UNIVERSITY OF CALIFORNIA LOS ANGELES SCHOOL OF LAW LIBRARY PUBLIC UTILITY RATES McGraw-Hill Book Company Electrical World The Engineering and Mining Journal Engineering Record Engineering News Railway Age Gazette American Machinist Signal Engineer American Engineer Electric Railway Journal Coal Age Metallurgical and Chemical Engineering P o wer PUBLIC UTILITY RATES 'Sill A DISCUSSION OF THE PRINCIPLES AND PRACTICE UNDERLYING CHARGES FOR WATER, GAS, ELECTRICITY, COMMUNICATION AND TRANSPORTATION SERVICES BY HARRY BARKER, B.S. \\\ Mechanical and Electrical Engineer, Associate Editor of Engineering News, Member American Institute of Electrical Engineers. FIRST EDITION McGRAW-HILL BOOK COMPANY, INC. 239 WEST 39TH STREET. NEW YORK LONDON: HILL PUBLISHING CO., LTD. 6 & 8 BOUVERIE ST.. E. C. 1917 T 1917 COPYRIGHT, 1917, BY THE McGRAW-HILL BOOK COMPANY, INC. Stanhope Jbrcss F. H. GILSON COMPANY BOSTON, U.S.A. PREFACE THE collection and formulation of these notes have been under way about eight years. Before utility questions had attained their present popularity, the author felt (in following the discussion of public-service questions at engineering conventions and from the varied acquaintance of an engineering editor) that a comprehensive discussion of (1) such corporation and municipal activities as affect service and rates, (2) the trend of public opinion and court and commission decisions, and (3) the most important engineering and economic problems involved, would be useful to many who have to deal first-hand with one phase or another of public service. Very many men who have seemed to be interested in all phases of these problems have not had the time or opportunity to study the con- flicting and reiterative ideas of the scattered documents, pamphlets, and papers which very largely form the literature of the subject. There has seemed to be a desire among public utility officials to throw off the blinders of daily duties, and to study what some are pleased to call "the academic questions" of. their business. The writer hopes to make that possible here. It has seemed, as the notes have grown in these years, that if the main lines of some broad survey of the rate problem could be given, free from the mass of obscuring detail which necessarily marks individual cases, then the contemplated review would be of some service to lawyers and legislators, to editorial writers of the daily press, to students of municipal affairs and even to some part of the general public. For this varied service, although the in- herent nature of these studies demands essentially an engineering and economic analysis, an attempt has been made to keep the pages understandable to men not technically trained. Partly for such readers are the brief reviews of history and technology of railroads, electric railways, water-works, and gas, electricity and telephone utilities, given in the chapters on special problems. But even the technical reader of these pages must give heed to the history and technology of any utility whose rates he studies. VI PREFACE s This is particularly true in comparing the fixed charges in different fields. A presentation of rate problems cannot be evolved out of inner consciousness as can a novel or poem. It must be based on an accumulation of separate contributions to the thought on the subject with perhaps new explanations here, a realinement there, and a different deduction elsewhere. It is hoped, however, that the mere presentation, in one volume, of the diverse phases of rate making may be of service in provoking thought in spite of the inherent shortcomings of the text.. The author has felt that such a review of essential facts and principles can best be arranged by some third impartial party, such as an editor of an engineering journal being affiliated neither with a public-service corporation nor a regulating commission, but in touch with both and not confining all his attention to the field of one utility class. It seems reasonable that such a third party can most easily attempt to approach the several and conflicting viewpoints and can best endeavor to pick out the essential elements of the problems in the most nearly unbiased manner because free from the pursuit of petty details and the irritating distractions of daily administration. With the foregoing ideas in mind, the author has carefully studied the wealth of discussion that has come to him and he has very gradually formulated this presentation. It is admittedly incomplete and possibly defective, but it is hoped that continued open-minded study and discussion may enable the reader to bridge gaps and eliminate fallacies. It is only fair to all approaching the subject with open mind, to warn them that some of the author's opinions, while supported by the views of many eminent engineers and economists, are not yet accepted by some others equally promi- nent. An attempt has been made where such divergence exists, to present the diverging ideas. Acknowledgment is here made to many prominent specialists in the several utility branches for their ready cooperation and frank criticism of the author's notes at various stages of growth. Their number and modesty prevent more complete and specific credit. It probably will seem to the public commissioner, to the company official, or the consulting engineer, that innumerable important details have been omitted. The author feels, however, that, in spite of the importance of interpretations of principles in each con- PREFACE Vll crete case, the inclusion of more detail here would obscure the fundamental points that need to be emphasized besides giving a book that would rival an unabridged dictionary in size arid re- quire a lifetime to prepare. It might be well to remark, perhaps, that the author does not believe in any inherent iniquity of corporations, in spite of the occasional mismanagement of officers of quasi-public enterprises and the laxity of directors. He trusts that these notes accordingly will be found temperate in tone and fair toward such organiza- tions. On the other hand, he recognizes, in the magnitude and complexity of modern organization schemes, opportunities for hiding grave abuses; and he does not feel that any man who has the requisite ability and energy to cultivate or exploit public serv- ice should be allowed to do so solely for private profit, without some effective oversight and chance for restraint. It is to be hoped that the author will not be classed as an apologist for the cartoon type of public-service magnate if such exists to-day; he agrees that with the absolute disappearance of the men who organize corporations solely for the sake of large and speculative promotion profits, and not for the more moderate and certain returns of daily service, there will come a better day, for both the public and the corporations. H. B. NEW YORK CITY, January, 1917 CONTENTS PAGE PREFACE v CHAPTER I DEVELOPMENT OF UTILITY REGULATION; UTILITY PRIVILEGES AND OBLIGATIONS; RIGHTS OF THE PUBLIC 1 Political place of utility regulation. Definition of public utility. Privileges. Obligations. Rights of the public. CHAPTER II PRODUCT AND SERVICE COMPANIES; SOME DEFINITIONS OF RATES AND SERVICES 5 Two classes of companies. Product storage. Service capac- ity. Class costs. Two classes of rates. Split rates. Twi- light zones. Relative importance of low rates. CHAPTER III VARIOUS BASES FOR RATES 10 Cost of service a necessary approach. "Cost" replacing "worth." Use of cost not new. An unsound basis. A fair basis. Courts do not fix reasonableness. Need of classifying customers. Classes promote simplicity. Off-peak classes. Individual diversity factors. Strict equity versus general welfare. CHAPTER IV DETAILS OF THE COST-OF-SERVICE STUDY OF RATES; TEST FOR FIXED AND OPERATING CHARGES 18 Test schedules. General cost of service. Preliminary survey of profits. True-cost schedule. The problem of apportioning costs on customers. A test for fixed charges. Apportionment of taxes. Apportionment of depreciation expense. Deprecia- tion expense as an operating cost. Depreciation expense as a fixed charge. Apportionment of amortization. Apportionment of general expense. Distribution of metering cost. Labor. Service losses. Limitations of test for apportionment. Revised X CONTENTS PAGE cost schedule. Simplicity in rates. Customer groups. Dis- tribution of fixed charges. Importance of studying individual diversity. Ends, not means, sought. Minimum charges to cover readiness. Study of hypothetical case. CHAPTER V FAIR VALUE OF UTILITY PROPERTY 36 What is fair value? Market value as a basis. Investment as a basis. Equivalent substitute basis. What basis to use. Investment as a datum. Court decisions on fair value. Court decisions not yokes and fetters. Court errors. False respect for precedent. Other values than "rate-basis worth." Valua- tion for various purposes. Value of favorable contracts. Worth as disclosed by accounts. Worth as disclosed by ap- praisal. Actual or substitute plant? Bearing of original con- ditions. Depreciated value as a basis of rates. Use of apprecia- tion in value. CHAPTER VI VALUATION AS AN ENGINEERING TASK; APPRAISAL OF LAND AND WATER RIGHTS 52 The general problem. Selecting the engineers. Helping or hindering the engineer. Cost of appraisal. Preliminary in- vestigation. The inventories. Unit prices. Short cuts in appraisals. Appraisal of real estate. Cost of condemnation. Denial of condemnation cost. Value of adaptability. Value for paving over mains. Value of franchises. Water rights to be considered. Better understanding needed of water rights. Rights as real estate. Splitting the value of rights. Comparing two rights. Valuation of rights by earning capacity. Short-cut steam-power comparison. Value of rights under regulation. Values appurtenant to water rights. A water- rights fallacy. Valuation of storage reservoirs. Omissions in inventory. Allowances for overhead charges. Cost of ad- ministration, organization and preliminary investigations. Interest during construction period. Taxes during construction period. Insurance during construction. Piecemeal con- struction. Contractor's profit. Engineering design and in- spection. Architect's fees. Influence of contingencies. Data on engineering and contingencies. Bond commissions and dis- counts. The value of discarded plants. Promoter's profit. Business development investment; "going-concern value." Accrued deficits as a measure of going value. Wisconsin method of estimating going value. Reproduction of going-concern value. Depreciation as a measure of going value. Amortization of intangible values. Effect of good design or favorable location. Sudden reduction of value. CONTENTS XI CHAPTER VII PAGE REASONABLE RETURN; INTEREST; COMPENSATION FOR RISK AND ATTENTION; EXTRA PROFITS ' 96 What is reasonable return? Pure interest. Compensation for risk. Factors increasing risk. Compensation for attention. Prospect of extra profits. Super-profits through infrequent rate revisions. Dividing scales. The fair division of excess profits. Freedom from lax management. Surplus profits as compen- sation for early inadequate return. Official burdens not a basis for profits. CHAPTER VIII DEPRECIATION AS IT AFFECTS UTILITY RATES 107 Liability for retirement. "Depreciation" too loosely em- ployed. "Depreciation" properly used. '- " Retirance" a repay- ment of lost investment. Subdivision of retirance. Relations between depreciation and retirance. Relations between appraised value and retirance. Failures to collect retirance. Computing annual depreciation and retirance. Maintenance plan. Ap- praisal plan. Straight-line scheme. Sinking-fund plan. Modified straight-line schemes. Annual cost of service and actual depreciation. " Equal-annual-payment" scheme for com- puting retirance. Objections to the equal-annual-payment plan. Depreciation under increasing operating costs. The Supreme Court on retirance methods. Lower courts on sinking-fund re- tirance. Choice of retirance plans. The famous hen argu- ment. Other depreciation-computation plans. CHAPTER IX MISCELLANEOUS PROBLEMS INDIRECTLY RELATED TO RATE-MAKING 134 Problems old and new. The future of regulation. Avenues of regulation. Common powers of a commission. Public re- gard of franchises. Franchise value in rate basis. Other regards of franchises. Short-term franchises. Indeterminate franchise. The interference of public utilities. Cost of changes to avoid interference. Improper activities. Undue discrimination. Utilities in politics. Preventing over-capitalization. Broad public policy. An utility should relieve public burdens. Re- duce company burdens. Secure full publicity. Competition or monopoly. Some results of monopoly. Lessons from compe- tition. Potential competition a constant restraint. Lighten future burdens. No call for industrial legacies. The vicious cost spiral. Preventing higher costs. Reduce unit labor costs. Cause of inefficient labor. Satisfactions of labor. Utility labor in an enviable position. Higher rates or greater economy. Scarcity of funds for investment. Better public relations. Better ideas of service needed. xil CONTENTS PAGE CHAPTER X PROBLEMS OF RAILWAY RATES 161 Problems of specific utilities. Magnitude of the railway in- dustry. Beginnings of the railway industry. Development of governmental regulation. Power of eminent domain an early mark. Early beginnings of public regulation. The Interstate Commerce Commission established. The railway as a service- type utility. Difficulty of applying "cost of service" to rates. Expenses independent of traffic. "Law of joint costs." "Law of increasing returns." Renewing separation of operating ex- penses. How freight charges are figured. Classification of freight. Trunk-line rate system. Zone rates for transcon- tinental freight. Southern basing-point system. Early Inter- state Commerce Commission rates. Effect of value of com- modity. Effect of market price of competing products. How cost of service has been used. Cost of carrying competing prod- ucts. Geographical comparisons of cost. Effect of carload lots on cost. Effect of distance on cost of transport. Risk as a factor in rates. Sum of locals and maximum through rate. Federal versus state rates. The effect of water competition. Railway route competition and rates. Limits to route competition. Competition of seaports. Competition of private producers. Vested interests protected. Some rates fixed by general public interest. Rates not allowed to overcome natural advantages. Competition of localities fostered. Railway passenger rates. Commission control of passenger fares. Appreciation and de- preciation of railroad property. The valuation of American railways. Organization of the federal valuation. Suggested economies in railroad operation. CHAPTER XI PROBLEMS OP EXPRESS TRANSPORTATION RATES 201 Relations of express companies. Worth of express companies. Recent improvements in express rates. The old express rate system. The interstate express-rate system. Rates made between geographical blocks. Tentative scheme inadequate. CHAPTER XII RATE PROBLEMS OF STREET AND INTERURBAN RAILWAY TRANS- PORTATION 208 Rise of city transit. Some technical features. Depth of organization. Reasons for nickel fares. Growth of city systems. Early departures from nickel fares. Electric traction no pre- vention of congestion. Natural step to suburban and interurban lines. Financial status of the industry. Peculiarities as an utility. Tests for fixed charges, etc. Fixing the fare. Wia- CONTENTS Xlil PAGE consin idea of fares. Apportionment of standard account items. Substituting car unit for passenger. Effect of peak loads. Reasonable length of trips on individual lines. Practical fixing of zone fares. Traffic surveys. Constitution of good service. Contrasts between old and present costs. Depreciation of electric- railway property. Securing retirance. Rapid transit and rates. The transfer problem. Jitney-bus competition. Cleveland 3c. fare campaigns. Cleveland city-control ordinance. Objections to the Cleveland scheme. Milwaukee zone system. Milwaukee ticket system. CHAPTER XIII PROBLEMS OF WATER RATES 240 Development and magnitude of industry. Water-works as utilities. Regulation of water utilities. Varied requirements for good water. Water-works technology. Water consump- tion. Fire service or domestic supply first? Charges for fire protection. The delusions of "hydrant rentals." Lump sum for fire protection. Effect of fire service on water-works costs. Quantity of water to be provided for fire service. Per capita cost of fire protection. What is the value of fire-protection service? Charges for private fire protection. Distributing costs of comprehensive system. Cost accounting for water-works. Pre- venting water waste. Minimum charges for water. Proposed standard rate form. CHAPTER XIV RATE PROBLEMS OF GAS UTILITIES 277 Development and magnitude of gas industry. Gas-works technology. Uniform rate persists. Variation in gas cost for large use. Gas-utility accounting. Natural-gas utilities. New Baltimore schedules. How Baltimore schedules were made. Results in Baltimore. CHAPTER XV RATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 300 Nearly all utility problems encountered. History of the elec- tric central station. Secrets of early success. First central station. Uses for electricity. Technology of supply. Develop- ment of lighting. Difficulties of continuous service. Importance of the meter. Maximum demands of electric customers. Di- versity of central station loads. Residence tariffs. Norwich tariff. "Telephone" tariff. Wisconsin system. The Detroit system. Canadian cities system. The Kapp rate system. Comparison of rates in American cities. Isolated plants and breakdown service. Charges for street lighting. xiv CONTENTS PAGE CHAPTER XVI PROBLEMS OF TELEPHONE RATE-MAKING 318 Some telephone history. Development of the business. Long- distance service. Telephone technology. Automatic telephone systems. Telephone service compared with transportation. Importance of adequate telephone service. Peculiarities of tele- phone investments. Development of rate system. Value of serv- ice used in the past. Commission regulation of telephone rates. Commission study of value of service. Telephone cost analy- sis. Chicago telephone studiesr Massachusetts commission cases. Wisconsin commission cases. Classification of sub- scribers. Bases for apportioning expenses. Adjusting for interdependence. Wisconsin cost analysis. Cost analysis in Milwaukee case. American telephone-rate examples. APPENDIX A 347 B 352 C 366 D 370 INDEX.. 373 PUBLIC UTILITY RATES CHAPTER I DEVELOPMENT OF UTILITY REGULATION; UTILITY PRIVILEGES AND OBLIGATIONS; RIGHTS OF THE PUBLIC Political Place of Utility Regulation. It is obvious that a second great American experiment in civil government is under way. The primary experiment, of course, is our particular arrangement of a democracy under a legislative-executive-judicial division of function; the second is the control of quasi-public industry by powerful combined-function agents (railroad and utility commissions) of the legislatures, both state and national. The best forms of regulative legislation evidently were framed by men who saw possibilities of curing grave corporate abuses, though the passage of regulating acts probably was helped by those who saw new prospects of political capital. Good state-commission regulation and the appointment of capable and conscientious commissioners, on the whole, continues steadily to increase. The evidences of superior value in state regulation over local legislative control must be appreciated by the mass of thinking and influential voters of the country or this could not be true. These commissions are given powers, more or less broad in the several cases, over financial arrangements, general operating results desired, and over rates. At first only operation and rates were put under scrutiny; but it was found in very many cases that full control of service and rates was impractical without a considerable power over capitalization and the issue of securities, so that the tendency is to add this last. There are many who decry this supervision over corporations, forgetting perhaps that the corporation is a creation of the state, an artificial personal entity brought into being primarily for the 1 2 PUBLIC UTILITY RATES promotion of public welfare directly or indirectly. If it be a child of the people's creation, surely it ought to answer to the public for its acts and be willing to give all information about its activities that may not adversely affect its business, perhaps eventually confidentially reporting to the state or national govern- ment what is reserved from general publication. A common avenue for commission control is in the matter of charges. This directly affects the people and makes a greater impression on the body politic than any equal attention to safety and adequacy of service or to the issue of securities. It is there- fore of immediate use to have widely disseminated sound knowl- edge of how rates may be fairly governed. Fortunately, general principles are more crystallized here than in many other matters of regulation, for the latter depend much more on local necessities and often involve the application of a mere sense of common justice rather than any economic principles or elements of law and engineering. It must not be supposed, however, that local conditions may not profoundly affect rates. In any rate case, as complete a study of the local situation as is possible must be made and some situations will arise when adequate precedents cannot be found and a logical analysis cannot be perfected. Throughout this work, therefore, emphasis will be placed on the latitude to be allowed rate makers from formal statements of principles and precedent which at times may be but convenient points of departure. These studies into testing the reasonableness of charges for public service are made with a few basic propositions in view which it is well to state at the outset. Definition of Public Utility. A concern having special rights to use public property (like highways) and serving the general pubh'c conducts a true "public utility" when its service has passed the state of being a mere luxury or convenience for the few and has become a necessity in the conduct of business and ordinary life of the many. (Before that condition is reached, the concern does merely a "quasi-public" business, more or less of public interest and in which the government has specific limited rights to interfere.) This definition does not exclude all concerns whose business does not immediately involve every citizen (as does that of a water company); it includes enterprises, like electricity-supply DEVELOPMENT OF UTILITY REGULATION 3 works, which serve many citizens, but by no means all, and whose service is a growing public convenience though seldom a complete necessity. Privileges. A concern furnishing a public service enjoys a privilege not to be unduly exploited by the company, not to be the excuse for abuse by the citizens and not to be the cause of harassment by the government. A concern that has eliminated competition within some field of activity, or has come into a control of a trade without the approval of the customers and the public generally must always be prepared to justify every action or else permit and expect public scrutiny of every act. This applies to business in necessary commodities perhaps even more than to service concerns. There is reason to expect an extension of present utility-regulation ideas more and more into general business. Obligations. The conduct of a true public-utility business involves several definite obligations. There is first that of giving the most satisfactory and complete service which the needs of the people, the state of the art involved, and the local physical limitations and finances permit. Secondly, there is need of secur- ing from the customers the common local rates of interest on prop- erty involved, plus a just compensation for all the risks of the business as a venture and perhaps some small extra return for giving especially good and careful service, or for the continued reduction of costs and rates through careful attention to improved processes, or for the pursuit of an especially broad and beneficent public policy. Rights of the Public. The public may properly take all precautions to protect itself, as a civic unit, as customers or as stockholders, against vicious franchise obligations and privileges, and against pernicious activity either by or against the public- utility- concern. In the conflict of interests, however, the prin- ciple of "the greatest good to the greatest number" is to be applied. No distinction has been made in these discussions between personal or corporate ownership of a public utility, and little for municipal operation. For convenience, reference has been made throughout to public-utility "companies." But the remarks apply equally whether one man holds the property or a thousand own the stock of a service corporation; they should apply also 4 PUBLIC UTILITY RATES to the public-utility departments of a municipality like the water- or electric-supply works. There is possibly no greater field (geographically and in aggregate injustice) of discrimination and unfair rates than among the municipally owned utilities. For instance, in a water-works department the charges for fire-hydrant service, which are assessed on each taxpayer, may be heavy to permit of low rates for general supply or may be so light as to throw an undue burden on the consumer distinguished from the taxpayer. In gas or electric service a deficit from supplying ordinary consumers at too low rates may be prevented by high charges for street lights. The municipalities should be amen- able to the same demands for reasonable rates and adequate serv- ices as private plants. This sort of control has been exercised in Massachusetts and Wisconsin for many years but is not yet broadly exercised beyond these states. CHAPTER II PRODUCT AND SERVICE COMPANIES; SOME DEFI- NITIONS OF RATES AND SERVICES Two Classes of Companies. Public utilities may well be separated into two classes in inquiring into rates; (1) those which store and handle a product and (2) those which perform a service. Into the first class, naturally fall most domestic water and gas companies, and perhaps sometimes sewerage and other wastes- disposal undertakings, or eventually, furnishers of domestic supplies like ice, coal and milk. In the second class are electricity- supply concerns, telephone and telegraph companies, steam- and electric-transportation lines generally, express companies, and the postal service. Product Storage. Perhaps the most distinguishing charac- teristic of the two classes of public utilities above made is in the ability of the first to produce (or acquire) and store a tangible substance, as compared with the inability of the second class to store a service in advance of demand. For instance, a water company often can continuously impound its supply at a uni- form rate for a whole day, month, or season, drawing upon some reservoir in larger or smaller amounts as the demand may dictate. A gas company, similarly, may be producing gas at a compara- tively small but uniform rate constantly, feeding most of it into its holders from whence the supply flows at times of larger demand. Service Capacity. An electricity-supply company must have ready for more or less quick service generators of a total capacity equal to the maximum demand its customers as a whole are apt to make at any time of the day or year. Necessarily this apparatus must be idle much of the time. Storage batteries, to serve the function of the water reservoir or gas holder, are not practicable or economical, except in small installations and for some special services. Street and suburban railways must have a reserve of employees and equipment, sufficient to handle the crowds which may travel to business in the morning and home- ward at night. Railway companies must have spare equipment 5 6 PUBLIC UTILITY RATES to carry with minimum discomfort the crowds which travel at certain seasons or on certain holidays, and to move with minimum delay the crops which mature at certain seasons. The telephone companies must have central-office equipment enough to serve the greatest number of subscribers apt to call at one time. Class Costs. Thus it may be seen that the manufacturing plants of the first class of utility companies may work under con- ditions of maximum efficiency that is, close to designed capac- ity and continuously. The investment per unit of product then may be small so far as generating plant goes, but it may be large for storage facilities. These conditions are reversed for the second class. The apparatus must work at reduced efficiency during light and discontinuous operation; there are apt to be considerable standby losses (as in keeping boilers hot and engines warm) and certainly there are heavy fixed charges on idle invest- ment. Two Classes of Rates. Two broad schemes of charging for public service or supply may be discerned; (1) the unit charge and (2) the flat rate. These two have been dubbed also the "European" and the "American" plans, respectively. The unit charge, or " European plan," involves measuring the amount of product handled or service rendered and making the payment bear some definite relation to such quantities. The flat-rate scheme, or "American plan," consists in charging a customer an agreed sum, more or less logically determined, irre- spective of actual utilization of proffered product or service, or not based on varying factors which are measured. The first is the more logical and fair in principle but the expense of measur- ing product or service sometimes makes flat rates more economical all around especially with small customers. Split Rates. A third scheme of stating rates is by a two- or three-part charge under various names and disguises. This is more seen in service-type utilities than in product-type. By many this scheme is classed as a unit-charge plan, and truly such it is but carried to a logical extreme. One part of the charge is based on the customer's maximum demand at any time (for this is related to the investment for that customer in the service-type of company). There is a second part, proportional to the amount of service shown by meter (for this is related to the actual operat- ing cost of serving a particular customer). There may be some- RATES AND SERVICES 7 times a third part a fixed sum to cover the cost per customer of expenses peculiarly proportional only to the number of customers. Sometimes the first and third parts are combined; where demand cuts no figure the split rate reduces to a simple unit charge.* While the multi-part tariff may be wholly logical, it may be so complex and unintelligible to the customer that he cannot check up his bill by any instruments on his premises and this may create a fundamental prejudice against the utility. Then the disad- vantages outweigh the benefits of the schedule in most cases. Twilight Zones. Many rates are not wholly flat nor yet quite like logical unit charges; for instance, take the postal letter rates. For all domestic and many foreign letters, the charge is flat with respect to distance, collection and delivery, but in units so far as. weight and number go. For newspapers, the only unit basis is that of weight; in this case distance, collection, delivery and number of separate pieces are not separately considered and to that extent the charge is a flat rate. In the American parcel- post system, recently inaugurated, a much more definite pro- portionment is made, based on pieces, weight and distance, so as to be practically a unit-tariff plan. Some telephone rates at first seem like flat charges being frequently so many dollars per installation per year; but closer inspection shows that there is a differentiation into classes, suclTas residence, commercial, etc., and further into single-party, two-party, etc., with different charges to each and with or without count of connections actually completed for a customer. Sliding scales so much for the first thousand cubic feet of gas or water (for example) and proportionately less for succeeding thousands are unit charges with a device attempting to bring the price automatically close to the cost of serving large and small consumers. In general, it may be stated that it is easier to test the adequacy of service and the reasonableness of rates in a company making a storable product than one performing a service. * Credit for these schemes should go first to Dr. John Hopkinson who for- mulated in 1892 the demand and output division in a presidential address to the Junior Engineering Society (British). Shortly after Mr. Arthur Wright produced his well-known maximum-demand indicator and further developed the demand-output basis. In 1900 Mr. Henry Doherty, in the paper " Equi- table, Uniform and Competitive Rates," before the National Electric Light Association split fixed charges into demand and customer factors. PUBLIC UTILITY RATES Gas Electricity Water Street Railway ILLUSTRATIONS OF AMERICAN UTILITY RATE CLASSIFICATIONS FLAT ($0.25 per lamp per I month. $0.75 per lamp or motor per month or year. :$1 per fixture or per- son per quarter. 5c. per passenger . trip. ( Long excursion fares. Steam Railway | Monthly commu- l tation tickets. ' Various sums per outlet or per per- son or per inch of outlet. f $15 to $200 per 1 year. J Various sums for I leased lines. 2c. per oz. for let- ters, to Ic. per Ib. for newspapers. Sewerage Telephone Telegraph Postal Service UNIT-CHARGE $0.70 to $1.25 per thousand cubic feet. $0.05 to $0.15 per kilowatt hour. $2.25 to $5 per thousand cubic feet. 5c. per passenger in first zone plus 2c. per added zone. 2|c. per passenger mile (mileage books, trip tickets). Per thousand gallons or cubic feet discharged. 12 to 5c. per local call. Various toll J charges for long distances.* ) Tolls based on number of words, J distance and time of day.f Parcel-post zone-weight rates. Relative Importance of Low Rates. The expressions of public-utility officials seem to indicate that, after fair convenience and more or less attractive prices have been established for the proffered service, complete ability and readiness to serve all who apply is first to be secured; then a service is to be sought that will not cause complaint as to regularity, uniformity or reliability, and finally a lower rate established. * For messages between New York and Chicago, a distance of 900 miles, the message charge is $5, or 0.19c. per mile per minute. An average of the New England Telephone & Telegraph Co. tolls, as found by D. C. Jackson in the Massachusetts Highway Commission studies, was 1.6 to 0.65c. per mes- sage mile. t The telegraph charge for ten words from New York to Chicago in 1916 was 50c., or 0.0066c. per word mile. The similar charge from New York to San Francisco is $1, or O.OOSlc. per word per mile. The New York-New Orleans charge is 60c. or 0.0045c. per word mile. For transmission during off-peak hours, 50 words are transmitted for the same price, which correspondingly reduces the word-mile charges to $ those quoted. RATES AND SERVICES 9 What constitutes superior service beyond the essential qualities of adequacy outlined? Due regard for the preservation and en- hancement of a community's external attractiveness, search for especially courteous and skillful employees, general wide use of safety precautions and devices for the protection of the public and employees such are about all that can be named without study of specific cases. A closer study of adequacy is not at- tempted here, as such discussions turn on regulation rather than on rates. CHAPTER III VARIOUS BASES FOR RATES Cost of Service a Necessary Approach. To complete any survey of the justice and equity in a scheme of rates, the prices charged should be studied in their relations to the cost of the serv- ice and the income to be received. The deeper the probe, the more will this need appear in spite of other matters that exert a profound influence (like the maximum price which small tele- phone users can afford to pay). When quality of service regulates some rates to certain classes of customers, as in telephone, tele- graph, express and postal utilities, cost of service at least is a base of departure. It is obvious that a corporation will not long do business if cost of service is not met by income; the reasonable- ness of an aggregation of tariffs cannot be judged until the rela- tions between income, expense, profits, dividends, surplus, etc., are known. " Cost " is Replacing " Worth." Time was when innumer- able able men held that such a proposition was not tenable be- cause it was strange and because it seemed to be an attempt to substitute an easy plan for the difficult scheme of determining "what a service was worth." It seems reasonable, however^to assert that such arguers deny the possibility of growth in legal and economic thought, even if the proposition were strange. This is not today a stranger doctrine than history shows was the one of 1875 that a state legislature could fix maximum utility rates so long as they allowed a fair return on the value of the utility. Yet, since the celebrated corner-stone case of Munn v. Illinois (94 U. S., 113; 1876) this principle has been unquestioned. Use of Cost is Not New. While in ordinary private trans- actions the worth of a service has depended on various external influences, yet, when a large part of the public has been affected, cost has been a large measure of worth. When industrial life was more simple than now and competition more free, the selling price of a manufactured product and the production cost were nearly parallel year after year. When virtual monopoly developed, 10 VARIOUS BASES FOR RATES 11 the manifest desire of the people nevertheless was to continue the results with which they had been so long familiar, i.e., they de- sired some assurance that production cost and selling price would continue to be parallel and separated at all times by profits no larger than obtained in other lines of manufacturing effort. Thus the reason for the important role of cost of service in public-utility rates far antedates the utilities as now organized and is but one expression of a general treatment to be expected for monopolistic business. It is apparent then that even when it is attempted to apply " value-of-service " as the fundamental process of judgment (taking a well-known definition* of "value of service" as the "amount which a user would have to pay for the same or equivalent service under fair but not destructive competi- tion"), it is not possible to cut loose from " cost-of -service. " An Unsound Basis. A basis of rates, which once existed more broadly than now and one which is probably the oldest and possibly the simplest to follow, is often stated as "charging all the traffic will stand." Most rates which result from this plan are perhaps to be regarded as the outcome of a bargain, and in these cases they have probably been fixed blindly without con- sidering what profits, or losses, might properly be assumed. Such a course, taken as the fundamental procedure of a true public utility, is not now regarded as generally fair to the consumer or to the utility concern; and sometimes it is in opposition to a wise public policy. It belonged, indeed, to the pioneer days when a given service was not a public necessity or even a convenience, and hence not subject to more public regulation than that afforded by common barter or by refusal to trade. (As a subordinate idea, however, it has still a certain important but restricted application as noted later.) A Fair Basis. A basis of rates for real public service now acknowledged to be generally equitable is one by which the legitimate expenses, and reasonable profits, are fairly distributed upon the total service or product given. This idea of a proper basis of rates is gaining wider recognition constantly. How this basis is to be secured may be seen in the trend of judicial and com- mission opinions, based on the constitutional principle that prop- erty cannot be taken without due process of law and on the * Rate Research Committee, National Electric Light Association, 1914 Report. 12 PUBLIC UTILITY RATES concept (given in 1885 by R. R. Commission Cases, 116 U. S. 307, 331; and in 1888 by Reagan v. Farmers Loan and Trust Co., 154 U. S., 362, 399) that a rate imposed on a concern by public mandate must permit a common profit in order not to be con- fiscatory. The oft quoted decision of the U. S. Supreme Court in Smyth v. Ames (169 U. S., 466) early outlined the idea applied to a railroad case. It is stated there: We hold, however, that the basis of all calculations as to the reason- ableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And, in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stocks, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. Courts do not Fix Reasonableness. It must be remembered, however, that neither legislation nor judicial opinion have yet made much closer determination of the relative importance or fixed the application of the elements which the Supreme Court, in the above case, held should be more or less influential. One can- not expect that courts will become very explicit as to what might be reasonable. It is the court's function to determine only if rate systems in specific cases are unreasonable and confiscatory, or perhaps on the other hand extortionate. It is the function of the legislatures and their agents, the commissions and municipal- ities, to find and prescribe the reasonable figures. Moreover, such remarks as above quoted, found in typical court decisions, are only statements of an end to be sought. Such broad ideas, applied without qualifications, might be fair to the com- pany in final result, especially as to protection of property rights, but still work injustice to a large percentage of the consumers through not charging individuals even roughly in accordance with the cost of serving them. How may the same result be secured to the company with substantial justice and approximate fairness in apportioning each consumer's burden? That is not to be answered easily or quickly in an offhand way, and the complete answer must remain as the object of all the studies which follow. VARIOUS BASES FOR RATES 13 Need of Classifying Customers. Ideas must differ as to- what (speaking only of rates) constitutes "substantial justice" and "approximate fairness." It seems reasonable to consider those secured if a customer receives a rate that would be fair to the average customer of a class having wants similar to his. It may be assumed here as axiomatic that the unit cost of serving each customer will vary somewhat from that for all others, de- pending somewhat on the size of his demand for service, on his distance from service centers, on the times of service relative to the demand of other customers, etc., etc. The bearing of these affecting conditions will appear again later. It is generally mani- festly unfair to compel a public-utility concern to compute a different basic rate for each small individual, or every time a bill has to be rendered. But that is what is sometimes seen, in effect, where a company adopts a multi-part tariff scheme where the change to any customer has different demand, service quantity and customer factors which vary from month to month. Con- cerns adopting such complicated schedules would perhaps com- plain if forced to adopt them by public service commissions. Moreover, with the difficulty of a customer's checking the charges, opportunity might here be seized by employees for petty harassment and discrimination. Common public knowledge of the basis for prices would become difficult and unreliable. Confidence in the existence of an equitable basis of computing charges would di- minish. It is general experience that the business of most utilities may be gathered into a few classes wherein the maximum and minimum costs of unit service (cubic feet of gas or water, kilowatt-hours, local telephone calls, etc.) vary but little from the average. Classes Promote Simplicity. This is fortunate, for simplic- ity in the rate system is usually a greater public benefit than per- fect adherence to wholly logical or completely accurate individual rates. Moreover the ideal individual rates need not seriously differ from the practical class rates if the classifications are well drawn. In very many cases, the natural commercial separations are sufficient. For instance, it has been shown that cost of electricity supply often changes greatly with the size of a cus- tomer's load. Here individual rates become possible for very heavy consumers and .perhaps segregation of the various smaller users between certain load limits, as to 50 kw.-hr. per month, 14 PUBLIC UTILITY RATES 51 to 500 kw.-hr., 501 to 1000 kw.-hr., 1001 to 3000 kw.-hr., etc., sufficient to secure the "approximate fairness" and "substantial justice" mentioned. Such class separation may exist but be indirect and even un- recognized, as by the use of discounts which increase in proportion to the size of the customer's bill, or sliding scales of diminishing prices. Each classification needs to be closely scrutinized by managers and regulators alike to avoid if possible large groups of customers in each size class falling close to the limits with few between for then some may be unduly favored or unjustly burdened. The most desirable adjustment of size-class limits results when cus- tomers are generally scattered between, bunching, if at all, not far from the mid-point. Off-peak Classes. A customer classification which greatly affects cost is according to the time of service, or supply, relative to the maximum daily or seasonal demand on the utility company. This affecting condition is most pronounced in the cases of service rendered rather than storable product supplied. For instance, the capacity of generating machinery to be installed in a central electric station is fixed generally by the maximum demand which exists for a short time only once in one day. Investment charges may then be apportioned more or less according to the demand which the various customers exhibit at the time of maximum plant load. Customers whose maximum demand comes at the time of smallest station output may come into special classes or sub- classes and may justly receive rates which include little or no charge for investment in generating equipment. This evidently has long been recognized by the Massachusetts Board of Gas and Electric Light Commissioners, one of the earliest and most far sighted utility commissions, though its opinions discussing this point do not directly take up investment. Thus in the 1908 petition case of the Public Franchise League relative to the Boston Edison Electric Illuminating Co. (24th Ann. Rep., Jan., 1909) the Board stated: In distinction from the large body of customers just mentioned [de- pendent and non-contract] there is a considerable number, both actual and possible, who may readily supply themselves . . . from some other source. To such customers the value of the service furnished by the company wiH probably depend to a considerable extent on the probable VARIOUS BASES FOR RATES 15 cost of supplying themselves. If the company is to supply them, it is subject to the ordinary rules of business competition it must meet prices established by conditions which it did not create and cannot con- trol, or not do the business. . . . In reaching out for additional business by making concessions from the average rate, it is plain that the only justification for the continuance of such a policy is that this additional business will be for the benefit of the large body of customers who must pay the regular rate. ... In fact, the only means by which the average lighting customer can hope to see the price to him materially reduced is through a greater increase in the volume of business relative to the company's investment. Long use of a customer's installation, especially during parts of the day or year when otherwise a considerable proportion of the company's plant is standing idle, even at very low rates, provided they reasonably exceed proper "running costs" may yield a revenue otherwise not available, which will materially help to dilute the company's general expenses. This has been re-affirmed in various more recent cases. The history of a given utility, the industrial situation and va- rious other local factors necessarily enter any opinion as to the extent to which special classes of customers may participate in investment-charge burdens. Individual Diversity Factors. Participation in investment charges may sometimes be made after a study of the individual diversity factors of various customers or subdivisions of an utility system. This idea has been developed for electric central-station conditions* and can be extended to other fields. The cost of gas and water-supply is much less affected by the time of a customer's demand (for the stored product) than is electricity. "Group Diversity Factor" for such a study has been defined as "the ratio of the sum of the maximum power demands of any system or part of a system to the maximum demand of the whole system or a part under consideration." "Individual Diversity Factor" then becomes "the ratio of the maximum power demand made by any subdivision of a system to the coincident demand made by such subdivision at the hour of the maximum load upon the source of supply." Strict Equity versus General Welfare. It will not do to be dogmatic in saying on what fundamental basis new rates always are or are not to be built up or old ones scrutinized. For instance, / * " Application of Diversity Factor, " H. B. Gear, National Electric Light Assoc., June, 1915. 