit company was therefore compulsory under the provisions of the law. Underground transmission was then experimental, its success was doubtful, and the risk was great. Under these conditions it was found impossible to secure outside capital sufficient to build the conduits. The telephone, telegraph and electric companies were therefore compelled to supply the needed capital. As the New York Telephone Company was required by law to place its wires underground, and at the same time was in effect inhibited by law from building an underground system of its own, its capital investment in the needed underground equipment took the form of a subscription to the securities of the Subway Company. This investment, therefore, represents the permanent outlay for part of the permanent plant required for telephone operation in this city. It is therefore included in the necessary investment. Earnins. The gross earnings considered by the Committee in its analysis of the accounts and by the Audit Company in its examination of the books included earnings of all kinds resulting from the operation of the telephone equipment, included in the investment accounts above mentioned, rents for space in the buildings temporarily not required by the Company for its own purposes, dividends from subway securities and interest on bank balances or deposits of cash, and on bills and accounts receivable. 15 The items in the Expense Account, except depreciation of plant, represent amounts actually disbursed for services, supplies, etc., as indicated by the respective titles of such items, as set forth in the report of the Audit Company below presented. The Committee found that in the purchase of supplies and the employment of its forces, and generally in the control of its expense accounts, the New York Telephone Company observes the practices ordinarily followed by a well-managed commercial house. It will be observed that in its certificate presented below, the Audit Company states that the expenditures for the year I904, as well as for the preceding fifteen years (the period covered by the examination), appear to have been properly distributed between capital and expenses. (utflays for replarement. Careful consideration was given to the matter of depreciation or replacement, this being, in the opinion of the Committee, an element of very great importance in the safe management of telephone investments. Improvements in the art of telephony have been numerous, frequent, and often radical, and at rapidly recurring intervals, it has been necessary to discard as obsolete, equipment in fair physical condition installed but a few years previously at great cost. Safe financiering requires that the rates should be so fixed as to provide for this necessary replacement, as well as for the ordinary depreciation due to natural wear and tear. A grave mistake frequently made in telephone financiering is the failure to provide by sufficient rates of charge for the heavy outlays inevitable for replacement. A striking instance is the case of the former Home Telephone Company of Baltimore. That company was organized in I896, to provide service of the best standard at rates less than one-half those of the local Bell Company. Its contracts were based upon the best equipment of that day. The rates of charge adopted were purely arbitrary, and without foundation in experience. They proved insufficient even to meet ordinary operating expenses, which steadily increased pro rata; and of course could not provide any fund for replacement of obsolete equipment. In four years the Company became insolvent, and its plant was sold to a new company. The purchasers soon found that the plant was practically obsolete, chiefly because of rapid and important advances in the art. In a recent suit, the,court records of which were inspected by this Committee, the President of the Maryland Telephone and Telegraph Company testified that within a year after:acquiring the plant of the Home Telephone Company the new company was forced to raise $i,ooo,ooo for replacement, and that further investments were immediately compulsory until $2,I55,000 had been expended to properly equip the system for the immediate use of about 6,000 subscribers, with reasonable provision for expansion. He stated that practically all the original plant, after being in service but five years, was disposed of as junk. This testimony was given in justification of an increase of 57 per cent. in the Company's average rate. In the New York telephone system improvements and changes have suceeded one another at close intervals during the entire period in which the business of exchange telephone service has existed. Iuring the sixteen years which the Committee's investigation covers, the plant has been practically rebuilt three times. At various times radical improvements have been made in cables and in switchboard systems which have involved the abandonment of plant by no means unserviceable because of its physical condition, and its replacement by plant of an improved character. Some of the central stations have been rebuilt three times within a little over ten years. Complete changes of equipment are within the public knowledge, as it is well known that the whole system was changed some years ago from an overhead "grounded circuit," or single-line system, to an underground "metallic circuit," or double-line system, and that later the entire equipment, both at central stations and at individual subscribers' stations, was changed from the magneto-call and local-battery system to the present automatic centralized battery system. As appears below, the Audit Company certifies that this important item of depreciation, considering the period covered by its examination as a whole, has been treated fairly by the Company. Ieasonablr Margin of 1rofit. The telephone business demands a continuous accession of fresh capital to satisfactorily serve the public. Having in view the importance to the public of constant improvement and expansion and the greatest possible efficiency of telephone service, as well as the necessity of offering an attractive investment to new capital to provide for such expansion, it is the opinion of this Committee that to provide a fair return on capital actually and necessarily invested, and a proper allowance for contingencies, 10 per cent. margin above operating outlays is a reasonable and proper margin in the telephone business. In the various movements hitherto made for the limitation by law of telephone profits, wherever the permissible percentage of profit has been dealt with, this margin has been accepted as a proper one. It has also been specified by law in the case of some other public service corporations. This conclusion was acceded to by the New York Telephone Company, and it was therefore agreed that the rates should be so readjusted as to produce a net revenue of approximately Io per cent. on the actual capital necessarily invested in the business. It was further agreed that expert accountants selected by this Committee should have free access to the books of the New York Telephone Company for the following purposes: 17 A. To analyze the Capital Account and learn the amount of capital actually employed in the operation of the Company's system during I904, and each of the preceding fifteen years. B. To ascertain the percentage of net earnings upon that capital during 1904, and the average annual percentage of net earnings to capital for the sixteen years ending December 3ISt, I904. C. To compute the reduction in revenue effected by the readjustment of rates. I8 43 <>eXr' ci ref THE CERTIFICATES OR REPORTS UPON AUDITS OR EXAMINATIONS MADE BY THE AUDIT COMPANY OF NEW YORK ARE DELIVERED TO CLIENTS WITH THE UNDERSTANDING IN EACH CASE THAT ANY ADVERTISEMENT OR PUBLICATION OF SUCH CERTIFICATES OR REPORTS, OR PUBLISHED REFERENCE THERETO SHALL BE IN A FORM TO BE APPROVED BY THE MANAGEMCNTOF THIS COMPANY. The Merchants' Association of New York, 340 Broadway, New York City. Dear Sirs:Agreeably to your request owre have examined the books and accounts of the METROPOLITAN TELEPHONE & TEILEGRAPH COMPANY and of its successor, the NEW YORK TELEPHONE COMPANY, for the sixteen years ended December 31, 1904. We find the average percentage of net Earnings to Investment to be as follows: For the fifteen years from Jan. 1, 1889 to Dec. 31, 1903, Ten and eighty-nine hundredths per cent......(10.89 per cent For the sixteen years from Jan. 1, 1889 to Dec. 1, 1904, Eleven and twelve hundredths per cent........(11.12 per cent For the year ended December 31, 1904, Fourteen and sixty-four hundredths per cent....................... (14.64 per cent This has been arrived at on the basis of the schedule of investment and net earnings submitted to us as having been agrsed upon by your Association and the Company. The INVESTMENT, considered, comprises the following: Telephone property Real estate Subway securities. C ash Accounts and bills receivable Supplies The average Investmnt for the year was obtained by adding the amrount at the beginning to the amount at the end and dividing by two. The EARNINGS, considered were as follows: Telephone earnings Real estate earnlngs (less uncollectable accounts) Income from Subway securities Interest on deposits and accounts receivable. from which were deducted: Operating expenses Maintenance and reconstruction Depreciation on plant Instrument and Subway rentals Pole, wire, and roof rentals Damages and compensation Legal expenses Real estate expenses General administrative expenses Insurance and taxes rhe average percentage of net Earnings to Investment for the full period was obtained by dividing the total of the yearly percentages by number of years. The expenditures for the year 1904, as well as for the whole period, appear to have been properly distributed between capital and expenses. The important item of depreciation, considering the period as a whole, has been treated fairly by the Company. Every facility was afforded us by tile Officers of the Company in the conduct of our examination. Very truly yours, THE AUDIT COMPANY OF NEW YORK. N e w Y o r, eneral Manager., April 11, 1905. II. EXAMINATION BY THE AUDIT COMPANY OF NEW YORK. PURSUANT to this agreement, the Audit Company of New York was retained by this Committee to make the examination. The Audit Company was given unrestricted access to the Company's books and accounts, and upon completion of the examination made the following report: THE AUDIT COMPANY OF NEW YORK, 43 CEDAR STREET. The Merchants' Association of New York, 346 Broadway, New York City. Dear Sirs: Agreeably to your request, we have examined the books and accounts of the METROPOLITAN TELEPHONE & TELEGRAPH COMPANY and of its successor, the NEW YORK TELEPHONE COMPANY, for the sixteen years ended December 31, I904. We find the average percentage of Net Earnings to Investment to be as follows: For the fifteen years from Jan. I, 1889, to Dec. 31, 1903: Ten and eighty-nine hundredths per cent.... (o1.89 per cent.) For the sixteen years from Jan. I, 1889, to Dec. 3 I, 1904: Eleven and twelve hundredths per cent....... (II.2 per cent.) For the year ended Dec. 31, 904: Fourteen and sixty-four hundredths per cent.. (I4.64 per cent.) This has been arrived at on the basis of the schedule of investment and net earnings submitted to us, as having been agreed upon by your Association and the Company. The INVESTMENT considered comprises the following: Telephone property, Real Estate, Subway securities, Cash, Accounts and bills receivable, Supplies. The average Investment for the year was obtained by adding the amount at the beginning to the amount at the end and dividing by two. I9 The EARNINGS considered were as follows: Telephone earnings Real Estate earnings, (less uncollectible accounts), Interest on deposits and acIncome from Subway Securities, counts receivable. From which were deducted: Operating expenses, Maintenance and reconstruction, Depreciation on plant, Instrument and Subway rentals, Pole, wire and roof rentals, Damages and compensation, Legal expenses, Real Estate expenses, General administrative expenses, Insurance and taxes. The average percentage of Net Earnings to Investment for the full period was obtained by dividing the total of the yearly percentages by number of years. The expenditures for the year 1904, as well as for the whole period, appear to have been properly distributed between capital and expenses. The