16 PUBLIC UTILITY RATES it will not do even always to deny that the traffic is to be "charged all that it will stand" if we dissociate from that phrase its sinister intimation of gentle highway robbery. A certain service or product may be very desirable for a given community and very few persons therein may be able to meet the cost that should fall on them. For the sake of having the convenience, some few may be willing and economically able to stand for more than their proper charge based on proportionate cost of service. Then, an "overcharge" to some, and as great as they would consent to, in connection with an "undercharge" (below the proportionate cost of service) to others, might be made to yield an income which would cover expenses and profit and justify the undertaking. The whole community would then be a gainer. Extortion may be guarded against for, with public supervision, it can be seen whether total operating income covers reasonable investment charges and still yields the concern enough for a proper reward or more than enough to attract needed capital. For a specific example illustrating the point fairly well, we may take a telephone exchange in a small community. To a few 'it is evidently a real necessity; to the multitude it could be a great economizer of effort and time, but a luxury and even an extravagance if the charge equaled the cost. By charging those who most needed and most valued the telephone service, all they would stand, the service might be brought within reach of all and the business raised to a size worth the attention of men skilled in the industry. Such a course in this one case perhaps also might be justified as following closely the real value and cost. The worth of tele- phone service increases in proportion to the total number of per- sons which a subscriber may call or be called by. This advantage of a very large list of subscribers is of greatest value to the already heavy user of a limited list like the merchant and of much less value to the average householder, who normally reaches the same few tradesmen and friends. In such a case the real individual cost of some subscribers might be considered to include a part of the book cost of others the cost of having some one to call. A similar condition exists in the postal service today. It is known that the expenses of collecting, assorting, transporting and delivering the several classes of mail matter are not at all evenly distributed. A logical basis of comparing class costs is not in VARIOUS BASES FOR RATES 17 use and some shifting of the burden from letter-rate matter prob- ably would be seen dictated if such a logical basis were operative. At the same time, it is possible that were the newspapers and magazines to bear their full proportion of cost, then their distri- bution would be so restricted that there would be a consequent marked decrease in first-class matter fewer letters being drawn out by advertisements, etc. Moreover, the transmission of in- telligence and the spread of intellectual enjoyment might be so appreciably impaired in rural districts that the best development of the country would be hindered. If that result is expected, the country at large can fairly contribute to prevent it through slightly excessive first-class rates. CHAPTER IV DETAILS OF THE COST-OF-SERVICE STUDY OF RATES; TEST FOR FIXED AND OPERATING CHARGES Test Schedules. A good approach to the study of a con- cern's existing rates or the logical formulation of new ones is to build up independent or tentative schedules based on cost of service for various classes. General Cost of Service. It is necessary first to arrive at some knowledge of all the true annual expenses in giving the serv- ice as a whole (exclusive of return on capitalization, investment or value of property used). This true operating cost, of course, subtracted from the earnings of the service in question should establish the lump sum of net earnings and leads to the computa- tion of the percentage return on value of plant, etc., for the par- ticular service. (Discrepancies in true net earnings from the figures of official reports will often arise even if the proposed schedule of true annual costs is very carefully built up since some items of true cost are often neglected. They may not always be "expense," in that they never have been paid out of cash, but they then represent value lost from the property investment and not compensated for by funds laid aside from earnings.) Preliminary Survey of Profits. If the computed rate of net earnings on value, investment or capitalization, as the case may warrant, is judged to be too low (the basis of opinion as to what constitutes a "fair return" is discussed later), then the conclusion may frequently be drawn that the existing rate schedule is unfair to the utility company at some point. However, before the opin- ion is further crystallized, close detailed scrutiny of the entire organization, equipment and daily activity of the concern may be necessary to see if the deficiency can arise from corporate or per- sonal inefficiency, from plant troubles like excessive leaks or losses, from too many bad accounts, insufficient or undistributed load, poor detail management, etc., etc. 18 COST-OF-SERVICE STUDY OF RATES 19 If the possibility is not disclosed of sufficient improvement to seem apt to raise the reduced profits, then it may be well carefully to look over the existing rate schedules. If at some point they are manifestly far below the rates seen in a number of plants under an approach to similar conditions, then the impression of rates unfair to the company is much strengthened Existence of compensating lower figures of expenses, due to local causes, are to be sought out. If the deficiency really comes from an unfair rate schedule, the conclusion is unescapable that the rates some- where must be advanced. If the trouble is internal rather than external, the plant load must be improved or new economies found. If the overall rate of net earnings is larger than those which are just necessary to attract fresh capital, and in the absence of cause for certain special rewards, discussed later, the common presumption is that the rate schedule somewhere is unreasonably heavy. Sometimes the presumption cannot be sustained, but the circumstance warrants study. The gross earnings of a com- pany, for instance, may include income not at all from the public service, or income from traffic developed by the unusual activity of the officials in fields where a demand for services of the utility concern did not previously exist and where good earnings may be secured with prices not based at all on cost of service. The same close scrutiny of organization, equipment and activity, as noted already, still may well be made, for possibly no condition is more conducive to perpetuation of bad accounts, loose engineering and general inefficiency than the rarity, "easy money." Such a scrutiny may disclose definite sums which can be saved and in justice to the public, these are to be taken from the actual annual costs to arrive at proper figures. True-cost Schedule. The following schedule of a concern's annual service costs (not necessarily annual "expenses" under some managers' understanding of that term) is perhaps useful for examination at this point. These figures are easily found if the utility is keeping its accounts according to prescribed stand- ards of most regulating commissions. 1 Return on value of physical plant and allowed intangible elements.* * This item is grouped here though when it is desired to test the percentage of net earnings on valuation or capitalization, it is to be excluded from the sum of expenses. Moreover, this item is capable of division into bond inter- 20 PUBLIC UTILITY RATES 2 Rentals on leased properties.* 3 Annual allowances to recover for " depreciation" and " obsolescence." 4 Annual appropriation for amortization of investment in intangible property. 5 Taxes or equivalent, fire-, accident- and liability-insurance premiums. 6 Annual appropriations for surplus funds to secure bond interest and dividends in lean years or for extreme contingencies. 7 Salaries of administrative officers and clerks. 8 Expenses of general offices, etc. 9 Engineering department expense. 10 Annual appropriations for hospital subsidies, welfare work, charities, etc. 11 Advertising; new-business getting. 12 Interest on working capital required. 13 Bad accounts, etc. 14 Meter reading, accounting, billing and collecting costs. 15 Labor in service or upon plant. 16 Supplies for service or plant. 18 Repairs distinct from depreciation. 19 Losses between plant and customer. Nothing is allowed for extensions to plant, for this item, in the great majority of cases, means fresh capital. The conditions which warrant reporting some part of the first cost of extensions as annual service costs, are so peculiar and are seen so rarely that their insertion is a special matter to be justified by special evidence to that end. This schedule is not the only arrangement that could be made and re-assignment of items is permissible. Further than already noted, these items are self-explanatory to a considerable extent, although various questions rise as to their determination and bearing; discussions of these points appear later. If there is subtracted from the lumped gross earnings, the cost of service aggregated without Item 1 (and perhaps Item 6), then the remainder may be considered the lump net return. This, divided by the allowed valuation of the property, gives us the per- centage return. It should be here particularly noted that Item 1, "return on value of plant," ought to work out to be such a per- centage on combined bonds and stocks as will attract capital, or est and dividends. Presumably, the bonds will not exceed bare physical prop- erty value, but the stock capitalization may bear no relation to the physical value less bonded and net floating debt. * Rentals need to be studied to see that undue parts of any earnings are not being by-passed as rentals. The rented property ought not to be expected ordinarily to return more than say 10 to 20% net of actual value as local conditions may disclose to be a proper rental change. COST-OF-SERVICE STUDY OF RATES 21 include all additions, above ordinary interest, for the risk of the business, special rewards, etc. The Problem of Apportioning Costs on Customers. Sup- posing, that we have reached the actual figures for true cost of service and income, and know the segregation of expenses accord- ing to such items as hi the foregoing schedule, and have ample infor- mation about customers' load characteristics, then in the majority of cases we can go a long step beyond the lump-sum and per- centage returns, and study the rates which should place on the ultimate consumers, the approximate costs of their respective services. In apportioning expenses among the customers, it is almost obvious that a mere equal division of all expense and profit ac- cording to their number or to their maximum load, or to aggre- gate of service alone may not be fair. At first glance, it may seem almost hopeless to attempt a logical apportionment of the items given. Indeed, the whole task of studying fairness of rates seems stupendous and hopeless in its entirety; but, like most other intricate problems when attacked step by step with engineering methods, it unfolds itself and loses its air of complexity and impenetrability. It has been seen that the expenses fall into two classes (1) "fixed" generally those continuing whether the plant is run- ning or not, and (2) "operating" mostly those which stop when service stops. For a complete analysis, it is well to further split up the first group into- (a) fixed charges which actually do not vary with any fluctuations of business, and (6) customer costs which vary directly with the number of customers and which would disappear entirely with the complete loss of business. A Test for Fixed Charges. For the logical segregation of expense items, a simple test is available and that is to ask such questions as these: "Is this item most concerned with providing physical property?" (If so, it is a true fixed charge.) "Is this closest related to mere maintenance of corporate functions?" (If so, it usually is an operating expense, unless there are peculiar circumstances.) "Is this item dependent on actual daily amount of service furnished or accepted?" (If so, it is clearly a true operating expense.) "Is this expense caused by dealings with customers as individuals?" (Then it is a customer or "semi- fixed" charge.) 22 PUBLIC UTILITY RATES The common and generally acceptable sequel of such tests, as noted later, is to apportion rental, appropriation for obsolescence reserves, taxes and fire insurance, a small part of appropriations for amortization, parts of salaries of administration officers and part of general office expenses, upon the customers according to their proportion of peak-load demands. (On account of the diversity of the individual demands, which usually do not quite coincide with each other, each customer's share or peak load ordinarily is less than his own small peak.) This apportionment is secured more typically in service utilities than in concerns which distribute a product like gas or water from cheap and easy storage. The argument for this test and distribution of fixed-cost items is that the actual equipment needed is fixed by the reserve necessary to meet the experienced coincident demands for service of those customers who cause the peak loads. Taxes, rentals, and allied outlays clearly are fixed by the amount of property needed for the business (the "load"). It perhaps is not so obvious, but it is seen on second thought, that part of the appropriations to surplus and for amortization of intangible purchases, parts of the salaries of administrative officers, and of the general office expense, etc., can be considered necessary to protect the integrity of such physical property (aside from wear), and so are to be borne by those who require equipment held in reserve. Peculiarities of electric-railway service need spe- cial application of this apportionment as noted in Chapter XI. In the case of those utilities handling a product out of storage, the manufacturing or generating equipment may be of small size but working very steadily; then the annual cost of such equip- ment may be assessed in proportion to total product irrespective of peaks, etc. But the storage plant, at first, might seem to be partly fixed by the peak loads or demands. Yet careful thought shows two things; (1) approximately, the total product enters the storage plant for a greater or lesser length of time, (2) the size of storage facilities is more or less proportioned to the total product to be delivered over the period of a short operating cycle and is very little affected by the rate of delivery (a high rate'means a peak demand). So then this class of utilities may often properly assess all items except No. 13 and parts of Nos. 6 and 7, on the basis of total product supplied. Gas and water mains have to be designed to carry peak flow, and so may have a certain part COST-OF-SERVICE STUDY OF HATES 23 of investment considered as reserve property and apportioned according to peak demand. The result of a peak-load apportionment of fixed charges is that one or a few classes of customers may carry nearly all the investment charges since they cause practically all the maximum demand. Local conditions may fix the most desirable solutions in specific cases remembering only that the peak customers get an indirect benefit from the development of off-peak business. Such benefits arise from the purchase of supplies in larger quantities, shorter life of equipment with less liability of heavy obsolescence, quicker installation of improved equipment by a broader distri- bution of depreciation charges, greater chance of reduced rates by reduction of operating expense through apportioning some items, like labor, over more units of service or product, benefits of higher-grade officials, employees and consultants attracted by the concern with the larger business. Apportionment of Taxes. Taxes and the various insurance premiums appear at first to be wholly concerned with the integrity of the property and hence fixed charges to be apportioned to the use of peak load capacity. However, further study shows that taxes (being contributions to the support of organized government with its fire and police protection, monetary system, etc.) may be considered a cost of maintenance of business as well and hence to be sometimes in greater or less part distributed over all service rendered or product supplied. Local conditions may exert a profound influence on the proper apportionment of taxes. Apportionment of Depreciation Expense. Questions of " de- preciation" are perhaps the greatest stumbling blocks in all rate discussions. Moreover, so involved is this subject in a maze of differing definitions that the terms employed, even when at- tempted to be used quite technically, convey different ideas to different persons. Therefore a later section has been devoted to a discussion of these difficult matters, and passing mention is made here only of the apportionment of current expense burdens commonly called "depreciation." Modern practice is to pay for the annual deterioration or pro- vide retirement-liability insurance by definite contributions from the rates intended to repay the actual cost of each item of property by the time it has to be retired. Theoretically, it would be expected that the annual deterio- 24 PUBLIC UTILITY RATES ration due alone to the year's unrepairable wear and tear (inde- pendent of any impairment of value due ttf antiquation through industrial advance) should have its repayment apportioned like fuel and operating labor since it increases with the hours of use. Theoretically, compensation for obsoletion and antiquation, when there is any, should be apportioned like interest for obsole- tion is a liability of change which is independent of the hours of service, heavy loads, etc., being only an expected impairment of the value of physical property. Where wear-deterioration is the controlling phenomenon in limiting the life of apparatus, theory justifies apportioning the annual repayment burden entirely along with the operating ex- penses. Where, on the other hand, obsoletion and antiquation control the length of useful life, the entire annual insurance pay- ment against these contingencies may enter the fixed charges. In many practical situations, as in the case of product-storing utilities, it makes little or no difference which way the apportion- ment is regarded since both operating and fixed charges are levied alike on quantity units. As a matter of commercial ex- pediency in some cases of service-type utilities where either wear- deterioration or obsoletion may predominate, it may be advisable to distribute the annual burdens on the various customers accord- ing to their respective responsibility for the deterioration and the obsoletion. This division can be made fairly logical; but so far it has been more often arbitrary perhaps through disregard of the principles underlying payment for depreciation. Depreciation Expense as an Operating Cost. In the actual practice of rate making, the assumptions as to expectation of equipment life (considering either deterioration or obsoletion) and the various approximations necessary (all of which crudities affect the annual "depreciation" burden) have given rise to the practice of treating all such expense burdens wholly as an operating ex- pense so far as apportionment goes. The lumping of all sorts of retirement contributions under the single heading of " depreci- ation expense" seems to have arisen through (1) railroad and similar utility management (street railways and telephone systems) with rates fixed more by external circumstances than the actual cost of the individual service or through (2) the accounting of product-selling utilities where peak loads have been so negligible that distinctions between fixed and operating expenses did not COST-OF-SERVICE STUDY OF RATES 25 affect the unit cost of the single class of product supplied. To illustrate: the Interstate Commerce Commission states in its accounting rules ("Classification of Operating Revenues and Operating Expenses of Steam Roads," July 1, 1914, p. 31): 2. Maintenance Expenses. The accounts provided for maintenance of fixed improvements and of equipment are designed to show the cost of repairs and also the loss through depreciation of the property used in operations, including all such expenses resulting from ordinary wear and tear of service, exposure to the elements, inadequacy, obsolescence or other depreciation, or from accident, fire, flood or other casualty. Elsewhere the Commission has stated ("Uniform System of Ac- counts for Telephone Companies," Jan. 1, 1913, p. 67): By expense of depreciation is meant (a) the losses suffered through the current lessening in value of tangible property from wear and tear (not covered by current repairs); (6) obsolescence or inadequacy resulting from age, physical change, or supercession by reason of new inventions and discoveries, changes in popular demand, or public requirements; and (c) losses suffered through destruction of property by extraordinary casualties. Depreciation Expense as a Fixed Charge. While it is seen to be common practice to regard depreciation levies on rates as an operating charge, yet there are numerous instances where util- ity officials regard it as a fixed or overhead charge. There is no reason why, in the formulation of adequate rates, this or the other course should not be followed if circumstances point to that plan as logical. Nor has there been any good reason set forth why a ratemaker may not divide his depreciation expense into some wear-deterioration and obsoletion payments which he thinks approximates the risks, and apportion them accordingly among his customers. When such a refinement is desirable, an official of course expects that his course will have to stand the future scrutiny of any regulating commission in authority as to the general fairness and reasonableness of the results. Apportionment of Amortization. Frequently sums for "amor- tization" are mentioned as a burden on rates distinct from depre- ciation allowances. Usually these are intended for the retirement of capital invested in franchises, development expenditures, engineering work not directly chargeable to specific equipment, early deficits which may have been capitalized, etc. Amorti- zation charges are most necessary in the case of an utility with a 26 PUBLIC UTILITY RATES limited-term franchise, where there is no certainty of selling out and receiving back the entire investment made. There are many who hold that all utilities should try thus to reduce their investment irrespective of their franchise term so that all the present-day customers may pay all the possible cost of the present service, and pass along for another generation a burden of liabilities only equal to the ready-sale value of the property units. This is an ideal not often easily attainable though worth striving for; the concern which can follow such a course will be on a more secure basis for instance, free from undermining competition. Not every utility can burden its rates to this extent; not every official believes it is a worthy ideal. The best argument against it is based on the fact that the overhead costs of today are a con- tinually decreasing percentage of the total value of a growing and developing utility. That is true, of course, but each grand expan- sion brings in its additional overhead items and these pile up a possible weakness for the time when the utility must reach equilib- rium. Something of this sort, it is commonly believed, has brought about the burdensome capitalization of British railways, on which no appreciable amortization of abandoned investment and development expenses has been made. It might seem at first, applying the test for apportionment of annual amortization sums, that they were simple charges on in- vestment and properly laid on demand or capacity units. Further consideration shows that it is desirable that all the customers should carry some share of this burden (except perhaps some de- sirable competitive business which cannot be held if so burdened) and this points to the' inclusion of annual amortization in with operating expenses apportioned among the customers accord- ing to quantity of service or product supplied. If the annual amortization sums which can be secured are not too trifling they may be subdivided between quantity-unit and demand-unit charges. The subdivision ratio then would follow the relative proportions of the general organization and develop- ment investment to the incidental costs of physical plant un- assigned engineering, legal work for rights of way, etc. Apportionment of General Expense. The time and thought of administrative officers and general clerks by study will be found to be given largely to the business as a whole at times or in certain cases but also partly to providing capital and equip- COST-OF-SERVICE STUDY OF RATES 27 ment, and to such an extent in cost resembles taxes and insurance. The numerical division is not difficult to approximate. Then it is logical to apportion the same proportion of the salaries of these officers and clerks (1) as a per unit charge on all service rendered or product delivered and (2) on peak-load demand as a capacity-unit charge. Distribution of rent, lighting, water, heat, and other such office services, of general office supplies and miscellaneous ex- penses may be similarly made, if it is worth while to have such refinement. The expenses for maintenance of an engineering department are evidently partly connected with providing physical property and partly with actual operation. The head of the department should be able to make a fair estimate of the proportion applicable to each for division as noted. Annual appropriations for hospitals, welfare work, charities, etc., are seen to be intimately associated with operating labor and virtually amount to an increase in labor cost. Therefore, they logically may be charged like labor, fuel, etc. However, if con- siderable benefits come to the employees in the administrative, engineering, and public-bureau departments, then a certain part of the welfare-work cost (generally according to numbers rather than salaries) may be allocated as per-capacity-unit charges according to peak-load demands and another part according to actual number of customers. Advertising, bad accounts, and interest on working capital are seen to be associated with service rendered or product supplied more than anything else, and hence are like operating costs. Distribution of Metering Cost. Meter reading and account- ing, billing, and collecting costs obviously are about as heavy for a small customer as a larger one and for an off-peak customer as a peak-load one. These then are expenses to be distributed on customers according to number. Labor. There can be usually little question about the dis- tribution of labor (as part of service or upon plant repairs), operating supplies like fuel, etc., repair and maintenance materials, etc., all as unit charges on quantity of service or product. Service Losses. There seems to be no better way, without undue complication, to apportion the losses between plant and customer than according to quantity of service given or product 28 PUBLIC UTILITY RATES delivered. This item covers the energy loss of electrical transmis- sion lines, the water and gas leakage from mains, etc. Some utilities have no such losses. Among such are telephone and tele- graph services; in transportation utilities there may be a loss through uncollected fares but there is no way of accurately ascer- taining the amounts so lost and service data is based on fares collected. In gas, water and electricity distribution, the output of a station is metered and the difference between this figure and the sum of the customers' meters gives easily and fairly accurately the losses. Even though existing, the losses may not enter the analysis of costs and rates. For instance, if the total costs are figured for distribution on service actually rendered, or product actually supplied to the customers, and not on units of main-plant output, then these figures cover the cost of losses. However, there are many cases arising when it is desirable to know production costs and cost of losses separately, even if only as a measure of proper operation of the utility. In that case internally used service may require separation. Limitations of Test for Apportionment. Such a varied ap- portionment of expenses is, of course, to be carried out more or less completely as needed information can be secured. The number of customers and the total number of units of service rendered or product supplied should be known. But the ag- gregate of maximum demands is very seldom known with any approach to exactitude; where no approximate idea can be had, or no reasonable assumptions are possible, of the individual con- tributions to the peak load, then the charges laid against demand or capacity must be apportioned like an operating charge on serv- ice units delivered. Such contingencies however will be rare. Indeed, the maximum-demand apportionment of part of the expenses is of great effect on rates only in the case of service works. In the case of gas works as already outlined, much of the investment costs can be equitably borne directly by the total product supplied. Usually this is true also of waterworks un- less there is practically no long-storage capacity so that the size of the pumping installation is fixed by the maximum demand rather than daily consumption, and unless much larger pipes are required for maximum than average flow. Where some of the expense items can be readily apportioned COST-OF-SERVICE STUDY OF RATES 29 but others cannot, it is common and reasonable practice to divide the sum of unapportioned items according to the aggregate assign- ments already made. Details of this scheme are shown in the chapters on problems of the specific utilities. The general rules laid down for distribution of cost items have been so stated after debates in which arguments for or against the rules and sub-rules or exceptions have been weighed. How- ever, the mere fact that most of these questions have two sides is enough to show that specific cases may arise which may decid- edly alter the arguments for the methods given. In these ex- ceptional cases the local necessities may prevent application of generalized ideas. But it is felt that such strange cases will be rare and that the effect of peculiar items on rates so minor that sufficient accuracy will be secured by any intelligent management which consistently and conscientiously strives to be fair and open minded and seeks competent advice. Revised Cost Schedule. Summarizing the results of such a scrutiny of expense apportionment, the following rearrangement of the former list of utility costs may be built up. I. FIXED CHARGES. (To be allocated according to partici- pation in peak-load demands, wholly or largely, except in special circumstances or as noted in chapters on problems of specific utilities.) 1 - Return on value of plant and intangibles. 2 Rentals on leased property. 3a Annual allowance for retirements or replacements. (In part only, and in proportion to obsolescence factor or deterioration from weather. See pages 24 and 111.) 4 Taxes. 5 Fire insurance premiums. 6a Salaries of administration officers and clerks. (In small part only.) 7a General office expenses. (In small part only.) 8a Engineering department expense. (In part only.) 9a Cost of repairs due to weathering. 10 Appropriations to surplus reserve to secure bond interest and dividends in lean years or for contingencies. II. OPERATING CHARGES. (To be allocated according to quantity of service rendered or product manufactured or delivered.) 3a Annual allowance for retirements or replacements. (In 30 PUBLIC UTILITY RATES part only, and in proportion to wear-deterioration factor. See pages 24 and 111.) 6b Salaries of administration officers and clerks (in part). 7b General office expenses. (In part.) 8b Engineering-department expense. (In part.) 11 Operating labor. 12 Operating supplies. 9b Cost of repairs and maintenance. (Apart from replace- ments and recovery from weathering.) 13 Appropriation for amortization of intangible values. (In large part.) 14 Interest on working capital. (Funds on hand.) 15 Cost of leaks, losses, etc. 16 Bad accounts. 17 Accident liability insurance costs or equivalent. 18 Appropriations for hospital subsidies, welfare work, charities, etc. 19 Advertising. III. CUSTOMER CHARGES. (To be equally allocated on in- dividual customers.) 20 Cost of meter reading or equivalent. 21 Accounting, billing and collecting. Gc Salaries of administrative officers and clerks (in small part only). 7c General office expenses (in small part only) . Simplicity in " Rates. It is seen that the simplicity of a given rate schedule primarily depends on the simplicity of the business in question. If the customers' characteristics are all much alike then there is but one form necessary for the charge and this very frequently allows a flat rate. As the customers' demands become dissimilar we can see that a two-factor basis becomes more logical, while for all sorts of complications the full three-factor base seems to place on each class the burdens of *its peculiar service. It has been argued that this two- or three-part basis, directly visible in the published schedule of an utility, is the most equitable that can be devised. In theory surely this is so, but practically the complexity of such a schedule, the uncertainty in the approx- imations of each person's real participation in peak loads, the im- possibility of the ordinary customer's checking his bills, etc., do COST-OF-SERVICE STUDY OF RATES 31 not promote public confidence and pleasant relations. Therefore the two and three-factor basis will often better form the founda- tion of rates to be expressed in more direct terms. Customer Groups. Simple tariffs are easily constructed if the customers can be arranged in groups wherein the individual re- quirements are not far from the average. Then the fixed charges on the peak-load capacity required for all the members of a group, plus the operating costs of furnishing the aggregate of service or product to the class, plus the costs of dealing with the several individuals of the group, gives the total annual cost of furnishing the group. If then this figure be divided by the total quantity of service or product for the group during a year, we have a unit price which it is generally fair to impose on all the members of the group. This scheme is largely followed, and with widespread satisfac- tion. The customers understand what they have to pay and their check on bills is obvious. Of course, if the peculiarities of the classes change materially, then the old rates may be unfair either to the utility company or to the customer to which depends on circumstances. Distribution of Fixed Charges. It has been noted that fixed charges were located "largely in accordance with participa- tion in peak-load demands." Usually for a group of small customers this participation may be found by a simple approx- imation for each class, being based on group maximum demand, actual maximum peak delivery of the utility, and the aggregate of the group demands, thus : T. , Actual Peak Group Max. X T ^ TT Aggreg. Group Max s. This averages the diversity of demand among the individuals inside a class but for small services it is simple, practical and reasonable. Where there are large customers each one may be handled like a class in the computation, basing the approximate participation in fixed charges then on group maximum demands, large individ- ual maximum demands, and actual peaks of delivery, thus : , ,. , , Actual Peak Group or Indiv. Max. X i 7; T^F r T ' Aggreg. Group and Indiv. Max s. A still further refinement in the approximation is possible by 32 PUBLIC UTILITY RATES assessing directly on each class and each large individual the whole fixed charges on equipment allotted to each of them solely and dividing charges on further equipment, used commonly by two or more of the groups or individuals, according to: Indiv. or Group Max. X Actual Peak on Joint Equipment Sum of Related Indiv. or Group Max's. and apportioning charges on remaining plant serving all the cus- tomers (usually manufacturing or storage equipment) as before by: Indiv. or Group Max. X Actual Peak Aggreg. Indiv. and Group Max's. Importance of Studying Individual Diversity. Individual diversity of demands becomes of great importance in reducing to a minimum the investment in plant required between an utili- ty's manufacturing plant, or its equivalent, and a customer. It is obvious that if the maximum of measured coincident demands of the members of a group is only | the sum of the individual maximum demands then the investment in joint-service distribu- tion apparatus need have only f the maximum output capacity which would have been required had not the individual diversity existed. This effect has been studied most with central-station electric service. Ends, Not Means, Sought. If study of annual costs shows an increasing figure for each successive year, then the fairest ad- justment for practical conditions may be above unit figures ap- plying at the moment, and vice versa. Frequent scrutiny -of costs, rates, and profits is desirable. But most utility managers will argue that the benefit of trifling changes is less than the ex- pense and trouble involved, so that frequent and inconsequential revisions are not worth while usually. No one of various ways of expressing the resulting tariffs is to be broadly recommended for all sorts of utilities. One town water- works department may charge $5 per capita per year; another similarly situated may charge $0.35 per 1000 gallons metered; a third may assess a user $1.50 per outlet per year. All these may amount to the same thing in the end. Some will prefer to give a unit price for all comers with changing discounts for different amounts of service or time of demands. The chances are that all flat rates have been empirically established and tinkered up COST-OF-SERVICE STUDY OF RATES 33 from time to time to yield sufficient gross income without the responsible officials knowing what is the relation between rates and actual cost of the various customers. Very often diverse statements of rates will yield substantially the same results under similar conditions, and in such cases we may regard the rates as equivalent and cease striving for mere methods of ex- pression so long as intent to deal justly with all is seen. Minimum Charges to Cover Readiness. Practically all util- ities have some form of minimum charge below which a cus- tomer's bill never descends, whatever the quantity of service rendered or product supplied. This enables them with certainty to secure the annual fixed and customer charges which have been computed as fair. In the greater number of utility com- panies the practice seems to be to use a straight monthly charge; water companies, however, very often adjust their minimums to an annual figure. An occasional electric company does the same witness the Boston Edison Electric Illuminating Co. At least one company (Public Service Electric Co., Newark, N. J.) gives a concession in that it waives the minimum charge on application and renders no bill for periods of one month or more when premises are closed or current cut off. Where no annual adjustment is made it is evident that an inequitable overcharge may easily be made since the rates are based on annual figures and since the maximum demand is an annual peak. A customer often may fairly be allowed to ease up the heavy consumption in one period of the year by the light con- sumption of another provided always that the proper annual demand, customer and quantity costs are secured by the utility. The New Jersey Commission, however, has ruled * that simple monthly charges are logical as well as convenient, basing its contention on the fact that salaries are paid weekly or monthly, depreciation written up monthly, and interest met semi-annu- ally apparently overlooking the more fundamental facts that revenue to meet obligations is collected monthly or quarterly, that working capital is a part of rate-basis worth, and that the annual readjustment of minimum charges is a correction of overcharges beyond the actual proper annual figure based on the cost-of-service idea. * Re Minimum Monthly Charges for Lighting Service by Electric Companies ; Informal Proceedings, January, 1912. 34 PUBLIC UTILITY RATES Study of Hypothetical Case. For a general illustration of the development of simple unit rates based on cost of service we may arrange a hypothetical case of the most difficult sort that of a service-furnishing utility as distinguished from the product- supplying type. Assume that it has five classes of customers; (1) large users (10,000 to 20,000 quantity units) whose maximum demand falls in hours of peak load, (2) small users (500 to 1700 units) whose maximum demand falls in the same hours of peak load, (3) large users (above 10,000 units) none of whose demand comes at hours of peak load, (4) small users with similar off- peak load, (5) miscellaneous users with maximum demands in hours of heavy load but taking service only in summer. Assume further that the utility has a peak-load output capacity of 35,000 units (gallons per hour, cubic feet per minute, kilowatts, etc.); that the total of all services is expressed as 30,000,000 quantity units per year (gallons, cubic feet, kilowatt-hours, etc.) ; that the fixed charge, including 8% on the fair value of plant, etc., is $340,000, while the general operating and individual customer charges reach respectively $295,000 and $67,000. Assume that the peak load comes in winter with Group 1 causing 60% of the peak and Group 2, 40%. Let the annual aggregate quantity output be taken up 55% by Group 1, 33% by Group 2, 7% by Group 3, 3% by Group 4, and 2% by Group 5. The number of customers is: Group 1, 1500; Group 2, 13,000; Group 3, 205; Group 4, 120; GroupS, 55. Then we can charge each and every consumer per annum , 07n / $340,000\ , $9.70 I = ' n ) per peak-load capacity unit (maximum de- \ oo,UUU / mand divided by individual diversity factor) plus $0.0098 / $295,000 \ ., , I = on nnn QAA ) P er um * * service, plus $4.50 per customer per year. But the preparation of bills might be rather too burden- some and the whole arrangement of rates too blind to most cus- tomers. Easy, fair and understandable class rates can be worked out as follows: Group 1 carries $204,000 ( = $340,000 X 0.60) of the annual fixed charges, plus $162,300 ( = $295,000 X 0.55) of the operat- ing costs, plus $6750 ( =$67,000 X TJ ^j of the special customer \ 14,ooU/ COST-OF-SERVICE STUDY OF RATES 35 costs; the total is $373,050 and, divided by the total quantity of service furnished the group, gives a unit rate of $0.0230. Group 2 similarly carries $136,000 in fixed charges, $97,350 in operating costs, and $58,500 in customer costs, making a total of $291,850 and a unit figure of $0.0295. Group 3 carries no part of fixed charges, not causing any of the peak load, but it has a burden of $20,650 operating costs and $922 customer charges, a total of $21,572 and a unit price of $0.0103. Group 4 has no fixed charges to bear either, but carries $8850 of the operating burden and $540 of the customer costs, making $9390 total and $0.0104 unit price. Group 5 also carries no fixed charges, but has $5900 plus $248 and a unit price figure of $0.0102. The hypothetical utility company might then fairly draw up the following preliminary rate schedule and claim it to be sub- stantially just and reasonable; or new classifications might be sought and the process completed again. (1) For long-hour peak-load customers whose annual consump- tion equals or exceeds 10,000 quantity units, 2.30c. per unit. (2) For short-hour peak-load customers whose annual con- sumption is under 10,000 units, 3.00c. per unit. (3) For off-peak customers, l.lOc. per unit. To avoid the abrupt change in rate to peak-load customers some sliding scale scheme may be substituted for sections*! and 2. For instance: For peak-load customers S.OOc. per unit for the first 1000 units, plus 2.20c. per unit for the next 9000 units, plus 1.50c. per unit for all additional above 10,000 units or some equivalent advisable figure. A minimum charge would probably be made also to cover the customer costs, the average fixed costs, and the average quantity found to be supplied to the minimum-charge customers; this would be, for instance, for the short-hour peak-load customer $4.50 per annum plus say $0.50 the operating cost of 50 odd quantity units assumed to be taken here by the average minimum- charge customer plus $7 fixed charge, amounting to $12. It should be borne in mind that the foregoing case merely illus- trates a method [of studying rates and does not show an example of a single utility to which the quoted dollars and cents apply. It does not even pretend to show a widely applicable form of schedule, or give the only approach to the problem. CHAPTER V FAIR VALUE OF UTILITY PROPERTY What is Fair Value. It has become common in dealing with public-service rates to say that they should yield a "reasonable return" on a "fair value." Such words sound innocent enough and indeed they are widely accepted as denning a condition de- sirable to secure. But arguments continue over the ways to attain this end largely because one person has one idea of what is meant by "fair value" and "reasonable return" while to an- other the words do not convey the same ideas. If limitations of language could be obviated, each would better comprehend what the other was striving, for and many of the apparent differences might disappear through harmonizing and adjustment. Here, unless made obviously otherwise, "fair value" will be taken to mean a property worth, expressed in dollars and cents, on which the utility company, for justice and equity to the com- pany and to the public, may earn a greater or less net percentage return free and clear Of all further deductions. Sentimental value is discarded. This is a description of the results of an evaluation not a statement of how a desirable end may be reached. Ideas of the proper road to travel are many, as a few paragraphs will show. Market Value as a Basis. In considering the many valua- tions of utility property for establishing rate-making bases that are now on record, it is seen that there are three general theories upon which they are founded. The first, and to many the most obvious, scheme (for years used in work prior to purchase and refinancing of a concern and therefore naturally transferred), seems to be to set up a " market value," a price which a willing purchaser would give a willing seller. In many cases of purchase, market value has been no more than " earning value " capital- ized net earnings; the weakness of this as a basis for rates is its circular reasoning, for this value depends on rates and rates in turn on value. Utility properties are not commodities that are traded so frequently as to establish a true market value and 36 FAIR VALUE OF UTILITY PROPERTY 37 appraisers, therefore, in trying to set up what they call such a basis, build up a hypothetical figure based on cost to reproduce, on notable appreciation of parts and estimated or revealed de- preciation, effect of mistakes, and the expense of building up the organization and business. Investment as a Basis. A second plan upon which rate- making valuation has been based is the investment or sacrifice theory. This would give compensation for all that the investor has given up, first and last, legitimately and in good faith, less anything equivalent to a return of investment. The investor is penalized for any obvious lack of common prudence, ordinary foresight and good -judgment of his agents, the utility officials, but not for unavoidable mistakes or unforeseen contingencies. Equivalent Substitute Basis. The third plan is the equiva- lent-plant theory which would give the old utility a value equal to what it would cost to produce a new going concern with the most economical plant equipment available, and an organiza- tion and business cheaply built up by having available the latest business experience and practice. What Basis To Use. The various decisions which can be generalized as noted in the immediately preceding paragraphs, it must be noted, do not often completely or exclusively embody a single theory, or is it essentialthat they should when slavish adherence to a single theory is very apt to result in absurdity and inequity. It appears as though some persons of pro-corporation affilia- tions employ whichever theory seems bound to result in the highest value, while others of anti-corporation leanings act as though the aim should be to produce the minimum value. Need- less to say, the men of greatest influence exhibit no bias in either direction but apparently seek to employ such means as in the specific cases farthest push the attainment of fair treatment for all. Frequently, in utility-rate controversies a "market value" is pitted against a "substitute-plant value" as being respectively what a willing seller would take and what a willing purchaser would give. The result in such cases is usually a compromise, in effect if not in aim, and this compromise figure is very apt to lie close to that determined by actual or probable investment. Present tendency seems to be to give more and more weight to figures of investment and investors' sacrifice in determining 38 PUBLIC UTILITY RATES rate-basis worth. With the general imposition of proper account- ing systems figures of investments and sacrifice can be more com- pletely secured than in the past so that a better basis for value by investment can be established. Where regulation has been longest established, there investment has greatest weight; it is not unreasonable to expect that in the course of time the entire country may accept the theory. To cite a specific instance of the acceptance of the investment basis, the Massachusetts Public Service Commission recently declared in the Middlesex & Boston Street Railway case (No. 553; Oct. 1914): It is argued by some of the counsel that the present value of the prop- erty used by the petitioner is the only amount upon which it can claim to earn a return. ... It is sufficient here to observe that few words having a fundamental importance in dealing with questions of law and finance have been found more difficult of accurate and generally accepted definition. . . . In this fairly consistent adherence to sound principle our Massachu- setts public utility code is in striking contrast with the loose and hap- hazard legislation as to capitalization in many other states, which has recently resulted in compelling their regulating commissions to resort to reproduction cost as perhaps the least unsafe basis for determining a fair rate. Accordingly, we rule that under Massachusetts law capital honestly and prudently invested must, under normal conditions, be taken as the controlling factor in fixing the basis for computing fair and reasonable rates; that if there is mismanagement causing loss, such loss must be charged against the stockholders legally responsible for the mismanage- ment; that reproduction cost either with or without depreciation, while it may be considered, is not, under our law, to be taken as the determin- ing basis for reckoning rates. It should be noted that the Massachusetts Commissions have existed, under one title or another, many years and that this policy may give equitable results under continuous and long- standing regulation when it might not apply fairly to previously unregulated properties. Investment as a Datum. In the absence of all the historical facts to establish investment figures, it may well be the object of an evaluation of the utility property to establish some figure as what the actual legitimate investment of the moment reasonably might be. Legitimate investment may often be a datum below which for common justice the actual agreed worth ought not to drop unless there is some way of showing that original capital FAIR VALUE OF UTILITY PROPERTY 39 probably has been returned to the investor or sacrificed by a lax management through neglect to provide for depreciation and in making renewals of worn-out plant out of new capital. What the agreed worth may be, above such a general minimum, may involve the effect of appreciation in market value of property like land (an increment to deprive a concern of which without com- pensation the courts have held, but may not always hold for quasi-public concerns, is confiscatory and unconstitutional). This valuation figure must be carefully determined and based on good evidence to carry weight especially in court. The highest courts repeatedly have thrown out parts of appraisals that were mere conjecture. For instance, all these several points are illustrated by the decision of the U. S. Supreme Court in the Minnesota Rate Cases (230 U. S. 352; June 1913). Two para- graphs are as follows: It is clear that in ascertaining the present value we are not limited to the consideration of the amount of the actual investment. If that has been reckless or improvident, losses may be sustained which the com- munity does not underwrite. As the company may not be protected in its actual investment, if the value of its property be plainly less, so the making of a just return for the use of the property involves the recog- nition of its fair value if it be more than its cost. The property is held in private ownership and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law. Assuming that the company is entitled to a reasonable share in the general prosperity of the communities which it serves, and thus to at- tribute to its property an increase in value, still the increase so allowed, apart from any improvements it may make, cannot properly extend be- yond the fair average of the normal market of land in the vicinity having a similar character. Otherwise we enter the realm of mere conjecture. Court Decisions on Fair Value. The courts have laid down some general requirements for determining "fair value." The most quoted is the opinion of the U. S. Supreme Court in the now famous case of Smyth v. Ames (169 U. S. 466). The original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with original cost of construction, the probable earning capacity of the property under the particular rates prescribed by statute and the sum required to meet operating expenses, are all matters for consideration and are to be given such weight as may be just and right in each case. 40 PUBLIC UTILITY RATES It must be remembered that this was a broad outline made be- fore many people had carefully considered these problems and an evident effort was made to warn appraisers of what they must examine in general to use or to discard, depending on purpose, etc. Court Decisions not Yokes and Fetters. So far in the history of this country, the highest court benches have been filled by the best men of learning, ideals and judgment which the country has developed and, while no one man can be infallible, yet in the ag- gregate their opinions command respect. Decisions of the highest federal courts then are usually to be taken not as yokes and fetters under which we must necessarily labor but as rules of conduct by which justice is to be promoted, by which political (economic) and industrial pitfalls are to be avoided and by which the will of the people is made clear. If the decisions seem wrong to the engi- neering view of economics, they are to be persistently studied to see if the conflicting ideas are not reconcilable. Engineers, how- ever, have a duty in seeking recognition for their ideas. There is perhaps a widespread impression that high-court civil- action decisions are necessarily based only on hard and fast statutes and difficultly appreciated pyramids of blind precedent. But that is not the actual case they are in general rather the official interpretations not only of legislative will and common law but of inexorable economic principles, and they aim to apply common ideas of simple justice and equity. Court Errors. However, in spite of the ability and intent of the learned judges, there are cases where engineering knowledge and experience show fallacies; for instance, the point in the de- cision of the U. S. Supreme Court in the N. Y. Consolidated Gas Case where the court held that cast-iron gas mains in New York City would not withstand the equivalent of 1\ in. water-head pressure without strengthening; again in the Minnesota Rate Case where Justice Hughes writes that railroad land must be valued at market value since the roads have the power of eminent domain to take land at market value which is contrary to com- mon experience in condemnation results. But such decisions probably come about through some inadequacy in each case in preparation or presentation of matters in which the judges are not as versed as in law and economics, and it is unsafe to generalize on one or a few selected decisions, which are apt to be suspended FAIR VALUE OF UTILITY PROPERTY 41 or reversed in apparent principle as soon as the subjects are pre- sented in a better way in another case. False Respect for Precedent. There are people who hold as sacred and infallible principle any finding frequently affirmed in any court like those, for instance, bearing on the idea which holds that all "unearned increments" of property must fully re- dound to the benefit of the owner, or on one which affirms that annual appreciation of property must not enter the accounts in the same way as obsolescence and amortization items, or one which maintains that public-utility franchises, having the at- tributes of property, must necessarily enter fair value. The view that courts are tied to precedent and cannot strike out into fresh thought is not supported by law reports, and it seems to deny the possibility of advance in economic ideas, political principles and legal processes along open paths toward industrial and social democracy. Other Values than " Rate-basis Worth." Other phases of "value" in public-utility cases, besides basis of earnings, will not be dealt with at length here. It is necessary to note, however, that the restricted meaning given to "fair value" before makes it quite different from mere "earning value" (or capitalized net returns) which profoundly affects "market value" of stocks. It is also distinct from, because usually more inclusive than, "physi- cal value" i.e., the "cost to replace new" or the "reproduction cost less depreciation." Nor should the restricted meaning of "fair value" here employed be held synonymous with such un- accepted concepts as "service value" which has frequently de- noted original total cost decreased in proportion to decreased ability to give the original service or original efficiency of oper- ation. Further, while fair value, as defined, is parallel to "going- concern value" in many respects, it is not necessarily the same thing. Fair value will usually contain a "going-concern" ele- ment since there has been considerable expense in welding equip- ment and organization together for effective, satisfactory and profitable activity. But "going-concern value," as generally meant, is a price which may be secured for an adjusted physical plant run in connection with a smooth-working organization, internal good will and external business satisfaction; it arose in sale and condemnation cases and it belongs there. 