important item of depreciation, considering the period as a whole, has been treated fairly by the Company. Every facility was afforded us by the Officers of the Company in the conduct of our examination. Very truly yours, THE AUDIT COMPANY OF NEW YORK, NEW YORK, (Signed) E. T. PERINE, April ii, I905. General Manager. The period of sixteen years was chosen for the audit because it witnessed the complete conversion of the plant from an overhead single-wire system to an underground metallic-circuit system, and again from the magneto-call local-battery system to the automatic centralized battery system, as well as the great development of the system from some I2,000 to over I50,000 stations. This Committee is of the opinion that, considering the entire period covered by the report of the Audit Company, including the year I904, the net earnings of the New York Telephone Company, aitnough liberal, have not been unreasonable nor excessively disproportionate to the cost of the service. It appeared, however, that the percentage of net earnings had been annually increasing of late, and that for the fiscal year of 1904 it reached 14.64 per cent. on the capital actually employed. Although the average for the sixteen years was more than ten per cent., the Committee did not deem the actual percentage unreasonable, but believed that had the annual amount been to the same extent under ten per cent. it should have been accepted by the Company as satisfactory, and although it was appreciated that the results of a longer period than one year should ordinarily be considered in determining rates for a business like that under consideration, nevertheless 20 as there had been an increasing percentage during the past few years and as it seemed probable that without a readjustment of rates the percentage would continue to increase rather than decrease in the future, the Committee concluded that the time had arrived when the public should be given the benefit of another reduction in charges and urged the view that the reduction should be of such amount as to bring the present rate of earnings to at least a ten per cent. basis. It was conceded by the Company that the rates prevailing in 1904 were producing an income larger than required by sound financiering to meet necessary outlays and provide a sufficient return on the investment, and the view urged by the Committee was accepted. A readjustment of rates to reduce the net revenue to the basis previously agreed upon as a reasonable one was therefore at once begun by the Company, and expeditiously carried into effect. All subscribers were given the benefit of the new rates, regardless of their existing contracts at higher rates. This reduction was in harmony with the previous policy of the Company as stated at the commencement of this inquiry in a letter from the General Manager of the Company to the Merchants' Association, under date of May 25th,- 1904, as, follows: "As you may know, in the past our rates have frequently been revised and reduced, and I may add that doubtless, as warranted by experience, further reductions and revisions will be made from time to time." An indication of the extent of former reductions is shown by the table on page 38, and Diagram No. 3, appended to this report. That the policy of the Company as stated has been carried out consistently, and with due regard to its obligations to the public, is in the opinion of your Committee shown by the table referred to and the results of the audit as above set forth. 21 III. READJUSTMENT AND DISTRIBUTION OF RATES. AN examination of any schedule of rates, with a view to their equitable readjustment, involves an analysis of the opposed principles underlying so-called flat rates, and service charges. slat lat, itards. In the early days of the telephone there were no sufficient data from which to determine the unit of cost of telephone service. In the absence of experience and of a demonstrated unit of cost, it was necessary to assume an arbitrary basis of charge. The sole unitary factor of cost that could be reasonably approximated was the cost of installation per telephone. A fair average could be made of the cost of wire mileage, individual telephone equipment, and pro rata of the general equipment. It was assumed that a safe and equitable annual charge would be an average sum based upon the average cost of equipment per station, plus pro rata cost of operation and a margin of profit. This theory was fallacious as to large cities in that it assumed practical equality of use by all subscribers and based the charge exacted of each subscriber primarily upon the equipment, and not upon the extent of his use of that equipment and the services of the forces required to operate it. In effect, small users paid much more than their fair share, and large users paid much less. As the use of the telephone developed, this inequality became steadily greater.* A system which exacts an average uniform charge for widely varying degrees of service is obviously inequitable to the public. The flat rate is also harmful to the public in another way. Such a rate, comprehending all classes of business users and based upon the average of wide extremes, of necessity compels small users to pay a relatively higher rate than they would pay under a graded rate based upon the cost of the service used by them, and is therefore highly burdensome to such users, and presents a formidable obstacle to the development of the telephone system.1 -*See APPENDIX B: (Page 42) "Extracts from Report of Commission of the Imperial German Post Office." fSee APPENDIX A: (Page 41) "Extracts from Statement of Lord Stanley, Postmaster General of Great Britain." See APPENDIX D: (Page 44) "Statement of Mr. Bouton, President Maryland Telephone and Telephone Co." 22 This condition is of course detrimental to a telephone company as well as to its patrons. Moreover, the effect of a flat rate is to increase the individual use of the telephone equipment and the individual demand upon the operating force, thereby increasing operating expenses, without providing additional income. Under a flat rate system with a definitely restricted income, it is imperative that the tendency of operating expenses to increase disproportionately by reason of unlimited calls be counteracted. The necessary economy can only be effected at the expense of efficiency. It is the opinion of this Committee, therefore, that in large cities the flat rate with unlimited service is based upon a fallacy, that it is extremely unjust to small users, favors large users unduly, impedes expansion of the telephone business, tends to inefficient service, and that as a financial proposition it is unsound.* The flat rate system, however, is quite suitable for small places. In a small system the conditions are fairly equal for all subscribers. The amount of plant used and the amount of operating labor required by the various subscribers show no extreme variations, and a flat rate meets the circumstances quite fairly, while it avoids the extra work of registering the messages. ervtcr Thargre. These are based upon the principle of charging in proportion to the approximate cost of the particular service rendered. The cost of service varies with the number of calls, the extent of the territory covered, and the number of subscribers within that territory between whom calls may be interchanged. As the factors of cost are thus variable, the charges for the service, to be equitable, must be graduated correspondingly. This results in: A. A rate per message based upon the number of messages within a specific area. B. An extra charge for extraordinary service or distant connections. lessange lates. A telephone station and collateral equipment represent a definite capital outlay, and a continuous outlay for the maintenance of an operating staff in readiness, irrespective of the number of calls made. The message rate must provide for this fixed charge. If the calls are few, the message rate should be relatively high. If *See Mr. John Hesketh's statement (Page 47, Appendix E) that independent telephone companies realize that low flat rates are a mistake and are now generally trying to raise their rates and to introduce message rates. Also Mr. Bouton's statement (Page 44, Appendix D) that his company must change from flat rates to graded prices based upon amount of use. 23 the calls are many, the rate should be relatively low. It is obvious, also, -that a great volume of calls further greatly reduces the pro rata operating expense, and therefore warrants a gradually decreasing rate of charge. Hence the general principle of a graded scale, beginning with a relatively high maximum rate for small users, declining to a relatively low minimum rate for large users. The New York Telephone Company's scale of charges is based upon this equitable principle. Each subscriber pays only for the service actually used by him, at a rate bearing a definite and just relation to the cost of serving him. The equity of this system is obvious. Under it the smallest users pay the smallest average annual sum, although charged the highest rate per message (on the principle defined above); while the largest users receive a wholesale rate of three cents per message, the latter rate being based not only on a smaller pro rata cost, but also on a much narrower margin of profit than is derived from smaller users at a higher rate. ofhe Zone lyatem. It has been demonstrated that service charges or message rates are alone proper for a large system operated as one exchange or district of intercommunication, and that flat rates are proper for small systems. In a large area embracing widely differing localities, in various stages of development, whether or not they are in the same municipality, the public interest, in the opinion of this Committee, is best served by the application of various rates to the various localities, in such manner as to meet the peculiar requirements of each section or locality, with an appropriate rate or plan of rates. This method of treatment has been followed in Greater New York. Within New York there are many local districts, where most of the traffic is local and therefore does not involve general inters.,munication with distant parts of the city. Excluding such distant connections and considering only local interchange, local service is on a basis of local cost and a moderate charge is possible. Some of these localities are of such character, and the variation in use among the various subscribers is so small, that flat rates for unlimited local service are proper and most advantageous to the locality. It is, however, a fact that distant connections must be provided to enable Kingsbridge or Williamsbridge, for example, in the extreme north of the city, to communicate at once with "Cortlandt," "Broad," or even "Tompkinsville," in the extreme south of the city. These distant connections are a great element of cost, and that cost must be paid by a higher average rate applying equally to all users or by special service charges exacted from the users of distant connections in proportion to the extent of that use. It has been found both just and expedient to impose a low average rate for local service in the outlying districts in question, in order to enable all classes of the community to have telephone service at a rate 24 within their means, and commensurate with the cost of serving them. Therefore, the general rates for local service in all the outlying sections are much less than those in the great Borough of Manhattan, there being rates in some sections as low as $24.00 per year for unlimited local use. The question therefore presents itself, shall the extra cost of distant connections be met by increasing the average rate or charge to all subscribers and imposing uniform charges throughout the city, treating the entire city as one telephone district regardless of the special and peculiar needs and conditions of the different sections or localities; or shall the extra element of cost, namely, distant connections, be assessed ratably upon the persons who use these distant connections and be represented by an extra distance charge or toll rate in addition to the charge for local use? The first proposition would involve increasing the charge to a very large majority of the users, to pay the cost of extra service enjoyed only by a few, and in operation it would amount to a practical denial of