42 PUBLIC UTILITY RATEg Some of these factors should be left out of account in rate making for some of the momentary sale value of a producing con- cern, even of a regulated monopoly, is due to a constant expense in keeping the internal organization " oiled," the product or service advertised, the customers satisfied, etc. Such costs are met from earnings and arise year after year. If the concern is to sell out they contribute to the price which a willing purchaser would pay; if rate making is under consideration any such sale value should not be considered when it arose first from regularly allowed development expense and has been maintained as a burden on earnings. Such value is like centrifugal force, continued action is required for its perpetuation and the transferable value of past action is due to momentum; the impropriety of entering it in rate basis depends on its arising out of the service and rates. Valuation for Various Purposes. The determination of a worth on which the company may earn some reasonable net re- turn is valuation for rate-fixing purposes. But this is not the only valuation that may be made of the same property. Even though the several valuations follow parallel paths, include some identical factors and are under equally wise and experienced legal and engineering advice, yet they may be distinct. There can be one valuation preliminary to a sale and transfer, one as an aid in fixing proper capitalization for reorganization, another to find a basis for the taxes which it is proper for the concern to pay, yet another to give some new accounting plan a more secure foundation based on the actual condition of an utility. Unless specifically stated or otherwise obvious, " valuation " used hereafter will mean " valuation for rate making" the finding of rate-basis worth. There are economists who hold that there can be no difference in the results of valuation for different ends. They maintain that for taxation, for sale or condemnation, and for fixing finan- cial return there can be but one " value " that of a sort of " con- stitutional property" which will stand in court. While true in some cases perhaps, this does not always seem equitable and just to either corporation or public, as will appear as the principles and practice of valuation are discussed. What many undoubtedly mean is that there can be but one result of a general inventory and appraisal. FAIR VALUE OF UTILITY PROPERTY 43 Take, for instance, one phase of the very large and involved question of whether full original investment or some diminished figure is to be the basis of rates. In cases of sale it is obvious that most purchasers of a physical property will pay only a depre- ciated value (plus appreciation) for they assume the responsibility for approaching renewals; in rate making this burden on the owner may sometimes represent an investment on which a re- turn may be required to be earned if it has continued unreturned or unsquandered while depreciation has been going on. As a further instance: in valuation for taxation the several states' requirements vary greatly. There is supposedly some attempt to make a corporation contribute its just proportion of the expenses of organized government with its police and fire protection, stability of business conditions, etc. So far as the protection of mere physical property goes, the corporation of course should pay according to the same scheme as the indi- vidual citizens, and that is usually a certain annual percentage on "quick-sale value" which may vary in different localities say from 40 to 80% of actual legitimate investment. All the concerns "property" and business is protected by government and hence subject to taxation. But not all the "property" is "used and useful in service" some valuable franchises for instance and some may not enter the rate basis. Other tax burdens may be reasonable under special circumstances as where presence of the utility on the highways brings added burdens to the municipality, but those are not pertinent to this discussion. This is sufficient to show, however, that a valuation (a "basis" it might be better to say) for taxation is for radically different ends from that of rate making and may be fairly attained through radically differ- ent theories of procedure. Value of Favorable Contracts. Contracts to supply special service at an attractive figure have been capitalized for transfer of property, since a bidder for the property would raise the sum of his bid as far as he could and still reap a little return on such favored business. But to include this in the basis of rates is obviously unfair through multiplication of profits. Such con- tracts are property but not "used and useful" in the public service. The question is thus disposed of by the New York Public Service Commission, First District, in the Kings County Lighting Case (No. 1273, Oct. 20, 1911): 44 PUBLIC UTILITY RATES When computing the capitalized value [of a favorable street-lighting contract] from the annual amount, he [company's expert witness] used a basis of 4^%. But when considering the fair rate of return on such capital value he used 10%. The fallacy of such a method is evident. Assume an annual profit of $90,000 to be a fair return. Capitalized upon a 4^% basis the value of such a perpetual annuity would be $2,000,000. But 10% of this would be $200,000. The more the city pays the more the consumer must pay. If there is any relationship between these two factors, it is that the more the city pays, the less the consumer should pay. The argument of the company proves too much for if it is cor- rect, it could be argued that every contract should be similarly treated. All are property and presumably all are profitable. Those that are could be capitalized if this one may and the more profitable they are, the higher must the rates to others be placed. Conversely if any one should not be profitable, the capitalized loss should be subtracted from the fair value of the other property and the rates lowered accordingly. Worth as Disclosed by Accounts. For aid in determining continuing investment in physical equipment, the accounts of a company should be thrown open. They will be invaluable if they have been properly kept in ways now approved and if there are sufficient memoranda on the conduct of replacement work, repairs, etc. However, the pioneer officials necessarily had a poorer understanding of present-day requirements, so that their accounts, even when preserved, are open to various interpre- tations with consequently limited reliability and value. Worth as Disclosed by Appraisal. In cases of inadequate records, it is necessary to work back from an inventory of the plant as it exists today, in fixing fan* value. There are two as- sociated ideas in the reason for this: First, it is a logical step in studying property "at present used and useful" which the U. S. Supreme Court has reminded us must be considered; secondly, it looks toward finding probable legitimate investment which is an important factor in fair value. Efforts to work up, from in- complete and vague accounts, a probable figure for actual legiti- mate investments in force are usually too speculative to carry weight. Sometimes the early affairs of a concern are so involved and the transactions so questionable that it is necessary to let the past lie dead and to find, instead, the investment required in such a property today. Actual or Substitute Plant? There may be special cases where the utility plant has been established by such incompetent FAIR VALUE OF UTILITY PROPERTY 45 hands that it is necessary hi the public interest to fix the reason- able investment in such a plant as the probable total cost with a more modern equipment substituted for that in use. But in most cases appraisers are attempting to find the most probable investment in the actual plant as it was obliged to develop, and not in an ideal plant as it might be developed under later con- ditions. This is usually necessary since there is too much difference of opinion as to the design of the substitute plant and too many ways of giving the desired service to allow close agreement among different appraisers or to approach a comparable basis in differ- ent cases; too much speculation is introduced. Further, justice to the investors indicates the need of taking equipment procurable at the time of installation .and not the best the art affords today. Bearing of Original Conditions. The foregoing reasoning also logically advises us to take into account the environment of the works and local conditions existing during the development period. For example, if extensive city buildings have been erected, the razing of known or very probable old structures should be included in the cost of the new ones. If a reservoir has been created, the cost of buildings destroyed, the expense upon highways and railways that have been moved and for any special cleaning up of the site that was needed these, logically and in fairness, all should be included in the cost of the reservoir. There should be some acceptable evidence, however, showing the extent of all such work. Mere conjecture is ruled out. For establishing the most probable investment, as originally made, the unit prices of property items used would be those prevailing at the time of original construction. But where any considerable period has passed, the desired figure is a continuing investment which is affected by changed prices of materials and labor, renewals of older equipment, etc., so that present prices are commonly combined with historical conditions. This gives a short cut over rinding an original-investment figure and adjusting it to date. There are vexatious problems, however, in considering the bearing of original conditions; take, for instance, the "paving over mains " cases. It is obvious that, if water or gas mains or electric conduits have been put down under expensive pave- ment which had to be torn up and replaced, then the cost of the 46 PUBLIC UTILITY RATES installation is considerably greater than for streets with inex- pensive surfacing. Therefore some companies claim, as the present value of their mains and conduits under improved streets, some figure approaching the present cost of putting down the pipes and ducts irrespective of whether the new paving was laid be- fore the mains or after. Justice to the public would seem to in- dicate that the increased value be admitted only in the case of subsequent mains, etc., otherwise for each such municipal im- provement the city is to be penalized by higher utility rates. While the U. S. Supreme Court has held that a present worth is to be the fair value sought in general, yet it has specifically ruled (Des Moines Gas Case, June 1915) that new paving over old lines is to be excluded. Some experts hold that strict adherence to a plan of estimating the cost of reproducing the actual existing property as though built today, is the only consistent attitude which will satisfy the courts. This has an apparent benefit at first of dispensing the same degree of j ustice to all not discriminating between those properties whose history is obscure and those wherein the effect of historical conditions is apparent. To many others perfect con- sistency is not more apparent with the neglect of such historical facts so far as they are satisfactorily secured it merely means establishing the cost of the property and its continuing value to date so far as facts disclose it. There seems to be no inconsist- ency between the use of current prices of materials and the con- sideration of past actions it is using all the available data to full extent and neglecting none. However, valuation work is in a formative stage and the last word has not been said; all these points in specific cases are indeed often questions with two sides. Depreciated Value as a Basis of Rates. Many commissions sanction the use of actual (or reproduction) cost less accrued de- preciation as the actual (or probable) investment of the moment. Many of the most eminent corporation officials condemn such a practice in strongest terms. Both parties are evidently striving for just treatment of either utility or customer. Since justice to corporation and public can usually be secured simultaneously, the contradictions of this question should be more apparent than real. The trouble is that these generalizations are put forth with- out some statement of underlying premises. The proposition to subtract "depreciation" from actual or reproduction cost must not FAIR VALUE OF UTILITY PROPERTY 47 be separated from an explanation of the treatment of annual de- preciation allowances. It is reasonable to expect that a concern should not earn on its original investment if there is evidence that extra large dividends have been passed back to the stockholders instead of providing for the inevitable depreciation in service value of plant or amortiz- ing some of the early development costs, especially promoters' profits. There might then be good ground for holding that the investors had had returned to them that part of their investment represented by drop in value. But where very modest returns have been made, where management has been careful and where there is no suggestion of improper demands of the promoters, justice to the investors would indicate that they should not lose part of their funds just because the utility had not been able to lay up funds enough to pay for all replacements expected soon. The loss of this much capital can hardly be called one of the "risks of the business" covered by the expected dividends especially since the importance of burdening rates with depre- ciation allowances was hardly appreciated fifteen or twenty years ago. But such deficits generally are counted in with cost of business development rather than with value of physical property. Some argue that when depreciation allowances are being ac- cumulated from earnings, a company ought not to earn on the present depreciation in physical worth. Really, equity depends on how one handles these annual contributions of the customers taken to offset depreciation. One popular scheme is to put in the rates such annual allowances as would, on being put out at compound interest, equal the unredeemed cost of the several items of property at the end of the useful life of each. In that scheme the annuity does not fully equal the depreciation; it is obvious that the sums derived from these allowances have to be invested somewhere in order to be ample. Therefore whether they are invested inside the business or outside, they are not free capital and are bringing in returns only for their own proper up- building. In such cases justice to the investor indicates that something equivalent to the full undepreciated investment should be in the earning basis. Conflicting views in this case are har- monized by noting that the sinking-fund reserve is analogous to reserve equipment, and fills the gap between depreciated value of 48 PUBLIC UTILITY RATES plant and continuing investment. (See further discussion of de- preciation in Chapter VIII.) Another scheme of providing funds to meet depreciation burdens the gross earnings with an equal sum each year, the sum being figured by dividing the total cost of each property item by its probable life. Modifications of this plan make the payments unequal each year of probable life, being smaller at first and larger toward the last. Such methods, it is plain, provide direct and immediate compensation for depreciation in worth and the allowances do not have to be put out at interest to assist in their own accumulation. They are in the nature of a repayment of destroyed investment sums which the company may re- invest as it sees fit. As depreciation in value has thus been cur- rently compensated for, then, and only then, is it just that a correspondingly diminished investment be used in the basis of earnings, instead of full investment as before. (See also later discussions of depreciation.) Use of Appreciation in Value. There have been cases where it was attempted to have the appreciation of an utility's property (usually land) enter the income accounts, since the trend of court decisions is to denote such "increments in market value" as property and hence as an earning investment. Any general doctrine that public utilities must expect to forego "unearned in- crements" in land has not been yet widely accepted although there is some superficial plausibility in the oft-repeated claim that "unearned increments" should not enter fair value (for rates) in view of the increasing protection against "unearned decrements" in property. It is necessary to inquire into the "increments" and "decrements" in specific cases really to understand when and why they should affect the valuation and the accounts. The inclusion or exclusion of unearned increments in utility valuation is not a simple case like a boom or slump in real estate where no one knows with complete certainty whether a develop- ment will succeed or fail. In general it is equitable to deny an increment only when protecting against a decrement. The private real-estate promoter stands the chance of either loss or gain, but in an utility a certain loss in the value of original prop- erty is certain while any increase is doubtful. Unless the pro- tection against loss is complete there can be no equitable denial of increments. FAIR VALUE OF UTILITY PROPERTY 49 What the utility is protected against is the financial loss due to a reduction in value of plant resulting from service. A certain deterioration is inevitable the irreparable attrition due to service rendered. Even obsolescence and inadequacy, elements in depreciation which are expected to be problematical, in ex- perience are found generally inevitable. None of the utility arts and sciences stand still long enough but what inadequacy and antiquation are manifested in service plants; one has only to think of telephone equipment, street-lighting apparatus, steam engines and turbines, street cars, railway locomotives and track, gas retorts and holders, reciprocating and centrifugal pumping engines, etc., to see the process. The public benefit of this pro- tection is reflected in lower rates of return in capital, not in elim- ination of increments. What the utility is not protected against, as yet, is a slump in market value of property (mostly land) due to outside influences not connected with the service. This is the antithesis of the unearned increment which some would deny. If the protection has not been given, denial of the effect of a boom does not seem equitable. In some cases such protection is tacitly assumed. Take, for instance, the much debated case of new paving over old mains, a case of possible unearned increment generally denied the utility. If the pavement perchance became so peculiarly bad that it was cheaper than ever before for a concern to dig to its mams, or that it had to replace no street surfacing, then the earning power of the main would not decrease and there would be no demand that the value of mains be diminished. Here the company is pro- tected against an unearned decrement and prevented from bene- fiting from a possible increment. The arguments for balancing both appreciation and deprecia- tion in valuation and operation accounts were best stated by M. R. Maltbie when on the New York Public Service Com- mission for the First District. His arguments in the first place seem to be based on a decision of Judge Hough in the earlier N. Y. Consolidated Gas case (157 Fed. Rep., 855), quoted thus: Upon reason it seems clear that in solving this equation, the plus and minus quantities should be equally considered, and appreciation and de- preciation treated alike. 50 PUBLIC UTILITY RATES In the opinion for the Queens Borough Gas & Electric Co. case (Informal Proceedings, June 1911), the Commissioner stated: Thus land has been taken at its fair value and not at its original cdst, and the annual appreciation of land has been treated as a profit. By this method all property is treated absolutely alike as Judge Hough sug- gests. No difference is made, except that as depreciation represents a decrease in assets, it is placed as a debit against operation, while appre- ciation is placed as credit because it is an increase in assets. If property is to be taken at its depreciated value where it has depreciated, an entry must regularly be made in estimated operating expenses equal to the average annual depreciation. Conversely if land or any other property which genuinely appreciates in value is to be taken at its appreciated value, then an entry must be made in the estimated receipts, equal to the average annual appreciation. It is suggested that the annual increase in the value of land which is treated as income is not actually received. Increase in the value of un- occupied land is not realized until sold or put into use, but it is real, nevertheless, although payment may be deferred. Likewise, payments to the depreciation fund are not actually expended; yet they have been considered legitimate charges in practically every case. Furthermore, the annual increment is no more indefinite than the total increment the present value. There is a further similarity, the exact amount of depreciation and the annual rate are not definitely known until the piece of property is actually replaced or has become useless. Total apprecia- tion and the average annual rate are not known until the land is sold. The depreciation of the buildings is a charge against operation; why should not the appreciation of land be a credit? In the later case of Merihew v. Kings County Lighting Co. (No. 1273, Nov. 1911), one reads: The company apparently desires that the Commission shall increase the value of the land and then eliminate all reference to such increase in the profit and loss amounts, thereby the company would be enabled to collect from gas consumers 7 or 8% upon the value of the land and also retain the unearned increment from the land itself, thus obtaining double return. The profit obtained from increasing land values is just as real as any profit. The person who rents property that costs him $10,000 several years ago at a rental which yields him a return on $50,000 has just as certainly realized a profit from the increased value of the land as if he had sold it and invested the $50,000 elsewhere. The Commission has throughout, from 1909 to 1913, allowed 7^% return upon the in- creasing value of the land, and it must, in order to be consistent, consider the annual increase as a profit for the purposes of this case." FAIR VALUE OF UTILITY PROPERTY 51 But the highest court of the state threw out this annual ap- preciation allowance, confirming the court below which held that it was not income and an asset available for paying debts and so was not permissible in the annual accounts. There still remains one unsettled problem connected with the Maltbie plan of entering the annual increment of land among the earnings. The treatment is not quite analogous to that of de- preciation; the latter is paid for and a certain deduction made in the rate-basis worth and in the fixed charges. Where the in- crement is entered among earnings a certain addition is made to the rate-basis worth and the fixed charges are increased there- after. In the case of depreciation the present customers pay the bill of loss and the deal ends there. In the case of appreciation the company pays the bill of gain and only the present consumers get the benefit; all the consumers of future years have to pay interest on what the present ones gain. That creates a tendency of fixed charges which is in the wrong direction for effort should be made toward the reduction of fixed charges rather than their increase. It may be that this tendency is necessary in this case, but the last word has not been said. CHAPTER VI VALUATION AS AN ENGINEERING TASK; APPRAISAL OF LAND AND WATER RIGHTS The General Problem. Determination of reproduction cost or reproduction less depreciation is essentially an engineering problem. Theoretically, there is one true figure to be found in each case, but practically there are as many different sums as there are attempts to appraise owing, in addition to the honest differences of opinion already noted, and even under the most favorable conditions, to error, unconscious prejudice, unrecog- nized influence, variable prices of materials and work, and the varied experiences of the engineers in charge. It is almost trite to say that the appraisal should be under the guidance of the best engineer the available funds permit, for heretofore valuation has been made largely when subject to re- view by courts and commissions. Selecting the Engineers. To carry weight, the work must be consistently detailed and reasonably accurate; the engineer must have a reputation for conservatism, carefulness, and lack of prejudice either for or against corporations. It is well to recognize that there are many able appraisers in this country whose experience has been all on one side or the other of these questions. While they believe themselves to be eminently fair, their figures have almost always been discounted by court or commission until experience warns that their employment will be regarded as special pleading and their results will weaken rather than strengthen the merits of their client's case. Indeed, some engineers seemingly will not accept appraisal tasks in ac- tions against an utility corporation and others probably would not be employed by such concerns. On the other hand, there are many prominent men who seem to enjoy the confidence of public officials, corporations, courts and commissions alike; naturally their experience becomes more varied and valuable each year. Helping or Hindering the Engineer. In much of the work that valuation runs into, so many interpretations of fact can be 52 APPRAISAL OF LAND AND WATER RIGHTS 53 made under any peculiarities of a particular case, that the employ- ers must take their engineer into full confidence about every phase of their problem. Few would employ legal counsel without treat- ing them so if they expected good results; it is equally im- portant on the engineering and economic sides. The engineer's experience always can bring out valuable suggestions of procedure, leading to greater public confidence in the client and fairer deal- ing all around. Yet many concerns secure an engineer to find the value of their property without advising him fully about every possible use of the results, which, if foreseen, might demand special consideration of fact. Cost of Appraisal. When an engineer of reputation is re- tained to organize and direct valuation, the whole work may be expected to cost from $0.25 to $1.25 per $1000 in property studied. The lower limit applies to large and uniform property arrange- ments, the higher limit covers smaller collections of diversified and scattered property. Some railroads have been appraised at $2 per mile (Texas Commission), but with much expense borne by the roads. Others have cost $6.50 per mile (Michigan) where everything was done by the appraisers. These sums amounted to about $0.137 and $0.424 per $1000 worth of property. The 1915 appraisal of the $84,000,000 property of the New York Tele- phone Co. cost $500,000^ $6 per $1000. This was intricate work. Where men of broad experience and accepted standing can be employed to direct an appraisal it is frequently possible to cut down the cost by various approximations. But it has more often been considered that most cases might come before the courts and that, to stand there, the appraisal must show a most detailed inventory of minor as well as major equipment. This idea may prove to be a misapprehension. Rapid and inexpen- sive methods of valuation giving over-all results of substantial accuracy are necessary in many cases notably for bankers' participation in utility-refinancing schemes and for insurance of manufacturing establishments. The experience in the latter field has been correlated to a notable extent and the accom- plishments of such an organization as the Inspection Department of the Associated Factory Mutual Fire Insurance Companies are worthy of careful study by utilities.* Some details of this work * Mr. J. G. Morse presented the results of his work as Appraiser for the Inspection Department in a paper " Valuation by Approximation " at the 54 PUBLIC UTILITY RATES are discussed a little later under the topic " Short Cuts in Ap- praisal." The intervening remarks apply particularly to current practice in utility rate cases without constituting a defense of every practice noted. Preliminary Investigation. A first step in appraisal is to search out and compile all possible historical data, and all con- struction and operating accounts of the concern in question, to see if real knowledge of investments can be secured, to find what depreciation compensation has been levied on customers and where such money has been put, to learn what hardships the pro- moters and investors have endured, to discover possible improper manipulations of capital, etc. Generally, this first step has been productive of meager and disappointing results. The Inventories. The second step in appraisal is the prepa- ration of a detail inventory a listing of the tangible property and related intangible items with remarks on condition of various items and any information affecting worth dimensions, mate- rials, qualities, design, condition, important specifications, finish, date of installation, repairs, condition, scrap value, contractors' profits, cost of engineering and contingencies. In "inventory" here are included all papers from the first field and office notes to the final summaries. Really, the building up of a public-utility inventory is in several distinct steps instead of one, as might be thought from the foregoing. There is first an office inventory, based on the prelim- inary investigation and any information furnished by the com- pany. That inventory can be expected to be little more than a mere listing of equipment which is expected to be found but it facilitates the preparation for the inspectors' efforts. It is often useful, particularly in the absence of the pre-inventory, to study forms devised elsewhere for the field work. A number of com- plete systems have been published as worked out by various Commissions and private firms. Those in charge of this detailed study must be very familiar with the design and operation of such properties as are under examination. In mapping out the inspectors' work, only a few main divisions can be made, and these along natural lines, or else there will be so Valuation Conference of the Utilities Bureau, in Philadelphia, November, 1915; for proceedings of this Conference see the Bureau's " Utilities Maga- zine," January, 1916. APPRAISAL OF LAND AND WATER RIGHTS 55 much property on the borders of several divisions that no force lists it, each one thinking some other division had recorded it. Beyond this, it is not here possible to make detailed rules as to how the inventory must or must not be made. It can be said, however, that as generally successful a plan as any has placed the inspection and cataloging of these major divisions on separate parties (or for small properties on the same party at different times) with instructions to follow a logical or orderly path in their endeavor to get everything of the particular nature then dealt with. Such major divisions of inventory may be for in- stance; land, buildings, machinery (and rolling stock), service lines (track, wires, pipes, etc.), supplies, furniture and tools. When a paper pre-inventory has been worked up from records supplied, the inspectors' work is more a checking than an original listing. When blank forms have to be developed it is an aid to follow the standard classifications of accounts in general use as developed by the Interstate Commerce Commission, the several state commissions, the National Electric J^ight Association, the American Electric Railway Association, etc. Their service con- sists chiefly in reminding of detailed items. It has been found well, too, to have the listers or inspectors confine themselves in the field work to mere cataloging of property items and all available information about them. Then they study one grand division of equipment to the exclusion (temporarily at least) of the others and that is the extent of such classification as is worth while by these men. For further rearrangement of items into different groups, pure office help is believed by some engineers to be the best under technical scrutiny of course. The property items listed should be complete in every important detail, so as to determine character and probable cost, but pursuit of petty details beyond that point is expensive and useless. This point alone shows the necessity of care, conscientiousness and experience. The " field notes " of an appraisal should be well made and preserved for other possible use, as in court review which is frequently present as a possibility. In making the field inventory, the inspectors should be familiar with the apparatus they are listing so that, among other things they can form some approximate idea of the amount of depreci- ation undergone. Before the reports are made use of, however, some of the most experienced engineers in charge generally study 56 PUBLIC UTILITY RATES at least the important parts of a plant to arrive at an idea of the life and depreciation of the apparatus. Unit Prices. Each property item reported as in service or available needs to have its number of property units multiplied by "unit prices" to get the physical cost. These unit prices, it is now generally accepted in finding a present value for rate making, should be prices of today or the average of the last 5 to 10 years for fluctuating data. Combining present prices and old pieces of property seems to many doubtless to introduce an inconsistency into the whole procedure. Yet sometimes the original charges are no longer procurable, and if the official direc- tions to appraisers are to obtain present cost of reproducing the still existing old property items, then no other procedure is more logical. It has been often argued that it is the height of incon- sistency to figure reproduction cost taking into account historical facts of the course of construction and then using unit prices of today. Yet that inconsistency diminishes, or fades entirely, when we see that this is but a labor-saving way of attaining the equivalent present value instead of reproducing a plant under old unit prices and then adjusting the whole value to present prices in the endeavor to approximate present worth. Unit prices in but few cases are all fixed by men of such expe- rience that the figures do not have to be selected for a case after careful comparison and consultation of the appraisal staff. Un- less care is taken peculiarities may creep in to discredit the ap- praisal. Some unit prices, as those taken from contracts, will show a contractor's profit of 5 to 20% and when such units are used this should be clearly expressed so that later the aggregate costs may not be increased by amounts intended to cover contractors' work. In rare cases, the unit prices used may have been changed to show appreciation or depreciation, and the value then secured by appraisal is not simple reproduction cost. Such situations must be guarded against. In some appraisals the inventories and unit prices cover the overhead costs of plant development commonly included under going-concern value. In the Des Moines Gas case before the U. S. Supreme Court this procedure was held to pre- vent further entrance of going-concern value. Short Cuts in Appraisals. Brief mention has been made of the possibility of lowering the cost of appraisals and of the work APPRAISAL OF LAND AND WATER RIGHTS 57 done by the Inspection Department of the Associated Factory Mutual Fire Insurance Companies. The practice of this organ- ization is based on the argument that it is inconsistent to in- ventory the material of a building and the machinery in a plant to the last minute detail while only the value of the different standard materials and machines can be as accurately secured, while large costs of waste, labor, erection and contingencies have to be gross estimates, and while depreciation in value is largely guessed at. Therefore the detail to which a given part of a works is inventoried by these insurance appraisers depends on the percentage which that part may be expected to have of the value of the whole works. In such ways large manu- facturing establishments have been appraised by a few days work in the field and an equal time in the office. These valu- ations have been free being a part of the insurance work but they have been accepted for cost accounting, etc., by the assured concerns some of whom have compared the results with old-school appraisals. Such rapid valuations have not generally come before the courts, but the methods have been supported satisfactorily in court in a couple of instances. It is the practice of this bureau first to divide a manufactur- ing plant into buildings and machinery; elevators, piping and all things that can be removed without altering the building are classed as machinery. The floor areas and type of con- struction of buildings are noted and valuation made on a basis of square feet of floor area, using the cost tables of C. T. Main * as a basis for the length -width-height relations. The machinery is subdivided into machine units, shafting, belting, piping, electric wiring, and furniture and miscellaneous equipment. These items are inventoried with notation of only such dimensions and description as show trade sizes and lead to location of unit value. Thus " 1 engine lathe 14 X 6 comp. taper " designates a lathe with 14-inch swing, 6-foot bed over all, screw cutting, no special gearing, compound rest and taper attachment. All modern power machines (engines, turbines, motors, generators, etc.) carry a name plate giving the needed information, except that sometimes speed, cylinder diameter * Given first in a paper before the New England Cotton Manufacturer's Association, April, 1904; revised to January, 1910, in the article "Approxi- mate Cost of Mill Buildings," Engineering News, Jan. 27, 1910 (see Appendix). 58 PUBLIC UTILITY RATES and length of stroke of engines and pumps have to be noted. Boilers and piping are appraised by rated horsepower. Stand- ard machines are appraised by current price lists, special ma- chines by experience or quotation. Such prices are increased 5 to 10% to cover transportation and erection. Of the total value of the buildings and contents, the value of buildings and fixed machines amounts ordinarily to more than half so that short cuts based on averaged experience are justified for the minor items. Lengths of shafting are measured and priced per foot erected and equipped. Main belts are measured by eye; an addition in value of a machine unit for its machine belts is made, there being several groups. Steam, hot-water, and gas piping for heating and lighting and automatic-sprinkler pipes are cov- ered by an allowance of so many cents per square foot of floor area. The manufacturing-service piping for steam, water, gas, oil and air is covered by per-machine and per-horsepower charges, cross checked. Electric wiring is valued per light and per motor horsepower, actual figures depending on the type of lamp, and on grouping the motors in size groups. From the experience of this bureau extending over many years, figures have been made of total costs per main machine unit per spindle in a cotton mill, per pair of cards in a woolen mill and per square foot of floor space or per producing machine in a standard plant so that still quicker approximation can be had, when necessary. The bureau's practice in regard to depreciation is to assume that where a building is over three or four years old, is plumb and in good repair and adequate, the depreciation stands con- stant for several years at 5% of total first value. On machin- ery 2 to 5% is deducted for each year of a main unit's life. Some special machines have depreciation figured on wearing parts only. Depreciation of shafting is not recognized; ^ drop is allowed on belting as a whole. On piping a total of 10% is the usual limit. This work has been in industrial works but most of these have water, steam, electricity, or gas plants so that the general applicability of the plan has been tested. It is considered by the department that even less detail than noted would be re- quired in a pure utility plant owing to the concentration of APPRAISAL OF LAND AND WATER RIGHTS 59 values in a few large machine units, etc. It is obvious that parts of a plant thus appraised are treated as conforming to the average worth of similar parts in other works unusual contingencies and extreme peculiarities have no effect. The success of such appraisals depends upon how complete are the appraiser's records of plant costs upon how closely they rep- resent true averages of present values. Appraisal of Real Estate. A fair procedure for land valu- ation, known as the sales method, has been extensively employed with apparent general satisfaction by the Wisconsin Railroad Commission and is discussed at length in an early case (State Journal Printing Co., v. Madison Gas and Electric Co., March, 1910). Yet it is stated (p. 528), that it is only a valuable aid to the judgment of the experts. A part of the opinion reads: The sales method may be defined as a plan or process for the systematic collection and comparison of data relating to real-estate transfers for the purpose of estimating true market realty values. It consists in a study of the transfers of neighboring property having conditions or character- istics similar to the land whose value is to be determined and it is intended to duplicate as nearly as may be the mental or judicial processes ordi- narily employed by the so-called "local real-estate expert," with a view to arriving at results approximating those which would be reached by such local experts acting without bias or suggestion. Two interpretations of the sales method have been most commonly employed. In one of these, the area and consideration in each sale of similarly situated land is found, the average unit price (per square foot, per foot frontage, per lot, per acre, etc.) ascertained, and this unit applied to the tract under investigation. The other application introduces what, in many cases, is believed to be an additional safeguard, consisting in the use of the aver- age assessed value of adjacent or similarly situated lands in combination with an average ratio representing the relationship of the assessed value of transferred lands to the final consideration paid for such lands all figures being based on "ground values," exclusive of improvements thereon. In the broader and more flexible applications of the sales method, the expert adopts one or the other of the processes outlined or blends the two in such fashion as to yield the most consistent and trust- worthy final result. In view of the close similarity as to fundamental basis of the sales and local expert methods, particular interest and importance attaches to any specific cases affording a direct comparison of actual valuation results by the two methods made under normal conditions. Fortunately, the re- sults of two such comparisons are available, one involving some 300 60 PUBLIC UTILITY RATES blocks, or over 3 square miles, of representative, residential property, in St. Paul; the other of some 500 acres of valuable railway-terminal lands, in Milwaukee. The St. Paul investigation was made by Mr. T. A. Polleys who con- ceived of a plan to test the sales method of valuing lands. A district in the westerly portion of St. Paul was selected for reason that the great activity for several preceding years would insure ample sales data and because of the representative characteristics of the territory. The average ground values per foot front was ascertained by a flexible ap- plication of the sales method, chiefly by Mr. Polleys personally who then requested some 14 highly qualified real-estate experts to submit their estimates of the same values. To arouse interest in the investigation Mr. Polleys charted his determinations and submitted copies to the ex- perts with the urgent request however, that they should not be in- fluenced thereby. The experts served without compensation, acted independently and were free of suggestion in preparing their estimates. ... It was seen that the tendency of the sales method was to give deficient results to an average amount of 3.8%. This result is strikingly confirmed by the valuation of terminal lands of the Chicago, Milwaukee & St. Paul Ry., in Milwaukee, in 1903, under the auspices of the Tax Commission. The lands amounted to upwards of 500 acres, scattered through some 15 wards and having an aggregate valuation of approximately $6,000,000. The market value of these railroad lands was determined by specially qualified local experts under the direction of Mr. F. W. Adams, secretary of the railway company. The state valuation staff, under the direction of Prof. W. D. Taylor, engineer for the state board of assessment, used the sales method on a basis consistent with local conditions. The final results differed by only 3.5%, those by the sales method being lower. Cost of Condemnation. It is common experience that the cost of acquiring real estate for an utility concern has been two or three times the preliminary valuation based on market value of contiguous property. This is caused in part by the necessary expenses of searching for most suitable grounds, the destruction of existing buildings, and oftentimes the premium which must be paid to induce sale from persons either not anxious to part with the land or suspecting the purchasers' purpose and desirous of securing maximum advantage from the transaction. If the right of eminent domain be used there still are large additional expenses incurred for engineers and lawyers, for damages to plots cut in two and to various other adjacent lands. An instance has been cited (1914 Report, Valuation Committee, APPRAISAL OF LAND AND WATER RIGHTS 61 Am. Soc. C. E.), of the Wachusett Reservoir of the Boston Metro- politan Water Works. Experts made the preliminary valuation of the 4772 acres with buildings at $697,000. The actual aggre- gate price of the property acquired was $1,182,000, or 69% in excess, and this was under right of eminent domain. The over- head costs of the takings (estimated at 15%) were not included. Generally, it seems to be recognized as good practice to pay up to two or three times the common market price of similar but unaffected lands rather than enter upon condemnation litigation and delays. The point is that under either bargaining or con- demnation there are items of heavy expense and owners' demands not disclosed by either prior or subsequent examination of the lands. These increments of expected cost are not covered, either, by the ordinary overhead allowances of construction engineering, contingencies, etc. Where the utilities have not the right of condemnation, as in the case of certain eastern electricity-transmission companies, and the corporation has to rely on its own bargaining, there may be a genuine " hold-up" even for easements. Of course, such excessive costs are legitimate and essential matters for capitalization. But if possible the generation that imposed them on the utility should obliterate them through amortization contributions and a corre- sponding reduction of the ratio of capital to tangible property. Denial of Condemnation Cost. Some consternation has been produced among utilities by the so-called Minnesota Rate Cases (230 U. S. 352; June, 1913) in which railroad terminal -prop- erties in St. Paul, Minneapolis, and Duluth were not admitted to have a value as much above the market value of contiguous prop- erty as railroad properties generally are known to cost above market price. However, it is only fair to note that the eminent justice's opinion relates only to the cases in hand where the railways had been long established, the contiguous property largely enhanced by the presence of the railways, and the actual increase of price above original market value so far hidden in the dim past that its study was largely conjecture. It is interesting to note the language of this decision; it states that railroads have been given the right of eminent domain so that their necessities may not be played upon to secure more than market value of land taken. However, this reasoning must not yet be carried as a precedent too far afield of the specific applica- 62 PUBLIC UTILITY RATES tion in these cases; it would be expected that for cases when the actual cost of taking the land was not mere conjecture, the court would receive evidence of that cost in a case at hand and in similar cases. The point to be observed is that where the contiguous property values rise because of the presence of the utility, then the rising value of the railroad land cannot be expected always to outstrip the market value of the contiguous parcels. The mis- cellaneous items of condemnations engineering, superintend- ence, legal expense, contingencies, etc., according to this decision, are to be regarded as absorbed in the general rise of value if that has carried present worth very much above original total cost. The decision runs: It is clear that in ascertaining the present value we are not limited to the consideration of the amount of the actual investment. . . . The property is held in private ownership and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law. Assuming that the company is entitled to a reasonable share in the general prosperity of the communities which it serves, and thus to at- tribute to its property an increase in value, still the increase so allowed, apart from any improvements it may make, cannot properly extend be- yond the fair average of the normal market of land in the vicinity having a similar character. Otherwise we enter the realm of mere conjecture. Value of Adaptability. Special value for land because of its inherent adaptability for reservoirs, wells, dams, railways, power stations, etc., has often been claimed and numerous de- cisions are to be found both for and against such allowances. The U. S. Supreme Court in the Minnesota Rate Cases has this to say about such an element of value: It is urged that, in this view, the company would be bound to pay the "railway value" of the property. But, supposing the railroad to be obliterated and the lands to be held by others, the owner of each parcel would be entitled to receive on its condemnation its fair market value for all its available uses and purposes. If, in the case of any such owner, his property had a peculiar value or special adaptation for railroad purposes, that would be an element to be considered. But still the inquiry would be as to the fair market value of the property; as to what the owner had lost, and not what the taker had gained. The owner would not be en- titled to demand payment of the amount which the property might be deemed worth to the company; or of an enhanced value by virtue of the purpose for which it was taken; or of an increase over its fair market APPRAISAL OF LAND AND WATER RIGHTS 63 value, by reason of any added value supposed to result from its combi- nation with tracts acquired from others so as to make it a part of a con- tinuous railroad right-of-way held in one ownership. Other cases like McGovern v. N. Y. (130 App. Div., N. Y. 350, 356), sustained by the U. S. Supreme Court on account of the dis- cretion allowed the trial court, indicate that if special value is not recognized until the utility starts its initial proceedings, then it could not be secured on condemnation. Value for Paving Over Mains. One of the controversial matters in appraisal is what has already been incidentally noted as "value of paving over mains." On the one hand, there are those who argue that if improved paving has been put down since the pipes, conduits or other underground structures, then the value of the mains has increased according to what it would cost to put them down under the new conditions. The theory by which this is defended seems to be that a strict adherence to the cost-of-reproduction method of valuation necessitates reproduc- ing all such actual conditions rather than giving any weight to former conditions. On the other side of this question are those who argue that this is unreasonable even verging on extortion. It is obvious that the company necessarily has been passive, so far as improving the pavements, while the city has presumably been active. The net result is that the more money the city puts into the pave- ments, etc., the more the citizens have to pay for the same old utility service. One reason for denying this value is discussed under increments and decrements of value above. Those who contended for maximum allowances for 'improved paving over mains for years relied on the Supreme Court opinion in the Consolidated Gas Case (212 U. S., 19; Jan., 1909), support- ing in general the findings of a lower court which had admitted the cost of new paving over old gas mains in New York City. The precarious nature of this foundation is seen from one para- graph in the Supreme Court opinion. And we concur with the court below in holding that the value of the property is to be determined as of the time when the inquiry is made re- garding the rates. If the property which legally enters into the consider- ation of the question of rates has increased in value since it was acquired, the company is entitled to the benefit of such increase. This is, at any rate, the general rule. We do not say there may not possibly be an ex- 64 PUBLIC UTILITY RATES ception to it where the property may have increased so enormously in value as to render a rate permitting a reasonable return upon such in- creased value unjust to the public. How such facts should be treated is not a question now before us, as this case does not present it. Those who stood out against excess cost of paving over mains, relied on the Supreme Court in the Cedar Rapids Gaslight Case (223 U. S. 665), which generally supported a lower court in deny- ing excess value but did not specifically mention the topic. The intention of the Supreme Court to sanction including cost of new paving over old mains was denied by the highest New York State court in the Kings County Lighting Case (N. Y. Public Service Comm., First District, No. 1273; People ex. rel. Kings County Lighting Co. v. Wilcox et al.; March, 1914). The leading state- ment runs thus: The relator is entitled to a fair return on investment not on improve- ments made at public expense. The case is not parallel to the so-called unearned increment of land. That the company owns. It does not own pavements, and the laying of them does not add to its investment or increase the cost to it of producing gas. On one hand, cost of reproduc- tion less accrued depreciation should not be so applied as to deprive the corporation of a fair return at all tunes on reasonable, proper and neces- sary investment made by it to serve the public, and on the other side it should not be so applied as to give the corporation a return on improve- ments made at public expense which in no way increase the cost to it of performing that service. The question has been definitely settled by the Supreme Court in the Des Moines Gas Case (438 U. S. 153; P. U. R. 1915 D, 577; June, 1915). The Court did not state any new ideas on the subject but accepted and promulgated the views of the court below and the master in chancery, thus: As to the item of $140,000, which, it is contended, should be added to the valuation, because of the fact that the master valued the property on the basis of the cost of reproduction new, less depreciation, and it would be necessary in such reproduction to take up and replace pavements on streets which were unpaved when the gas mains were laid, in order to re- place the mains, we are of the opinion that the court below correctly dis- posed of this question. These pavements were already in place. It may be conceded that they would require removal at the time when it became necessary to reproduce the plant in this respect. The master reached the conclusion that the life of the mains would not be enhanced by the necessity of removing the pavements, and that the company had no APPRAISAL OF LAND AND WATER RIGHTS 65 right of property in the pavements, thus dealt with, and that there was neither justice nor equity in requiring the people who had been at the expense of paving the streets to pay an additional sum for gas because the plant, when put in, would have to be at the expense of taking up and replacing the pavements in building the same. He held that such added value was wholly theoretical, when no benefit was derived therefrom. We find no error in this disposition of the question. Value of Franchises. Under administration expense has been mentioned the cost of obtaining franchises. But when nothing is paid for the franchise public opinion is against entering any value for it in the appraisal of worth for rate making. That cannot be said to apply to appraisal for pur- chase since then the company rightfully could expect to receive compensation for expected profits during the rest of the franchise life. In adding franchise value to rate-basis worth, if at all, the history of the company should be consulted particularly to see if the communities definitely held out prospects of extra profits over interest, risk, etc., on actual investment. More and more the franchises now granted are stripped specifically of such pos- sible value at their granting; but the terms, expressed or implied, in existing grants need to be studied carefully in adjusting rates that unjustified retroactive punishment is not meted out. This question was recently (June, 1915) decided by the highest New Jersey court (Errors and Appeals) in the so-called "Passaic 90-c. Gas Case." The Public Utilities Commission denied a value to the gas company's franchises, beyond cost and burden, and the state supreme court sustained it. The highest court at first reversed the lower court but on a rehearing sustained it. The concurring opinion of Justice White is an interesting discus- sion of the idea that a franchise is property but not "used and useful" in service. A part of the opinion is given below: Taking up the second proposition, that the Company's charter right to charge reasonable rates is in itself a valuable property right entitled to consideration in rate making, I suppose it must be conceded that the franchise to charge as a "reasonable rate," sufficient to yield a net profit of 8% on the value of the Company's property as allowed and established respectively by the findings of the Utilities Commission in this case, is a very valuable property right. Certainly I think it is. That this valuable privilege is the Company's is beyond question. That it is property is undoubted. That the law protects it against confiscation and subjects it to taxation follows as a matter of course. 66 PUBLIC UTILITY RATES But that this valuable property right to charge "reasonable rates" should by virtue of its own existence have the effect of converting itself into a still more valuable property right to charge "unreasonable rates" is, of course, preposterous. Presumably the incorporators went into this public utility business because they expected that their charter privilege to charge "reasonable rates" for the gas they were to manufacture, dis- tribute and sell, would be a valuable one, but that fact and the fact that it has become so, cannot have the effect of altering the terms of the con- tract made with the State. The mere statement of this proposition is sufficiently convincing, but if anything more were needed, a glance at the absurd practical result of the contrary view would be illuminating. If the franchise to charge ninety cents in order to pay 8% on the value of the Company^ prop- erty not including the franchise is worth a million dollars and must be included and have 8% paid on it also, the rate would have to be $1 instead of 90c.; but if the Company has the property right to charge $1, the franchise is worth two million dollars instead of one million, and so the rate must be $1.10 in order to pay 8% on this additional million, and so on indefinitely. That the Company's contract with the State to charge "reasonable rates" cannot be thus evaded, is, of course, quite obvious. The plain fact is that the commercial value of the Company's property right in its franchise can have no effect in fixing the rate it can charge, because by the terms of its contract with the State the stream of its franchise value arises from the spring of its right to charge "reasonable rates," and in the very nature of things no stream can rise higher than its source. Water Rights Must be Considered. Greatly varying ideas are prevalent as to whether or not a public utility utilizing a water power can include in the rate-basis worth of its plant any allowance for rights to the beneficial use of water. This has been denied in a few specific cases, notably by the Public Service Commission for the Second District of New York in Fuhrman v. Cataract Power and Conduit Co. (3 N. Y. Pub. Ser. Comm. 2nd D. 670) on the grounds that the federal and state permission to use water at Niagara Falls gave the corporation no title to the water and hence no water right measured by the price of steam power. Other commissions, for instance, like those of California (re No. Calif. Power Co., Calif. R. R. Comm. Rep. 1913) and Idaho (re Pocatello Water Co. 1 Idaho Pub. Serv. Comm. Orders 78; 1914) appear to have held at one time that water rights were in the nature of fictitious intangibles and so not admissible as part of rate-basis worth. APPRAISAL OF LAND AND WATER RIGHTS 67 Later ideas of both these bodies named (See re City of Santa Cruz, Calif. R. R. Comm. 2666; P. U. R. 1915 F 768, and re Pocatello Water Co., Idaho Supreme Court, 150 Pac. 47; P. U. R. 1915 F 437) show a different attitude for in both cases a value for the rights was allowed. There has existed little doubt anywhere as to the necessity of giving proper attention to water rights since the United States Supreme Court held in 1914, in San Joaquin & Kings River Canal & Irrig. Co. v. Stanislaus County (233 U. S. 459), that in spite of a declaration in the California Constitution that water appropriated for sale was appropriated for public use, the benefit was private and the rights thereto should be considered in con- demnation and rate cases. Mr. Justice Holmes thus speaks: But it is said that as the plaintiff appropriates this water to distri- bution and sale, it thereby dedicates it to public use under California law, and so loses its private right in the same. It appears to us that when the cases cited for this proposition are pressed to the conclusion reached in the present case, they are misapplied. No doubt it is true that such an appropriation and use of the water entitles those within reach of it to demand the use of a reasonable share on payment. It well may be true that if the waters were taken for a superior use by emi- nent domain those whose lands were irrigated would be compensated for the loss. But even if the rate paid is not to be determined as upon a purchase of water from the plaintiff, still, at the lowest, the plaintiff has the sole right to furnish this water, the owner of the irrigated lands cannot get it except through the plaintiff's help, and it would be unjust not to take that fact into account in fixing the rates. ... It seems unreasonable to suppose that the constitution meant that if a party, instead of using the water on his own land, as he may, sees fit to distribute it to others, he loses the rights that he has bought or lawfully acquired. This case is widely quoted as controlling. The question now is not whether any water right is to enter rate basis but how much should be allowed. The hesitant attitude of public representa- tives as to amount is well expressed by the New Hampshire Public Service Commission when it states (re Grafton El. Light & Power Co., 4 N. H. Pub. Serv. Comm. Rep. 178) The objection of the Supreme Court to the conjectural character of the cost of reproduction method [of valuing property in the Minnesota Rate Cases] applies with equal force to the "saving-over-coal" method of valuing water power. It assumes, what is not proved, that power 68 PUBLIC UTILITY RATES could be produced profitably by coal, and it assumes, what is not true, that a given amount of power produced by water varying in amount as it will on even the best regulated streams is equal in value to a like amount of power generated by steam, constant and reliable at all times. We live in a region remote from the coal fields, the cost of transporta- tion is heavy, and the price of coal is higher than in almost any other part of the country. On the other hand ours is a mountainous state with many streams having a large fall and furnishing an abundance of water power, much of which is still undeveloped. .... A f air value of a water power in New Hampshire cannot be a value which takes no account of our natural resources and makes electricity produced by water as expensive to the public as if produced by coal. The Vermont Public Service Commission also expressed the same hesitancy in re Montpelier & Barre Light & Power Co. (No. 452, 1916; P. U. R. 1916 B 973), as follows: The Commission, however, entirely disapproves of this method of de- termining the value of water rights [by direct comparison with steam] because, in our opinion it creates a value which may be largely in excess of the actual value of the rights and because this method, if applied to rates, would entirely deprive the consumer of any benefits to which he is entitled by reason of having these natural resources at hand. Better Understanding Needed of Water Rights. The large amount of water-power valuation being made all over the country, the peculiar results being presented by some well-meaning but uninstructed appraisers and the hesitation of Commissions to accept the results make timely a review of defensible procedure in water-rights appraisal. Valuations that can be criticized are those, for example, which set forth the worth of water rights as the "combined intangible and going values of a power develop- ment" locating this as the capitalized possible net annual in- come. Such a finding has no justification for parading as the value of water rights, although water rights indeed are hidden therein. At the outset it should be stated that authorities are universally agreed that water rights are property having essentially the nature of real estate industrial real estate. Therefore, they are valuable in accordance with their power to produce income. The Idaho Commission in valuing the water rights of a hydro- electric company (Taylor v. N. W. Light & Water Co.; Idaho Pub. Util. Comm. Order 297; P. U. R. 1916 A 372) refused to APPRAISAL OF LAND AND WATER RIGHTS 69 allow a value where it transpired that the company could pur- chase cheaper than it could develop power. But this value of earning power must be separated from the common intangible values also generally recognized by their earning power or by investment. Even where such procedure is followed, the greatest variation is seen in the results of its use by different persons. The appraiser with sympathies running in one direction seems apt to make value large enough to com- pensate the holder for amounts more desired than supported by fact. .The appraiser of opposite sympathies seems to minimize the value of water rights where these can be construed as depend- ing to any measure on public grants. As is usual on such con- troversial matters, the actual truth in any specific case generally resides in a somewhat indefinite middle ground and can be approximated only by the exercise of good judgment as well as the study of specific data. Rights as Real Estate. If water rights are essentially of the nature of real estate it would be expected that they should be valued like real estate by the direct comparison of sales. However, this method, in simple form, is extremely restricted for the study of water-power rights; exchanges are extremely few in number compared with the parcels of land that are traded every year. Moreover, in comparing the values of real estate it is essential to take into account transfers of land in the immediate vicinity of the parcels studied. That seldom is pos- sible in the case of water powers, and in making any direct comparison of sales the geographical separation usually will be sufficient seriously to impair the validity of the appraisal unless such effects as different cost of development, different annual return, different market conditions and different probable net profit are brought into play. But the handicap of geographi- cal separation may be overcome by scientific analysis preceding the attempt at comparison. Splitting the Value of Rights. Water rights, it has been stated already, exhibit the peculiarities of industrial real estate in that the value depends on utility for special service. Indeed con- solidated water rights may be regarded as the enhancement of value of land well situated for the special use of generating power from falling water, etc. The enhancement from these special uses is far greater than the value of the real estate for 70 PUBLIC UTILITY RATES all the ordinary uses of land, so that the common value of the tracts is generally neglected as inconsequential. This enhancement consists of two elements of value, the first depending on the physical conditions which lead to ease or difficulty (measured by expense) of developing the rights. The second depends on the demand for water or power in the locality, and the kind and cost of power that predominates to rule the market. The two values are not wholly independent for where there is competition with steam power, the second element in- creases with any decrease in cost of development. These value factors we may call* "constructional" and "regional." In case either factor is zero, the value of the water rights is zero. For instance the many water powers hundreds of miles back from even moderately populous areas have little or no regional value at present, and the value of the water rights is inappreciable in spite of possible high constructional value. The numerous waterpowers of the Adirondack region of New York have no local market and cannot be completely developed to com- pete profitably with steam power in the metropolitan markets; the regional value is low. If it were sought to dam the Hudson River and develop power anywhere near New York City the regional value would be great but constructional value obviously would be zero, so great would be the legal, engineering and financial obstacles. Comparing Two Rights. If an engineer has data in hand on the sale prices of scattered water rights, the unknown value of a questioned private water right can be approximated by increasing or decreasing the known value in proportion to (1) the size of the possible development, (2) the difference in regional value and (3) the difference in constructional value. Much the same sort of scheme would be employed by an experienced engineer, the rights of actual scattered plants taken before for comparison being replaced by those of an ideal normal plant existing in the mind of the appraiser. It might be thought that the problem could be approached also by setting up for com- parison a hypothetical plant of the specific local capacity, built under local hydraulic data but under fixed difficulties and at specific cost, and finally having a specific market and specific * Following the nomenclature employed by Robert E. Horton, Consulting Engineer, Albany, N. Y., in recent cases. APPRAISAL OF LAND AND WATER RIGHTS 71 income. For such a plant there could be computed a net income and the water rights would depend on this being in the nature of real estate which is valued by its earning power. Then the real water rights could be approximated by changing this value to accord with greater or less construction difficulties which developed, and for more or less favorable market conditions which arose. But this last study reduces more or less to a direct appraisal by earning capacity. Valuation of Rights by Earning Capacity. Where there is not dependable data for the method of appraisal by sales com- parison, it is necessary to fall back upon an earning-capacity study. At the outset it is necessary to start with the query: What sum could an intending purchaser afford to pay for con- solidated water rights going with a diversion for power or water- supply, knowing the gross income which the power or water will bring, knowing that certain fixed charges, interest and taxes must be paid on the full investment including land and water rights and the cost of plant and business development? All the factors entering into the solution of the problem are known but one water rights and the answer is therefore ascer- tainable. On the basis of earning capacity, the capitalized net profit is equal to the cost of the physical plant and going-concern value (the latter estimated for an undeveloped business by any of the acceptable methods) plus the water rights in question. The net earnings or profit in turn are the gross annual earnings less the annual operating, supervision and repair cost, depreciation com- pensation, etc., and less the interest and taxes on plant (structural) value, going-concern value and worth of water rights. This is briefly and simply stated * in mathematical symbols as : ,,, I - - (S + (?) (N + R + T) whence N + R + T ' where P = annual net profits W = water-rights value 7 = annual gross income * Following the form suggested by Robert E. Horton, Consulting Hydraulic Engineer, Albany, N. Y. 72 PUBLIC UTILITY RATES = annual operating expenses S = structural cost G = going-concern cost N = capitalization rate R = fair return on investment T = tax rate. The warning that needs to be made in the use of the earning- value method is that appraisers have seemed apt to under-estimate the annual operating expenses and so over-estimate the profits and the value of water rights. Short-Cut Steam-Power Comparison. The gross annual income of a water-power plant in the East is tremendously affected by the cost of steam power. There are few hydro- electric plants where a considerable proportion of the output does not compete with steam drive directly. Even where the service is for lighting the price is limited to that of possible local steam-plant current. Therefore, there has been used in the East a short-cut scheme of appraising water rights by capital- izing the difference in cost of output between the hydraulic plant and an equivalent steam plant in the same district. This may be permissible at times, but it is not to be universally rec- ommended as it substitutes an extreme hypothetical condition where a closer approach to actuality is possible. Public hostility to it has already been noted. For instance, with utility regu- lation, even in the East, the tendency of rates is toward cost of service, including therein a reasonable return on physical prop- erty employed. The regulated rates are not directly or fully re- lated to the cost of steam power. (The off-peak factory-drive competitive business, however, is secured only by cutting under steam-power costs. The off-peak commercial business operates to reduce the general cost of service by giving more constant utilization of the plant and diluting the over-head expenses with small additional profits.) The desire to use steam-power costs in the valuation of water rights springs out of the convenience of such comparisons rather than rising from their applicability. The capitalized annual cost of operating and maintaining in perpetuity a profitable steam plant to produce an amount of energy equal to that which can be produced at a given water power, generally will prove larger than the similar figure for a water-power development, APPRAISAL OF LAND AND WATER RIGHTS 73 the water rights of which are determined by weighted comparison of sales, or by study of actual earning-power. Therefore the value of water rights determined by such steam-power cost com- parisons may be expected to be often large enough to prove an embarrassment to the owners in time of protracted business stagnation, financial depression, strikes, war, unfavorable legis- lation, strict regulation, or poor internal management. When this scheme is or has been employed, care should be exercised to see that the valuation of water rights and plant plus capital- ized operation and maintenance costs does not exceed the cap- italized sum which would maintain and operate the equivalent steam plant not continuously but for such portion of the time as the water-power plant could reasonably be expected to operate under the unfortunate contingencies noted. The necessity for such a scrutiny may be realized when it is recalled that the investment costs, which continue always, are high for the water-power plant and low for the steam plant; the operating expenses which may be curtailed during depressions are small for the water-power development and large for the steam plant. Value of Rights under Regulation. Many believe that the valuation of water rights in the Western states must be on a different plane from that in the East. There is nothing seen, however, in the sales-comparisons or earning-value plans of appraisal but what can be followed in one section as well as in another. Some publicists claim that as the water rights came from the public and are used for the public good, no value should be allowed the utility company for those rights. The actual conditions under which public grant of water powers has been made need to be considered, of course. It is conceivable that in some cases the public desired that the company should earn on its investment and activity but not on the fundamental land and water rights. Where that view actually prevails, obviously there can be no water right owned by the utility company. Where such a condition has not been found, the appraiser has to find rights even under rate regulation. This is difficult for he has to avoid a reasoning-in-circle situation. That is, if he takes earnings through rates based on a worth which includes value of water rights, the larger the value of those rights the higher the rates must be; then the larger becomes the value 74 PUBLIC UTILITY RATES of the rights again and the higher the rates, and so on. The only escape usually is to consider what the water rights would be in private service. The concern may have obligated itself to serve the public when it might have continued to give private service in large blocks; then the water rights ordinarily should be considered as before the public service became predominant. Surely neither the company nor the public expected that the company would be penalized for furnishing a multitude of users instead of the few. The right to use water for private gain of course is as legitimate as the right so to use land. Care has to be taken to insure that the estimate of earnings on a private-business basis is strictly consistent, that it does not include income-rate enhancement promoted by public assistance marking the change from private to public utility like occupancy of streets or of power of eminent domain. There are various ways away from reasoning in a circle when the very earnings to be taken in the earning-power method are under attack as unreasonable. First it must be ascertained what peculiar status any Federal and State legislation may give the water rights; or what specific franchise contracts may affect them so that they may be declared non-existent, existent but partly dedicated to public benefit, or existent and entirely in private possession. If existent and in private seizure, in most cases, there appears to be no escape from the higher prices due to earnings on water right. A parallel case exists: A state may have given away its valuable mineral land to any who would develop and it cannot but endure the situation as to old land patents, though it can demand a share of the profits in land yet ungranted. It is the same way with water rights in many cases. Legislatures may have the power to cancel the rights by amortization and repay- ment. The actual estimation of probable earnings of the rights under purely private industry may be arrived at, in some cases for instance, from the figures available from the private utilization of part of the water rights as leased to others. Values Appurtenant to Water Rights. The "value" obtained in the ways and under the conditions noted in reality is more than simply worth of water rights. It has been seen that it in- APPRAISAL OF LAND AND WATER RIGHTS 75 eludes first of all, the relatively unimportant value of the appur- tenant land for common uses. If the plant is already built and in operation, the value may often also include a factor depending on the brains worked into the design, construction and operation. The separation of the value of the real estate for building or agricultural purposes may be carried out with reasonable sim- plicity, but the value of applied mentality is very difficult to separate from the water rights. Therefore, it is common to allow all of these accompanying values to remain consolidated with the value of water rights and no case is recorded of resulting injury. Care must be exercised not to admit the same appli- cation of mentality in two separate parts of the accounts. A Water-rights Fallacy. In actual cases, there are marked differences in the opinions and procedure of the different sides. For instance, in condemnation proceedings the owners frequently compute the annual cost of their power so as to include the interest and taxes on only structural investment purposely neglecting charges on water rights. They then subtract this cost of their water power from the annual cost of some sub- stituted form of power, like steam, and arrive at an apparent an- nual profit which they capitalize at 8, 6, 5, or 4 per cent. The resultant figure is their contended value of water rights. This procedure is defended on the claim that since they own the water power they are not paying interest on the rights, and it should not be charged against them in comparing the cost of water power to them with the cost to them of some substitute power. Obviously such a procedure is most unsound. If the water power were worth all that is shown by such a series of computa- tions, the plant and rights could be sold and the money invested in government bonds to bring by pure interest an annual profit as great as could be secured after undergoing the risks, and giv- ing the attention needed to develop and market the power. On the other side of such condemnation cases, the would-be seizors claim that the value of water rights cannot exceed a sum which a purchaser could afford to pay if he borrowed all the funds for acquisition of rights and development of plant, and if the enjoyment of the rights enabled him to derive a small, safe profit in return for service in promotion and management, and as a guarantee of permanent ability of the works to afford enough revenue to cover interest and retirance. 76 PUBLIC UTILITY RATES The monetary value of the water rights in any specific case for different services, power, municipal supply, irrigation, may not be the same. There are grounds, in many cases, for hold- ing that the true monetary value for all services is governed by the maximum for any service, since in private hands it could be put to its most valuable use. Valuation of Storage Reservoirs. A problem now becoming pressing is the valuation of storage reservoir sites. In a few eases, the estimated or experienced total annual gross return from the increase in available power over that of no storage has been capitalized to secure this value (with or without deducting investment charges on the reservoir) on the evident assumption that there would be no increase in size of generating plant or in the operating expenses. It is more conservative, but not wholly satisfying, to capitalize the net annual earnings from the increase in power. A still more rational procedure would be to compare the entire situations with and without storage; then the value of the storage site might be, as a maximum, the capitalized difference in net earnings of the larger works with storage (deducting all operating costs and fixed charges on gen- erating station and storage works complete) and of the smaller plant that would have been built if storage had been impossible. In securing these net earnings it hardly need be noted that recognition must be given to the amounts of primary, perma- nent, assured or continuous power and of secondary, non-per- manent, assured or continuous power and of secondary, non- permanent, unassured or non-continuous power produced under the two conditions of storage or no storage. Where one reservoir benefits a string of plants scattered downstream, it is common to state that the value of the storage depends on the amount of fall through which the impounded waters may be utilized. As a quantitative statement this may be inaccurate for the general benefits of storage decrease with the distance downstream. This is due first to the fact that the impounded waters form a smaller and smaller proportion of the stream flow as added units of drainage area pour their run-off into the stream. It is due also to the disturbing influ- ence of local-plant pondages below, especially where they do not operate alike at simultaneous hours or where they are not under the control of a single load-dispatcher. The value of APPRAISAL OF LAND AND WATER RIGHTS 77 the reservoir site then is not the sum of capitalized net earnings of each plant assumed to secure full benefit of the stored water; it would depend upon the somewhat complex and difficultly ascertained difference in net earnings for the entire existing or probable situation of all the plants as a unified system with and without the storage. Omissions in Inventory. No matter how complete the in- ventory seems to have been, nor how well supervised, it is the general experience of appraisers that later some things were noted which had been overlooked. It has been found impossible to insure complete freedom from all omissions, and to secure a closer approach to actualities an allowance is frequently made for them. Some 5% is not unwarranted as an average allowance, though 2 or 3% would seem to suffice for a large property of comparatively few items and 15% may be fair at the other extreme of a smaller property with many and scattered items which are difficult to check up. Allowances for Overhead Charges. Anyone experienced in construction knows that the bare cost of fabricating the utility's present physical works is not all of the legitimate and necessary expense. There has been money spent in investigating the possi- bilities of the particular project; the promoters have earned some reward in financing the development; the cost of the engineers' designs and of the inspection of construction are not to be neglected; various contingencies arise to add to the cost, and evidence of their presence does not persist. Working capital has had to be provided and its interest has been lost. These and similar costs are all items locked -in with the tangible features of the actual plant brought into service. These can be accurately determined, as actualities and not as probable approximations, only if the various accounts have been well kept on approved lines and pre- served intact a combination not common in utilities more than 10 to 15 years old. Cost of Administration, Organization and Preliminary In- vestigations. The very first of development costs covers the expense of preliminary engineering studies, of organizing the cor- poration, of acquiring the franchises and rights of way, of the numerous legal actions which have to be started. It costs considerable to work up an effective organization and to get out the detailed plans and specifications. After construe- 78 PUBLIC UTILITY RATES tion is started, all this corporate activity increases. Items like office expense, legal advice, damage claims, salaries of general officers, clerks, accountants, etc., and interest on the working capital (which has to be kept on hand to pay contractors, engineers, administrative force, purchase miscellaneous supplies, etc.) grow apace. The engineer's appraisal must report all evidence tending to throw light on proper allowances for overhead items. The ap- praiser's instructions should state whether or not the engineer is to go farther and fix a reasonable figure for such additions; such determination is valuation by judgment rather than mere ap- praisal by evidence. What has been found fair in the past is noted in the following few paragraphs, on interest and taxes during con- struction, contingencies, commissions and discounts, discarded property, promoters' profit, etc. Interest During Construction Period. A company, of course, has to pay interest on the funds which it secures through bond issues. Therefore it should be allowed to enter as one of the property-development expenses some proper interest on funds locked up in plant not yet earning. In the first place, it is neces- sary to find or estimate the sums secured from time to time whether all in a lump before work was started or in smaller amounts from month to month to pay cost of work completed to those dates. This analysis also involves study of the time before the plant units become operative and capable of earning. Then too the rate which it is reasonable to assume for such money so tied up must be approximated. It is common recourse to allow 6% but it would appear to be more logical to take the rate which the loaners actually demanded. If money came from bonds then the net bond rate (adjusted to sale price) might prevail; if the funds came from stock sales perhaps nothing since the stock holders may have expected and received no return until the plant is capa- ble of operation and such deficits may enter the business-develop- ment cost which should not be confused with overhead charges on plant. If both bonds and stock were put out then perhaps the desired rate might be the bond rate modified by the ratio of bonds sold to total funds provided. Where temporary paper has to be floated to carry construction and later replaced by bond or stock issues, of course, the actual or estimated note rate is to be consid- ered. Some attempt at reduction of the capitalizable interest APPRAISAL OF LAND AND WATER RIGHTS 79 may be made also by considering how the funds secured have remained on tap if on deposit ready for meeting payments. If so, then the depositary frequently allows 2% daily balance. In many cases perhaps it is sufficiently exact, where definite historical figures cannot be discovered, to take half of the total sums involved and the whole of the construction period. But in some cases the heaviest expenses, as for expensive machinery, come toward the end of the work and it is advisable to approxi- mate closer, say by taking the probable figure of construction cost for each year and computing interest for half a year at full rate or at full rate less 2% as may be thought nearer actual pro- cedure; then from that year to the end of construction the esti- mated expenditure, the full time and the full rate would be used. Where extensive additions or reconstructions to plant are made then each of the various completed units of equipment goes into whole or partial service without waiting for the others and the interest cost of construction is correspondingly reduced to, say, full rate for half the time of constructing each unit. Interest may increase construction cost from 2 to 10%. Taxes During Construction Period. Parallel to interest dur- ing construction are taxes on the utility before operation. Of these, a great variety are imposed on utility corporations cor- porate, capital-stock, franchise, and real- and personal-property. The process of finding the probable figure is similar to determining interest; the local demands must be ascertained and the property owned at each local assessment date. Taxes during construction may amount to as much as | of 1% of the construction cost. Insurance During Construction. Closely allied with taxes and interest is insurance during construction. There is, of course, fire insurance, where fire loss is possible. Accident-liability pro- tection is generally carried also. These items may run as high as 2% in certain difficult and hazardous undertakings such as in city subway construction under streets in which traffic has to be main- tained. Under ordinary conditions \ to \ of 1% on cost of work is believed to be a reasonable expectation for the total of all in- surance premiums. Piecemeal Construction. Where a plant has really been built up by a succession of additions, the cost is more than as if one big job had been done that is a matter of common experience and is explained by the comparatively larger amounts of overhead 80 PUBLIC UTILITY RATES charges per unit of plant on the small than on the large job, by the more favorable prices secured on the larger quantities, etc. When such piecemeal construction has to be made around plant in service there is still more added expense. There are innumer- able instances of this in connection with power-plant changes, adding valves and hydrants to water mains, etc. But in an ap- praisal of physical plant as standing, there is usually little sure evidence of the piecemeal construction so that it is essential to consult whatever history of the utility is available if the concern is to be treated equitably. Piecemeal construction has often added upward of 5% to construction cost, the addition increas- ing with the difficulty of the new work. Contractor's Profit. It is usually more economical for an operating company to employ a construction contractor who, from special knowledge and experience, can usually build better and cheaper than the concern organized for operation. Indeed some operating concerns, which expect construction more or less continuously, have organized a friendly construction company. This scheme has been greatly abused at times and made the means of bleeding illegitimate profits out of a project. The wholly in- dependent contractor's profit may run from 5 to 20% of the cost of materials and work, but a common allowance is 10%. The profit of an allied contractor ought not to be more than for an independent one. Engineering Design and Inspection. The charge of a con- sulting engineer who assumes complete responsibility for the design and advises about construction usually is 5% but rises sometimes to 10% depending on the size and intricacy of the work. The fee would be expected to decrease slightly with the magnitude and increase with the difficulty of the work. Where concerns have done their own engineering design and supervision of construction, with only the review of prominent consulting specialists, the total cost has turned out about the same 5 to 10%. For example the reported figures for the several rapid transit tunnels and subways in New York City hover around 6%; for similar works in Boston, the reported figures are 9 to 10%. Architect's Fees. In some cases, where extensive buildings enter an appraisal, the above allowance for engineering charges may need increasing to include the architect's fees (6% on par- APPRAISAL OF LAND AND WATER RIGHTS 81 ticular structures). Sometimes the engineer's fee may cover the pay for architects, etc. In most such cases where many buildings enter, the grading of the grounds has added an appreciable sum say from $100 to $1000 per acre depending on the fills, cuts, gardening embellishment, etc. This of course is not an overhead item of engineering and design but rather one of structural cost; it is, however, a matter on which oftentimes no little of the engineer's effort is expended. Influence of Contingencies. All sorts of unforeseen events may have enhanced the cost of any work more or less over the estimates for normal conditions there are floods, conflagrations and all the other "acts of God" to be considered. After the ad- verse situations are past and a few years have elapsed, the marks are not seen on the physical property to be appraised. A true view can only be secured by access to good accounts and these are rare for the older utilities. The history of a locality or an utility may well be examined to find evidence of particularly favorable or unfavorable circumstances compared with those prevailing at the date of appraisal. But usually it is necessary to add a per cent or two to the pure physical cost to cover what cannot be detailed item by item, but which experience teaches is always met with. This, moreover, covers excess expense not compensated for as a common business risk. Any allowance for contingencies is commonly lumped in with engineering. Data on Engineering and Contingencies. Some very in- structive data on actual costs of engineering and contingencies have been collected by the American -Society of Civil Engineers Valuation Committee (1914). Notable are the following cases: the cost of engineering for the Boston Metropolitan Water Works was 8.42% on $26,736,000, which was the total cost to 1913 not including engineering; the cost of engineering for the New York additional water supply (Catskill Aqueduct) was 11.2% on $93,128,000 the cost to September, 1913, not including engineer- ing; on the Boston Tunnel and Subway^ the cost of engineering was 5.48% on $3,623,000, and the general expense was 3.58%; on the East Boston Tunnel, cost of engineering was 6.62% on $2,894,595, and general expense was 5.57%; the Cambridge Sub- way engineering was 8.05% of the construction cost alone ($1,280,000) and general expense was 5.20%. 