telephone service in many outlying districts. The rates in all parts of any zone or district for service to all points within the boundaries of the district must be uniform and equal. Consequently, if the entire city constituted one zone or district, the rates in every part of the Bronx, Brooklyn, Queens and Richmond must be the same as those in Manhattan. That the wider service referred to could be profitably furnished even at present Manhattan rates may seriously be questioned, as indicated by the analysis already made in this report. Such rates would greatly retard the development of the system in all parts of the city, particularly in the outlying sections, and, as stated, in such sections would amount to a practical denial of telephone service. This first proposition is therefore on its face indefensible. In practice local rates are in use in each of the districts of New York City, the rates varying with the conditions in the various districts; in the outlying districts they are very materially less than are charged for the wider service supplied in the central districts of Manhattan and Brooklyn. In addition to the rates for local service, an extra or toll rate is charged for connection with other districts, thereby imposing an extra rate only upon those who make use of the extra service. The principle upon which this system of charging is based seems sound and reasonable. In its application, however, there are inevitable inequalities and some hardships to be borne by individual users, but these are inherent in any zone system. Without most careful consideration of the whole question of telephone rates as worked out and applied in each section of the city, these extra charges for distant connections may be considered irksome and unnecessary, but after mature consideration, it is the opinion of this Committee that while these charges should always be moderate, the principle of imposing them should be maintained, as it is believed to be sound and reasonable, and in the best interests of the telephone-using public as a whole. 25 Distribution of leblrttatn. There has been a recent great increase in the number of telephones in use in this city. This increase has been in very large degree in the residence and small business classes, which pay relatively the highest rate, and presumably therefore yield the largest percentage of profit. Coincident with the increase in the number of telephones of these classes, there has been a marked increase in net revenues. It may therefore fairly be inferred that the recent increase of profit was derived mainly from the classes named, and that the charges imposed upon them, in proportion to the charges imposed on other classes, were unnecessarily large. In equity, it was thought that these classes paying the highest rate per message and supplying relatively an undue proportion of the Company's net revenue, should have first consideration in a readjustment of rates. This Committee therefore concurred in the position of the New York Telephone Company that the first and heaviest reduction should be made in the case of the classes paying the highest relative rates, that the intermediate users should next be considered, and that the remainder of the aggregate should be applied for the benefit of the largest users, already enjoying the lowest message rate, although paying an extra equipment charge. It is the sense of this Committee that this principle of distribution was essentially fair, and that the reductions made by the New York Telephone Company have been distributed with intelligent consideration of and just regard for the reasonable claims of the several classes of users. Tested by the aggregate net revenues, and the further fact that the greater proportion of profit was derived from the higher rates per message, it appeared that the 3-cent rate enjoyed by large users was a fair and reasonable one, and no reduction in that rate seemed called for. The charge for extra equipment in this class was, however, very materially reduced. Xntrreoab iBillsi Bi teo Enlarger 31i. Before concluding this branch of the subject, this Committee desires to point out that telephone charges should not be considered excessive merely because their annual volume may have become so large as to be a serious item in the expense account. It is true that the annual outlay of most business houses for telephone service increases with each year, and in many cases is several fold larger than in former years. But it has been demonstrated above that the aggregate net revenues of the Telephone Company are not excessive, and, therefore, that the rates of charge as a whole bear a fair proportion to the cost of the service; and also that relatively the larger proportion of the net profit is derived from the charges paid by small users. It is obvious, therefore, that however large the annual aggregate paid by any user, the amount is due not to the exaction of unreasonable rates, but to the extensive use made of the service. 26 THE CERTIFICATES OR REPORTS UPON AJDITS OR EXAMINATIONS MADE BY THE AUDIT COMPANY OF NEW YORK ARE DELIVERED TO CLIENTS WITH THE UNDERSTANDING IN EACH CASE THAT ANY ADVERTISEMENT ORf PUBLICATION OF SUCH CERTIFICATES OR REPORTS, OR PUBLISHED REFERENCE THERETO, SHALL BE IN A FORM TO BE APPROVED BY THE MANAGEMENTOF THIS COMPANY. The Merchants' Association of New York, 340 Broadway, New York City. Dear Sirs:Agreeably to your request we lhave computed the reduction in its revenues effected by the recent readjustment of rates made by the NEW YORK TELEPHONE COMPANY. Some of the reductions made were susceptible of an accurate and absolute check, while others had to be estimated. As to the latter, however, the estimate and the bases on which they were made have been carefully considered, and it is believed that they are conservative and substantially correctd These reductions affecting 1905 revenues as compared with those of 1904 are as follows: Items checked absolutely, $1,242,000.00 Items estimated, 283,000.00 Total amount $1,525,000.00 As under the agreement with your Committee the reduction was to amount to not less than $1,075,.00.00, it will be seen that the reduction actually made largely exceeded the minimum agreed upon. Very truly yours, THE AUDIT COMPANY OF NEW YORK. General Manager. N e w Y o r k, June 21, 1905. Aggrgate Annumnt of ieurtniotf. The Audit Company of New York has computed the reduction in the revenues of the New York Telephone Company effected by the revised schedule of rates, and has reported thereon as follows: THE AUDIT COMPANY OF NEW YORK, 43 Cedar Street. The Merchants' Association of New York, 346 Broadway, New York City. Dear Sirs: Agreeably to your request, we have computed the reduction in its revenues effected by the recent readjustment of rates made by the New York Telephone Company. Some of the reductions made were susceptible of an accurate and absolute check, while others had to be estimated. As to the latter, however, the estimates and the bases on which they were made have been carefully considered, and it is believed that they are conservative and substantially correct. These reductions, affecting 1905 revenues as compared with those of 1904, are as follows: Items checked absolutely...................$1,242,000 Items estimated........................... 283,000 Total amount.......................$1,525,000 As under the agreement with your Committee the reduction was to amount to not less than $1,075,000, it will be seen that the reduction actually made largely exceeded the minimum agreed upon. Very truly yours, THE AUDIT COMPANY OF NEW YORK, NEW YORK, (Signed) EDWARD T. PERINE, June 21St, I905. General Manager. The reductions are set forth in detail in the schedules appended to this report. 27 IV. METHOD OF RECORDING CALLS. NDER the system of charges based upon the number of messages, it is necessary to record each message. Until recently each message was recorded on a slip, upon which was entered the number of the subscriber making the call, the number of the subscriber called, the date and the operator's number. In case any subscriber desired an itemized account, showing the details of the messages charged for in his monthly statement, these slips supplied the necessary data. In practice, however, the system was dilatory and expensive. Every operator was required not only to make connections in response to calls, but also to record two numbers, two central station names, and a date for each call. The time required for the recording operation materially increased the time needed for each completed connection, thereby diminishing the efficiency of the service to an appreciable degree. In addition, a considerable clerical force was required to collate the slips and make the charges therefrom, thereby adding to the expense of operation. An automatic recording system designed by the Western Electric Company has been substituted for the slip system, upon which it is a great advance, as it lessens the demands upon operators, permits them to give uninterrupted attention to answering calls, and dispenses with much clerical assistance. The accuracy of the present system of recording calls having been questioned, the Committee requested its technical advisors, Westinghouse, Church, Kerr & Company, to particularly consider the system with reference to its fairness to telephone users, and was advised as follows: WESTINGHOUSE, CHURCH, KERR & CO., (Incorporated) Engineers. New York, U. S. A., July 7th, 1905. To the Merchants' Association of New York, 346 Broadway, New York City. Gentlemen: In response to your request, we have investigated the method which the New York Telephone Company employs to register the number of messages which its subscribers transmit, and we beg to report our conclusions as follows: First: We find that the New York Telephone Company employs 28 an electro-mechanical counter somewhat similar in operation and general construction to a steam engine revo.lution counter. Sccoild: In design, construction and installation the registers are stubstantially and carefully made, in accordance with the best standards in the manufacture of such devices. lEach line is supplied with a separate register and all registers for each office are enclosed in a locked dust-proof case accessible to responsible officials only. Third: Each register is direct reading, the message tally from time to -tie being shown by figures which can be olserved through the glass sides of the protecting case, with the case closed. Fourth: Each message is recorded by the operator in charge of the line originating the call, after the conversation is finished and hence only successfully complete connections appear upon the register. Fifth: The use of this system, by enabling the operator to do more work, has cheapened the cost of service and enabled the Telephone Company to reduce rates to its subscribers. Sixth: The probability of error appears to be reduced to a minimum, and such as may occur seem even more likely to count against the Telephone Company and in favor of the subscriber. Seventh: On the whole, the system employed by the New York Telephone Company appears to be reasonable and fair to both subscribers and the Telephone Company and as good as the present state of the art will permit. The reasons which have led us to the foregoing conclusions appear in the annexed detailed report.* It is appropriate to state that the New York Telephone Company has afforded us all the facilities in their power to examine the apparatus and the methods employed. Yours very truly, WESTINGHOUSE, CHURCH, KERR & Co. A. V. ABBOTT. An expert study of the system was also made by J. Gavey, Esq., C. E., Engineer-in-Chief of the General Post Office, London, in charge of the telephone service. Mr. Gavey's conclusions upon the subject were requested by the Committee, and his reply was as follows: "I have paid particular attention to the method of recording telephone talks by means of meters designed by the Western Electric Company. My investigations have led me to the conclusion that the records are substantially accurate, and that, as a general rule, where inaccuracies arise, they tell rather against the telephone administration, and in favor of the user, for each conversation is recorded by the depression of a suitable key, and it is obvious that an operator when working under extreme pressure may occasionally omit to depress the key. On the other hand, the construction of the meter is of such a character that it is difficult to conceive its advancing except by the deliberate depressions of the meter key." * See Appendix H, page 54. 29 V. ADEQUACY AND EFFICIENCY OF SERVICE. EN years ago there were but 12,000 telephones in Manhattan and the Bronx. To-day there are more than I50,OOO. It is self-evident that the increase in number has vastly increased the utility of the system, for the usefulness of a telephone system depends primarily upon the extent to which it affords intercommunication. From this point of view, the correctness of which cannot be gainsaid, the New York service is the most valuable in the world. The system is by far the largest in existence, and is much larger than those of European cities of greater population. It is larger by nearly 50 per cent. than the systems of Berlin and Paris combined, and nearly as large as those of Berlin and London combined. The table below shows the relative development of the telephone systems of New York and of the principal European capitals, and clearly proves that the telephone service here has reached much higher development in proportion to the population than in any of the great cities of Europe, and that the development of the New York system is progressing at a greater rate than that of any of the European systems. Population Telephones Telephones Increase in City Latest Census Year per Iooo Telephones or Reliable Estimate I904 Inhabitants I904 London.........6,580,000 93,598 14.2 16,716 Paris..........2,660,000 49,444 I8.5 3,981 Berlin.......... 1,93,000 66,744 34.5 4,859 Vienna........I,762,000 21,723 12.I 2,914 Manhattan and Bronx...... 2,216,700 144353 65. I 22,418 NOTE:-London has two telephone systems which are operated under uniform rates and with intercommunication. The figures for London include both systems; they will eventually be consolidated into one TELEPHONE DEVELOPMENT OF NEW YORK COMPARED WITH THAT OF EUROPEAN CAPITALS. In the opinion of this Committee, the main factors which have operated to cause this great and continuous development of the telephone system in New York have been efficient service and the graded scale of rates. * * See statement of John Hesketh, Telephone Engineer for the Australian Government (Appendix E, Page 47). 30 The message rate plan was adopted in 1894. At that time the system contained a total of II,628 stations, and was increasing at a comparatively slow rate. With the introduction of the message rates, the number of telephones in use began to increase rapidly, and during the past few years the system has increased at the rate of about 25,000 stations per year. These remarkable figures show that the message rate plan of charging for telephone service has appealed strongly to the general public. Diagrams No. I and No. 2 show graphically the growth from year to year, and the transformation from flat to message rates. At the beginning of the introduction of message rates, it was optional with the subscriber whether he took service at a message rate or at a flat rate, but of late years flat rates have not been offered in the Borough of Manhattan, and it is seen by Diagram No. 2 that the flat rate subscribers are now only an insignificant number, less than I per cent. of the total. In the extent of intercommunication, both absolutely and in proportion to the population, New York leads the large cities of the world, and therefore represents the highest potential utility. Potential utility, however, differs from actual utility, and the latter depends upon efficiency An extensive system may be so defective in equipment or operating methods as to reduce its actual utility to a low point. This is the case in many of the cities of Europe, where, with extensive systems, intercommunication is relatively slow and uncertain, by reason of insufficient connecting equipment, and dilatory operating methods. Of this dilatory service in Europe members of this Committee have had personal experience. The highest efficiency requires a physical equipment of the most improved type, sufficient in extent to enable prompt connection in response to every call, an operating force able to handle the maximum traffic without delay, and a maintenance force able to constantly maintain the plant in excellent order and quickly remove such unavoidable troubles as may appear. These essentials are found in a notable degree in the management of the New York Telephone Company. The Company seems to appreciate that without them it would be sacrificing its own commercial welfare. As to the general efficiency and superiority of the equipment and service in New York, there is much reliable and unbiased testimony. An expert study of the relative efficiency of the telephone systems of the most important cities of America and Europe has recently been made by Mr. John Hesketh, under direction of the Post Master-General of Australia, for the guidance of the Australian authorities in developing their telephone systems. Mr. Hesketh devoted many months to this work, personally inspecting the telephone plants and the methods in use in most of the principal American and European cities. In an article in the Electrical Engineer (London), February Io, I905, Mr. Hesketh said: 31 "America undoubtedly leads the world, both in general development of the telephone business-that is, the amount of use made of the service by the public -and in the technical development of the industry. The long lead in telephone engineering which America holds over the rest of the world stands out most clearly, and in Europe the best work is being done where American experience is being followed. * * * In American cities the telephone development has already reached a point which seems hardly to be realized as within the bounds of possibility in most European countries. * * * " Mr. Hesketh was asked: "Among all the telephone systems you have seen, which should you say is most complete?" He replied: " Without any question, that of New York. The New York telephone system is the finest example of thorough telephone engineering I have seen. All the exchanges are equipped in a uniform manner, all are in fire-proof buildings designed specially for telephone purposes, the cable distribution is, for the greater part of the city, so carried out that the lines are in lead-covered cables practically the entire distance between the exchanges and the subscribers' premises, and the service is in all respects at the very highest point of efficiency. * * * The New York system is by far the largest telephone system in the world, and is undoubtedly in all respects the best equipped." ~ In a recent discussion of telephone methods at a meeting of the Institution of Electrical Engineers (London), as reported in the Electrical Times of May I8, 1905, Mr. Frank Gill, Engineer-in-Chief of the National Telephone Co. of Great Britain, said that New York was "the Mecca of telephone men." Lord Stanley, Postmaster-General of Great Britain, recently characterized New York's telephone service as "highly developed and efficient." This Committee deems the evidence cited above conclusive as to the excellence of equipment and efficiency of management of New York's telephone system; and although it was, therefore, not thought necessary to make a further expert examination as to technical details, the Committee's personal examination enables it to confirm the general conclusions stated. The Committee made a personal inspection of all of the Company's central stations in Manhattan, and carefully observed the workings of the system. In its opinion the operating organization of the Company is highly efficient. The operators are chosen with great care, thoroughly trained in a school maintained for the purpose, subject to admirable discipline, and, to secure undeviating attention to duty, are under the constant direction of supervisors. The utmost promptitude of service is thereby secured. In the selection of operators, good education, high intelligence, quickness, and good character are required. A very large portion of applicants are rejected forthwith; others are subjected to tests as to education and intelligence, after which a careful personal investigation as to character is made ~ For Mr. Hesketh's further remarks concerning efficiency, high development and the fallacy of flat rates, see page 47, Appendix E. 32 in every instance. As a result, about 90 per cent. of the applicants are rejected, and but about IO per cent. are given an opportunity to prove their fitness. In the training school the operators are instructed by means of charts and special apparatus, and are taught the theory and practice of telephone operation. Those who show unfitness are dropped, and others, at the end of a month or more of training, are given positions. The hours are reasonable, and the wages excellen t the latter being graded according to the term of service and the position held. The Company finds it good business policy to make every provision for the comfort and welfare of the operatives. Comfortable and attractive sitting rooms of large size are provided in every central station, also well-equipped lunch rooms, where coffee, tea, sugar and milk are supplied without charge. The operating rooms are, without exception, large, light and airy, and ventilated by mechanical means, so that the air is always pure and cool. 33 VI. REGULATION OF RATES BY COMPETITION. THE desirability of competition as a means of regulating telephone charges in this city having been represented to this Committee, it has examined into that aspect of the question. It is obvious that unless competition results in reduced cost of telephone service without impairing the utility of the latter, it cannot benefit the public. On the other hand, if it increases the public's aggregate outlay and at the same time diminishes facility of intercommunication, it is a positive detriment. 3nrreasb (Outlagy tu to (mtmptittimt. During this Committee's inquiry, statements have been received from merchants in various cities where competitive telephone service exists, to the effect that competition has resulted in an increased, instead of a decreased, burden of cost, and in a divided service which has materially obstructed intercommunication. Business and professional men find it impracticable to dispense with the established telephone system, no matter what inducements of apparent low price may be offered by a new company. General intercommunication is the essential requirement, especially for business men. This cannot be assured by either competing company in case of a divided service. The use of both systems and an increased outlay is therefore compulsory.* No real compensatory advantage is derived from this added expense. It may be assumed that the addition of a second system increases the number of persons who may be communicated with by telephone, and therefore expands the utility of the service. This assumption is misleading. Most of the telephones placed by a new competing telephone system do not displace telephones already in use, but simply duplicate them. In all these cases facility of intercommunication is not enlarged. The real increase of possible connections is small, and obtained at disproportionately large cost. This is illustrated by the case of Baltimore. In that city the local Bell Telephone Company has somewhat more than I8,ooo stations, the independent company between 5,000 and 6,ooo. An examination of *A Committee of the City Council of Hamilton, Ont., personally visited a number of American cities having competing telephone systems, to study the operation of competition. In every city visited telephone competition was condemned by the public, after experience, as an evil whose abolition was desirable. For the substance of the Committee's Report see Appendix F, page 49. 