82 PUBLIC UTILITY RATES The cost of several preliminary engineering investigations is also given by the same authority. For the Louisville sewerage works this was 1.7% on the construction cost ($3,317,000) com- pared with 10.3% for engineering on design and construction and 2.6% for administration and damage suits. Some very general idea may be gained in the appraisal as to whether the engineering charges have been heavy or light by the appearance and character of the work. If the designs are very simple with comparatively little elaborate detail, as in some storage-reservoir dams, or if the work is somewhat crude and none too well built, judged by the standards of the day, the engineering costs were probably light. If the design has necessitated a vast amount of detail, as in some power stations and filter plants, and the work shows unusual excellence, then the charges were prob- ably above the average. Bond Commissions and Discounts. Over and above the allowances for overhead expense noted before in connection with various items of physical property is the cost of floating the stock and bonds particularly the latter. With bonds, this expense is covered by a commission demanded by the bond brokers as profit and to recompense them for the expense and risk of sale. As a result, the sum realized is less than the liability incurred and this difference varies from 5 to 50%. The cost of the physical property, overhead expenses, etc., should be increased by some allowance for this. Commission control of financing arrangements tends to reduce brokerage costs; the California board recently noted a cost of less than 1% in one large issue taken locally. Fairly distinct from the commissions and brokerage expenses just noted are bond discounts which have the effect of increasing the interest on capital actually paid in from the sale of securities. If a 4|% bond with a 10-year term sells for 96, then the yield rises to 5.1%. Such discounts are not generally recognized as capitalizable, nor is it sufficient to enter the price secured and the actual yield in fair value and fair return since the concern has incurred a liability for the full par value of the bonds. Two recent typical opinions bear well on this point. In the Blue Hill Street Railway case of the Massachusetts Public Service Commission (No. 886; P. U. R. 1915 E, 370; July, 1915) it was stated: APPRAISAL OF LAND AND WATER RIGHTS 83 While the $13,750 representing discount on bonds likewise cannot be considered a part of the "capital invested," the company is entitled to have this sum liquidated, or amortized, from earnings during the life of the bonds, and to receive interest upon it to the extent that it is insuffi- cient to provide the funds found by the Board of Railroad Commissioners to be "reasonably requisite" for lawful purposes. The deficiency was sup- plied through floating indebtedness, and the company is fairly entitled to interest upon this indebtedness until the impairment of capital so caused has been made good from earnings. In the New York Central Bond case of the Illinois Public Utilities Commission (No. 3629; P. U. R. 1915 D, 1025; April, 1915) one reads: It is further ordered that all discounts, commissions, and expenses in connection with the approval, issuance, and sale of the said bonds author- ized to be issued under this order shall be amortized out of the income of the company before May 1, 1935, by the payment of equal annual in- stalments so long as may be necessary: or that the said company may charge the amount of such discounts, commissions, and expenses to profit and loss at the tune of the issuance of said bonds, or at any time may charge to profit and loss any or all of the unamortized balance thereof. Any premium realized through the conversion of said debenture bonds into capital stock shall be applied against any unamortized balance of the discounts, commissions, and expenses above referred to. The Value of Discarded Plant. The rapid growth of certain utilities, especially those involving the use of electricity, has made vast amounts of equipment antiquated so that it has been replaced by apparatus more modern, more economical or more satisfactory to the customers. It is necessary, in recalling such instances, only to mention such things as cable cars, steam engines, common arc lamps, early telephones, etc. Such obsolete property has had a useful life much less than it was reasonable to expect of it when it was placed in service and therefore there has been insufficient time to repay the investment out of earnings even had the need for replacement expense been as well recognized as it is at this later day. If the worth to be used as a basis of rates is itself based on cost to reproduce the existing structure without regard to the history of the utility concern, how may the company be fairly treated? In one way this is another aspect of a question already touched upon whether it was better to strive to secure a formal strict 84 PUBLIC UTILITY RATES adherence to an appearance of complete consistency in valuing property on the basis of cost to reproduce new or to secure a nearer approach to fair dealing by throwing on this scheme "the light of reason" in allowing the history (but not a legendary past) of the works to modify the valuation. This means that the valuation may include cost of some items not still existing. Especially does this seem essential in those cases where the old equipment has been thrown aside by legal enactment (in which case the Knoxville ruling probably does not apply) and the superseding property has been paid for by fresh capital stock, bonds, or notes, etc. Similarly, the utility corporations may expect to earn on something which has passed away, when there has been insistence of the customers for greater convenience or luxury while the actual necessities and ordinary conveniences of the public were satisfied by the old property, and when there was no prospect of a compensating economy by the change. This opens the door for possible abuse of the historical modification of reproduction cost new, but surely not in a way that is beyond the powers of any live regulating commission properly to curb. To prevent the perpetuation of such debts on a future generation of stock holders and rate payers, the present genera- tion of customers should amortise such sums by contributions out of the earnings above those for depreciation, interest, profit, etc. Moreover, the records should clearly show when such old debts have been actually refunded. To many the only logi- cal solution will appear to be to allow the unrepaid costs of dis- carded equipment to enter the item of business-development cost. There seems less cause for including such lost investment in full in the rate-basis worth, when an unregulated company made the change wholly, or in large part, with the expectation of secur- ing important operating economies and larger profits. Before the supplanting installation was made, the concern should have satisfied itself that the net economies of the new apparatus would have themselves retired any unrepaid cost of the displaced equip- ment within a reasonable term say the length of time before the older became insufficient, and paid interest on the new investment and on the diminishing balance of the old. There may be cases, where the repayment process is not com- plete and where full economies are not realized, that the "fair APPRAISAL OF LAND AND WATER RIGHTS 85 value" would include the new investment and some part of the old. The annual expenses might also include something to hasten the amortization of the old funded debt which it was de- sired to have continually diminish. Such rather generous treat- ment, under fair commission regulation, seems to give a more logical solution of the obsolete-property question than the blind provision of allowing a slight addition to the rate called "fair return" to compensate for another "risk of the business." Promoters Profit. Compensation for promoters' services is another overhead expense not listed by any inventory of physi- cal property. It has been allowed in some cases and undoubtedly could have been allowed with justice in many others. Probably this item would have been more easily accepted had the attitude and operations of some conspicuous promoters been more calcu- lated to win public confidence. Many promoters, perhaps a majority, are men of large out- look and force enough to push through a project where the nar- rower minded or timid would fail. Ability to win support, and to build in face of great obstacles, or at notably low cost, deserves a good reward, of course. In the past it has been a common custom for promoters to take their pay for the time they have nursed a project, for hardships, etc., in speculative issues of stock rather than in admitted sums, say of 5 to 10% or more of the cost. Up to a certain point this stock is "brains," not "water." Unscrutinized and speculative rewards in connection with public utilities are not highly regarded now, but condemnation of such issues quietly made in the past are not to be over-severely condemned in all cases today on ac- count of the once general public acquiescence. Yet such a state- ment is not to be construed as a sweeping approval of promoters' watered stocks, some of which seemingly have been put out with evil intent. Business-development Investment; " Going-concern Value." It is obvious that for a case of purchase of an utility, a smooth- running concern in an established locality or a developed territory is worth more than a new development of equal capacity. This has been recognized by courts and regulating commissions gen- erally; for instance, an early important decision is that of the U. S. Supreme Court in the Kansas City Water Works case (62 U. S. Fed. Rep. 853) where we read: 86 PUBLIC UTILITY RATES The city steps into possession of a property which not only has the ability to earn but is in fact earning. It should pay not merely the value of a system which might be made to earn but that of a system which does earn. , The fact that this earning condition represents money invested and skill applied makes permissible some allowance for it in the basis of rates, among the intangible values. Great care should be exercised, however, not to include in the rate-basis worth those elements which would enter a purchase price as springing out of adequate rates and good service, and which exist because maintained by annual expenditures. The term "going value" has been used for years to cover a list of vague and diversified ideas as to certain additions to the total worth of physical property used as basis of rates. Some of the claims seemed to include vague unearned increments in market value and were so problematical and difficult of consistent appli- cation that "going-value" at one time bid fair to be only a name for a discredited effort to increase value. But if we give it the very definite idea of the unrepaid extra investment surely or prob- ably made, after operation has started, in bringing the utility up to the reasonable earning power which is associated with success- ful service, then it will be more generally accepted in rate cases. Accrued Deficits as a Measure of Going Value. In the early years of an enterprise, it is necessary to make the prices for service attractive in order to build up the business. But the actual costs, if distributed on the few early customers, would make the charges usually all out of proportion to the intrinsic value of service as fixed by potential competition with other service or product. Then there results a series of annual deficits, between earnings as they are and as they might better be, which in jus- tice to the stockholders must be made up somehow and sometime. If we limit "going value," for rate making, to the cost of the aggregate deficiencies in the rates of the utility, then a simple and practical solution of a troublesome problem has been made though this plan is not universally accepted by any means. This practice eliminates the factor of "good-will." Utilities have become largely monopolistic in nature and "good-will" is generally discarded as an asset to be included in the basis of rates, it being argued that the public has to buy from the one concern or suffer the inconvenience of no service. No considerable in- APPRAISAL OF LAND AND WATER RIGHTS 87 vestment is represented in devices to meet competition. There are, to be sure, certain minor expenses, in the case of a monopoly with enlightened management, for publicity, new business, en- couraging the confidence and respect of customers, but these are in the nature of general annual administrative costs certainly if such efforts are cut off the old attitude of suspicion and un- friendliness returns in a few months. Satisfied customers spend more than disaffected ones, and favorable public sentiment makes it easier to tide over operating emergencies; this is like more or better oil for the machinery. There is then no good reason why the customers should pay for this item year after year through general expenses and then pay interest on it as a capitalized value. Some will argue that during early years there is expense in fitting the new organization together, in harmonizing all the little details of equipment, in adjusting apparatus. It is true that these are more than mere evanescent effects of administrative expendi- ture for their good result persists and is transferable. How much money is so spent is very speculative and indeed it is probably distributed in various accounts as general expense, repairs, oper- ation, etc. Then this also has been paid by the customers and so a separate increment in worth should not be capitalized directly. There is, however, logic in the argument that if expenditures for publicity, new business, internal adjustment, etc., had not been made (neglecting the consequent drop in business secured) there might not have been as large early deficits. If the utility concern is allowed to include in its capitalization the early defi- ciencies below a fair return, then there will be adequate compen- sation for expense of knitting the organization together unless rare and peculiar circumstances can be proved. It seems fair if these early deficiencies in interest and profits are summed up, only temporarily capitalized, and the total gradually repaid out of earnings; this has the added advantage (in cases where the cost of service approaches the ultimate "value" as fixed by po- tential competition of a rival process) of strengthening an utility's commercial position by not asking the customers forever to pay interest on inevitable early mistakes as well as on full cost of final plant. Wisconsin Method of Estimating Going Value. What has come to be known as the "Wisconsin method" of estimating going- concern value or business-development investment, consists in 88 PUBLIC UTILITY RATES adding to each year's investment the deficiency by which net earnings fail to provide for depreciation, interest and profits, etc. The plan was worked out in the case of Hill v. Antigo Water Co. (3 Wis. R.R. Com. Rep. 623), and further explained in the case of State Journal Printing Co. v. Madison Gas Electric Co. (4 Wis. R.R. Com. Rep. 580). A few paragraphs from this last report state the method so concisely that they are reprinted : The plant was charged with the cost of the plant at the beginning of the first year, with the new extensions, interest on the investment, de- preciation of the plant and the expenses of operation during the first year. It was next credited with the total gross earnings during the year. The balance between these debits and credits was regarded as the net value of the plant at the end of the year. This balance was then carried forward to the beginning of the second year, and with the extensions, interest, depreciation and operating expenses for this year charged up against the plant in the same manner as for the first year. The credits to the plant for the second year, the same as for the first, consisted of the gross earnings; and the balance was regarded as the net value of the plant at the end of the second year. These operations were performed for each year of the fife of the plant, the balance at the end of the last regarded as the value of the plant on the earnings basis in question at the end of the period. Computations of this character must of necessity show the value of a plant at the end of each j^ear on any given earning basis. If the figures that are included in these calculations contain only such items as equitably belong therein, and if the rate of interest and profit that is used is the rate that is fair and equitable to all concerned, then it also follows that the balances at the end of the year are fairly close representations of the reasonable valuation of the plant and its business. Thus it is seen that early deficits in net earnings below stipu- lated rates of return increased the cost of the plants and business by that amount; early surpluses above such stipulated return repaid the cost of plant and business. The Wisconsin Commis- sion, at that time (1910), held that when the worth of physical property (by appraisal) was less than the total investment as above determined, the concern was entitled to have at least the difference entered into the rate-basis valuation. If the probable investment figure was equal to or less than the appraised value of physical plant, then no allowance for going-concern value or business-development expense was admitted. The same Wis- consin report above quoted has this further to add about the plan : APPRAISAL OF LAND AND WATER RIGHTS 89 For public utilities which, under both the common and the statute law, under normal conditions, are only entitled to reasonable returns on the investment, justice as well as equity appears to demand that the amounts, if any, by which they, under ordinary conditions, have failed to earn such returns, should be considered in fixing values and rates for such plants. In fact, such consideration would in most cases seem to be absolutely necessary in order to secure the capital required. For it must be obvious to all, that unless the prospects for obtaining at least a reasonable amount for interest and profit are at least fairly good, private capital will not enter such enterprises. By this is not meant, however, that deficits from operation can be equitably taken into account in the appraisals or rates regardless of the conditions under which they were incurred. As already stated, when such deficits are due to abnormal conditions, or when due to bad management, defective judgment, ex- travagance, lack of ordinary care and foresight, unduly high capital charges and other causes of this nature, it is manifestly clear that they should be accorded little or no consideration in either the valuation or the rates. This is also likely to be the case for such deficits which were incurred under and borne by others than the present owners, and which have been wiped out in the various transfers of ownership. That these propositions are, as a rule, sound and equitable, appears to be so clear as to need no further argument. This plan has been repeatedly affirmed.* It seems to be ap- proved in theory at least by one old federal-court decision Metropolitan Trust Co. v. Houston & T. C. Ry. Co., 1898 (90 Fed. Rep. 683). The plan has been disapproved in a few rate cases notably Spring Valley Water Co. v. San Francisco, 1908 (165 Fed. Rep. 667), evidently (1) in fear that the deficits might be due to waste, extravagance, and mismanagement and (2) because a con- cern earning well from the start would have no "going value." It is true that the method fails to show a "going value" in initially prosperous concerns a value actually acquired but nevertheless one possibly to be regarded as amortized by the consumers through high rates. No concern jumps into a full-fledged business and the presumption is safe that there will be early deficits or else comparatively high rates. It should be noted that the denial of * In the following rate cases: Racine v. Racine Gas Light Co., 1911 (6 Wis. R.R. Com. Rep., 228); Beloit v. Beloit Water, Gas & Electric Co., 1911 (7 Wis. R.R. Com. Rep., 187); in re Oconto City Water Supply Co., 1911 (7 Wis. R.R. Com. Rep., 497); JanesvOle v. Janesville Water Co., 1911 (7 Wis. R.R. Com. Rep., 628); Marinette v. City Water Co., 1911 (8 Wis. R.R. Com. Rep., 334). 90 PUBLIC UTILITY RATES going-concern value to a prosperous utility is possibly a retroac- tive penalizing for past profits a procedure apt to be challenged in any high court. Reproduction of Going-concern Value. The Wisconsin method of finding going value depends on securing records of origi- nal investment, extensions, earnings, etc., and it fails when the basic data are not available. Some other approach to the same end then is desirable. An attractive but laborious method of reproducing the going-concern value has been evolved by J. W. Alvord and Leonard Metcalf (American Water Works Association, June, 1909; Transactions American Society of Civil Engineers, Vol. LXXIII). This method probably appeals strongly to the advocates of a strict consistency in use of reproduction cost of property (unaffected by historical conditions). Alvord and Metcalf take development cost as the sum of the present worths of the annual excesses in net return available for fixed charges and dividends (excess divided by the amount of $1 at interest to the end of the given time) from the existing plant over the net earnings of an imaginary comparative plant (con- struction just started) from the date of valuation to the time when the net earnings of the new plant equal those of the old. The comparative plant, which of course is purely hypothetical, is pushed ahead as rapidly as possible, taking up the business of the old as fast as suitable units can go into service. Obviously many estimates have to be made such as (1) time required for construction of the comparative plant, (2) time re- quired for its net earnings to equal those of the old plant, (3) ratio of installed capacity to actual business for the new plant compared with the old, (4) the gross income of the new plant at various stages of the transfer of business, (5) the various expenses except return available for interest and dividends. It is evident also that many of the assumptions must be more or less arbitrary. There is also the anomalous situation that com- plete value of the new plant has to be in hand to start with, in- cluding the very going-value sought. However, a tentative value is given from experience and the calculations are carried through. Then, if the actual resultant going-concern value is much different from the assumed, the tentative value is changed and the process repeated until there is no change needed. This scheme of finding going-concern value has been applied APPRAISAL OF LAND AND WATER RIGHTS 91 to condemnation and transfer proceedings rather than to rates, though there is no good reason why it is not so applicable. Some will accept it as they accept reproduction cost based on present physical conditions in lieu of original cost and investment or knowledge of old conditions; others seeking rigid consistency of reproduction methods of evaluation will accept it in place of the Wisconsin accrued-deficit method. It has been assailed by the opponents of the reproduction-cost schemes of appraisal for what they call its "unreal and fantastic assumptions" such as start- ing a hypothetical new plant in a community and taking over as fast as possible the business of the existing plant. Those who assail it most have no more logical substitute and retire to a gen- eral denial of value from business-development expense. Depreciation as a Measure of Going Value. It has fre- quently transpired that an utility company, instead of making wise provision against depreciation (usually not realizing the 'necessity of giving this item careful consideration), has continued to pay dividends more or less satisfactory to the stockholders. In some quarters there is a disposition to hold that the depreciation in value of the plant is then a direct measure of the cost of develop- ing a going concern. There is merit in this attitude if the management has been hon- est though short-sighted and if the dividends from the start have been only reasonable no more or no less. Then the moneys diverted from depreciation funds can have gone only into develop- ment of business. The trouble with this measure of going value is that seldom is the proper combination seen of honest manage- ment, lack of depreciation provisions, and reasonable return. Such a measure of going value may be expected to be unfair to the utility, rather than to the public, since it is a common result that in the early years the concern is not able to set aside from earnings, either ample depreciation funds or reasonable return. Amortization of Intangible Values. While all the plant- development items, discounts, promoter's profits, engineering and contingent allowances, taxes, business-development costs, etc., are to be seriously considered and usually aggregated in fair value, yet they are expenses which the present generation of users should be expected to wipe away so far as it is possible. We may rightfully pass along to our successors total liabilities equal only to the tangible assets and leave their hands free to work out their 92 PUBLIC UTILITY RATES utility problems under their own strange conditions. They should not start with the burden of our development expenses which, if history repeats, will not prevent development expenses of the future plants. The common way to attain this end is to lay aside out of earn- ings, some contributions to an amortization fund for retiring bonds, etc. It is equivalent to this to make extensions to equipment out of earnings or surplus until the worth of tangible property is up to the capitalization and bonds. In the early years, before the business has attained any dividend-yielding status, either course may not be possible but the need for such action is not to be permanently forgotten and the process should be instituted as soon as a way can be found. There is no occasion for amortiz- ing an overhead burden which will be wiped out by the funds provided against depreciation of the underlying property item. While as a general proposition it seems fair to group the develop- ment expenses noted as parts of rate-basis worth, yet it is not to be forgotten that such a practice in rare cases may make the cost of service prohibitive or unattractive in some specific cases and thus hamper a concern's development. Therefore, cases may arise when these sums in part are to be noted as an unearning invest- ment to be retired as described, and as early as possible. Effect of Good Design or Favorable Location. After a " fair- value" has been established so far in accordance with the ideas already set forth, then if the plant in question does not stand free from comparison with any similar plant, a final disturbing question arises as to the full propriety of making this somewhat idealized value the actual rate-basis worth. Nearly every en- gineer knows of some utility plants of -such meritorious design and favorable location that they can give good service at less than average cost; other plants have such inferior design and poor location that they can furnish only inferior service and that at higher prices. Shall the same percentage rate of earnings in both cases be allowed on the aforesaid "fair value" similarly obtained f6r each supposing that capital is attracted by the same rate in both localities? If so, then the inferior service must cost the customers more than the superior. There is some ground for arguing that the better situated com- pany should be given still another increment of "fair value" so that the rate-basis worth may include some of the capitalized 93 brains that may have been responsible for the favored condition. But obviously, if inherent natural conditions contribute to the superior service and low cost then the public should reap a pro- portionate benefit, for it has been settled that an utility is en- titled to a fan* return on fair value and no more which surely does not include a return on capitalized opportunity. How then can this be adjusted? The question has not been decided by any court or commission and so may be regarded as in the formative stage. Tentative schemes, however, may here be advanced for future test of propriety. If the utility works are really able to furnish the superior service at low rates, and there are absolutely no natural endowments which create or foster this situation, then it may be accepted, prima fade, that unusual promotion ability must have been mani- fest and may be rewarded if any principles akin to "statutes of limitation" do not prevent. The amount by which the "ap- praised-value " may be increased for the rate-basis worth, is then such a sum as would make the resultant rates approach more or less to the average of many similar localities or to the average, perhaps of a selected number showing comparatively low rates. This has the effect of increasing the rate of return. Indeed the rate of return may in the end be the real criterion. A good com- mission ought to be able to estimate the cost of having the work planned by one of the leaders of the industry, then adding this to fair value. A dividing scale also might be devised for the allowable increase of worth corresponding to a given decrease in rates. If on the other hand, natural opportunities create or foster the favorable rates and service, then there can logically be little or no increase in capitalization and all the benefit may go to the cus- tomers. If the peculiar favorability is due say half to the pro- moters and half to nature, then the utility corporation may secure half the value increase it would have secured if the promoter alone has made the gain possible; and so on. It may be desired to secure this end sometimes by changing the rate instead of the rate-basis value. Then, the high rate is always before the public where the explanation of its size must be repeated at times. Changes in capital-value are not so easily compared "in the street" as are rates of return and are not so frequently published. There would perhaps be aroused less mis- conception and misunderstanding by providing for the extra re- 94 PUBLIC UTILITY RATES ward in rate-basis worth instead of per cent return ; if commission regulation is complete and in good hands the chance of abusing the lack of easy publicity is small. If the foregoing reward be permitted, then it seems necessary, in the absence of natural obstacles causing inferior service and higher costs, to penalize poor design and construction or lack of promotion brains. If the added cost and inferior service are wholly due to short-sightedness, then the intangible values al- ready noted may be properly reduced until the rates approach those elsewhere for the same service. How far this should go depends on the grossness of mismanagement, extravagance of expenditures, etc.; as to the presence or absence of extreme neg- ligence and gross carelessness, commissions may judge. If natural conditions impair service and lead to the high costs then the public should bear the burden and the concern little or none. Inter- mediate degrees of shared responsibility may allow proportionate reduction of intangible parts of capitalized values. The various schemes possible for estimating increase of intangible values to cover unusually beneficial promotion can be reversed for comput- ing a decrease. Sudden Reduction of Value. The few paragraphs immedi- ately foregoing lead to a possible solution incidentally of another problem which has bothered many. Suppose the favored utilities to have been established for a decade or two and always to have charged rates comparing favorably with those in other localities but bringing an unusually good net return to the company. The securities then have appreciated on the general expectation that the high returns will continue. Shall a new commission with large powers break in, reduce rates to the idealized ''fair-value- fair-return" plane, cause a decrease in market value of securities and a corresponding financial loss to recent investors? Certainly if the favored earning condition of the utility is purely the result of promotion brains, such a change would not seem equitable, on the grounds previously noted. If natural conditions produce the favored situation, wholly or in part, then in many cases it may be possible, without great hardship on any one, to reduce gradually the price per unit output and the actual return on appraised value, the time involved depending somewhat on how widespread the distribution of securities has been from the original holders. The aim might well be to let a security holder recover in his super- APPRAISAL OF LAND AND WATER RIGHTS 95 profits (above a very moderate return on his investment) the final loss of principal to be expected. Such a situation also somewhat resembles the gas-utility situa- tion in England, public control of which was secured with diffi- culty. The final outcome was that a lower return was earned by new capital, through limiting dividends or selling shares at auc- tion, and increases of dividends depended on reductions of rates for service. Excess earnings went into a reserve fund (10% of capital) for contingencies, extraordinary renewals; or indicated further reductions of rates. CHAPTER VII REASONABLE RETURN; INTEREST; COMPENSATION FOR RISK AND ATTENTION; EXTRA PROFITS What is a Reasonable Return? The rate of return which should be secured on the money invested in a public-utility plant has been commonly denned in a general way as that which is sufficient to pay ordinary interest and above this to compensate for the risks of the business. It has also been generally defined, from another angle, as one just sufficient to attract fresh capital to the field. But for the very specific problems of ascertaining fair rates, very definite percentages as to the allowable of return are required, and these are not indicated by such broad statements which are declarations of ends rather than descriptions of means. But by scientific approach one can analyze the judgment of suc- cessful men and fix upon quite definite percentages. It is obvious that capital will flow into a field, if it secures (1) ordinary local interest return, plus (2) compensation for business risks, plus (3) some reward for the actual attention re- quired from the investor, and plus (4) the possibility of more or less profit above these other factors which partake much of the nature of mere wages of capital and capitalists. It should be illuminating therefore to examine these elements in theory and practice, to formulate a basis of judgment as to the rate of return in specific cases. Only what may be called normal conditions will be considered where the utility can sell its product or service, with profit, at rates which are equal or less than those which customers will pay rather than forego the service. Situ- ations where such is not the case require such special measures that their discussion cannot easily be undertaken in advance of occurrence. Pure Interest. Money cannot be secured for any business purpose unless a certain annual percentage be paid for the use of it. In most cases, individual borrowers can exert little or no in- fluence widely to reduce the rates of interest, though it is largely affected by the desires of borrowers as a body. Similarly, an in- 96 REASONABLE RETURN 97 dividual lender can seldom exert influence to raise the general rate though the total available funds and the aggregate demands of the lenders may do it. It is commonly reported at times that 4%, 5% or 6%, say, is the prevailing interest rate because mortgages and notes can be negotiated on that basis. However, other elements than in- terest, pure and simple, enter in nearly all such cases and the real interest rate is appreciably less. An idea may be secured of the prevailing true interest by the return in the locality on funds put out with practically no risk and requiring practically no effort of the lender to keep risk away and to collect the income. Bonds of stable governments and deposits in some savings banks are fair indicators of unalloyed interest as good perhaps as are easily examined. The real interest rate corresponding to the 5% or 6% noted as nominal popular figure, is frequently 3 or 4%. The difference compensates the leaner, on mortgage and note for in- stance, for his need of scrutiny at intervals of the collateral prop- erty value, for the greater chance of losing principal or interest, for the effort required to collect the interest, etc. Compensation for Risk. The business risk involved in any investment cannot be immediately stated in definite figures as it can only be estimated rather than measured and as its esti- mation is, within limits, a matter of judgment. However, it is axiomatic that an individual mortgage is more risky than a savings bank account and the latter in turn more so than a govern- ment bond. All admit the respectively increasing uncertainty in manufacturing, mercantile pursuits, railroads, agriculture, mining enterprises, etc. About the nearest approach to a logical scrutiny of the risk in a given public-utility business is to study its organi- zation, stockholders, customers, locality, development, earnings, etc., and to exercise judgment in comparing the risk with that in any local manufacturing, mercantile business, agriculture, railroad- ing, or mining, the returns from which can be found. Factors Increasing Risk. The risk of investing in any in- dustrial enterprise may be reasonably held to depend on a few factors such as (1) the soundness of its early organization, financing and management; (2) the honesty and ability of the present management, the present business status of the concern and the present effect of its early history either good or bad; (3) the possibilities, probabilities and extent of competition; (4) the 98 PUBLIC UTILITY RATES ability to hold the market and maintain gross earnings, the pro- tection afforded against ruinously low prices, the probability of raising prices or rates parallel with the movement of wages, materials and general expenses, the probability of continued good management or better; (5) the probability of increase in taxes, in prices of materials and in wages of labor, etc. If in the case of any particular utility, we could study certain other local industrial projects paying good dividends, light might be thrown on the effect of these factors in definite percentages. For instance, take a hypothetical manufacturing concern paying 9% but with its stock hovering a little above par this would indicate the probable existence of considerable risk to the in- vestors. If local bonds were yielding 4%, savings banks paying 4% and 3|% on small and large accounts respectively; the 5% difference might be largely considered as extra compensation for risk, scrutiny and effort. Suppose study disclosed a variegated past which had not been wholly lived down, although the present management was capable, high minded and well intrenched. Suppose that there was great potential competition to be reckoned with, that taxes had been temporarily set aside by local au- thorities, prices of wages and materials fairly low but bound to go higher. Assume that our investigation showed the probable weight of these elements of uncertainty as; history (1), compe- tition (3), taxes, wages and material (4). The sum of these weights is eight and corresponds to the added return percentage secured. Then transferring these ideas to the utility in question (having much the same risks), we could add |% for poor history as a money maker, nothing for competition (being a protected monop- oly), 2|% for expected rise in cost of taxes, operation, etc. This makes some 3% extra above mere interest for risk and perhaps another f % could be tacked on for the need of extra attention of stockholders in an enterprise which needed good directors but had once attracted undesirable ones by the opportunities for undue exploitation. Compensation for Attention. One difficulty that enters the comparison of a public utility with local businesses, as to rela- tive risks, is the fact that in them all there also enters the variable amount of attention demanded of the investor from time to time. Before the rise of the modern artificial business individuals the corporations investors and managers were more nearly REASONABLE RETURN 99 identical. The single man, or the few, who furnished the funds for an enterprise, and carried the risks, also managed the business. But under modern conditions, those who have capital to put out seem to prefer to scatter it among the larger organizations in- stead of burying it in their own business, and they thereby lose much or all of the direction of the employment of their funds. As stockholders, they still carry the risks of the business and, in theory, while they do not immediately direct the routine, they control the policies of the managers through the directors (whom the stockholders elect). But if a stockholder owns only a small part of the shares outstanding, his voice in the affairs of a concern may be very small unless he agrees with the more powerful in- terests, or possesses a vigorous personality, or can show illegal acts of other stockholders. The attention to directors required of majority stockholders may affect the return on all stock, and the minority holders get an "unearned increment" or a return for their slightly greater risk, through lack of voice. If the investment is in bonds of the corporation, the bond- holder has practically no voice in the management of the con- cern's affairs beyond protecting the security offered for the bond. Naturally if the risk is less than with stock, the rate of return is less. It is less also because the bondholder has less demand on his attention than the stockholder. The larger the proportion of bonds a corporation carries, the greater the risk assumed by the stockholders and the greater amount of attention, correspondingly, both directors and important stockholders have to give to the business and its safety. It is seen, therefore, that the three variables, interest, risk, and attention, are peculiarly interwoven in any corporation. Any estimation of one or all obviously is so much a matter of personal judgment, that hard and fast rules cannot be made for com- paring a public utility with another local business, to see how the returns go along with the degree of risk, and attention. Judg- ment should be based, however, on a logical and scientific scrutiny more or less as indicated. Prospect of Extra Profits. In the days of smaller business units, the investor-manager himself supervised that combina- tion of capital and labor that resulted in product or service. He planned the output, superintended the operation, found the market, and collected the revenues. He aimed to secure a fair 100 PUBLIC UTILITY RATES rate of interest, to insure the risk of loss, to earn the equivalent of an undefined salary, to pile up surplus profits over interest ac- cording to his ability as an economizer (an "efficiency expert") or a bargainer. In a corporation with large affairs, the managers are salaried officers whose pay is, or should be, ample to secure the same ability to plan, to superintend operation, to develop the markets and to collect the revenue. The risks of the business, however, are not borne by the managers, for, distinctly as man- agers, they have usually no financial interest in it. In some cases, stockholders and directors may have transferred their functions largely to the salaried managers, though still carrying the risk of stocks and bonds. In private business, the sometimes apparently high profits above interest may often include the manager's wage for at- tention; in the corporation, especially the utility corporation, the wage of management has already entered the operating ex- pense and should not be further considered in demands for profits. The business handled by the corporation manager is frequently more or less speculative there is some uncertainty of his mak- ing a profitable use of labor and money, of the stability of the market he finds, of his ability to collect the revenue. Yet all the salaried manager risks is his situation and pay; the stockholder bears the burden and this is additionally heavy since he neces- sarily must depend on the skill, knowledge, foresight, tact and honesty of his hired agents. Such situations must be considered in finding what return will attract capital, and in comparing local industries. There is a certain amount of inherent reduction to these added burdens of risk in corporate business, resulting from the truly monopolistic nature of a few utilities. Obviously greater risks are met in competitive business through ungoverned markets and prices, improvement in competitors' arts, reliance on patent and secret advantages of inherent instability. With utilities there is, to be sure, the menace of potential competition by temporarily outclassed services, but this change is generally so slow that the first art and science has a chance to make compensating advance. It appears probable that if there is the possibility of earning 1 to 3% on the value of an utility plant as extra profits above in- terest, risk and attention, capital should be forthcoming in times of normal activity and good business. However, instead of being REASONABLE RETURN 101 a blind allowance which any who rush in may secure, such surplus profits should be automatically developed when stockholders and directors show constructive shrewdness, ability to develop at un- usual advantage, ability to perform ever more adequate service, ability to improve efficiency of production and to decrease cost of service, willingness to maintain a broad and beneficent public policy, deep-seated desire to win and maintain public confidence, etc. Super-profits through Infrequent Rate Revisions. It is not generally well, in fixing a fair rate, that excess profits should be immediately included in the rate of return; in many cases it is sufficient to leave an open door for their development. For in- stance, where there is expected, more than realized, an unusual ability to perform more and more adequate service and to present more and more beneficent public policies, there may be a tacit agreement that rates will be undisturbed for a considerable period, during which term the company secures the full benefit of its advances in the art and its search for economies. Dividing Scales. A plan of dividing the benefit of develop- ments between utility and customer, while strongly encouraging economy and efficiency in operation, is seen in the so-called "London sliding scale" for gas companies. Throughout Great Britain it is common to allow an increase of |% over the standard or base dividend for each penny (2c.) reduction below a standard price. But in Britain frequently only the early issues of stock have been allowed to earn say 10% while later issues of an es- tablished concern have been set at 7%, 5%, 3.5% base rate. On the low-rate shares, a common increment has been ? V% for the 7% issues and |% for the 5% capital. Similarly, in Massachu- setts, the Boston Consolidated Gas Light Co. was authorized to pay dividends, increased over 7%, by \% for every Ic. reduction in retail price for gas below 90c. per 1000 cu. ft. Of course these particular so-called "sliding scales"* seem more or less arbitrary and under them the consumer has often secured the lion's share of benefit.* However, it is possible logically to apportion the dividend increment and price decrement so that the benefit is otherwise divided (as early pointed out by the late W. D. Marks in Engineering News, Aug. 26, 1909). * The term " dividing scale" has been used hereafter In this work as being more truly expressive especially in view of the common use of the other term to indicate a scale of prices changing with quantity purchased. 