34 the lists of the two companies shows that more than half the independent company's subscribers are also subscribers to the Bell Company. An independent inquiry was made by a member of this Committee in the city of Baltimore on this phase of the question. A leading merchant stated that practically for each I$oo per year paid for the service of the local Bell Company, with the ability to reach through its system more than I8,000 other telephone users, he was required to pay for the service of the independent company an additional $50 per year for the ability to reach less than 3,000 additional telephone users. In this instance, the effect of competition is to increase the aggregate expense about 50 per cent., while the facilities are increased but about I7 per cent. If the new facilities were combined with those of the original company, instead of being isolated, they would be far more effective and could be supplied at much less cost. Alltrg b Rebuirta in latrs not roat. The principal, if not the sole, argument in favor of a competitive service is the alleged lower rates commonly offered by a new company in competition for business. In fact, the average annual charges under the flat rates of the independent companies in Philadelphia and Baltimore are as high as, or higher than, the average annual charges under the graded rates of the Bell Companies in those cities. In Philadelphia during the fiscal year of I903 the average gross income per station of the Bell Company under graded rates was $57. For the same period the average gross income per station of the independent company under flat rates was $56.67. In the latter case the maximum business flat rate was $80, with a diminishing scale for party lines, residences, etc. These figures were given by the officials of the two companies in formal statements made to the Trades League of Philadelphia. In Baltimore the average gross annual earnings per station of the independent company for the fiscal years I901 and I902 were $37.64. The company increased its rates more than one-half, to nearly the Philadelphia scale. The average gross annual earnings per station were thereby increased to $51 for the fiscal year July, 1903, to July, 1904, as stated by the President of the Company in an affidavit recently made. During the fiscal year I903 the average gross annual earnings per station of the Bell Company were $41.75; and for 1904 they were $42.88. It is thus shown that the independent service, which purports to be the cheaper, is'not so in reality, but, on the contrary, is the more expensive, both absolutely and relatively, as it involves an equal or greater outlay for a much inferior degree of utility. 35 le~strirtion of 31tfilitfy, The effect of two rival telephone systems in one city is to divide the population into two parts without means of telephone communication with each other, except at excessive cost. While a single system promotes general intercommunication, two systems make it impracticable. Two systems therefore greatly restrict the utility of the telephone, seriously impair its value, and impede its commercial development. ittal fattem0 an Eronnmicr IWate. It has been shown that a single system can perform the desired service much more efficiently and at less aggregate cost than two systems can. It is obvious that two systems involve extensive duplication of plant and organization, which entails a heavy additional burden of fixed charges and operating expenses, much of which would be unnecessary if the service were performed by a single system. This duplicated outlay, being in excess of the amount really necessary to perform the service, is an economic waste. In telephone operation no compensatory benefits to users in the form of lesser cost of service or increased efficiency have yet developed to justify this waste. The dangers coming from it are easily seen. Unless it is provided for in the charges exacted from consumers, the capital investment will be gradually eaten up. In the meantime, as abundant experience in railroad competition has shown, equipment will be permitted to deteriorate, operating expenses will be reduced below the proper limit, and the efficiency of service will be lowered. (Setwral Ieultts of ilelOphlne Totmprtition. In the opinion of this Committee, competition in telephone service is not a public benefit, and not a useful means of regulating telephone charges. As shown above, little or no benefit accrues to any part of the public in the way of reduced rates, many consumers are compelled to increase their aggregate outlay, the utility of the service is cut in half, expansion made difficult, the efficiency of the service threatened and the capital investment endangered. Competition in telephone service does not offer a choice of benefits, but compels a choice of evils-either a half-service or a double price. 36 VII. REGULATION OF RATES BY LAW. W\ HILE this Committee contends that telephone companies, in common with all other public service corporations, should be subject to regulation by law in case the necessity arises, such regulation should be resorted to only when the unreasonableness and arrogant attitude of a corporation and its refusal to justify its rates leaves no alternative. It is certain that the regulation of telephone rates by law, although it may produce an apparent and momentary reduction of rates, must in its operation prove harmful rather than beneficial. The reasons for this may readily be inferred from the extended analysis which has preceded, by which the complexity of the whole subject may be clearly seen. It has been shown that a complex gradation of charges in a large city is not only just, but essential to the lowest average rates, and the most extended use of the telephone. It has also been shown that the principle of flat rates in such a city is a fallacy whose effect in operation is to exact unduly high charges from the greater proportion of telephone users, and to obstruct the expansion of intercommunication. It is obviously impracticable for any legislature to deal with all of the factors upon which equitable charges must be based. Therefore, the adoption by a legislature of any basis of charge must be in a large degree arbitrary, and if a mistake is made it cannot be easily corrected. In I897 and I898 there were propositions before the Legislature of this State for the fixing of a flat rate by law. If telephone rates had at that time been regulated by law as proposed, the result would have been most detrimental. The principle of message charges was then in the infancy of its application. A compulsory return to the principle of flat rates would have precluded the use of properly graded charges, which experience has since shown to be immensely promotive of telephone development, beneficial to users, and productive of a much smaller average charge than could have prevailed under the flat rates proposed in 1897 and I898. The enormous development of the telephone system in the Borough of Manhattan and the successive reductions in cost to users which have resulted from the free application of the system of graded charges unimpeded by arbitrary legislative enactments, is shown by the following table: 37 No. of Year. Telephones 1894 June I I,054 I894 November..... 11,251 I895 June...... 12,820 1897 July..... I9,985 1899 June.. 32,196 I905 May.... 48,595 NOTE:-The rates above relate only to business telephones. in the rates for residence telephones. 2400 1200. Messages. Messages. Minimum $240 $I66 $150 240 I66 120 200 132 90 177 130 90 I65 I II 75 135 87 60 Corresponding and even greater reductions have been made The great expansion in the use of the telephone has been due in very large part to the fact that the reduction of rates voluntarily made by the Telephone Company through "enlightened self-interest" has created very extensive new classes of small users, who, under the flat rate proposed to be fixed by law in 1897 and I898, would have been debarred from the use of the telephone. All the legislation hitherto proposed containing any provision on this point has contemplated net revenues of ten per cent. upon the capitalization as a fair basis of return upon the capital. It has been shown above that the earnings of the New York Telephone Company are now adjusted approximately to, and probably below, this basis. It has likewise been shown that in the past the rates of that Company have been voluntarily adjusted and reduced at moderate intervals, so as to have maintained a reasonable rate of earnings during the past sixteen years; that the public have been the beneficiaries of these voluntary reductions made possible by a graded system of charges based upon sound business principles; and, further, that these reductions would have been unlikely and probably impossible had legislation arbitrarily intervened to force a continuance of the fallacious system of flat rates. It is the belief of this Committee that the regulation of telephone rates by law or intervention in the affairs of telephone companies by legislatures is undesirable so long as telephone companies afford convincing evidence of the reasonableness of their rates and show that the latter bear a proper relation to the cost of the service provided. 38 VIII. REGULATION BY PUBLICITY. THIS Committee is convinced that consistent and reasonable publicity of the affairs of public service corporations is not only due to the public as its right, but that such publicity would do much to remove prejudice and misconception and to promote the interests both of the public and of those whose capital is invested. No fair-minded person will deny that the capital employed in telephone operation is entitled to a just return. If the public is assured by proper evidence that the capitalization is not inflated, that the operating outlays are not excessive, and that the net profit is reasonable, there will be little complaint, and the fairness of the charges will be generally conceded. When, however, the managers of a public service corporation refuse to the public the knowledge necessary to enable it to judge understandingly and deny the public right to such knowledge, prejudice and misconception must arise, with periodic appeals to the legislature for the correction of what is believed, either rightly or wrongly, to be unjust. Throughout the inquiry, of which the results are set forth in this report, the Committee has had the thorough and willing co-operation of the Telephone Company's officials. No information asked for has been withheld, and much which might reasonably have been considered to be private has been freely offered for the inspection of the Committee and of its experts. In the opinion of this Committee, the course of the New York Telephone Company in frankly responding to a proper request for information regarding its affairs, while showing a far-sighted and intelligent regard for its own interest, is most commendable, and likely to be productive of good results in the future by establishing mutually friendly relations between the Company and the public, and by removing the grounds of prejudice. In conclusion, this Committee, after many months' study, during which it has acquired due knowledge of the conditions surrounding telephone operation in this and other cities, is of the opinion that the position taken by General Manager Bethell in his letter of April I4, I904 (cited on page 7), that the system of the New York Telephone Company is not surpassed for adequacy and efficiency, that the rates are reasonable in amount, and that the plan of charging each patron 39 in accordance with the amount of service rendered to him, is equitable, is sustained by the facts developed by this Committee's inquiry. (Signed) CLARENCE WHITMAN, Chairman. J. CRAWFORD MCCREERY, JOHN C. EAMES, HERMAN A. METZ, FREDERICK B. DE BERARD, Secretary. NEW YORK, June 23d, I905. 40 APPENDIX A. EXTRACTS FROM STATEMENT OF LORD STANLEY, POSTMASTER-GENERAL OF GREAT BRITAIN. IN I904 the British Government had under consideration the purchase of the National Telephone Company's property. A letter from the Post Office Department to anl official conference in relation thereto held July I2, I904, stated the views of Lord Stanley, the PostmasterGeneral. The following extracts are from that letter, as printed in the London Times of July 13, I904: "Lord Stanley desires me to point out that there are two systems of charge in London-the unlimited service system and the message rate system. The unlimited service system * * * in Lord Stanley's opinion, is unsuitable for a modern telephone exchange service, and owes its continuance to the force of custom and the demands of a limited number of large users. * * * The London exchange system is constantly increasing, both in the number of subscribers and the number of exchanges. * * * "The growth of the system has greatly increased its value to subscribers, but the cost of construction and maintenance has increased in even greater proportion, and this must necessarily be the case in every growing exchange system. "It is clear, therefore, that no fixed rate for unlimited use can adequately correspond with such conditions. If fixed with regard to the cost of the service for a large exchange system, it must necessarily be prohibitive for small users, and if fixed on the basis of the cost of a small exchange system, it must soon become unremunerative. In Lord Stanley's view, the proper method of charge is that which was recommended by the Select Committee of 1898, under which the payments of the subscribers are fixed in proportion to their use. The message rate system offered by the Post Office fulfills this requirement, and its advantages have been proved by its acceptance by more than 90 per cent. of the subscribers to the London Post Office system. In the United States, where during the last few years the telephone exchange system has been largely improved and developed, methods of charge of this kind have been widely adopted, and have proved an effective means of increasing the number of subscribers." 