102 PUBLIC UTILITY RATES Assume, for example, that half the benefit is to go to the com- pany and hah* to the customers; then half the profit (per unit of service or product) equals the rate reduction. Expressed in mathematical form: p ma c T = . 2 r = cents reduction in unit price of service or product. p = standard fair unit price, cents. c = cost of delivering a unit of product or service (including interest on bonds, preferred .dividends, fixed charges, depreciation compensation, etc.), cents. m = proportional amount of stock (cents per unit of quantity of product or service sold per year) benefiting from the dividing scale. a = standard dividend rate (expressed as a decimal) on benefit- ing stock. Also, the cents increased return on stock per unit of product (m) is equal to the cents price reduction per service unit (r). If we denote by x, the increase of dividend for each cent of price re- duction, then mrx = r and x l/m. These expressions are very convenient in applying the ap- portionment to actual cases, it being understood that the "rate" is the resultant of all the actual tariffs and that the further dis- tribution of the reduction is a complicated procedure. Therefore such scales are more easily applied to utilities having a simple rate or charge, like many gas and water concerns and street railways. The apportionment has been applied to a composite of eight gas companies in Massachusetts selling gas by the thousand cubic feet. From their reports : p = 90 r = 4.99 c = 60 x = 0.0055 a = 0.11 a + rx = 0.1375, or m = 182 13f % new dividend. Applying to the Cleveland electric railways in 1909, the fol- lowing figures resulted: REASONABLE RETURN 103 m = 18 a = 0.05 c = 3 r = 0.05 p = 4 x = 0.0556 The standard profit then is 0.05 X 18 = 0.9c. per passenger fare compared with the actual of Ic. on the books. But as reduction could easily come only in Ic. steps, such a low fare would be possible only after a large increase in economy and traffic so that "m" and "c" are reduced. For the Ic. reduction to be safe, ap- plying the above expressions, 4 - (0.05 m + c) 2 and, 0.05 m + c = 2, which would be satisfied if unit cost, c = 1.8 and unit stock, m = 4; if c = 1.9 and m = 2.0; or if c = 1.99 and m = 0.2. This "dividing scale" apportionment may also provide for the possibility of raising prices above a standard and decreasing dividends in case it is desirable to share with customers the effect of a drop in sales, a decrease in economy or even an increase in cost of labor and material though it is very questionable whether or not all the last item should not fall on the consumers' prices instead of investors' dividends. Suppose that in the composite of ten gas companies, it was seen that p = 90c., a = 0.11, c = 75c. and m = 190c. Then 90 - 190 X 0.11 - 75 ftc r = - ^ = 2.95c., u the negative result signifying increase of price to 93c. The dividend decrease would be x = 1/190 = 0.00526, a + rx = 0.11 - (2.95 X 0.00526) = 0.095, or 9.5% instead of the old 11%. It is by no means necessary that the surplus profits be divided into two equal parts, one going to consumer and one to company. There can be any desired arrangement say one-third for the company, one-third for the customers and one-third for the local government. Then the expression before given reads p ma c r = . 3 104 PUBLIC UTILITY RATES The total divisible surplus is now 3r but if the extra dividends still equal the price reduction, the expression x = 1/m holds. What is a Fair Division of Excess Profits. There is a certain superficial air of fairness about splitting the benefit equally be- tween an utility and the customers, but this plausibility is dimin- ished after noting that the dividend increments ordinarily are cumulative and that the reward for advance made by the company is analogous to an individual's patent. The inventor is allowed to reap his reward only for a period; each generation of utility managers should have to make its own advances rather than con- tinue forever to reap the rewards of its predecessors. The logical expectation would be that each dividend increment should run only for a fair period say, 5 to 20 years. Greatly reducing the premiums and neglecting the cumulative action, which was the course followed in England, may be regarded as an easy make- shift aimed to secure the same end. The proportion of the excess profits over a common fair return that should go to the utility customers obviously depends in a measure on the growth of a community, the price of material and labor, and on that normal development of the art in which the local manager has no part; the company part depends all or nearly all on increases in operating efficiency, on extensions of service, on improvement of load factor, and on reduction of capital costs. In England it is not believed that equal division of surplus profits would have worked as well in the gas industry for either public or companies. It is reported (R. H. Whitten, Appendix to Annual Report for 1913, Public Service Commission, First Dis- trict, State of New York) that for 18 leading British concerns the ratio of dividend premium to price reduction, both expressed per thousand cubic feet of gas sold, at first averaged 1 : 3.8, but by 1911 had fallen to 1:7. The maximum was 1 : 4.6 and the minimum 1 : 20. It is not thought in England that greater economies could have been produced had the premiums been greater and the aim was to allow only the smallest incentive that would stimulate maximum possible price reduction; too great a premium was considered "easy money" and a hindrance to continual progress. A typical concern (Luton Gas Co.) sells REASONABLE RETURN 105 gas for 48c. below the standard price. The premium dividend is 6% on ordinary 10% shares, being a burden of 2.4c. per thousand cubic feet of gas sold. This is ^ of the price reduction. Freedom from Lax Management. Willingness to allow a concern to develop surplus profits by unusual attainments in service, economy, contributions to public welfare, etc., should not degenerate into giving special rewards for freedom from lax management, or from mere failure to drop beneath common standards as to adequacy of service, cost of supply, or public policy. The public utility may be regarded as being under con- straint to live up to reasonable standards without claim for surplus profits. Except in the matter of dividing scales, no standards have been set as to how much surplus profit should be allowed for super- standard service, etc. A commission wishing to make utility in- vestments in its state attractive to capital (without injustice to public and customers) could without much serious difficulty make up tentative and flexible standards of management, public policy, welfare work among employees, etc., and give some rough esti- mate of how improvement would be measured quantitatively and how far judgment of profits would be affected thereby. Surplus Profits as Compensation for Early Inadequate Re- turn. It is common to read in utility-commission reports that the latter-year returns have been examined to see if they make up for the deficiencies of early years. So far as has been seen there has been no scientific or logical comparison of return in these periods nor is one easy. For instance a report may state that "the net earnings recently have been 8% or 9% (or more) on the present value of the property and that this should compensate for the 3% and 4% (or less) of much earlier years." Generally data is not complete for definitely formulating the extra return that should come today truly to compensate the stock- holder for lean years at the start; it seems a more accurate process to include deficits in business-development costs. Official Burdens not a Basis for Profits. One plea for higher dividend rates of public utilities which has been heard in various parts of this country runs as follows: "This industry is by no means a pleasant one for those engaged in it. It is fraught with annoyances, unpleasantnesses and extraordinary hazards. If we are to be limited to .6 or 7% as a maximum earning 106 PUBLIC UTILITY RATES after bearing all these hazards and annoyances and after going through the lean years necessary with all new enterprises, then I would rather go into other business." Such arguments indicate a subtle, though probably uncon- scious, attempt to throw an undue burden on customers. Of course, as already emphasized, there should be due compensation to investors for attention, use of money and risks of investment. But the trouble and grief of the officers is not an excuse for larger income to the stockholders. The fallacy in such arguments as that quoted is not so plain if the officers have not completely separated their relations as employees and stockholders of the corporation. It is the function of the officers to bear the annoy- ances and unpleasant features of the business. Salaries are, and properly should be, affected by the conditions under which these men labor; but there has not yet been pointed out any reason for increasing the rate of return to stockholders on that account. CHAPTER VIII DEPRECIATION AS IT AFFECTS UTILITY RATES Liability for Retirement. Where maintenance and repairs are well cared for, obviously for a long time the plant suffers no reduction in ability to render service. Its service ability (called by some "service value") is 100%. Of course, the time must come, in a more or less foreseen number of years, when repairs no longer can suffice to maintain service, and retirement becomes advisable or absolutely necessary. But such wear-deterioration is not the only effect to be noted as causing retirements. When the demands for service from a popular and growing utility outstrip the designed capacity of the system, then the extra service can be performed, if at all, with various sacrifices of efficiency and quality. Too small electricity, gas, water and sewer mains, and too small street cars for the crowds that try to "board are common examples. Differing from the simple inadequacy described are the con- ditions which arise with an old plant when advances in an art or science have made the service of the given equipment less safe, less economical, or less attractive, though still adequate. For ex- ample, it is only necessary to cite the replacement of cable and horse-car lines by electric tramways, the use of tungsten-filament lamps in place of carbon, underground electric cables for overhead wires, steam turbines for reciprocating engines, steel railway cars for wood, etc. Beyond wear-deterioration, inadequacy, supercession and an- tiquation, there is a natural dilapidation which arises merely from age, though in practice not easily distinguished from that irreparable deterioration which springs from continued wear and tear. Structures corrode, shrink, crack, or rot on mere exposure to the elements without use; the insulation of electrical equip- ment grows weak; pipe lines rust and clog and leak, and a variety of phenomena can be traced solely to the ravages of time. The responsibility for making changes hi equipment on account of these actions is a contingent liability of the operating concern. If it should sell out, the purchasers would have to assume the 107 108 PUBLIC UTILITY RATES burden and therefore would demand a deduction from a full-cost price. If the business could cease at the retirement period for the first investment, then the concern would suffer the loss of its early funds unless it had received very large dividends, had re- tired its indebtedness, had accumulated a proper reserve, or had spent for other equipment an equivalent sum out of the receipts beyond all the normal expenses and reasonable profits. There- fore, there must be a certain growing reduction in the value of the parts of a plant with the passing of the years of service, even though that service might continue to be given at 100% of original quantity and quality. This loss of value is " depreciation," in the most generally accepted meaning of the term though so many other uses of the word have sprung up that endless confusion usually arises in discussions participated in by several persons. " Depreciation " Too Loosely Employed. The meanings which have been given to the term "depreciation" are seen to fall into two general classes: (a) losses in value of physical property, and (6) sums secured from earnings to offset loss in value of property. The first group of definitions of "depreciation" is further divided into: (1) aggregate actual or estimated loss in value from all causes, (2) the loss in value due to wear- and age-deterioration as distinguished from the loss of value from liability of obsoletion or inadequacy, (3) the loss in value due to loss of ability to render full service or to decreased efficiency. The second group of definitions is seen to be split into: (4) an annual accounting figure representing the depreciation for the year, or any other given period, deducted from gross earnings in computing probable true net earnings; (5) an annual sum used in making up the amount of necessary income to be secured by the rates. This last is often an annual amount to be set aside out of the earnings to help create a reserve which will equal the cost of the several items of plant when they are retired from service, and will pay for the renewals to the extent of the cost of the items retired. It might well be a direct repayment out of earnings of investment, equal to the annual loss in value of property due to depreciation. There is a final observable definition of depreciation as (6) various aggregates of the annual sums secured from time to time to compensate for loss in value through depreciation. The various shades of meaning indicated in these definitions DEPRECIATION AS IT AFFECTS UTILITY RATES 109 explain the extreme confusion which has been introduced into discussions of depreciation and the need of greatly restricting the use of the term. Language is not so impoverished that it is necessary to use the single word in so many senses. " Depreciation " Properly Used. The first definition as the aggregate loss in value from wear-deterioration, inadequacy, supercession, antiquation, delapidation, etc., is probably the most used and the original one. This can well be adhered to, and a few available terms employed to carry the other meanings given. The idea involved in the second definition makes a most useful distinction which should be preserved, but it is more definitely indicated by "wear-deterioration," "age-deterioration" or "wear- and-age deterioration" according to the precise shade of meaning needed. The third definition loss in value due to diminished power to function or decreased efficiency has no real place in depreci- ation discussions, for mere ability to render the original service does not indicate lack of depreciation, and percentage of service ability (which is not the "serviceability" of the dictionary) alone does not measure value. (It indicates relative value only when the duration of that percentage of service ability is considered; if one machine can yield certain service for 10 years and a second machine can yield the same sendee for 20 years their real values are not equal.) Instead of speaking of this loss of service ability as depreciation it should be called "service-ability drop" or some equivalent. The fourth definition has sprung up to give a short expression equivalent to "deductions for depreciation expense," or something like that. If there were not so many definitions in the field need- ing weeding out, its abbreviation to "depreciation" would be excusable; but, because of the confusion this induces, the longer phrase should be reverted to. Similarly in the case of the fifth definition it is advisable to say "allowance for depreciation expense," or more briefly "depreci- ation allowance, " and not merely " depreciation. " Between speed of speech and accuracy of expression there should be no question of choice. Depreciation-allowances correspond to what some engineers call a "theoretical depreciation" in contrast with what they designate as "actual depreciation" (meaning wear-deteriora- tion) found by examination. 110 PUBLIC UTILITY RATES Definition five conveniently reduces to "renewal allowance" and for further simplicity to the coined word "renewance" which the author has found generally understandable. The first and the fifth definitions are perhaps the ones most used, so that it is a great advance to agree to speak of "depreciation" as the actual lost value, and "renewance" as one year's part of the compensation therefor. However, it is little more than a convenient fiction to speak of building up reserves for renewals, since those funds have no rela- tion to the amounts spent for the new equipments. Electric railways have been known to scrap their generating stations and purchase power from central-station companies (notable examples being the Cleveland, Ohio, Railway Co., and the Third Ave. R.R. in New York City). In general, replacements are made with radically different equipment. What the business must be made to yield, in line with the Supreme Court's dictum, is full compen- sation to the utility concern for the loss in value of property from all the various causes already outlined. That is to say, the rates must cover the liability for retiring plant rather than the cost of renewing it. "Retirance" therefore has been substituted for "renewance." Retirance then is the annual amount to be repaid the corporation to compensate it for each year's depre- ciation. Retirance is a definite factor in rates and in its nature is a repayment of invested capital. Unit retirance may be spoken of as a subdivision of retirance as it has been apportioned over rates. Wear-retirance, age-retirance, obsoletion-retirance, etc., become useful special terms which can be accurately employed. The place of aggregate retirance is obvious. By such a restriction as outlined on the employment of the terms " depreciation, " "wear-deterioration, " "depreciation-allowance," "retirance," etc., discussion is not appreciably encumbered and a fundamental cause of exasperating confusion is removed. Retirance a Repayment of Lost Investment. Whether or not the retirance money secured out of rates can be regarded as a repayment of investment is one of the most debated points that has arisen. Careful consideration of the question (keeping in mind the fundamental idea that loss of investment, impairment of capital, or assumption of liability for renewal must be com- pensated by the customers in whose service the loss, impairment or assumption arose) will seemingly leave little doubt that the DEPRECIATION AS IT AFFECTS UTILITY RATES 111 retirance collected is a restoration of balance between physical assets and incurred liabilities (including stocks and bonds). That looks like repayment. However, retirance cannot be a direct repayment when it is purposely made smaller than the annual depreciation with a view to placing it in a sinking fund and obtaining the normal amount through accumulations of interest. In this case the retirance is not free capital which the owner of the property may put in service to swell his income; all the earnings must be retained to complete the retirance fund which can be drawn on only when an item has reached its assumed length of life. Subdivision of Retirance. It has been stated already (p. 24) that in some (but not all) rate-making problems it is useful to keep retirance in component sums and to apportion them among the customers according to the fundamental peculiarities of the several services. It is not necessary to repeat here the reasons for different apportionments but it is useful perhaps to note that, where any division of depreciation and retirance is logical, it is wear-deterioration that follows the hours of plant service, and wear-retirance that may be assessed like operating expense on quantity units; it is antiquation, obsoletion, and inadequacy that depends on the years which pass, and age-retirance, etc., that may be assessed, like investment-costs, on the demand units. All action leading up to - the retirement of utility property can be put into these two groups the "wear" or the "age" classes. Even hastened decrepitude (like the racking of street- car bodies) which some regard as a distinct action, is seen on analysis to be essentially the same as the unrepairable wear- deterioration of machinery about which there is no question. Expected length of life, considering only wear-deterioration must be based on early experience with apparatus worn, or wear- ing down, to the discarding point. Expected life, considering only obsolescence, etc., is based on the experience of older appa- ratus (and the probability of newer) becoming less economical than that available, or less attractive to customers, or less adequate for growing needs, etc. Relations Between Depreciation and Retirance. It is the actual depreciation which in the long run affects real profits considering actual values preserved as well as net earnings secured. But it is retirance which determines the computed, and approx- 112 PUBLIC UTILITY RATES imated, profits and possible dividends from quarter to quarter or year to year. The annual increment in actual depreciation is not necessarily the same as the annual retirance sum which is intended to cover it, though that is the ideal sought. The most that can be said is that the aggregate of retirance accumulated on an item of property plus the scrap value should equal the total first cost when the item is discarded no sooner, no later. Few can estimate so happily as to have their first estimate of retirance con- tinue to the end without readjustment. If an examination of a piece of apparatus showed that the aggregate of contributions made against its retirement is going to be too large, then they might be decreased to such an amount as will probably complete the return of cost at the end of the useful life of the item, except that the 'rates should be held steady rather than fluctuating. The reverse adjustment would be necessary if the aggregate of allow- ances for a number of years proved to be less than the actual de- crease in worth shown by examination. This adjustment affects dividends and surplus rather than stable rate schedules. The exact eventual return of cost through retirances can be simply secured with the sort of accounting required by the Inter- state Commerce Commission. In following its rules monthly charges against depreciation are made, based on expectation of life. If an item lasts longer than anticipated, the retirance charges stop when 100% of its cost has been reached. If the life for any reason is shorter than expected the unreturned balance is used to swell the depreciation-expense account for the year, or for large sums, the balance is put into a suspense account and spread over several years. Relations Between Appraised Value and Retirance. It must not be expected that the valuation figures of a property, even though based on a good appraisal, plus the aggregate of all retirance moneys secured out of rates, will any more than roughly approximate the reproduction cost of the property or the legiti- mate investment historically established. The reasons are fairly obvious. Among other things the value may be based on changing unit prices; appreciation of property may enter. The retirement allowances, as assessed on customers, are weighted composites for the various items that make up the whole plant. With uniformity and stability of rates over a given short period of time, the annual retirance at first would usually accumulate faster than observable DEPRECIATION AS IT AFFECTS UTILITY RATES 113 composite depreciation would accrue. The deterioration of ma- chinery seems to become more obvious in the last years of its service than in the earliest; and part of the retirance covers an antiquation which descends swiftly and, though impending, may not be seen by the appraiser. Failures to Collect Retirance. Where retirance money has not been collected, through the error and oversight of officials or neglect to charge sufficient rates, then according to the Knox- ville case decision the company still is entitled to earn only on its depreciated value of property. This view has been assailed by many prominent engineers and the hope has been cherished by them that the Supreme Court would reverse itself. It is of inter- est therefore to examine this part of the decision in question (City of Knoxville v. Knoxville Water Co., 1909; 29 Sup. Ct. Rep. 148) to find its basis in law and economics. The company's original case was based on an elaborate analysis of the cost of construction. To arrive at the present value of the plant large deductions were made on account of the depreciation. This depreciation was divided into complete depreciation and incomplete depreciation. The complete depreciation represented that part of the original plant which through destruction or obsolescence had actually perished as useful property. The incomplete depreciation represented the impairment in value of the parts of the plant which remained in existence and were con- tinued in use. It was urgently contended that, in fixing upon the value of the plant upon which the company was entitled to earn a reasonable return, the amounts of complete and incomplete depreciation should be added to the present value of the surviving parts. The court refused to approve this method and we think properly refused. A water plant with all its additions begins to depreciate in value from the moment of its use. Before coming to the question of profits, the company is entitled to earn a sufficient sum annually to provide not only for current repairs, but for making good the depreciation and replacing the parts of the property when they come to the end of their life. The company is not bound to see its property gradually waste without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any given term of years, the original investment re- mains as it was at the beginning. It is not only the right of the company to make such a provision, but it is its duty to its bond- and stockhold- ers, and in the case of a public-service corporation, at least, its plain duty to the public. If a different course were pursued, the only method of providing for replacement of property which had ceased to be useful 114 PUBLIC UTILITY RATES would be the investment of new capital and the issue of new bonds or stocks. This course would lead to a constantly increasing variance be- tween present value and bond and stock capitalization a tendency which would inevitably lead to disaster either to the stockholders or to the public, or both. If, however, a company fails to perform this plain duty and to exact sufficient returns to keep the investment unimpaired whether this is the result of unwarranted dividends upon over issues of securities, or of omission to exact proper prices for the output, the fault is its own. When, therefore, a public regulation of its prices comes under question, the true value of the property then employed for the purpose of earning a return cannot be enhanced by a consideration of the errors in management which have been committed in the past. This statement is seen to be based on the proposition that for every dollar by which the property has depreciated, the company is entitled to earn a dollar above interest and profits. When this is done each item is repaid as it is retired and existing depreciation is made good each year. If it should not be done, in the course of time replacements would have to be made out of entirely new capital and that would be an economic sin against the next gener- ation. This is a statement of general principle evidently intended as broadly applicable since there are no references to the effect of peculiar conditions disclosed by the evidence in this case. So it must have been well considered before given form and stated without exceptions. It is hard to find grounds therein for ex- pecting its reversal except for those cases where the company has been constrained by local government or regulating commission to make rates that did not fully provide "for the replacement of its property out of earnings." Requiring a company to base rates on depreciated value of property in such cases would seem to constitute confiscation. The same unfortunate result would be attained if the regulating authority had applied and continued to use the sinking-fund annuity in determining rates together with depreciated value of property. The sinking fund is not free capital ; it brings th& company no dividends by its investment and the concern gets no return on part of its investment where the equiva- lent of full value is not retained in the rate basis. If rates have been based on full value and retirance has been secured by sinking-fund annuities, the regulating authorities could follow two courses. First, they could continue to risk using the DEPRECIATION AS IT AFFECTS UTILITY RATES 115 sinking-fund annuity for retirance and full value of property on which to figure return; or they could follow the Knoxville dictum and use depreciated value provided retirance was made fully equal to computed annual depreciation henceforth; the accumulated sinking fund properly handled would equal the depreciation up to that time and would then become free capital. The last sentence quoted from the opinion lays stress on the errors of management which cause or permit insufficient rates. It is not to be assumed that the same interdiction applies to the many cases where the business could not have struggled along in its earlier stages had the charges been large enough to satisfy this demand customers would have been driven away instead of being encouraged to increase to the point when the same rates yielded all the proper sums without being burdensome. Error and incompetency, not mere force of circumstances, are to be penalized, if a strict sense of equity is to be preserved and that surely was what the court sought. Therefore, the inclusion of deficits between the actual returns and what would be proper to cover depreciation may be retained in development expense or "going value." Computing Annual Depreciation and Retirance. Depreci- ation computations depend first on past experience as to future expectation of life. With some utilities wear-deterioration, natural delapidation; or antiquation may fix the probable time when various parts of plant will have to be retired from service, as already noted. Once the term is fixed, and the apportionment made as quantity or demand charges, how shall the amount be distributed as to years? How close may the annual retirance be made to follow the annual increment of depreciation? Some of the schemes followed are outlined below in answer to these queries. Maintenance Plan. The oldest and the simplest attempt to saddle renewals on customers was by charging them for all the repairs and renewals of the year. This had the unfortunate effect in some cases of placing an extreme burden of retirance on some years and practically none on others, with the result that rates were too far below true cost at the start and the company was in financial straits at the end. This was apt to be the situ- ation particularly in those utilities where the property items were long lived like water and gas works. It has worked out best in the case of utilities whose plant was composed of a multitude 116 PUBLIC UTILITY RATES of parts of short life like telephone systems and some railroads, though the latter have to resort to "expedients" when expensive long-lived fixtures like stations and bridges give way. It is hard to distinguish between upkeep of old property and new extensions, so that one result of the direct-replacement or main- tenance scheme in some cases has beeri to make additions out of earnings. A certain amount of such manipulation often may be sanctioned, but too much of it hides the true cost of service and may cause a company's stockholders to earn unduly on property which the customers and not the investors paid for. The actual value of an established property in equilibrium administered after this scheme is only from 60 to 85% of the investment (plus appreciation). This 15 to 40% depreciation is lost to the company, according to the Knoxville decision, through neglect to collect. The plan gives no adequate knowledge of the annual depreciation and it is assuming less and less importance each year. Appraisal Plan. A second plan that has been tried is the sub- traction from earnings of sums which an examination of the prop- erty shows to represent the loss in value. This is better in theory than in practice due to certain human limitations and to one inherent defect. Changes due to depreciation are not well dis- closed by annual examinations because of but slight changes in appearance from year to year differences which however be- come more noticeable as the period between appraisals lengthens. Then, the mind of the appraiser may change from year to year, or, more likely perhaps, the appraisers themselves may change and bring a radical change in standards of comparison. This sort of a depreciation levy must be dangerous, in view of the Knoxville decision. It gives weight largely to superficial evidence of past deterioration, while the worth of the property, from the point of view of the integrity of investment, has been further impaired by the accrued liability for renewals on account of probable obsoletion. It will not do to say that the "depreci- ation" allowances secured from rates relate absolutely to the past decay to what can be seen to have definitely happened. Retirements of obsolete equipment must come in the future, it is true, but when they do come they must be paid out of past earn- ings or future economies, to accord with the Knoxville decision. This means that the utility has an increasing liability each year DEPRECIATION AS IT AFFECTS UTILITY RATES 117 for obsolescence and that each year something must be secured to compensate for the annual increment. Straight-line Scheme. The most obvious way of distribut- ing the burden of retirement over the life of service is to divide the cost by the years of life and set out the resultant quotient from each year's earnings. Such money can be held by the utility owner as he sees fit against the day of replacement. If the ac- cumulated reserves and the time passed be plotted as a mathe- matical graph or "curve," the form will be a straight line of course hence the engineers' term "straight-line scheme" which has mystified most laymen and some attorneys. One difficulty is that in spite of a superficial plausibility in the straight-line plan, there is no logical reason to expect that simple depreciation necessarily accumulates in direct proportion to the age that the value of a machine is half gone at half its expected life. Indeed when property having a very long life, like cast-iron pipe which is good for 60 to 100 years, is considered the value is seen to be not inversely proportional to the age. In fact the pipe at 30 years is worth 80% instead of 50% because of the importance of interest element in affecting worth. Moreover, during the early period of operation, the load is apt to be light and the unit costs high anyway so that the development of the business would be hampered by large retirance factors in rates. However, on the other hand, if the utility property largely con- sists of a great number of short-lived items, as is the case with most telephone systems, railroads, and some electric railways, then the straight-line scheme has an attractive simplicity and the discrepancy between actual depreciation and retirance secured cannot be appreciable. Straight-line schemes here have an ad- vantage over the actual-renewal or maintenance basis for utilities whose properties may not show equilibrium between depreciation and maintenance. Sinking-fund Plan. It is desirable that annual retirances should closely approximate annual depreciations. The most popular scheme of computing the annual depreciation of a property item is to consider that it follows the growth of a sinking fund sufficient to extinguish the cost at the end of the probable life. Now, as is well known, a sinking fund grows through the payment to it of an annuity or annual contribution and by the investment of the sums so contributed, so that there is an annual sum for 118 PUBLIC UTILITY RATES interest which is retained in the fund. The annuity or annual contribution is made of such size that it will, if invested at com- pound interest, with the interest accumulations, equal the cost of the property item after a given number of years, representing the life of such item. Therefore, in order that the annual retirances which must come from the rate payers may closely approximate the annual depreciation increments, they must in each year equal the annual contribution to a sinking fund plus the accumulations of interest, and this furnishes the basis for the equal-annual-pay- ment plan, subsequently described. The general practice, how- ever, is to include directly in the sums to be earned as retirances only the annuity or annual contribution to the sinking fund, which is a much smaller sum, and if the discrepancy were not provided for in the earnings somehow, a great injustice would be done the owner, for it is only through the rates that the entire depreciation can be made good and the investment kept unimpaired. This discrepancy between annuity and required retirance, in practice, is compensated for by allowing the owner of the property to include in rate-basis worth the undepreciated value of the prop- erty even though it may have lost considerable value through depreciation. Part of what should have been accounted for as direct retirance is recovered in increased interest. It is a serious defect of the sinking-fund-annuity plan, in view of the principles underlying the Knoxville decision, that it is necessary in order to preserve equity to use the undepreciated value of property contrary to the requirements of law as interpreted in this famous case. There is danger that the law, as it stands interpreted so far, may prevail against equity for the older utilities working. with sinking-fund annuities as pseudo-retirances. The injustice will come to those concerns which in good faith have used sinking-fund annuities to provide retirance. The situation is brighter for those who have been constrained by government to form sinking funds, for they may charge that confiscation has begun, unless they employ full value. The remedy for these dangers seems to be the abandonment of the sinking-fund annuity as the measure of retirance and the substitution of the larger sum equivalent to a sinking-fund annuity plus the interest accumula- tions of the year. A good part of the popularity of the sinking-fund-annuity plan has possibly been due to a vague feeling that somehow the depre- DEPRECIATION AS IT AFFECTS UTILITY RATES 119 elation was being cared for adequately at much less expense than by any other scheme. Such a view savors a bit of the old "some- thing-for-nothing" ideas that are so persistent and so often attrac- tive. A good example is furnished by the following remark of one of the best known utility commissioners in the country: Without going into details, it can be said that the sinking-fund method employs a more efficient use of the reserve [than the straight-line plan]. Because of such use, the amount the consumers will have to contribute to cover depreciation is less than under the straight-line method. Where the amounts so provided have been used for necessary and proper renewals and for the accumulation of a reserve for covering the accrued depreciation of the property still in use, no reduction from the cost new, because of depreciation, should be made in determining the fair value for rate making and certain other purposes. Obviously, what is not paid in as retirance is covered by in- terest on nonexistent plant value a palpable trick in words or bookkeeping. This plan carries with it, in some cases and always in some people's minds, the implication of a distinct reserve fund invested in outside securities. However, in the great majority of cases seemingly, the allowances so secured are put into the property in place of money that would have to be raised from outside sources. Investing reserve funds inside the business complicates the scrutiny of accounts and operating results, but it tends to reduce slightly the cost of service or product something which is desirable. No matter whether the retirance funds are invested inside or outside of the business, for the scrutiny of rate facts it seems essential to remember that reserves made up of sinking-fund annuities must earn for their own aggrandizement in order to provide full amortization. Therefore they are not to be regarded as free capital in studying the business, no matter how the owner chooses to handle them in the interests of daily operation. It needs to be emphasized perhaps that in the great majority of concerns, up to the present, the sinking-fund method of figur- ing retirance in rates has been merely an attempted process of arriving at a fair and proper burden on the customers. Unless the degree of regulation is severe, there is not apt to be dictation as to how the retirance moneys shall be invested. The public is protected when the utility uses these repaid moneys in well defined and safe ways. 120 PUBLIC UTILITY RATES Modified Straight-line Schemes. The complication and confusion of thought introduced into the scrutiny of utility busi- ness by the "sinking-fund" plan has led some to go back to the scheme of directly apportioning the cost of an item over the ex- pected years of life, but not uniformly as in the regular straight- line scheme. Instead they have variously decreased it in the early years and increased it toward the end of the expected life period of the piece of equipment in question. Usually this has been done arbitrarily and empirically. Annual Cost of Service and Actual Depreciation. It is not mere age, nor yet service ability drop that discloses annual depre- ciation; nor is it general appearance. But it is reasonable to expect that there should be some fairly logical basis of computing the probable annual real decrement. If the annual depreciation be assumed to start high, then the early retirance must be heavy and in the later years light; the fair value (rate basis, Knoxville- Case standard) of an item would be low in later years and the fixed charges (interest and retirance) would greatly fluctuate. If now operating costs have not risen (excluding the effect of rise in price of labor and materials) and the service is well maintained, steady fixed charges may be regarded as a normal economic phenomenon. Fluctuation of service cost would be due to fluctu- ating cost of labor and supplies. That is to say, given a probable life of equipment where the fixed charges are large hi proportion to the operating costs and where the deterioration or inadequacy will not seriously change the operating costs until very near the expected tune of retirement, the real annual depreciation is such that the fixed charges (interest and retirance) continue steady year after year. For example, assume that a water pipe costing new $1000 and having an expected life of 50 years had been in use 25 years. The interest at 6% and retirance would be for the first and 25th year, by the straight-line plan: 1st year interest $60- 00 1st year retirance 20 . 00 1st year fixed charges $80 . 00 25th year value 500.00 " " interest 30.00 " " retirance 20.00 " " fixed charges $50.00 DEPRECIATION AS IT AFFECTS UTILITY RATES 121 If it were assumed that there was no depreciation up to 25 years, as the pipe was giving good service, the comparison would be: 1st year interest $60 . 00 1st year retirance 0.00 1st year fixed charges $60.00 25th year value $1000.00 " " interest 60.00 " " retirance 40.00 " " fixed charges " $100.00 Following sinking-fund computations the same pipe would show these figures : 1st year interest $60.00 1st year retirance 3 .44 1st year fixed charges $63 . 44 25th year retirance aggregate $188 . 97 " " value 811 ,03 " " interest 48.66 " " retirance (on $811.03) 14.78 " " fixed charges $63.44 It is obvious that the $80 and $50 given by the straight-line plan for fixed charges during the first and 25th year, and the $60 and $100 given by the inspection plan are extremely abnormal and uncommercial, while the $63.44 for both years by sinking- fund computations is economically and reasonably desirable. Where the operating expenses go up materially due to the deterioration of the equipment, then the depreciation increases more rapidly than otherwise and may approach the straight-line basis, as shown later. " Equal-Annual-Payment " Scheme for Computing Retirance. This plan is really a convex-curve modification of the straight- line scheme and is, with its developments, the most ingenious and the only scientific modification which the author has seen. It was developed by Frederic P. Stearns for his engineering practice and the simpler elements were discussed in 1914, in the progress report of the special Committee of the American Society of Civil Engineers on Valuation for Utility Rate-making. The annual allowances were not arranged arbitrarily but were fixed in such a way that the aggregate of dominant factors in rates would tend to be constant year after year. 122 PUBLIC UTILITY RATES The calculations leading to equal annual fixed charges in the preceding example were spoken of as "sinking-fund computations." They follow the 'standard sinking-fund tables as to the amount of depreciation in the property at the beginning of the 25th year, but the amount of retirance adopted for the 25th year is not the sinking-fund annuity but the increase in the amount of the sinking fund during the year, consisting of annuity plus interest accumula- tions. When the sinking-fund computations are used in this way, the equal-annual-payment scheme of compensating for depre- ciation is evolved. As each year's retirance by the equal-annual- payment plan is equal to the annuity under the sinking-fund plan, plus the amount of the interest accumulations of the sinking- fund during the year, the larger sum thus represented by the equal-annual-payment plan is the sum which the company is en- titled to earn as an offset to the depreciation of its property items in order to keep its investment intact. It may seem at first sight that the equal-annual-payment plan, providing as it does a larger retirance for each year after the first than the annuity of a sinking fund, would be opposed to the interests of the rate payers and would give larger earnings to the company. This, however, is not the case when both systems are applied in an equitable manner. The company should be per- mitted to earn a retirance equivalent to the amount of deprecia- tion, and if the retirance is figured to be the inadequate sum represented by the sinking-fund annuity alone there must be a further allowance from the rate payers to cover the interest accumulations of a sinking fund during the year. As shown already, it commonly masquerades with interest on full undepreci- ated value of plant. The assumption, contrary to the facts, that the property has not depreciated in value, is wholly for the pur- pose of making up for the inadequacy of the retirance when it is assumed to be equal to the sinking-fund annuity. By the equal-annual-payment plan substantially the same results can be secured as with the sinking-fund annuity and full-value scheme but quite in harmony with the Knoxville decision. The equal-annual-payment plan will be seen to be the simplest case of what the author has called for convenience a group of "convex-curve" plans all closely related to it and all springing out of complicated practical conditions discussed in a later para- graph on the effect on depreciation of rising cost of operation. DEPRECIATION AS IT AFFECTS UTILITY RATES 123 Retirance, figured by this plan, is declared not to be in any sense a reserve. It is an immediate and direct compensation for property value lost by deterioration and by liability incurred for retirement of equipment. The retirance is immediately available for canceling obligations or, what is equivalent, for reinvestment in replace- ments, additions, improvements, etc. When retirances are so reinvested they enter rate-basis worth on a par with extensions paid for by fresh accessions of capital. Interest is allowed only on the diminished worth (unreturned investment) of each item; where the retirance sums are rein- vested those new property items so purchased earn like all the other items and retirance is collected each year for them also. Obviously, the annual interest on unrepaid investment in each item of property goes down steadily but the retirance aggregate goes up correspondingly. The annual payments for retirance and interest on continuing investment then can have a constant annual aggregate when the rate of interest and rate for retirance compu- tations are the same. Objections to the Equal- Annual-Payment Plan. The Stearns plan has been criticised for making the retirance (and the com- puted annual depreciation increment) change with the selection of an interest rate at which the hypothetical sinking fund is compounded, whereas the actual depreciation obviously is in- dependent of the rate for the calculations. The answer to this objection is that there is but one definite rate for compounding the hypothetical fund to satisfy the economic criterion already applied equal annual fixed charges. That proper interest rate is the same as the allowed rate of return on the property so long as there is no change in operating cost or capacity through depreciation. The effect of such changes is traced in a later para- graph. This plan would seem to allow great flexibility of management in public utilities, but it has not been universally accepted. In the first place, many railroad men have shown themselves hostile to anything which suggested "basing rates on cost of service" having in mind, however, not "rates" but "tariffs" and forgetting that a "rate" for a railroad at present means a sort of unit gross revenue, a weighted average of all the detailed "tariffs" which admittedly are affected by many things besides cost of service, as noted under special problems of specific utilities. 