4I APPENDIX B. EXTRACTS FROM REPORT OF COMMISSION OF THE IMPERIAL GERMAN POST OFFICE. IN 1899 a commission was appointed by the Imperial German Post Office to consider a revision of telephone rates in the German Empire. After a year's consideration the commission reported an elaborately graduated scale of charges based upon equipment, distance, number of calls, urgent service and night service. The following extracts are from that report: "The present mode of charge for telephones, according to which all subscribers to the telephone system of the Imperial Post and Telegraph Administration have to pay the same annual sum of ~ 7, 0o s without any distinction being made as to size of the town or telephone area, and without any regard to the amount of use, has for a number of years given rise to many complaints on the part of the public, and to numerous questions in Parliament. * * "The justice of the complaints from the point of view of the telephone users cannot be denied-the conditions existing in the various towns being so different that a uniform tariff cannot be considered a right one. It is justly felt that it is not fair that subscribers in Berlin and Hamburg, who can communicate with 30,000 and I2,000 telephones respectively, should have no more to pay than the inhabitants of a town with 50 or Ioo subscribers." * * * "Furthermore, it must be remembered that the expenses of the telephone system increase not only absolutely but also relatively in proportion to the increasing extension, inasmuch as, especially in the larger towns, the increase in the number of subscribers augments the expense of each single subscriber, on account of the installations of the exchanges becoming even more complicated." * * * "The larger the number of subscribers, however, the higher the expenses are, because the installation of the exchange becomes more complicated, and therefore relatively more costly." 42 APPENDIX C. EXTRACTS FROM REPORT OF THE MAYOR AND ALDERMEN OF AMSTERDAM ON THE TELEPHONE TARIFF. I4th:of March, I899. ** * *, THE fact must not be lost sight of that the working expenses per subscriber, as the trade accounts show, were higher last year than during the preceding year, and that the average expenses for construction were also considerably increased. Whether these expenses have already reached their maximum cannot safely be'sstated; there is ground rather to think that they will further increase during the next few years. Contrary to what one observes with other businesses, with the telephone the expenses do not decrease in proportion with the increased number of subscribers, as every new subscriber requires new capital charges, on which interest has to be paid, and on which depreciation has to be written off; and further, the expenses of the service are not only increased by the amount which is required for attending to the new subscriber, but also with the additional cost incurred on behalf of the older subscribers. How large this amount will be is difficult to say at present, but this is certain, that by an increase in the number of subscribers the number of combinations}to.be made on the multiple switchboards will increase to such an extent that an increase of the service expenses per subscriber must naturally result." 43 APPENDIX 9. [From the Washington Post, Saturday, May 3, I902.] TELEPHONE CHARGES. BALTIMORE INDEPENDENT COMPANY SAYS RATES OF $48 AND $36 PER YEAR ARE TOO LOW. SEEKS THE RIGHT TO GRADE ITS CHARGES ACCORDING TO THE USE OF THE TELEPHONE SERVICE. Baltimore, Md., May 2.-THE Maryland Telephone and Telegraph Company, operating a system in opposition to the Bell Company in this city, has had introduced in the City Council here an ordinance which, among other things, releases the company from a provision in its present charter and agreement with the city whereby it is now prohibited from charging more than $48 per year for a business telephone and $36 per year for a residence telephone. Mr. Edward H. Bouton, president of the Maryland Company, speaking-of the ordinance, said that provision had been made by his company for a plant to accommodate 5,000 subscribers, which it was thought would be sufficient to take care of the business for a great number of years, but that the demand had been so great that the company now has in service in the neighborhood of nearly 7,000 telephones, and has invested in its plant upward of $2,000,000. This amounts, in round numbers, to $300 per telephone, and does not include the cost of subways which have been built and are owned by the city, from which space is leased by the Maryland Company. In explanation of the ordinance and of the company's desire to be released from the present rate regulation, Mr. Bouton had this to say: " It has been found that, contrary to almost all other kinds of business, the operating expenses per telephone increase with the number of telephones in service, for the reason that, as the number of telephones increases the amount of use to which each telephone can be put is correspondingly extended, so that the operating expenses per telephone of the Maryland Telephone and Telegraph Company's Baltimore plant are more than twice as much as those owned by the same company in exchanges located in smaller towns. The investment per telephone is also increased, for the reason that greater numbers of trunk lines between the exchanges are needed and the construction of the switchboards is much more elaborate and expensive. This increased cost of investment means not only additional interest charges, but increased maintenance, an item of very large expense in the telephone business. tertvt at tm hapim toot. 'One of the reasons why the cost of operation is expensive in a large city is the enormous service to which the busy telephones are put, such as those located in express 44 and railroad offices, banks and large business houses. Many of such telephones average fifty calls per day, or the enormous total of 15,000 calls per annum. Under the present ordinance not more than $48 can be charged for such telephones, making an average in many cases of less than one-third of a cent a call. This is far less than the cost of the service. "The Company wishes to put in practice a plan whereby the telephones which are used but little can be graded down to a very small cost. There are many small dealers to whom the telephone nowadays has become a necessity, but who cannot afford to pay, and ought not to be compelled to pay, as much for it as the large institutions which use their telephones constantly. The ordinance, as it stands, however, would not only prevent the Company from carrying out this plan, but would likely make it necessary for it to abolish some of its present low service rates. It cannot do business at a loss and unless it is permitted to charge a fair price, based somewhat upon the amount of use to which a telephone is put, it will be prevented from giving the low rate which it could in that case afford to give to the small tradesman who uses his telephone but little. iurbtrn n itgl Aarglan. "Under the conditions existing in Baltimore the number of calls per telephone to which the instruments of the Maryland Telephone and Telegraph Company are put is largely in excess of that of any other company in the country with a like number of telephones. The reason for this is that a very large and increasing number of business houses and residences using both telephones have a measured service contract for their Bell telephone and an unlimited service contract for their Maryland telephone, and in consequence of this, place the burden of their telephone service, as far as possible, on the Maryland telephone. "The enormous increase in the service demanded is shown by the fact that in November, 1901, when the Maryland Company had 5,651 'phones in use, the'peg-count' showed 76,350 calls for the day on which the count was taken. In March, 1902, there were 6,522 'phones in use, an increase of I5 per cent., whereas the calls had reached 92,369, or an increase of 21 per cent. One month later, i. e., in the month of April, 1902, there being then 6,718 telephones in service, an increase of 3 per cent. over March, the 'peg-count' showed Ioo,I55 calls, an increase over March in calls of over 8 per cent. Since last November the increase in the number of telephones has been i8 per cent., whereas the increase in the number of calls has been 31 per cent. It now averages about fifteen calls per telephone per day, and at the present rate of increase will soon much exceed this. Wans *lifwg ralt. "The condition, therefore, which now faces the Company is whether it shall restrict the service to its present lines and endeavor to increase its revenues by discontinuing some of its low-price service, or, by getting permission to increase its rates so that they will be fairly proportionate, prepare for a greatly enlarged business and provide facilities for the small tradesman by establishing telephones lower even than their present lowest rates. "The telephone business has been one of continued growth and experiment. It has been found that business cannot profitably be done in a large city under the present 45 conditions and that the present conditions are not such as make the charges bear equitably upon the large business house and the small tradesman. These are conditions which it is sought to correct in the proposed amendment to the Company's ordinance." mrtfin of a Atryrr. A report has been current in financial circles that negotiations are in progress for the absorption of the Maryland Company by the United Telephone and Telegraph Company, of Philadelphia. Mr. George R. Webb, who organized the Maryland Company, was its first president, and is still largely interested, denied that such a deal is on. Mr. Webb said that the Maryland Company contemplates extensive developments, but that the plans are not yet in shape to be made public. It will be remembered that a year or two ago Mr. Webb and his associates endeavored to secure a franchise from Congress to operate in Washington, agreeing at the time to charge the rates which the Maryland Company now seeks to be relieved from because of their unprofitableness in this city. The public is very much interested in the outcome of this movement. It is generally conceded that two telephone systems in one city are a source of annoyance to the public and result in imposing double charges on many telephone users. The Maryland Company was welcomed a few years ago because of its promise to furnish an up-to-date service at moderate charges, and its system has grown rapidly. The Bell Company's rates here are substantially on the plan advocated by Mr. Bouton for his company, and has claimed that it could not furnish service at flat rates as low as those offered by the Maryland Company without loss. The general opinion is that the position of the Bell Company here is strengthened by the statement of President Bouton, which goes to show the reasonableness of the rates which the Bell Company has endeavored to maintain. Naturally the public is not pleased with the proposed increase of rates, as the net result of the Maryland Company's operations must necessarily be a very large increase in the aggregate amount paid for telephone service over that which would be paid if one company only, charging reasonable rates, was doing the entire business. 46 APPENDIX E. STATEMENT OF JOHN HESKETH, TELEPHONE ENGINEER FOR THE AUSTRALIAN GOVERNMENT. AN expert study of the relative efficiency of the telephone systems of the:most important cities of America and Europe has recently been made by Mr. John Hesketh under direction of the Postmaster-General of Australia for the guidance of the Australian authorities in developing telegraph and telephone systems. Mr. Hesketh devoted many months to this work, personally inspecting the telephone plants and the methods in use in most of the principal American and European cities. In an article in the Electrical Engineer (London), Feb. Io, 1905, Mr. Hesketh said: "America undoubtedly leads the world, both in the general development of the telephone business-that is, the amount of use made of the service by the publicand in the technical development of the industry. The long lead in telephone engineering which America holds over the rest of the world stands out most clearly, and in Europe the best work is being done where American experience is being followed. * * * In American cities the telephone development has already reached a point which seems hardly to be realized as within the bounds of possibility in most European countries. * * * The principal ingredients of the recipe (for obtaining such a general use of the telephone) are an efficient service, a graduated tariff, and a thorough education_ of the public in the value of the telephone service. * * * "I should place, for a proper consideration of the telephone business,. the question of efficiency and development first, and the question of rates second. The; universal experience is that the public of big cities want an efficient service, and wantt it widely developed. As to rates, the proper principle undoubtedly is a graduated] tariff, under which the user pays according to the amount of his use. It is a; great: mistake to base the telephone service upon a low flat rate for unlimited use.. Thet independent telephone companies throughout America are now realizing the mistake. they made in basing all their business upon low flat rates. They have not only found' that to give an efficient service and develop it rapidly costs more than they hadlanti — cipated, but they have found that the flat rate is wrong in principle and that graduated' rates are correct, both in theory and practice. As a consequence, the independent. companies are now generally trying to raise their rates and to introduce message-rates; but it is much easier to talk about raising rates than to induce the public to pay. a.higher: rate when once they have become accustomed to a low figure." (Mr. Hesketh was asked: "Among all the telephone systems you have seean, whicht should you say is most complete? " He replied:) "Without any question that of New York. The New York Telliphone System is;: the finest example of thorough telephone engineering I have seen. Atlithe exchanges, 47 are equipped in a uniform manner, all are in fire-proof buildings designed specially for telephone purposes, the cable distribution is, for the greater part of the city, so carried out that the lines are in lead-covered cables practically the entire distance between the exchanges and the subscribers' premises, and the service is in all respects at the very highest point of efficiency. * * * The New York system is by far the largest telephone system in the world, and is undoubtedly in all respects the best equipped. 48 APPENDIX F. EXTRACTS FROM REPORT ON TELEPHONE COMPETITION BY A SPECIAL COMMITTEE OF THE CITY COUNCIL, HAMILTON, ONT. IN 1902 the Council of the City of Hamilton, Ont., appointed Aldermen Domville, Burkholder, Nicholson and Kerr a committee to visit cities having two telephone services, and to report generally on competition in telephony and the proposed introduction of competition into the City of Hamilton. The Committee personally visited Grand Rapids, Detroit, Toledo, Cleveland, Pittsburg, Rochester and Buffalo, and communicated by letter with the city authorities of St. Paul, Minneapolis, Adrian, Fall River, New Bedford, Pierce, Augusta, Des Moines, Grand Rapids, Rochester, Saginaw, Bay City, Trenton, Cleveland, Columbus, Richmond, Detroit, Montreal, Spokane Falls, McMinnville and Toledo. Concerning the attitude of the public of several cities towards competition after experience, the Committee says, in its report addressed to the Mayor and Council: * * * "The feeling in Detroit is almost universal against competition and in favor of some other means of regulating the rates charged. The business men were forced to install both systems at a cost to them 50 per cent. greater than was formerly charged. During competition the public were paying $40,000 per year more for telephones than they had been under the old system." * * * "The business men whom we approached in Toledo were not favorably impressed with competition, owing to the fact that it materially increases their rates, and was expressed by many of them to be a nuisance in operation." * * * "The Cuyahoga Company [Cleveland] publicly admit that they must get their rates raised or go out of business, and they have made application to Council for leave to raise the rates, and the matter is now before the Cleveland City Council. "In the application the manager of the Company states that unless the rates were raised it would be necessary to amalgamate with the Bell Company or go out of business entirely, and in reply Mayor Tom Johnson said: "I believe that the consolidation of the telephone companies would be a good thing for the people. This business is unlike almost any other in this respect. The two telephone companies in the same city are an absolute nuisance, and their consolidation would be a great accommodation to the public." This statement was entirely endorsed by Senator Mark Hanna, who stated emphatically that competition in Cleveland was a nuisance. "We found this was the attitude of nearly all business men, and they were emphatic in their statements that competition in Cleveland was an unnecessary complication and a nuisance. * * * It is the universal experience in this city that business and professional men must install both telephones, and they claim that it causes confusion in operation and a greater expense, besides occupying more desk room." 49 * * * "It is the experience here [Pittsburg] that business and professional men must have both lines, and the rates to business men have been increased by the cost of the Independent Company's service. The only effect competition apparently has had, has been to make both companies give a good service and to give residences an opportunity to get in one system at a somewhat lower rate than formerly. The cashier of the Pittsburg and Alleghany Telephone Company (Independent) in conversation stated that competition in telephones was not to be desired, that the effect of it was to increase the rates to business men, and there should be no competition unless there was very good reason for it." * * * "The experience as expressed by the business community [Rochester] here, is that they must install both systems and that the cost to business men is considerably more than it was under one system, although some business men say that the effect has been to make the service much better. There are very few in favor of competition; most business people express themselves that it is not to be desired, one company service being much better, provided the service is good." * * * " It has been the experience in Grand Rapids that business and professional men must install both systems. In Grand Rapids, owing to the rate war, the two systems cost the same as was formerly charged by the Bell, but both parties say the rates must advance, as the present is not a living rate." The Committee states the following as its main conclusions: "It is not desirable for any community to have competition in telephones unless: it is to regulate some very grave evil. The almost universal experience has been that competition raises the rates materially to business and professional men, and lowers the rate somewhat to a resident. "Competition in ordinary lines of business may be a good thing, but your committee are of opinion that in telephony the rates should be regulated by some other means, competition being costly and, up to the present time, somewhat in the nature. of an experiment." 50 APPENDIX G. SCHEDULE SHOWING FORMER RATES AND REVISED RATES OF THE NEW YORK TELEPHONE CO. umsin ftatEf I, l iapttau. DIRECT LINES. Number of Old New Messages Rates Rates 600 $ 75 $ 6o 1200 III 87 i8oo 141 III 2400 i65 135 3000 x83 I59 3600 201 177 4500 228 204 All Direct Line Business subscribers will be billed at the new rates from May ist regardless of the rates named in their contracts. PRIVATE BRANCH EXCHANGES. Minimum equipment (consisting of local switchboard, operating telephone set at same, two lines to the central office, and two stations) and the right to send 3,600 local messages in' one year.......... $240 $2 26 Additional lines to the central office, each,..... 36 24 Stations additional to the two included in the minimum equipment: ist 20, each,........ 12 9 All over 20, each,......... 12 6 The mileage charges for circuits connecting stations off the premises to private branch exchanges, or for tie lines connecting one private branch exchange with another, which heretofore have ranged from $6o to $84 per mile, have been reduced to range from $48 to $60 per mile. The charges for circuits crossing the North River (when used for connecting extension stations to a private branch exchange, or for tie lines) which heretofore have ranged from $204 to $300 per circuit, have been reduced to range from $180 to $240 per circuit. The charge for local messages from private branch exchanges in excess of 3,600 will be as heretofore, 4 cents each, or, when contracted for in advance in lots of 400, $3.00 per hundred. The charge for an auxiliary line and station, i. e., a second line supplementing a direct line, which heretofore has been $48.00, has been reduced to $36.00 per year. 5S The new rates herein mentioned will take effect June ist, 1905, and all subscribers affected will be billed accordingly, regardless of existing contracts. PARTY LINES. Party line business subscribers in Manhattan will be billed from May ist, 1905, at the new schedule of rates for direct line business telephones, announced above, and as soon as practicable after May ist each of such subscribers will be provided with direct line service. This will improve the working of the system as a whole, provide a higher grade of service to the subscribers directly affected, and reduce rates toVthose in this class who send more than the minimum allowance of messages, as follows: Number of Old New Messages Rate Rate 800 $ 75 $ 69 I000 87 78 1200 99 87 1500 II7 99 i8oo I35 III 2100 153 I23 These subscribers will also be relieved of charges for certain extras heretofore made, and in all respects will be put on the same basis as direct line subscribers. FLAT RATES. The old $240.00 flat rate will not be changed. Of the more than 150,000 stations in the system only about 600 are at this rate. In a great majority of the cases, these lines are now overloaded with traffic, and are consequently "busy" much of the time. For the good of the service as a whole, special efforts will be made to convince subscribers to this class of the importance of providing adequate facilities to meet their requirements. The Company does not deem it advisable to accept new contracts for direct line business service in Manhattan at flat rates. I.ib nt l Bat0, Mjlntiattam DIRECT LINES. Number of Old New Messages Rate Rate 600 $ 66 $ 54 8oo 78 63 I000 90 72 I200 I02 8I i8oo I38 I05 2400 i65 I29 PARTY LINES. Number of Old New Messages Rate Rate 600 $54 $45 800 66 54 I000 78 63 I200 90 72 52 The new residence rates will be applied also at physicians' offices and at private stables. All subscribers affected will be billed at the new rates from May ist, I905, regardless of existing contracts. (lambtah to, litanittsi Charitable Institutions (regularly incorporated as such) will be allowed a discount of 50 per cent. of the standard rate for local messages from stations placed in such institutions, as heretofore. Regularly ordained clergymen will be allowed a discount of 25 per cent. of the standard rate for local messages from stations to their residences. Such institutions and clergymen will be billed accordingly from May Ist, 1905, regardless of existing contracts. Toll tatts frotm isnlattan anb tfe tarnx, TO OTHER TELEPHONE CENTERS IN NEW YORK CITY. To TAKE EFFECT JUNE IST, 1905. FROM MANHATTAN FROM THE BRONX Subscriber's Pay Station Subscriber's Pay Station Centre Rate Rate Rate Rate Astoria................ 