124 PUBLIC UTILITY RATES Other utility officials have been hostile to this plan because it followed the dictum of the Knoxville Water case (that the rate- basis worth must be a depreciated value of property used and useful, irrespective of former investment). But the method in- cludes in "property," the reinvestment of retirance, development expenses, early deficits, etc., so that the objections were not so much against a principle as a policy. It has been argued by some objectors that to admit that a depreciated value could ever equitably be used (in the absence of official misconduct) in figur- ing rate basis, would result in a clamor for use of depreciated value irrespective of the treatment of retirance. Depreciation Under Increasing Operating Costs. Where the cost of operation goes up materially because of the deterioration of the equipment, then of course the equalization of annual fixed charges alone is not a proper criterion. Rather it would appear to be proper to hold that the sum of fixed charges and of opera- tion-cost increase should remain constant. Under these conditions the real depreciation may more nearly approach the unmodified straight-line apportionment. It may disclose a depreciation more rapid than that given by the straight-line scheme for the length of life first assumed to hold. For instance, take the case of a small water-works pump. Suppose that it was a new departure in design and was expected to have a life of ten years; suppose that in service it was found that slip and increased friction increased the cost of operation $4 each year. (This is a hypothetical condition purposely taken to illustrate the depreciation action involved.) Assume that the scrap value only equals the cost of removal. To find the actual depreciation under these conditions the capital- ized excess cost of operation is deducted from the figures for nom- inal value and considered as repaid to the investor. The remaining value is repaid during the ten years according to equal-annual- payment plan; the depreciation (and the retirance) is the sum of each year's capitalized excess cost and the other annual factor. The computations are shown in the accompanying tables, the simple plan for unchanged operating costs being presented first. When the output has decreased with age, the unit cost has in- creased. The multiplier is the reciprocal of the decreased capac- ity if the output is only 0.9 of the initial, then the unit cost is DEPRECIATION AS IT AFFECTS UTILITY RATES 125 I. ANNUAL RETIRANCE AND FIXED CHARGES BY THE EQUAL-ANNUAL- PAYMENT PLAN End of Year Diminished Value Interest Annual Retir- ance (or Depreci- ation Increment) Aggregate Retirance (or Depreciation) Interest plus Retirance o $1000.00 1 924.13 $60.00 $75.87 $75.87 $135.87 2 843.71 55.45 80.42 156.29 135.87 3 758.46 50.62 85.25 241.54 135.87 4 668.10 45.51 90.36 331.90 135.87 5 572.32 40.09 95.78 427.68 135.87 6 470.79 34.34 101.53 529.21 135.87 7 363.18 28.26 107.61 636.82 135.87 8 249.10 21.79 114.08 750.90 135.87 9 128.18 14.95 120.92 871.82 135.87 10 7.69 128.18 1000.00 135.87 II. ANNUAL RETIRANCE AND FIXED CHARGES FOR EQUAL FIXED-AND- EXCESS COSTS: RISING OPERATING EXPENSE OR DECREASING CAPACITY Total Sink- Retirance End of Year Excess Operat- ing Cost Capital- ized Excess Repaid ing Fund Incre- ment Depreci- ation or Retirance Retirance or Depre- ciation Dimin- ished Value Interest on Value Interest and Excess Cost $1000.00 1 $4.00 $66.67 $25.29 $91.96 $91.96 908.04 $60.00 $155.96 2 8.00 133.33 26.81 93.48 185.44 814.56 54.48 155.96 3 12.00 200.00 28.42 95.09 280.53 719.47 48.87 155.96 4 16.00 266.67 30.12 96.79 377.32 622.68 43.17 155.96 5 20.00 333.33 31.93 98.60 475.92 524.08 37.36 155.96 6 24.00 400.00 33.85 100.52 576.44 423.56 31.44 155.96 7 28.00 466.67 35.88 102.55 678.99 321.01 25.41 155.96 8 32.00 533.33 38.03 104.70 783.69 216.31 19.26 155.96 9 36.00 600.00 40.31 106.98 890.67 109.33 12.98 155.96 10 40.00 666.67 42.73 109.40 1000.07 -0.07 6.56 155.96 III. ANNUAL RETIRANCE AND FIXED CHARGES FOR EQUAL FIXED-AND- EXCESS COSTS: INCREASING OPERATING EXPENSE WITH DECREASING CAPACITY End of Year Excess Cost Total Capitalized Excess Repaid Annual Depreci- ation (or Retirance) Aggregate Retirance Diminished Value Interest on Value Retirance Interest and Excess Cost $1000.00 1 2 3 4 5 6 7 8 9 $8.00 16.00 24.00 32.00 40.00 48.00 56.00 64.00 72 00 $133.34 266.66 400.00 533.34 666.66 800.00 933.34 1066.66 1200.00 $133.34 133.34 133.34 133.34 133.34 133.34 133.34 66.66 $133.34 266.66 400.00 533.34 666.66 800.00 933.34 1000.00 866.66 733.34 600.00 466.66 333.34 200.00 66.66 0.00 $60.00 52.00 44.00 36.00 28.00 20.00 12.00 4.00 00 $20i.34 201.34 201.34 201.34 201.34 201.34 201.34 134.68 10 80.00 1333.34 126 PUBLIC UTILITY RATES 1.11 times the initial value. The total cost of the original out- put, if the deficiency was made up by other machines of similar type, would be increased by use of the same multiplier; that is, an excess cost results which can be studied exactly as was the extra cost of operation. If the annual operating expense of the hypothetical pump already noted was say $800, a gradual drop of capacity, without increase of gross operating expense, to 95.3% in these ten years would mean an increase in excess cost of 5% or $40. Table II therefore applies to this case. Should the two actions be combined then the result would be as in Table III. The only change over Table II is that caused by doubling the excess cost, and capitalized excess cost. This amounts to the original cost of the $1000 item by the 8th year so that there' is no need of attempting to retire the item by in- troducing any equal-annual-payment plan factor. 3 4 5 6 Years 789 VALUE AND RETIRANCE CURVES FROM TABLES I, II AND III In theory the excess costs may rise more rapidly than shown but attempts to find how they go probably are no closer estimates than assuming a uniform increase. The Supreme Court on Retirance Methods. There are no high court decisions dealing specifically on the questions of sink- ing funds actually maintained to offset depreciation and cover retirements. The nearest approach probably is the Knoxville water case, noted before. This opinion clearly points out that a company should earn enough to cover the depreciation of all its DEPRECIATION AS IT AFFECTS UTILITY RATES 127 property, and pay the running expenses, fixed charges, etc., but it holds that depreciation must be deducted from cost in arriv- ing at the rate basis "fair value." Beyond that there seem- ingly are no specific and inflexible demands in the Knoxville case opinion completely in favor either of setting up true sinking funds, or of putting the annuities into productive extensions of the plant, or of returning to the investor his annual impairment of invest- ment for him to put back into the business as fresh capital if he chooses. Yet the Knoxville-decision has been greatly feared as a breeder of injustice because it demands a return only on depre- ciated value whereas with the true sinking funds set up, as re- quired by some state commissions, the equivalent of a return on undepreciated value is needed. It is reasonable to expect that the court will recognize the un- just constraint and provide the remedy admitting the equiva- lent of undepreciated value of plant in rate-basis worth. The reasoning which the court might be expected to follow is not difficult to trace: The retirance comes from rates and only from rates. If the annual re- tirances have been held down by state regulations to less than the annual depreciations, some equivalent of the difference must have been made avail- able to the company or confiscation has resulted. Numerically this has been accomplished by the bookkeeping fiction of using undepreciated value in the rate basis. It is incidental that the retirances have been ordered tied up in a reserve fund for the earnings of that fund, which equal the return on the false element of value, prevent confiscation by providing return on enforced reservation of capital. The final results have been equitable and the methods of computation may be neglected as to the past. For the future, however, retirance should not masquerade as interest on a false value and the rate-basis worth should not be increased by any non-existent elements. Lower Courts on Sinking-fund Retirance. There are various lower-court decisions favoring and disapproving the sinking-fund- annuity method of figuring retirance elements in rates. But none of the lower courts have objected to the sinking-fund- annuity plan on the vital grounds already noted; their opposition seems to be due to a misapprehension of the mathematical basis of computation. Possibly this is because some courts have been led by the quotation of average percentages for composite de- preciation on the whole property to think that the sinking-fund method necessitated tying up the whole of the concern's renewal funds until the average life of the assembled equipment was 128 PUBLIC UTILITY RATES reached. That, of course, is not the intention by any scheme of proportioning the retirance and the quotation of average lives and aggregate percentages is but a convenient form for some discussions and comparisons. In every case the aggregates can be resolved into their components, when it is seen that the funds for retirement of each and every item is complete at the end of its estimated life. Reinvestment of a completed retirement item does not affect the growth of other and incomplete items. Re- placement of an item can be paid for at the expiration of its life out of the fund up to the stated cost-less-salvage. Typical of the adverse court decisions noted above two may be cited. The first is the New York case, People ex rel. Man- hattan Ry. Co. v. Woodbury (203 N. Y. 239; Oct. 1911). The opinion of Judge Haight runs: "The Special Term in this case, however, adopted a plan of amor- tization upon which an annual sum was authorized to be set apart as a sinking fund, which, by compounding the interest thereon for a period equal to the life of the structure, tracks, engines, machinery and rolling stock, would at the end of that period create a fund sufficient to replace the property. The difficulty with such holding is that railroad cor- porations do not reconstruct their railroads and rolling stock in that way. In order to afford proper protection to the public they are re- quired to maintain a high state of efficiency both in roadbed and rolling stock. The relator's railroad has been in existence already for about thirty years and some portion of its property has already suffered from decay and use to such an extent that portions thereof have to be recon- structed and made new each year. Old ties have to be removed and re- placed with new ones; old rails that have become worn and battered have to be removed and their places supplied with new rails and so the work of reconstruction progresses from year to year. It is not the waiting forty or sixty years to reconstruct, during which time the amount set apart as a sinking fund may be doubled many times over by compound- ing the interest, but it is the annual expenditure for reconstruction which is to be paid for at the time that the construction is made. To illustrate: Suppose the average life of the tangible property of a railroad, outside of the land itself, to be sixty years and the cost of reconstruction to be sixty million dollars, it would follow that one million dollars would have to be used each year in reconstruction, and that amount would have to be an- nually used for that purpose; but under the plan adopted in this case, instead of deducting from the gross earnings the amount necessarily expended for that purpose, a small fraction of that sum, viz., $4200, only is allowed to be deducted, a sum which, with the interest com- DEPRECIATION AS IT AFFECTS UTILITY RATES 129 pounded for the next sixty years, would amount to a million dollars. Under such a plan the company would be practically prohibited from annually constructing a portion of its road and thus prevented from keeping it in that state of efficiency which the public demands. Of course the necessities of reconstruction vary from year to year; some years it may be '"greater than others, but the assessors each year can easily ascertain the sum required for that purpose. I think, therefore, that we should adhere to the rule sanctioned in the Jamaica case, and that a gross sum should be deducted annually for the purposes of reconstruction." Two things are seen by reading this with the preceding discus- sions of "depreciation" and "retirance" in mind. The first is that the court did not grasp the possibility of the component items in the aggregate of the sinking-fund allowances maturing at different periods and being thereupon available for making a replacement. The second point is a palpable arithmetical slip; the cost of reconstruction is stated as sixty million dollars, yet the aggregate retirance is stated as one million. If the $4200 ap- plies to only this one million, then the allowance for full retirance which should have been made is $252,000. Computing the annual contribution at 4% compound interest for 60 years and sixty million dollars gives $252,000 also. It may be said that even this is only a quarter that needed for annual renewals; the reply must be that the needed replacements cannot reach that million aver- age or equilibrium figure for many years and that in that time there has been a heavy fund accumulation which, being distributed over the remaining years of the 60 and added to the annual amounts will give the million and over needed thereafter. This must neces- sarily result if the aggregate renewance figure is made up, as it should be when this plan is followed, of component factors properly figured on the several property items and their life as experienced under similar conditions. Similar misunderstanding of the underlying mathematical basis is seen in the so-called Louisville Telephone Case decision of Judge TSvans (Cumberland Tel. and Tel. Co. v. City of Louisville, 187 Fed. Rep. 637; April, 1911), often quoted as adverse to sink- ing funds : Of course our estimate could not be based upon the proposition that the per centum set apart to cover depreciation would be deposited in bank or loaned out from year to year so as to accumulate and be on hand at the end of 14 years, and to be then used to construct an entirely new plant, and so on from period to period. In such a case the public 130 PUBLIC UTILITY RATES would not only have a service that would progressively grow wotee until its operations ceased altogether, but it would thereafter get no service at all until a new plant replacing the old could be completed and put into operation. The question rather has been; What does experience show to be the proper average per cent of annual earnings which the company should expend hi order to insure that its plant at the end of 14 years will be as good as it now is, and in the meantime render to the public that good service which its duty to the public requires? Choice of Retirance Plans. Some engineers rest their con- fidence in one scheme of getting retirance out of rates, and others in another each contending that his is better than any other. Each may be justified in the light of his own experience, and as that changes so may his views on this point. It serves no good end to be dogmatic in opinions on any one plan, for under special conditions some shine to better advantage than others. Often the differences to a large extent indeed are matters of definition. It can be said, however, that with careful study some plan or other can be selected which will simply meet peculiar needs, remain within the spirit of the highest court decisions and protect all continuing investments. This may result in use of two or more plans in combination; however, the one should not require undiminished value and the other depreciated value. For instance in a telephone plant, there is a vast number of property items each comparatively small and of comparatively short life from obsoletion. The history of the art is so filled with rapid changes that it is difficult to make more than the roughest estimate in the hope that it will cover the renewals as a whole. But it is seen that there has been a steady growth of the more permanent plant, like buildings and underground conduits, on which one can approximately fix the life and therefore provide reasonable retirance by the straight-line or convex-curve plan as may be required. Then when these items have lived their useful life, the owners will have their equiva- lent in hand. But for the multitude of instruments, switchboards and various pieces of more or less small equipment it may be necessary to set aside out of earnings the actual annual cost of replacements. That alone will not do in fixing rates, however, and it may become necessary to estimate the most probable aver- age as shown by the cost of such replacements in the past. The two factors then may combine into an aggregate annual sum DEPRECIATION AS IT AFFECTS UTILITY RATES 131 which may enter rates. Since the equilibrium value of the tele- phone system (excluding buildings, conduits, and other long-lived items) will be found 10 to 20% under investment the difference should be repaid somehow and this is easily done by spreading the amount over several years in a suspense account. The inaccuracy, the inadequacy and the expense of the "valu- ation" plan of providing retirance seem to be valid arguments against the universal employment of this plan. The valuation study has some usefulness, however, as already noted, in being applied at intervals of five or ten years to correct any false trend taken by the other more easily applied annual schemes based on estimates of probable life. The Famous Hen Argument. One argument, advanced against use of depreciated value of physical plant in rate bases, which has captivated many hearers is the now well known hen story of counsel for the Consolidated Gas Co., in the famous 80c. rate case (Willcox v. Consolidated Gas; 212 U. S. 19). His argument in brief was that toward the end of the hen's career while she was still laying vigorously but apt to stop, the price of the eggs should decline with the value of the hen if the depreci- ated-value basis were followed, until perfectly good eggs would be sold at a ridiculous price. That illustration, as generally used, is extremely fallacious. A moment's careful thought shows that the cost of the eggs should be unchanged with a steady market price of chicken feed. The factors entering in (besides daily food) are (1) interest on depreci- ated value of hen, and (2) annual retirance; as (1) goes down (2) correspondingly goes up, if the problem be looked at from the standpoint of the straight-line or equal-annual-payment plan, and the aggregate repayment for the years past ha*s been avail- able for the owner to put into other hens or equivalent earning property (since he undoubtedly had more than one hen). If the sinking-fund annuity plan is followed, equity is established only by admitting the fictitious undepreciated value of the hen to make up the required retirance. This hen argument is hesitantly re- viewed here, but these few words have been added because the hen story has found too ready acceptance and has a certain popular appeal. Other Depreciation-computation Plans. The schemes dis- cussed already are not the only ones that have been proposed for 132 PUBLIC UTILITY RATES finding the retirances to be secured out of rates. Some of the others, however, do not satisfy the economic criterion of stable fixed and excess costs. One of their chief faults is that the early- year charges are excessive. One of these plans is the "reducing-balance" method, by which a definite percentage of the diminishing value is considered as each year's contribution. Its illogical status is obvious. Another is the "simple-annuity" scheme by which an equal annual sum is found which will include a given percentage inter- est on the remaining investment and reduce the investment to zero at the close of a given period. This is in contrast with the equal-annual-payment plan by which retirance is made to include the interest of an accumulated hypothetical fund and, incidentally, therefore on the lost value. There is finally to be noted the "unit-cost" method which aims to secure the same results as attained by the "convex-curve" schemes developed from the equal-annual-payment plan equal annual costs of "service. The total cost of operation, the amount of repairs, the sinking-fund annuity, the output old and new, etc., enter a complicated but logically developed formula:* Q + P + F + iV _g + p+f+iv ~Y- ~r y (Q + P + XV + iV q + p x.+ i\ Y y V = cost of new substitute machine; v = diminished value of old machine; F = sinking-fund annuity to amortize V in N years; / = sinking-fund annuity to amortize v in n years; Q = average annual operating expense of new substitute machine, exclud- ing repairs ; was judged that con- solidation was inevitable and required only the safeguard of some public supervision over the railways. In 1873 a board of com- missioners was created to guard the rights of private persons, to prevent trouble between roads, to insure interchange of traffic, and to prevent discrimination. In America the early years of pioneer development were suc- ceeded by a period (from about 1860) of destructive competition and oppressive discrimination. The flagrant injustice meted out by arrogant railway officials, who openly declared themselves to be above public scrutiny, stimulated two quite different plans for regaining the upper hand for the public. In the one case there was ready at hand a vigorous organiza- tion of farmers known as the " Grange," * whose members were revolting at the treatment afforded by the railways. The Grangers' vitriolic attacks on railway officials broke open the situation in the West and secured the enactment of drastic laws interfering with the asserted rights of common carriers and subjecting the roads to the control of state commissioners. The early laws were crude and the first commissioners were neces- sarily inexperienced; both laws and men were pitted against organization, wealth and brains. Looking back, it is phenomenal that any considerable success was attained. Possibly the roads overreached themselves in their first arrogant independence for after they finally bowed to the Supreme Court's affirmation of the right of state control they proved more formidable in attack than ever before. * The "Order of Patrons of Husbandry" or the "Grange," as it was com- monly called, was founded in 1867 by O. H. Kelley, of the (then) U. S. Bureau of Agriculture. It was the most successful of several attempts of farmers to organize for mutual benefit. The society's greatest development was from 1872 on, in Iowa where 100,000 members were enrolled in two years. In 1875 there were a million members in the country. Later its power waned with the rise of the more political " Farmers Alliance." The aims of the Grange were social and technical as well as political. It aimed to disseminate good techni- cal information about crops, cultivation, markets and transportation. It hoped also to organize the farmers for cooperative buying and selling, to oppose monopolistic railways, banks, implement makers and produce speculators. 166 PUBLIC UTILITY RATES Meanwhile things were working out differently in the East. For instance, Massachusetts organized its " advisory " com- mission in 1869 * and gave it but one weapon publicity. To support itself before the public, careful study had to be made of any complaints and a report stood on its merits. In 1876 the Massachusetts publicity measure was completed by the im- position of uniform accounts and complete reports a develop- ment toward which the railways materially cooperated. The two movements gradually consolidated. It began to be realized that it was an exaggeration of fear which the Grangers had had for the " money barons," the " eastern sharks," and the " bloated bondholders," to quote common epithets. In 1877 the Illinois Commission began to adopt the advisory and con- ciliatory tactics of the Massachusetts Commission; that year Iowa replaced its Granger law with one more of the Massachu- setts type. From then the influence of publicity was widely recognized; the more speedy action secured under some condi- tions by commission interference, however, was not forgotten. The Interstate Commerce Commission Established. State regulation of railways has necessarily been of comparatively minor importance as by the commerce clause of the Federal Con- stitution, all transportation of persons and goods from one state to another, or going abroad, is under the exclusive control of the Federal Government. This clause arose from the impelling necessity of facilitating commerce between the colonies freed from England. Indeed it was the pressing demands for un- fettered commerce that drew the constitutional convention to- gether when the local interests and jealousies threatened to override the other grounds for unification. The more or less successful attempts at state regulation of railways only emphasized the need of Federal supervision if effective control was to be secured. There was undoubtedly great direct influence toward Federal regulation exerted by the Granger agitations. The Interstate Commerce Act was not * Although the Massachusetts Railroad Commission made the greatest impression, it was not the earliest; Rhode Island had one in 1836 but it died of inanition, New Hampshire hi 1844, New York in 1850, Connecticut in 1853, Vermont hi 1855, Maine in 1858, Ohio in 1867, etc. See F. Hendrick, "Railway Control By Commission," 1900; B. H. Meyer, "Railway Legisla- tion in the U. S.," 1903. PROBLEMS OF RAILWAY RATES 167 passed, however, until 1887, 13 years after first introduced, and then after persistent efforts of Representative Reagan, of Texas, and Senator Cullom, of Illinois. The original act prohibited unreasonable and unjust rates, rebates, and discriminations, and required the publication of rates and detailed financial state- ments. Pooling, and greater charges for a shorter than a longer haul under similar conditions were prohibited. A commission was established and its orders were to be enforced by the Federal courts, to whom also appeals might be made. This imposition of court control in the end emasculated the law. The first result was that the courts really decided the cases which merely originated before the Commission an expensive and time con- suming procedure. In 1890 the Supreme Court decided that witnesses could not be compelled to answer questions in the com- merce cases. In 1897 it held that the Commission could not adjust rates in the absence of express authority of Congress. The court ruled also that the Commission had no authority even to decide the relative reasonableness of charges between different cities thus killing the long-and-short-haul section. By this time the Commission was well stripped of power; but a series of congressional acts effectively restored its authority. In 1906 it received definite power to determine and prescribe reasonable rates, the burden of proof on appeal being upon the carriers. Free passes were prohibited and railroads were forced to give up other lines of business like mining. In 1910 the Commission was authorized to suspend new rates of carriers, pending investigation. Then the long-and-short-haul section was restored to effective- ness. Jurisdiction was extended over pipe-line, telephone and telegraph, cable and power-transmission companies. This is not all of the legislation affecting the Interstate Com- merce Commission. The enforcement of the Railway Safety- Appliances Act of 1893 was given to it, and it was charged with the investigation of accidents. The inspection of all locomotive boilers has been added. The Railway is a Service-type Utility. A moment's con- sideration shows that while the railways handle products they themselves are only giving a service, as are electricity-supply or telephone concerns. One test of this is their peak loads and their inability to manufacture or acquire the essential elements of their service in times of light demands. Passengers require 168 PUBLIC UTILITY RATES to be carried when they present themselves. They can effect little adjustment to off-peak loads they want to travel on holi- days, days of college games, etc., and must all be carried at once or not at all. For instance * in Nov. 13, 1915, at the time of a Yale-Princeton football game in New Haven, 20,232 passengers were taken into New Haven during four hours; 13,277 came from New York City and 6950 from Boston and other points, all in 22 regular and 23 special trains. When the tide turned, 19,678 passengers were carried out in two hours by 22 regular and 20 special trains. Thousands of workers in urban districts must be taken from suburban districts in two early morning hours and carried back in three evening hours, with comparatively light travel at other hours. Crops have to be moved to the markets quickly if at all. There is a slight, almost inappreciable, storage capacity given to railway lines by their receiving depots, but freights cannot be allowed to congest at a shipping transfer or delivery points beyond a certain minimum, or else the service is retarded, if not finally stalled. After the slight storage capacity of terminals is once reached, extreme steps have to be taken to prevent the receipt of freight even embargoes are declared by the roads, as in 1907 and 1915. Difficulty of Applying " Cost of Service " to Rates. Even in the local utilities where the different kinds of service and classes of customers are comparatively few, the exact proper apportionment of costs as fixed charges and operating expenses is not very easy. In railway transportation, where the kinds of service local, joint-route, long-haul, short-haul, fast-freight, slow-freight, flat-car, coal-car, refrigerator-car, heater-car, regu- lar passenger, excursion-trip, commuting, etc. mount up to the dozens and the groups of shippers run into the hundreds (for there are now some 85,000 separate tariffs in force on American railways, and that is a forced reduction from over 220,000 in 1907 f) the difficulties of logically determining the costs of each service are obvious. Where a few allocations of joint expenses have been made the apportionment has been partly by judgment. When the study of railway costs is carried out, a survey on dif- ferent lines is needed from that used on local utilities; the aim * See Engineering News, Nov. 18, 1915, p. 1005. t For details see " Railroad Rates and Regulations," W. Z. Ripley, 1912. PROBLEMS OF RAILWAY RATES 169 is to find terminal expense and carriage expense for each service. In each of these expenses of course both fixed and operating costs enter. It is a common assumption of railway men that terminal costs loading and unloading cost 50 per ton on the average and that \i per ton mile is a good guess at cost of haulage, the com- bination of the two factors resulting in the cost rising less rapidly than the distance. But such a charge for service could be suc- cessfully applied under existing commercial conditions only as a basis of departure modifications being made above or below to accord with the value of the product, competition of water routes and other rail lines, and all the points exemplified later in the citations of actual cases. Expenses Independent of Traffic. Railway and commission statisticians seem to agree that about two-thirds of a road's annual expenditures are nearly or quite independent of traffic they would continue if traffic dropped nearly to zero. It is generally estimated that one-third of the annual expense covers fixed charges on investment interest and retirance and a third goes into maintenance of way, of structures and of rolling stock, into operating the trains (empty or loaded) and for paying for the general administration. That leaves only a third to rise and fall closely with the tide of shipments and travel. It may be argued that interest .depends on amount of equip- ment and that in turn on traffic. That is not true, however, in considering a road with given equipment and fluctuating traffic the common situation. Deterioration of structures and roadbed on the whole is caused by weather far more than by wear and tear of traffic, though in special situations that may not be true. Deterioration of rolling stock alone depends mostly on the amount of its use but even here, in times of idleness, there is a depreciation due to the attack of weather. Maintenance of the roadbed, structures and rolling stock is affected by, or is in- dependent of, traffic in much the same way as is deterioration. Sometimes added tracks are required to take slow traffic off con- gested high-speed tracks to prevent congestion of service. Then the new construction may not be self-supporting for the traffic over it, but the improvement in the capacity of the older tracks would more than compensate. Thus the more the railway service is studied the more it is 170 PUBLIC UTILITY RATES seen how, even with the ideal condition of traffic of a single uni- form quantity and quality day by day, it has been very difficult to arrange convincingly all the expenses according to (1) amount of equipment required by a given service, (2) the operating cost of haulage, (3) the proportionate use of terminal facilities by a given service and (4) the proportion of overhead charges for management. Add the complications of dividing the cost of tracks, yards, terminals, and rolling stock between freight and passenger service (and this has been seriously tried by railroads and commissions but more often with inconsistent and sometimes absurd results which sprung from the highly arbitrary assump- tions which had to be made) and an idea of the incomplete re- liability of the results begins to be gained. Further, take the amounts assessed as the cost of the freight business and try to split it up for shipments of coal, stone, timber, fruits, meats, groceries, machinery, wagons, clothing, ores, explosives, oils, beverages, medicines, and what not, and the immensity of the problems of scientific rates are realized. (There has been of late, howe.ver, a revival of confidence in the possibility of a limited segregation of costs, as noted later.) " Law of Joint Costs." The inter-dependence of costs already mentioned is an exhibition of what economists have long called the " Law of Joint Costs." It means, translated into the terms of this case, that so many of the expenditures are un- affected by the presence or absence of traffic and are so inevitable if the road is to be operated at all, that no apportionment is wholly rational. Then, it is argued by many, rates have to be adjusted to what the shippers are willing to pay modified by the provision that always the rate system as a whole must yield a " reasonable return on the fair value of the property used and useful," if the road is to live and grow. There is, finally, a crucial test for a value-of -service rate will it upset an existing equilibrium of traffic? Will it throttle transportation so that the net result is loss of revenue, or will it boom a carrier's business. This is solely a question of record, experience and judgment, except perhaps as to those vital living supplies which must flow unabated anyway coal, grain, and salt for instance. " Law of Increasing Returns." The economists' " Law of Increasing Returns " has been much discussed by writers on PROBLEMS OF RAILWAY RATES 171 railway problems. But it is essentially the same action seen in local-utility operation, though it is little spoken of there under its formal and formidable title. The " law " may be stated in two ways: (1) The operating cost of an utility does not go up as rapidly as the volume of business; (2) the unit cost of service decreases and the profits increase, under fixed rates, as the volume increases. The first statement emphasizes an effect evidently more pro- nounced in railway operation than with local utilities. It is more heard of in railway problems because of the lack of control over it. Each hundredweight of freight added to a partly loaded car adds less to cost of haul than a hundredweight of the original load. Each car added to a train, up to the capacity of the loco- motive, costs less to transport than one of the cars first coupled. Similarly, in an electric central station all the extra energy furnished by an underloaded generator costs less per unit than the output before the increase. But the local electric station, however, may adjust its rates to the unit cost under full-capacity output, and failure to earn its legitimate return is but a temporary loss as this may go into the cost of developing the business and affect the rates. Not so the railroad; the rates so far have been generally fixed by considerations beyond the absolute cost of service. If the legitimate return on the investment as a whole is not earned still the roads cannot easily raise the rates for fear of discouraging traffic. It does them little good to throw defi- cits into intangible property value (such as " business-develop- ment investment ") so long as cost of service is not the accepted criterion of railway rates. The alternative is always to secure the maximum amount of traffic which can be handled and this explains the time-honored struggle of all roads for more business. Traffic is carried on night and day; cars and engines are worked intensively; trains are spaced as close together as safety permits. American traffic officials have always sought to develop business to keep up this rush; they have taken new traffic at a small profit above the bare increment in cost brought by the added traffic, and it is only when fresh competition between localities and industries is kindled that serious contention has arisen such as has been seen over the cheap transportation of Pacific Coast fruit into the markets of Southern and Eastern growers. 172 PUBLIC UTILITY RATES Renewing Separation of Operating Expenses. From 1888 to 1893 the separation of operating expenses was required by the Interstate Commerce Commission in the reports demanded of carriers. At that time expenses not directly chargeable to freight or passenger traffic were divided on a basis of propor- tionate train mileage. In 1894 the practice was discontinued owing to the few directly assignable items and the uselessness of the train-mileage derivatives. By 1913, however, the Com- mission became convinced that sufficient progress in railway accounting had been made to make the separation serviceable. Some roads were already making it perhaps somewhat arbi- trarily in studying efficiency of operation. It was judged possible to separate two-thirds of the operating expenses satis- factorily, the remainder being divided on some basis which measured the use which either service makes of common facili- ties. The general and long-term statistics of separated expenses were held to be much more reliable in rate cases than any special short-time studies made for specific cases. In the testimony taken at hearings on Advances in Rates Western Case (20 I. C. C. 307), one railroad official testified that some 51% of operating costs could be directly apportioned, 29% divided with practical accuracy and 20% arbitrarily placed; this was interpreted to show that a statistician's estimate of ser- vice cost would be within 5% of actual. The practice on the Burlington and Santa Fe lines was concretely cited. After conferences the Commission's scheme of division was approved by ijie railroads and the Commission issued governing rules. The only disagreement seemed to be as to whether main- tenance of way and structures should be divided in proportion to " engine-ton-miles " or " gross-ton-miles." Both schemes are being tried out. The reported separations are according (a) solely to freight service, (6) solely to passenger or allied services (baggage, mail and express), (c) in common to freight and passenger services, (d) to neither service. It is of interest to note briefly how some of the items are ap- portioned. Thus in maintenance of way and structures only cost of superintendence, upkeep of roadway buildings, paving and roadway machines, a part of track work, and shops and engine houses, are reported common and undivided. Mainte- nance of yard tracks is segregated by record or estimate and joint PROBLEMS OF RAILWAY RATES 173 costs are apportioned according to switching locomotive miles. Expenditures on station and office buildings, grain elevators, storage warehouses, power plants, and injuries to persons are divided according to the facts. Expense of signals, interlocking plants, telephones and telegraphs are apportioned on a basis of transportation train miles. Water and fuel stations are divided in proportion to the division of engine fuel. Under maintenance of equipment, only the cost of keeping up work-train equipment is undivided. Expense on locomotives is placed directly as for freight or passengers or divided according to the locomotive-ton-miles given in each service. Expenses on car equipment, of course, can be assigned directly. The other items like cost of superintendence, shop machinery, power plants, floating and miscellaneous equipment, and injuries to persons are apportioned according to the freight and passenger proportions of the aggregate of the primary accounts mentioned. The expenses of getting business (Group III, Interstate Com- merce Commission Accounts) are assigned directly where possible and the remainder divided in proportion to the aggregate of directly assigned items. Under the rail-transportation group of operating expenses, train labor, fuel, water, lubricant and supplies are assigned directly as far as possible; for mixed trains these items are divided on a basis of car miles in each service. Yard labor, fuel, sup- plies, etc., are assigned directly or divided in accordance with the switch-engine-miles in each service. Cost of dispatching trains, signal operation and crqssing protection is apportioned on a basis of the transportation train miles (or by special study) ; mixed-train costs are divided on the basis of car miles. Engine- house expenses are split according to the number of engines handled for each service, with an arbitrary multiplier for engines hard to handle. Cost of weighing, inspection and demurrage bureaus, of coal and ore wharves, express and sleeping-car serv- ice, clearing wrecks, damage to property, lost or damaged freight, lost or damaged baggage, injuries to persons, etc., are assigned directly. Most other items like superintendence, station em- ployees (in part), drawbridge operation, telegraphs and tele- phones, floating equipment, stationery, insurance, etc., are divided in proportion to the aggregate of the divided primary accounts of this group already mentioned. 174 PUBLIC UTILITY RATES How Freight Charges are Figured. A local railway agent settling with a shipper ordinarily computes a two-part charge. From the " classification sheets " furnished the agent, is found the class (1, 2, 3, 4, etc.) in which fall the goods shipped. From the " tariff-sheets " are taken the lawful charges per hundred- weight for this class between the shipping point and destination over the route specified. The actual weight multiplied by this tariff gives the charges to be imposed unless there are extras for storage, switching (on carload shipments), transfer, lighter- age, refrigeration, etc. Classification of Freight. In the classification sheets, men- tioned above, all possible articles are put into various numbered classes depending on value, bulkiness, quantity, risk of damage, similarity to previously classified items and the relative cost of carriage. Prof. W. Z. Ripley has very aptly described * the classification sheets: Imagine the Encyclopedia Brittanica, a Chicago mail-order catalog and a U. S. protective tariff law blended in a single volume. . . . Such a classi- fication is first of all a list of every possible commodity which may move by rail, from Academy or Artists' Board and Accoutrements.to Xylophones and Zylonite. In this list one finds Algarorilla, Bagasse, Pie Crust Prepared, Artificial Hams, Cattle Tails and Wombat Skins; Wings, Crutches, Cradles, Baby Jumpers and all; together with Shoo Flies and Grave Vaults. Everything above, on or under the earth will be found listed in such a volume. There are three important groups of freight classifications in the United States, known as the Official, the Southern and the Western, made up by committees of all the railways in those respective territories. In the Official Classification (applying to the northeastern quadrant of the country) there are six regu- lar (numbered) and three special classes; in the Southern (apply- ing to the Southeastern quadrant) there are six numbered and seven lettered classes; in the Western (applying in the territory West of the Mississippi River) are five numbered, and five lettered classes and a few special cases where the maximum class rating has been multiplied or discounted. Many commodities shipped in carload lots (designated " C. L.") are given a lower classifi- cation than the same commodities moved in less than carload * "Railways: Rates and Regulation"; 1912, New York. PROBLEMS OF RAILWAY RATES 175 lots (" L. C. L.")- The " exception sheets " going with the classification used by any road show special products given a different classification within a restricted locality because of peculiar local conditions. Moreover from each important shipping point neither classi- fication sheets nor exception sheets may apply to certain com- modities since the need of special low rates (usually on the coarser products) to cause movement has led to the publication of so-called commodity rates, applying only to specified locali- ties and products. . There seems to be a general effort after given traffic has moved a few years under commodity rates to substi- tute regular classifications and tariffs but there is great difficulty oftentimes in retiring a favor once granted. It is commonly reported that as much as 75% of the tonnage of American roads moves under these exceptional rates. Grain, coal, oil, lumber, wool, cotton, live stock, dressed meats, and some of the products of these staples, are the most favored commodities. Trunk-Line Rate System. The trunk roads in self -protection built up a logical rate system for traffic between the Middle West and the Atlantic seaboard which antedates by 15 years the Interstate Commerce Act and embodies, in a general way, many essentials of a cost-of-service plan. This system has not been directly presented to the shippers but exists back of the tariffs a guide for railway officials (see Pratt Lumber Co. v. C. I. & L. Ry., 10 I. C. C. 29). In trunk-line territory the charges for a given locality are pro- portioned to the length of haul, the shortest line from Chicago to New York (920 miles) being the basis. In fixing the propor- tion, to illustrate, for Columbus, from the Chicago rate, say 25^ per 100 lb., the fixed charges on both ends of the haul (6fO are deducted and the remainder (19^) reduced in proportion to the reduced distance to New York (70%). The haul charge there- fore is 13.3^; to this is added the terminal charges to get the total rate 19.3^ which is 77.2% of the standard. This basis was not strictly applied to every intermediate point; rather it gave the rate from points common to two or more carriers, the local stations having to stand a small arbitrary addition to the nearest common point, but the long-and-short-haul prohibition being observed. One result has been the establishment of per- centage zones which have been slightly stretched here and there 176 PUBLIC UTILITY RATES to meet railway competition at junctions, by the presence of independent cross feeder roads, and by commercial competition between localities.