15 15 20 Barren Island.............20 25 20 25 Bath Beach.............. 5 20 20 25 The Bronx................ 5 -I - Brooklyn............... 1 15 15 20 Coney Island, Sheepshead Bay.....15 20 20 25 Far Rockaway, Lawrence, Hammels...20 25 20 25 Flushing...............1 5 20 15 20 Jamaica............... 15 20 15 20 Manhattan.............- 10 5 New Dorp............... 15 20 20 25 Newtown.............. 1o 15 5I 20 Queens................ 15 20 15 20 Richmond Hill............ 15 20 15 20 Tompkinsville, West New Brighton...15 20 20 25 Tottenville..............20 25 20 25 53 APPENDIX H. DETAILED REPORT UPON THE METHOD EMPLOYED BY THE NEW YORK TELEPHONE COMPANY TO RECORD LOCALrCALLS. By WESTINGHOUSE, CHURCH, KERR & Co. [Supplementary to Report of Conclusions, page 28.] XW HEN telephone service was first instituted a fixed annual rental was universally charged for each instrument. This flat rate tariff is still largely in vogue in many places, but tends to discriminate against certain classes of customers, because, as the amount of business which different subscribers transact varies greatly, a uniform charge to all favors the large user and is a hardship to the smaller one. To render tariffs more.equable some telephone companies offer service on the basis of a charge per message, so that each subscriber shall pay in proportion to the traffic which he sends. Unquestionably this method is much fairer, but the difficulties of keeping track of the number of messages each subscriber sends are enormous, particularly in such exchanges as exist in Manhattan, where something over a million messages per day are handled. The first attempt to record messages required each telephone operator to make a pencil memorandum of the calls each subscriber made. These so-called "tickets" were subsequently filed with the Auditor and formed the basis to compute monthly bills. This method evidently compelled each operator to perform a large amount of work in addition to the necessary avocations at the switchboard and so more operators. were needed, requiring in turn a larger switchboard equipment, all of which correspondingly augmented the expense of service to the subscriber. The ticket method showed other defects, for example, in the rush of business, operators would either write the wrong number or would forget to make any record at all. The first improvement consisted in arranging a kind of tally-board upon which operators made arbitrary marks against the numbers of the subscribers who called. As a means of reducing labor, this method was a step in advance, but otherwise it re — tained many of the defects of the ticket system and labored under the further disadvantage of being more open to errors. But even with the aid of arbitrary symbols, the operators' work was markedly increased over that required to handle flat rate subscribers. Much time, expense, and inventive ingenuity have been expended in the endeavor to devise some device which would automatically register the number of messages each subscriber transmits. But there is one apparently insurmountable obstacle; that is, that no good mechanical arrangement has yet been found which will differentiate between the call which the subscriber makes, and finds the desired correspondent "busy," and one in which the connection is satisfactorily completed. Telephone companies have adopted the practice of charging only for such connections as are successful, and hence a practical telephone register must only record the completed calls, and must not include those which for any reason fail. 54 Therefore, some telephone companies consider it best to place the recording of messages in the hands of skilled and trained attendants who shall be capable of accurately distinguishing between the successful and the unsuccessful call, and shall register only those for which the subscriber should properly be charged. It is the aim of the system now in use by the New York Telephone Company to record messages in this manner. The message-counter consists of a series of dial wheels bearing numbers on their peripheries, assembled in a dust-proof case, and arranged somewhat after the plan of a bicycle cyclometer or a steam-engine revolution-counter. In front of the dial wheels the metal enclosure is cut away and the opening covered with a glass window, so that the numbers on the edges of the dials can be seen at any time; thus the register reads directly, always showing the number of calls recorded in figures, obviating the difficulty inherent in registers that require the reading to be made by pointers. Each register is supplied with an electro-magnet which, when excited, causes the unit dial to register one unit and hence every time the circuit of this magnet is closed the register records, and under no other circumstances. Finally, all the registers of a given office are assembled upon an iron rack and the whole mass enclosed in a fire-proof dust-proof case supplied with glass windows, which enable the proper officials to read the register without opening the case. This enclosure is locked and the key placed in the Auditor's Office, so that the registers are inaccessible except to the proper officers. In order that the working of the telephone register may be understood, it is necessary to describe the avocations that the operators at the switchboard must perform to complete connections. The subscriber's station is connected to the switchboard by means of a pair of wires which end in two springs in a contrivance called the spring jack. Directly beneath this jack a small incandescent lamp is placed and when the subscriber removes his receiver this act closes his line circuit and causes the incandescent lamp connected therewith to light; this is a signal to the operator that the subscriber desires a connection. The jacks andjlamps of a number ofilines are placed in a vertical panel in front of each operator; beneath this panel there is a shelf termed the "cord shelf," upon which rest a number of brass plugs, each set or pair being connected by a flexible cord containing metallic conductors. These brass plugs are made to fit the spring jacks and hence if one plug be inserted into the jack of one line, and its companion plug inserted into the jack of another, the two lines will be connected together and the subscribers can talk.- ' *: When the operator sees the illumination of a signal lamp she picks up a plug and inserts it into the jack connected to this lamp, and by means of a switch connects her telephone to the cord which is then attached to the spring jack, and learns from the calling subscriber the number of the party he desires to talk with. She then takes the companion plug to the one already placed in the calling subscriber's jack and inserts it into the jack of the subscriber to be called and by pressing a second switch rings the bell of the desired subscriber. ':: In front of each plug as it rests upon the cord shelf another incandescent lamp is placed. The object of these lamps, of which each cord has a pair, is to notify the operator when the subscribers have completed their conversation, or otherwise the lines might be connected together indefinitely. The apparatus in the switchboard is so arranged that so long as two lines are connected together with a pair of cords and the receivers at the sub-stations are in use, the lamps attached to the particular cords 55 used will remain dark, but whenever either receiver is placed upon the hook, the corresponding lamp will light and by this means the operator is immediately notified as soon as the called subscriber reaches the telephone and takes up the receiver for a conversation, because at the moment the receiver is lifted the signal lamp in front of the cord attached to this jack will be darkened. Thus, when the conversation is finished she is notified whenever either of the respective subscribers replaces the receivers, because the corresponding lamp lights. Hence by the darkening of the lamp attached to the plug placed in the jack of the called subscriber the operator is automatically notified that the calling subscriber has received the party to whom he wishes to talk, and when the lamp relights she is similarly informed that the conversation has actually taken place, and that the subscriber has received the service for which the proper charge is now to be made. This is the keynote of the method of recording telephone calls now in use by the New York Telephone Company. There is a push button on the cord shelf in front of each cord and associated therewith. If the operator presses this button when the plug attached thereto is inserted in a spring-jack she registers one upon the register that is connected to that jack, but if the button is pressed at any other time no registration can take place. By this means the register of each line is placed under the control of the operator during the time that the particular line is engaged in conversation, and not otherwise, and as the operator is informed by the signal lamp when the called subscriber lifts the receiver and begins to talk and when he replaces it at the end of the conversation she knows that the call has been successfully completed, then by pressing the button she can register the call, and hence the subscriber is only charged for those conversations which are successful. As the registers are constructed with great care, are sealed in a double enclosure, and are only connected with the subscriber's line during the actual period of conversation and the push button so arranged as to make accidental registration very difficult, if not impossible, the chances of error seem to be reduced to a minimum. The following possibilities of error exist: The operator may forget to record the connection; this is in favor of the subscriber and against the Telephone Company, as, in all such instances no record of the call would be made. As the operator does not make the record until after the subscribers have finished the conversation, and as she removes the plugs from the jacks immediately thereafter, there is little possibility of doubling the record unless the operator does so maliciously; while this is conceivable, it does not seem a likely source of errors of magnitude. As a safeguard two special registration signal lamps are provided for each operator. When the operator presses a button to record a call, one of these signal lamps placed directly before her lights when the register records, and this tells the operator that the call has been recorded. The other lamp, made particularly conspicuous by a green glass, is placed in view of the supervisor of the particular squad of nine operators to whom the operator in question belongs. Hence whenever an operator registers a call she receives a visual notification thereof and the supervisor who watches her is also notified, but in a different manner. Hence there is a double check on the registration of each call. If the local wiring of two lines becomes crossed it is possible that the act of the operator in registering upon one register would cause a count to be made upon another one. To minimize this source of error great pains are taken to install all of the wiring in the most substantial manner known to the art, and further, in case such a cross happened, the subscriber's lines would become otherwise disarranged and unworkable. If, for any reason, the Telephone Company have reason to suspect the accuracy of any register, it is their policy to take up and adjust the record with the subscriber in a fair and equable manner. The usual method pursued is to ascertain from previous records the average number of monthly calls that the subscriber in question makes, and to suggest that the monthly bill be settled on the basis of past experience. Statistically, the Auditor's Office of the New York Telephone Company shows that during the past six months there have been questionable cases of counter-registration, amounting in number to about one-tenth of one per cent. of all the counters in service, andthat the number of cases in which it was necessary to adjust as above described were less than one-fiftieth of one per cent. 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