* Zone Rates for Transcontinental Freight. Of interest in comparison with the trunk-line rate system, but not intimately related to it, is the system of class and commodity tariffs which have been evolved by the transcontinental roads and the Inter- state Commerce Commission from 1910-1915 in making certain allowed exceptions to the long-and-short-haul provisions of the revised Interstate Commerce Act. For instance, a $3 base rate once prevailed for Class 1 goods for the Pacific Coast cities from anywhere in a broad belt be- tween Denver and Boston, but the rate to the intermountain points east of the coast was this figure plus a local back-haul - though the freight was merely stopped off at the proper point on its transcontinental trip. This practice came under the prohibitions of the long-and-short haul and the Commission, in e'ffect, was asked to allow it to continue, on the score of water competition through the Panama canal governing the coast rates but not the intermountain. The Commission reaffirmed the principle but found the difference too great and the origin zone too broad. So they adopted certain zones then seen on existing schedules and graduated the transcontinental class rates from New York, Buffalo-Pittsburgh, Cincinnati-Detroit, Chicago, and from Denver. The intermountain rates were made, for example in Class 1 on shipments to Reno and points east to Utah, $3.50 from New York City, and all the others correspond- ingly higher than the coast-terminal rate. (See R. R. Comm. Nev. v. S. P. Co., 19 I. C. C. 238; Transcontinental Rates From Group I, 28 I. C. C. 1.) The commodity rates were studied separately from the class rates and a somewhat similar system of zones worked out (Commodity Rates to Pacific Coast, 32 I. C. C. 611). Zone 1 included the states west of Minnesota, South Dakota, Nebraska, Kansas, Missouri, Arkansas and Louisiana; but for traffic to the Northwest the east line of Zone 1 was drawn west from Missouri to Kansas and New Mexico. Zone 2 ex- tended some 400 miles to the east of Zone 1; Zone 3 had its eastern line running from Buffalo and Pittsburgh down the Ohio * Details maybe studied in "Railroads: Rates and Regulation," by W. Z. Ripley, 1912. PROBLEMS OF RAILWAY RATES 177 River; Zone 4 included the North Atlantic group and Zone 5 the Southern and South Atlantic states. Higher rates, generally, on certain commodities which con- stituted the water-borne Atlantic-Pacific business were allowed out of Zones 2, 3, and 4 to intermediate points than to the coast ; the excess however was limited to 7% from Zone 2, 15% from Zone 3, and 25% from Zone 4. Similar carload rates on chemi- cals, and metal products were allowed but the excess was limited to 15, 25 and 35^ per 100 Ib. from Zones 2, 3 and 4. Coal was allowed to have an excess of 5 mills per ton-mile. The arrange- ments in their entirety are not as simple as here noted and the decisions themselves must be consulted for details. Southern Basing-point System. In great contrast with the trunk-line rate system is the so-called Southern basing-point system. The existence of this scheme depends on certain char- acteristics of the Southern carriers not pronounced in other parts of the country. First is the general high level of freight charges due both to tariffs and classification. A second prominent difference is the comparatively sparse population in the territory served and the small amount of local traffic. A third difference is shown by railway maps where the important cities and towns are seen to be centers from which railways radiate, rather than junction points on parallel trunk lines where cross lines are met. Rates from the more distant origins of traffic are made up of a through rate to some of these centers, plus a local to destination. The basing points first were historic trade centers at which cotton and tobacco (typically) could be concentrated for grading; Savannah and Montgomery are examples of old centers which enjoyed the benefits of water competition, and here the argu- ments were frequently accepted about the impossibility of charg- ing minor towns as low rates as were given places where com- petition flourished. Other great centers sprang up where no water competition was found but rival roads met. Finally the gateway idea was extended by the carriers to certain minor junctions resulting in many local discriminations. There has been experienced more trouble from this third class than from the others. The basing point system as constituted is inconsistent with the distance basis so satisfactorily employed in the trunk-line scheme and the gradual change of basic characteristics of trans- 178 PUBLIC UTILITY RATES portation in the South is expected in many quarters to point to the eventual elimination of the plan. Early Interstate Commerce Commission Rates. It is of no particular value here to examine into the basis of interstate rail- way rates before they came under the control of the Interstate Commerce Commission. It is of passing interest to note, how- ever, that the interstate rate situation had become deadlocked and unresponsive to changing commercial conditions (although the situation in a few states had improved). The Lincoln (Neb.) Commercial Club case (13 I. C. C. 319) illustrates this. Once the general supplies for Lincoln came from east of the Missouri River and had rates greater than to Omaha. But with industrial changes, the lumber, coal, salt, glass, sugar, etc., were produced nearer to Lincoln than to Omaha but rates could be changed only by unanimous action of the companies, and this could not be secured. Individual action would have started a rate war. The nearest approach to principles that can be found in early railway tariff tinkering (it hardly merits the term " rate making ") were necessity of securing traffic and general expediency. When the newly created Interstate Commerce Commission sought to make order out of the chaos which it found, it was soon con- fronted with the need of deciding whether the cost of a given service or its value should be the fundamental basis. They accepted the latter and while there have been notable departures and modifications especially toward the end that a railroad's whole rate system should give a reasonable return on a fair value of the transportation property yet the value-of -service theory still appears to be the dominant factor considered by the Com- mission. The declaration of this has been repeated at intervals, notably in 1910 in the general case of returned (rejected) ship- ments which take a low rate (19 I. C. C. 409). The Interstate Commission has always apparently been a little troubled in finding a logical way of defining and determin- ing the value of a given specific service. Many of the findings in their own analysis palpably reduce to " what the traffic will bear " being proportional to the difference in prevailing prices at shipping and receiving points. This has proved to be reason- ing in a circle since the prices at the receiving point are fixed by prices at the shipping point and the charges for transportation. While the early commissioners may have sincerely believed that PROBLEMS OF RAILWAY RATES 179 they were applying the value-of-service criterion, yet a careful study of the important decisions * shows the substitution of such bases as relative values of goods shipped, relative risks, relative distances and costs of carriage, natural advantages of localities, general public interest, maintenance of competition between producers, preservation of vested interests, etc. The Commis- sion evidently realized that certain necessities of life once made to flow must continue nearly independent of the price of carriage so that " value of service " alone is an undesirable basis. It is in such cases where the other standards were brought in, and before long they rivaled the fundamental standard in importance. In the actual cases the employment of several criteria are gener- ally seen. A few selected cases have been noted in the following paragraphs to show how railway freight rates have been shaped in practice; the review of cases is not attempted to be complete and especially in the years 1908-1916 are the gaps large, for m these years the cases were mostly affirmations of earlier work. Effect of Value of Commodity. In a variety of cases the Interstate Commission allowed a higher rate on finished goods than on raw materials or intermediate products. Thus: wheel- hub blocks went cheaper than wheels in Hurlburt v. L. S. & M. S. Ry. (2 I. C. C. 122); chair materials than chairs, Murphy, Wasey & Co. v. Wabash R. R. (5 I. C. C. 122); unfinished furniture than finished, Potter Mfg. Co. v. C. & G. T. Ry. (5 I. C. C. 514); lumber products than lumber, Eastern Wheel Mfg. Assoc. v. A. & V. Ry. (27 I. C. C. 370); hatters' fur than hats, Myer v. 'C. C. C. & St. L. Ry. (9 I. C. C. 78); live stock than packing- house products, Chicago Board of Trade v. C. & A. R. R. (4 I. C. C. 153); Chicago Live Stock Ex. v. C. & G. W. Ry. (10 I. C. 6. 428); Sinclair & Co. v. C. M. & St. P. R. R. (21 I. C. C. 490); grain than live stock, Grain Shippers 'Assoc. v. I. C. R. R. (8 I. C. C. 158); cotton waste than cotton goods (12 I. C. C. 388; 22 I. C. C. 293); cotton seed than its products (20 I. C. C. 37) ; salt in bulk than salt in packages, Gottron v. G. & W. R. R. (28 I. C. C. 38). This idea has been a straightforward proposition generally acceptable to shippers. Oftentimes cost of service has indi- * Such as may be found in "Railway Rate Theories of the Interstate Com- merce Commission" by M. B. Hammond, 1911, or in the "B" Appendices to the annual reports of the Interstate Commerce Commission to Congress. 180 PUBLIC UTILITY RATES rectly entered through consideration also of reduced risk and care demanded for rough stocks. Effect of Market Price of Competing Products. A few cases are on record where competing or substitute products were al- lowed to carry rates differing roughly according to general market prices. For instance: soap powder and soap, J. Pyle & Sons v. E. T. V. G. Ry (1 I. C. C. 465); anthracite and bituminous coal, Coxe Bros. v. L. V. R. R. (4 I. C. C. 535); envelopes and cheap paper bags, Wolf v. Alleghany Ry. (7 I. C. C. 40) ; concrete and steel vaults, Van Camp B. V. Co. v. C. I. & L. Ry. (12 I. C. C. 79); wheat and corn (12 I. C. C. 418). Similar in theory are several cases involving products nomi- nally not competing: Patent medicines versus beers and ales, Warner v. N. Y. C. & H. R. R. R. (4 I. C. C. 32); toilet versus laundry soap, Andrews Soap Co. v. P. C. & St. L. Ry. (4 I. C. C. 41); petroleum versus cottonseed oil, Rice v. C. W. & B. R. R. (5 L C. C. 193). Different tariffs for differing products of similar value have been disapproved in several cases, notably: Ties and lumber, Reynolds v. W. N. Y. & P. Ry. (1 I. C. C. 393); raisins and other dried fruits, Martin v. S. P. Co. (2 I. C. C. 1); celery and other green produce, Tecumseh C. Co. v. J. & M. Ry. (5 I. C. C. 663). Closely connected with the idea of market value of products is the quality of use for them. Where transportation places goods for high-value service, higher rates have been allowed than for similar carriage of goods intended for low-value utilization. For instance: cow peas as fodder instead of fertilizer, Swaffield v. A. C. L. R. R. (10 I. C. C. 281); electrical equipment as scientific apparatus or mechanic appliances, Scheidel v. C. & N. W. Ry. (11 L C. C. 532). Changing tariffs to" agree with considerable changes of market prices (of the coarser materials in general demand) have been sanctioned on the excuse of public benefit. One case covered hay, Nat. Hay Assoc. v. L. S. & M. S. Ry. (9 I. C. C. 264); others concerned iron and steel, Colo. Fuel & Iron Co. v. S. P. Co. (6 I. C. C. 488), Proposed Advances in Freight Rates (9 I. C. C. 382); still others involved grains, Alleged Excessive Rates on Food Products (4 I. C. C. 48), Evans v. U. P. Ry. (6 I. C. C. 520), Delaware Grange v. N. Y., P. & N. R. R. (4 I. C. C. 588). It should be noted that in 1914 the Interstate Commission de- PROBLEMS OF RAILWAY RATES 181 clared (Bd. R. R. Comm. Montana v. B. A. & P. Ry. 31 1. C. C. 641) that unreasonableness of rates (on grain) could not be wholly gaged by inability of shippers with depressed market conditions profitably to market their products under existing rates. How Cost of Service Has Been Used. The opinions of the Interstate Commission make frequent reference to the cost of railway service but this is seen to be very largely in regard to the relative cost of two services which is much more easy to scrutinize than absolute cost of either. (Indeed throughout the Interstate Commission reports, it is seen that in the majority of cases two rates are being compared one which it is desired to charge and one which is taken as a convenient standard for comparison.) Cost of Carrying Competing Products. Where two services have been compared in studying the reasonableness of one, the transportation has frequently been of what may be termed competing products such as raw or finished materials. Thus there was competition between live hogs and dressed pork for the Eastern markets in Squire & Co. v. M. C. R. R. (4 I. C. C. 611); a lower rate for hogs was allowed but largely on considerations of cost (through value of service entered). Similar considera- tions were seen in Chicago Board of Trade v. C. & A. R. R. (4 I. C. C. 153) and Chicago Live Stock Exchange v. C. & G. W. Ry. (10 I. C. C. 428). Other cases involved strawberries versus potatoes, Truck Farmers Assoc. v. N. E. R. R. of S. C. (6 I. C. C. 295); peaches versus common freight, Ga. Peach Growers Assoc. v. A. C. L. R. R. (10 I. C. C. 255); lumber dressed in transit compared with simple through shipment, Farrar v. S. Ry. (11 I. C. C. 632); berries versus oranges, Perry v. Fla. C. R. R. (5 I. C. C. 97); beans versus tomatoes, Rea v. M. & 0. R. R. (7 I. C. C. 43); corn products versus corn, Bates v. Penn. R. R. (3 1. C. C. 435; 4 1. C. C. 281), Kansas R. R. Comm. v.A.T.&S. F. Ry. (8 I. C. C.-304); live stock compared with general freight, Cattle Raisers Assoc. v. M. K. & T. Ry. (11 I. C. C. 296). Geographical Comparisons of Cost. Relative cost of service has been deduced by the Interstate Commission in a few in- stances by comparing an attacked rate with rates for similar service elsewhere. Thus carriage of cotton from Meridian, Miss., to New Orleans was compared with shipments from Shreveport, 182 PUBLIC UTILITY RATES in N. 0. Cotton Exch. v. C. N. 0. & T. P. Ry. (2 I. C. C. 375); wheat over a short and a long route, Newland v. N. P. R. R. (6 I. C. C. 131); cotton goods to Denver and to San Francisco, Kindel v. B. & A. R. R. (11 I. C. C. 495) (the last two cases in- volved route competition also) ; fruit in refrigerator and ordinary cars, Waxelbaum v. A. C. L. R. R. (12 I. C. C. 178). Under prevailing customs of making separate charges for haul and for refrigeration on fruit shipments, it has been held (R. R. Comm. Calif, v. A. G. S. R. R., 32 I. C. C. 17) that a " theory of differential costs " should be adhered to in judging of reason- ableness of charges; the refrigeration charge should cover cost of hauling the ice carried in the car and the extra cost of switching. Effect of Carload Lots on Cost. The Interstate Commission has often compared the cost of transporting goods in carload and less-than-carload lots, supporting a lower tariff for the former because of less labor in loading and unloading at transfer points, a single bill of lading and collection for the whole carload, better utilization of cars, etc. Among the cases to be noted is an early one involving oil in barrels, Schofield v. L. S. & M. S. Ry. (2 I. C. C. 90); another involved groceries, Thurber v. N. Y. C. & H. R. R. R. (3 I. C. C. 473). The Interstate Com- mission in 1912 declared that where a shipper asked for cars of certain recognized capacity and they were not furnished, the carload rates should be based on requested capacity. Lindsay Bros. v. L. S. & M. S. Ry. (22 I. C. C. 516). On mixed carload lots the rate and maximum charge applying to the article of highest rate prevails so as to give the carrier the earnings it might have for an entire carload of that commodity; Florida Fruit and Veg. Shippers Assoc. v. A. C. L. R. R. (17 I. C. C. 552). Effect of Distance on Cost of Transport. The distance of carriage obviously has some effect on cost of service in railway transportation, and therefore may be expected to have been considered in rate making. The relation between distance and cost of service were discussed in early cases; Lincoln B. of T. v. B. & M. R. R. (2 I. C. C. 147); Farrar v. E. T. Va. & Ga. Ry. (1 I. C. C. 480). Class rates from Sioux City, Iowa, to points in southwestern Minnesota were reduced to equal those from St. Paul and Minneapolis for equal distances; Traffic Bureau of Sioux City C. C. v. C. & N. W. Ry. (22 I. C. C. 110). Tariffs PROBLEMS OF RAILWAY RATES 183 from points on the Louisville & Nashville R. R. to Louisville were ordered to be no higher than to Cairo for equal distances; Norman Lumber Co. v. L. & N. Ry. (22 I. C. C. 239). Con- versely, distance permitted larger rates on cotton from Texas points to New Orleans than to Texas ports; Re Texas Cotton and Linters (23 I. C. C. 404). Equal or greater charges for a shorter than a longer haul on the same line were generally disapproved for the first years of the life of the Interstate Commerce Commission, as shown in Re Louisville & Nashville R. R. (1 I. C. C. 31); Commercial Club of Omaha v. C. R. I. & P. Ry. (7 I. C. C. 386). But the Com- mission's power in this matter was reduced in 1892 (Osborne Case - 52 Fed. Rep. 912) and practically lost by 1897 (Board of Trade of Troy v. Alabama Midland R. R., 6 I. C. C. 3, 168 U. S. 144; and the Chattanooga Case, 10 I. C. C. Ill, 181 U. S. 1). The power of the Commission, however, was restored in 1910 by a revision of the Commerce Act. The Commission may expressly permit the use of greater charges for the longer haul in specific "cases; a long list of such permissions is given in Fourth Section Violations in Southeast (30 I. C. C. 153; 32 I. C. C. 61), R. R. Comm. of Nev. v. S. P. Co. (19 I. C. C. 238), Commodity Rates to Pacific Coast (32 I. C. C. 611), and others. In making rates bear some relation to length of haul, the longer or shorter distances did not have to be over the same line necessarily, as shown by Freight Bureau Cincinnati Cham, of Comm. v. C. N. 0. & T. P. R. R. (7 I. C. C. 180) involving car- riage from Cincinnati and Louisville to points south. Similarly the service from Eau Claire and La Crosse, Wis., to the Missouri River was covered in Eau Claire B. T. v. C. M. & St. P. R. R. (5 I. C. C. 264). Shipments from Great Falls and Pipestone, Minn., to Chicago were covered in Morse Produce Co. v. C. M. & St. P. Rys. (12 I. C. C. 485). Risk as a Factor in Rates. A high explosive less dangerous to handle than dynamite was afforded a generally lower rate (by classification) in Masurite Expl. Co. v. P. & L. E. R. R. (13 I. C. C. 405). In Va.-Carolina Chem. Co. v. St. L. Swn. Ry. (16 I. C. C. 49) rates were lowered on fertilizer as a low grade traffic requiring " no special service," having less risk than other business, and also of service as an auxiliary producer of other traffic. 184 PUBLIC UTILITY RATES Sum of Locals Gives Maximum Through Rate. There are repeated instances where the sum of local rates has been taken as the maximum reasonable amount which a through rate may be. This is typically outlined in Porter v. St. L. & S. F. (15 I. C. C. 1), where emigrant outfits were involved. The same idea was applied for shipments of steam boilers in Lindsay Bros. v. M. C. R. R. (15 I. C. C. 40), and Lindsay Bros. v. B. & 0. Swn. R. R. (16 I. C. C. 6). In this connection is of interest the case Laning- Harris v. Mo. P. Ry. (13 I. C. C. 154) wherein it was held that there could be but one lawful rate for a given ship- ment between two points the local rate if on one road, the joint rate if on two agreeing roads, the sums of two locals if on two non-agreeing roads. A qualification to this principle was recorded by the Inter- state Commission in Humphreys-Goodwin Co. v. Y. & M. R. R. (31 I. C. C. 25). The fact that the joint (through) rate exceeded the sum of intermediates, it was noted, raised a strong presump- tion of unreasonableness but this could be rebutted by evidence. Federal Versus State Rates. In 1907 the Interstate Com- merce decided, in Hope Cotton Oil Co. v. T. & P. Ry. (12 I. C. C. 265), that a state-made rate " has no greater sanctity than a rate established by a railroad company " and while entitled to re- spectful consideration could not be accepted in fixing an inter- state rate. The same declaration was made in Saunders v. So. Ex. Co. (18 I. C. C. 417), in Cobb v. No. P. Ry. (20 I. C. C. 100) and in Trier v. C. St. P., M. & 0. Ry. (30 I. C. C. 707). When state rates are reduced the effect on interstate commerce must be considered, reports the Interstate Commission in R. R. Comm. of La. v. St. L. Swn. Ry. (23 I. C. C. 31). Here rates from Shreveport, La., to points in eastern Texas were ordered made similar to those from Dallas and Houston, Tex. The Effect of Water Competition. The effect of the real or potential competition of water routes with railway lines has long been a recognized factor in making freight rates. For in- stance sugar from San Francisco to Humboldt, Kan., was given 30% higher rates than to Kansas City, in Lehmann, Higginson & Co. v. S. P. Co. (4 I. C. C. 1). Lower rates on oil from Penn- sylvania and Ohio were given the Standard Oil Co., than to com- petitors at intermediate points because of water and pipe-line competition which the Standard Co. had but the others had not; PROBLEMS OF RAILWAY RATES 185 (Rice v. A. T. & S. F. R. R. 4 I. C. C. 228). Lower rates to Memphis and Nashville than to Chattanooga were permitted because of water competition (Chattanooga B. T. v. E. T. V. & G. Ry., 5 I. C. C. 546, and Chattanooga C. C. v. S. Ry., 10 I. C. C. 111). For the same reason lower rates from the Mississippi River to the Pacific Coast were allowed in Spokane v. Mo. P. Ry. (15 I. C. C. 376). Lower rates on flour from New York City to Boston than to Readville, eight miles nearer, were allowed to stand because of the Boston water route (King & Co. v. N. Y., N. H. & H. R. R., 4 I. C. C. 251). Brick machinery from Lock- land, Ky., to East St. Louis, 111., took a higher rate than that from more distant Louisville on the same line (Durham v. I. C. R. R., 12 I. C. C. 37). A recent declaration of the Interstate Commission (1912) was to the effect that a road could not discriminate against a city unless transportation forces (water competition) were brought into force in one place and not in another (Re S. P. Co., 22 I. C. C. 366, 24 I. C. C. 34). After the New York, New Haven & Hartford R. R. had con- solidated the rail and water lines between southern New England and New York City, a competing boat line broke in, but the other railroads would not make joint rates with the new concern. The Interstate Commission ordered the joint rates on grounds of fostering competition (Re Discriminations against Enterprise Trans. Co., 11 I. C. C. 587). Railway Route Competition Still Affects Rates. While rate wars are a thing of the past and governmental regulation has supplanted destructive competition, yet competition, real and potential, has left an indelible mark. In many cases where " local advantages " have been preserved these benefits are shown to be the results of competition in rail transportation. Roads have been allowed to lower their rates to meet short-line competition but the Interstate Commerce Commission has main- tained that a road cannot be compelled to do so, and that a mere reduction furnishes no evidence of the unreasonableness of the older rate. See Ottumwa Bridge Co. v. C. M. & St. P. Ry. (14 I. C. C. 125); Commercial Coal Co. v. B. & 0. R. R. (15 I. C. C. 11); LaSalle Paper Co. v. Mich. C. R. R. (16 I. C. C. 149). An increase of rates on lumber going from southern states to Ohio River points, the after effect of consolidation, were dis- 186 PUBLIC UTILITY RATES approved by the Interstate Commission because competition was favored by law and the old rates were fixed by competition (Cent. Yellow Pine Assoc. v. I. C. R. R., 10 I. C. C. 505). In some of the early cases of the Commerce Commission rail- route competition was held not to be sufficient ground to warrant lesser charges for a longer than for a shorter haul over the same line but this was overruled by the Supreme Court in the Troy Case (6 I. C. C. 3; 168 U. S. 144) and the Commission's authority was restored only by special legislation in 1910. Route com- petition has long been recognized by the Supreme Court as one of the factors entering freight rates, see Social Circle Case (162 U. S. 184). Presence of water competition between terminals has been judged excuse for permitting a greater charge for a shorter than a longer haul; Re Lumber Rates from South to Ohio River (25 I. C. C. 50) is typical of the many cases involving this idea. Raw wool went 50% cheaper from Fort Wayne, Ind., to Phila- delphia than in the reverse direction due to competition for steady traffic eastbound which did not exist westbound (Weil Bros. v. P. R. R., 11 I. C. C. 627). Similar grounds did not hold in. A. J. Phillips, v. G. T. W. Ry. (11 I. C. C. 659). Higher rates were allowed east from Fenton, Mich., to Winooski, Vt., than from Winooski to Detroit owing to empty cars going out (Phillips & Co. v. G. T. W. Ry., 11 I. C. C. 659). Rates to St. Cloud, intermediate between Duluth and St. Paul, were held unfair unless sharing in a general reduction of the through rate made to compete with a shorter through line ( Tiles- ton Millg. Co. v. N. P. Ry., 8 I. C. C. 346). In McLean Lumber Co. v. L. & N. Ry. (22 I. C. C. 349) a carrier was allowed to transport a shipment at a rate fixed for a route of a competitor specified by the shipper but the competi- tor's lower rate not accepted as evidence of unreasonableness of carrier's regular rates. Limits to Route Competition. Some cases are to be noted where no particular natural advantages were evident but old railway rates had given a locality certain business assistance which was preserved. Thus Wilmington, N. C., was losing jobber's distribution business to Norfolk and Richmond by virtue of a change in existing rates. The Interstate Commission restored the handicap (Wilmington Tariff Assoc. v. C. P. & Va. PROBLEMS OF RAILWAY RATES 187 R. R., 9 I. C. C. 118). Yet in contrast there are cases where the advantages of trade centers, due to old railway rates, were not perpetuated, the Commission ruling that the competition of merchants in smaller places could not any longer be shut out by discriminatory rates; see Payne, Gardner v. L. & N. R. R. (13 I. C. C. 638). Railroads cannot longer adjust rates (in order to increase revenues) so as to constrain shippers to send to one market on one line rather than another market off that line (Milwaukee C. C. v. C. R. I. & P. Ry., 15 I. C. C. 460). Competition of Seaports. One of the most important group- ing of interstate-commerce cases that can be made would cover those involving competition of seaports, the efforts of railroads to overcome peculiar port advantages, and the willingness of the Interstate Commission to foster such competition. Helping the port of Boston to compete with New York City has already been noted (Re Export Trade of Boston, 1 I. C. C. 24; Boston Cham. Comm. v. L. S. & M. S. Ry.; 1 1. C. C. 436). The long-discussed differentials on freight for export in favor of Philadelphia and Baltimore, and against New York City, were allowed to stand on first examination as the Interstate Commission concluded that they were the result of the competition of various carriers to get a part of the export business and had existed for forty odd years without " untoward or unnatural influence on traffic." The differentials were reduced however (N. Y. Prod. Ex. v. B. & 0. R. R., 7 I. C. C. 612). Lower rates on grain for export than for domestic sale were allowed after a general study of export rates because of competi- tion of routes to foreign markets, because the Interstate Com- merce Act was intended to foster competition, and because the Supreme Court had ruled that competition of carriers might be reason for lower charges to a distant than to a nearer point. Export grain rates came up again when the trunk lines leading East tried to justify a proposed increase from 17| to 20^ per 100 Ib. The Pennsylvania and New York Central roads had bought up some of the earlier competitors and believed that the 20^ rate could be returned to. The Commission did not sanction the raise on the grounds that the lower rate was not below the cost of service, had been dictated by ancient competition and was not unfair (Proposed Advances in Freight Rates, 9 I. C. C. 384). 188 PUBLIC UTILITY RATES The same differencials came up again in 1904 and the figures as reduced in 1899 were upheld on the grounds of preserving competition between great railway lines and ports. The dif- ferentials for export, under import, freight through Philadelphia, Baltimore and New York City were again adjusted in 1912 (Cham. Comm. of N. Y. v. N. Y. C. & H. R. R. R., 24 I. C. C. 55). Newport News, Va., was given old through routes and joint rates, the same as for Norfolk although the carrier lines did not go to Newport News (Cham. Comm. of Newport News v. S. Ry., 23 I. C. C. 345). Yet in spite of allowing all these differentials, the Commission has repeatedly declared that " differentials diminish with in- creasing distance and vanish when the mileage on which the differential is based becomes inconsiderable in proportion to the total mileage from basing point to destination " (Williams Co. v. V. S. & P. Ry., 16 I. C. C. 482; Norman Lumber Co. v. L. & N. R. R., 29 I. C. C. 565). Competition of Private Producers. While the Interstate Commerce Commission has several times refused to assume the right to foster an industry, no matter how desirable such action might be, on the grounds that it was not a rule of transportation (see Suits Milling Co. v. C. & A. R. R., 15 I. C. C. 351), yet there are some cases closely approaching such action. For in- stance in Schumacher Milling Co. v. C. R. I. & P. Ry. (41. C. C. 373) carload rates applying to a single grain were not allowed for a car of mixed grain when it was shown that only one producer could ship mixed grains in such amounts, and that his carload rate would enable him to kill off competition. A similar situa- tion arose in Proctor & Gamble v. C. H. & D. Ry. (9 I. C. C. 440) where meat packers shipping a mixed carload of soap and meats were not allowed to secure the highest carload minimum tariff when soap makers had to pay more. Local carload rates on eggs, lower than on the " less-than carload " tariff, were denied by the Commerce Commission on the ground that it would throw all the egg business into the hands of a few great concerns (Brownell v. C. & C. M. R. R., 5 I. C. C. 638). This stand was taken in spite of a showing of reduced cost of service for carload shipments. Similar cases were Paper Mills Co. v. P. R. R. (12 I. C. C. 438), and Milwaukee-Waukesha Brew'g Co. v. C. M. & St. P. Ry. (13 I. C. C. 28). PROBLEMS OF RAILWAY RATES 189 This stand also contrasts with the general attitude of the In- terstate Commission that mixed carloads are to be liberally pro- vided for (Re Western Classification, 25 I. C. C. 442). The same disregard of cost of service was shown in the case of Glade Coal Co. v. B. & 0. R. R. (10 I. C. C. 226), where lower rates were denied for coal loaded from a tipple than on coal loaded from wagons or sleds; the Commission held that this dif- ferential would reduce the number of shippers and shipping points whereas Congress intended that all persons desiring to ship goods should have a reasonable chance. The Commerce Commission has repeatedly refused to blanket the central-creamery industry in order to encourage the small local creameries; for a typical example see Beatrice Creamery Co. v. I. C. R. R. (15 I. C. C. 109). A low rate on cotton goods from Texas to Wichita, Kan., was once ordered (equal to old secret rates) so that local jobbers could compete with Kansas City firms (Johnston- Larimer D. G. Co. v. Wabash R. R., 12 I. C. C. 51). Other discriminations between Kansas City and Wichita, on mixed-car rates, were removed in Wichita B. Assoc- v. A. T. & S. F. Ry. (30 I. C. C. 374). One railroad was not allowed arbitrarily to charge more on a product from one mill on its line than others and to prevent the one from competing in certain markets while assisting the others (Texas Cement Plaster Co. v. St. L. & S. F. R. R., 12 I. C. C. 68). Vested Interests Protected. Delivery of oil tank cars to a Brooklyn, N. Y., railway terminal was ordered restored partly on grounds of plant built up on the old rates and partly to enable a competition of refiners (Preston & Davis v. D. L. & W. R. R., 12 I. C. C. 114). There are various cases on grain dif- ferentials which have been largely decided for the industries built up on them (Bates v. P. R. R., 3 I. C. C. 435; Kaufman Mill'g Co. v. Mo. P. Ry., 10 I. C. C. 35; Howard Mills Co. v. Mo. P. Ry., 12 I. C. C. 258). A furniture concern which had been given special rates to enable it to compete in certain markets, and which had therefore gone to much expense in order to manufacture for the new market, was judged entitled to hold the rates spe- cially established (New Albany Furn. Co. v. M. J. & K. C. R. R., 13 I. C. C. 594). This policy was again declared in Green Bay B. M. A. v. B. & 0. R. R. (15 I. C. C. 59). Even where the cost of service gave rates above those formerly 190 PUBLIC UTILITY RATES prevailing, a road was not allowed to impose charges that would destroy a business and investment (Mt. Ice Co. v. D. L. & W. R. R., 15 I. C. C. 305). Splitting up single-rate territory into districts, with different rates which resulted in loss of business to concerns in one district fostered by the old rates, was disapproved in Ind. Steel & Wire Co. v. C. M. & St. P. Ry. (16 I. C. C. 155). Some Rates Fixed by General Public Interest. There are many miscellaneous cases where the Interstate Commission's " theories of transportation " have been overridden for what the Commission has considered "a general public benefit." For instance higher rates on Missouri and Kansas flour going to Texas, than on wheat, were allowed as they protected the Texas milling industry, the existence of which had a beneficial effect on price of wheat in all three states ( Kaufman Milling Co. v. Mo. P. Ry., 4 I. C. C. 417; Wichita v. Mo. P. Ry., 10 I. C. C. 35). In the days before Los Angeles had grown down to the sea- coast and become a port, the eastern carriers were giving the same rates as enjoyed by San Francisco which were fixed by water competition. This preference over other Southern Cali- fornia cities was contested in Holdzkom v. M. C. Ry. (9 I. C. C. 420) but was allowed to remain on the excuse of creating lower prices throughout Southern California by making Los Angeles the distributing center in place of San Francisco. A number of cases established, or re-established, joint routes and rates " in the public interest " not in detail defined. For instance, regarding cattle coming out of Texas, see Am. Nat. Live Stock Assoc. v. T. & P. Ry. (12 I. C. C. 32); Birmingham Packing Co. v. T. & P. Ry. (12 I. C. C. 29). The Commission has held, in Loup Creek Co. v. Va. Ry. (12 I. C. C. 469), that a through rate over two or more roads may be greater than would be reasonable over one road, and that through routes and joint rates are not required in all cases only where there will be public benefit or promotion of justice. In contrast with this is a case decided shortly after, Cardiff Coal Co. v. C. M. & St. P. Ry. (13 I. C. C. 460), .where it was held that a merchant or manu- facturer having goods to be moved and ready to pay a reasonable rate is entitled to have through routes and joint rates established regardless of the fact that his competition with distant con- cerns may unfavorably affect the revenues of the railroad in question. PROBLEMS OF RAILWAY RATES 191 Rates not Allowed to Overcome Natural Advantages. Lo- calities under a commercial handicap compared with more favored places naturally employ every influence to offset their natural disadvantages, and, to this end, discrimination in tariffs have been no mean tool. The railroad position has been one of trying to equalize rates over all routes between any two competing points, so that goods may move freely everywhere to market. By this old order of things all products moved under flat rates largely, irrespective of distance. The Interstate Commerce Commission, however, has constantly frowned on most such practices and endeavored to have installed more natural and logical rates. The natural advantages, aside from water routes, which are preserved depend (1) on naturally lower transportation costs or shorter distances from one shipping locality than another to the same market, (2) on water-route competition and in some in- stances all-rail competition; or else (3) group, blanket, or zone rates are involved. There has naturally been a limit to the pro- tection afforded natural advantages and this appears to have been set so that one locality could not develop a trade monopoly, or so that relative costs of service might be followed. Indeed, the list of cases touching on this point shows that the " natural advantage " idea is largely a second aspect of the cost-of -service plan. An early case was Imperial Coal Co. v. P. & L. E. R. R. (2 I. C. C. 618). A more recent case is Enterprise Mfg. Co. v. Ga. R. R. (12 I. C. C. 131 and 451); low rates were there denied southeastern cotton mills to San Francisco as the advantage of water carriage from New England was offset by southeastern mills' proximity of supply. Boston enjoys certain long standing concessions over New York City on western freight for Europe but these differentials have not been allowed on domestic traffic for which New York's natural advantages are preserved; Boston Chamber of Commerce v. L. E. & M. S. R. R. (1 I. C. C. 436). The advantage of Eau Claire, Wis., for making lumber for Missouri River towns, which had been overcome by rates favoring La Crosse and Winona, were restored in Eau Claire B. T. v. C. M. & St. P. Ry. (5 I. C. C. 264). Certain rates, of eastern and western roads running to southern markets, which had favored the east for various manufactures and 192 PUBLIC UTILITY RATES the west for certain natural products were changed so that the man- ufacturers in the close Middle West might enjoy the advantages which they had developed (Freight Bureau of Cincinnati v. C. N. 0. & T. P. Ry., Chicago F. B. v. L. N. A. & C. Ry., 6 I. C. C. 195). The advantages of Ludington and Manistee, Mich., over Detroit in procuring salt for Missouri River points (advantages of distance, competing routes, and manufacture) were protected in Re Transportation of Salt (10 I. C. C. 148). Similarly the advantage of distance possessed by Kansas salt makers, supplying Texas, over Michigan were protected by low rates (Anthony Salt Co. v. Mo. P. Ry., 5 I. C. C. 299). Pueblo, Colo., as a steel center possessed great advantages of nearness to far western markets and eastern steel rates were not allowed to overcome the advantage (Colo. F. & I. Co. v. S. P. Co., 6 I. C. C. 488). Rates on milk for New York City from points 25 to 335 miles from the city were changed from flat to zone basis for 40, 100, 190, and 335 miles out so that nearby producers should not be forced out (Milk Prod. Prot. Assoc. v. D. L. & W. R. R., 7 I. C. C. 92). The Interstate Commission refused to make rates from Indianapolis to Wisconsin, Minnesota, and Michigan points as favorable as from Chicago or St. Louis to these places, on the score of shorter routes, competition of carriers and natural advantages of location for Chicago and St. Louis (Indianapolis Freight Bureau v. C. C. C. & St. L., 16 I. C. C. 276). Equalization of advantages of milling in transit possessed by Bangor and Lewiston, Me., over Washington county towns was not granted in Quimby v. Maine Central R. R. (13 I. C. C. 246). A declaration of lack of power of the Interstate Commerce Commission " to equalize advantage, to place one market in competition with another, to treat all railroads as part of one great whole," etc., was seen recently (1912) in Ashland Fire Brick Co. v. So. Ry. (22 I. C. C. 115). Competition of Localities Fostered. There are on record a number of cases where the Interstate Commission has helped commercial competition between localities which showed no peculiar advantages one over the other, by removing railroad discrimination. Thus, an arbitrary charge of 5^ per 100 Ib. for mills off the line of the Missouri, Kansas & Texas Ry. was held unjust as prohibiting the off mills from selling along the line (Blackwell Millg. Co. v. M. K. & T. Ry., 12 I. C. C. 23). PROBLEMS OF RAILWAY RATES 193 In Black ML Coal Land Co. v. So. Ry. (15 I. C. C. 286) it was held that, where one carrier serves two districts which by loca- tion, output and distance from markets are under similar con- ditions, a carrier cannot prefer one to another. Sioux City petitioned to be put on an equality with Omaha, Kansas City and Minneapolis for purchasing, milling and distributing grain; while it was held that certain competitive conditions did not prevail in Sioux City, as in the other places, and the full equalization could not be made, yet partial relief was granted by requiring more reasonable local rates for collecting grain (Sioux City T. E. Co. v. C. M. & St. P. Ry., 23 I. C. C. 98). Buffalo millers were enabled to continue in competition with Minneapolis by preserving old differences in rates to New York City and New England (Banner Milling Co. v. N. Y. C. & H. R. R. R.; 13 I. C. C. 31). There have been a long list of cases before the commission charging the effect of simple discrimination against one city over another. In general the policy has been to adjust rates so as to equalize advantages in the absence of causes for differences al- ready mentioned. Recent cases were Paducah B. T. v. I. C. R. R. (29 I. C. C. 583 and 593); Re Tropical Fruits From Gulf Ports (30 I. C. C. 621). Railway Passenger Rates. Greater simplicity exists among the railway passenger rates of America than in the freight rates. This is only to be expected because of the comparatively few different passenger services rendered. For years the division of railway revenues has been about constant in the vicinity of 70% freight, 25% passenger (mail and express), and 5% minor the passenger revenues including those from hauling parlor and sleeping cars, etc. The average revenue per passenger mile was 2.35^ in 1889, 1.93^ in 1909 and 1.98^ in 1914. The total travel was 472,171,000 passengers in 1889, rose to 891,472,000 in 1909 and 1,053,139,000 in 1914. The passenger miles in the same periods were 11,553,820,445,' 29,109,323,000 and 35,258,498,000. The classic rate is 2jzf per passenger mile though lately there has been a widespread movement permitted which substitutes 1\i. For instance see Railroad Passenger Rate Case (Mass. P. S. C. Nos. 805, 673, and 698 1915; P. U. R. 1915 B. 363). The 2^ or 2\i rate is intended to apply to extensive traveling and therefore is effective through the sale of coupon books. Where strictly 194 PUBLIC UTILITY RATES local tickets are sold the rate may rise to from 3 to 6jzf per pas- senger mile depending on the scarcity of local travel, the diffi- culties of local operation, etc. It may rise above 6^ under extremely unfavorable conditions. For example in Arkansas V.M.& N. A. R. R. (30 I. C. C. 488) local fares of 6|j were found reasonable over a mountain line. Mention should be made of special-excursion fares which are seen in seasons of light travel and which are intended to make idle property produce some small profit. Special fares less than normal rates are permitted but cannot be required; and they may be accompanied by any lawful non-discriminatory regula- tions (see Eschner v. Penn. R. R.; 18 I. C. C. 60). Commutation service between residential districts and busi- ness centers needs special mention, since here the rates are phenomenally low and the service peculiar. Many rates around New York City are below 0.4^ per passenger mile. These passenger rates are for first class travel which is practically the only class in America. There are a few second- class tickets sold but these may be regarded as special provision for immigrants, etc. First-class travel is comfortable, not to say luxurious; second-class passengers are required to travel in smok- ing cars or frequently on special trains. The unit cost of travel is increased by special services fur- nished many passengers parlor and sleeping cars, fast express service between important cities. But, with all these additions to the passenger-rate system, all the schedules which may be found are comparatively few and simple. It is generally accepted that railway passenger and freight business each should pay its own way, though each may not contribute the same profit (see Bud v. C. M. & St. P. R. R., 1 W. R. R. Rep. 324; Five Per Cent Rate Case, 31 I. C. C. 351 and 32 I. C. C. 325). The idea is difficult to apply on account of the difficulty of apportioning large items of expense as already referred to. But apparently the Interstate Commerce Commis- sion hopes to make progress here. Commission Control of Passenger Fares. The Wisconsin Railroad Commission started out to administer control of the railway passenger service of the state as carefully as the freight. However the legislature soon imposed a flat 2^ fare on the more prosperous roads and all carriers accepted the change. That PROBLEMS OF RAILWAY RATES 195 has relieved the Commission of passenger cases to a great extent. The Interstate Commerce Commission has had many passenger- rate cases in the aggregate though the percentage would be small of the whole dockets. In many ways there has been merely a transference of ideas expounded in freight cases. For instance discrimination be- tween places has been stopped as in freight rates; in one typical case, Beach v. Ann Arbor R. R. (26 I. C. C. 40), week-end excur- sion rates were required to all resorts in a locality where some were favored. Party tickets must now be sold to all applicants meet- ing the numerical requirements, whereas once they were available only for theatrical troupes, athletic teams, etc. (see re Party Rate Tickets, 12 I. C. C. 95, and Koch Secret Service v. L. & N. R. R., 131 I. C. C. 523). Commutation tickets for school chil- dren were similarly thrown open to all children (see re Regulations Governing Sale of Commutation Tickets, 17 I. C. C. 144). Other examples: The federal disregard for state-made rates is shown in passenger traffic; in Arkansas v. M. & N. A. R. R. noted above, it was held that interstate fares, of one road higher than another in the same general territory and higher than in- trastate fares fixed by state laws, are not evidence of unreason- ableness; the aggregate of intermediate fares, fixed by state laws, being less than the through interstate fare is not a violation of the long-and-short haul legislation. But where such conditions do not prevail through tickets are to cost no more than the sum of locals (see Kurtz v. Penn. R. R,; 16 I. C. C. 410). Route competition may permit of advantages to one place over another. Thus New York has lower tariffs to the famous resort Atlantic City, N. J., than has Baltimore (M. and M. Assoc. of Baltimore v. A. C. R. R.; 23 I. C. C. 129). Rates depending on value of service given under the same con- ditions and at identical costs were made when the prices of upper berths in sleeping cars were cut to 60% to 80% those of the lowers see Loftus v. Pullman Co. (18 I. C. C. 135; 20 1. C. C. 31). Appreciation and Depreciation of Railroad Property. There is a certain peculiar appreciation of railway track and roadbed which can be recognized aside from the increments of value of real estate due to general rises in value of contiguous lands. This appreciation is variously known but may well be covered by what has been called "adaptation, solidification and seasoning." Its 196 PUBLIC UTILITY RATES value is due to its effect in reducing the annual maintenance ex- penses of unseasoned and unsettled roadbed and reducing the cost of wear and tear of trains passing over an uneven track. There is a small element of value due to the possibility of more safely run- ning trains at higher speeds. A large part of any solidification value has been paid for by heavy maintenance expense in early years to compensate for settlement of fills, consolidation of bal- last, etc. According to the Washington Railroad Commission, this appreciation amounts to 10% in the first five years (Findings of Fact in the Valuation of Railroads, p. 164). Railway officials generally claim that there, is no depreciation in a composite property like a railroad's plant. They admit that there may be a certain depreciation of each of the individual units that make up a road's property such as rails, ties, switches, cars, locomotives, buildings, bridges, etc. but they strenuously and unitedly deny the existence of depreciation in the aggregation of these individual items which makes up the working railroad. The argument back of this stand apparently is simply the old one that full capability of service is present and that the annual maintenance work provides sufficient annual renewals of the more decrepit individual items of property so that full service ability or efficiency is held to. The railways deny that there is any relation between depreciation and what they call " deferred maintenance " or " accrued deterioration " (meaning what has been termed in this work " retirance " or " renewance ") contributions se- cured out of earnings to offset increasing liability of property having to be taken out of service and new equipment substituted. Outside of railway circles there has not been a ready accept- ance of the carriers' protests that their property is the great exception to all other property actively employed by man in that it does not depreciate. It may be that the railroad man's attitude is influenced by his fear that railway credit may be im- paired if the usual deductions for depreciation be made in ascer- taining present value of physical plant. Depreciation and retirance do not play nearly the important part in railway rates that they do in other utility charges, since the property units are so many and so diversified, and annual maintenance aggregates such a large sum that there is not much unbalancing of each year's expenses if the renewals and replace- PROBLEMS OF RAILWAY RATES 197 ments are charged directly year by year instead of being equalized by predetermined annual payments. There is a certain un- balance apt to occur in certain years, however, when large and expensive items like whole routes and large structures are super- seded. In these cases " expedients " are resorted to often suspense accounts are set up or temporary reductions of surplus are made; reductions of dividend are not to be expected if, happily, the road is paying a return and has a surplus. There is real ground for the claim of railway officials that they will not be equitably dealt with, if their credit is forced to depend solely upon depreciated value of plant seeing that railway rates have not been adjusted to repay the roads the capital lost through depreciation lost in the event of official government valuation result being stated as depreciatec cost. In such a case it would seem that equity could be preserved by placing the uncompensated depreciation in the department of business- development expenses, along with any other deficits which may be fairly included. This subtraction of physical value and addi- tion to intangibles is, of course, only paying from one pocket into another, but it has the great advantage that everything is prop- erly labeled and if it ever becomes possible to amortize the in- tangible items their proper figure is known. The Interstate Commission has made provision for retirance (under the name " depreciation ") in its uniform accounting plans but it has not required the roads to accept it to very great extent. The roads have not used the strong claims that reside in retirance for increased revenues and rates to compensate for constant impairment of capital invested. The Valuation of American Railways. The difficulty if not the impossibility of finding the real cost of each individual service performed by the railways of the country has not prevented a keen desire to find the value of the several carriers' property. The argument has been that it was impossible to know whether the rates of a road as a whole returned a reasonable percentage on a fair value somehow defined. It is possible that, in the event of a valuation showing insufficient earnings, rates as a whole might be raised over a given system or territory, though any such effect would be expected to be more or less incomplete owing to the necessity of holding many schedules down in order to make cer- tain traffic flow at all. 198 PUBLIC UTILITY RATES From its inception the Interstate Commerce Commission has advocated the making of a general physical valuation of rail- road property, and finally in 1910 Congress authorized the proj- ect. The Act as adopted specifically called for the detailed listing of all railway property, the original cost to date, cost of reproduction new, cost of reproduction less depreciation, in- tangible elements of value, the original costs and present values of lands, rights of way and terminals, cost of condemnation, damages, excess purchase price, etc., the original cost and presen- tation of property held for other than transportation service, the history and organization of the road, increases or decreases of securities in reorganization, money received from sale of securities and expended. The valuation is required to be detailed by state areas, so that there will be finally state valuations making up the federal. The best estimates that could be made at the time the Act was adopted allowed five years and $10,000,000 for the task. But as the organization of the valua- tion work was completed the early estimates had to be raised, both in point of time and money to be expended. It is now con- fidently predicted that the task will be finished in ten years after it was started (1913-1923) and at a cost of $50,000,000 ($15,- 000,000 to the Commission and $35,000,000 to the roads). A very considerable part of this increase has been due the re- quirement that the original construction cost, etc., should also be established historically as far as possible. In some cases it has been noted that the cost of the historical studies alone has mounted to $133 per mile of line. Organization of the Federal Valuation. One of the members of the Interstate Commerce Commission resigned to become Director of Valuation. One of the first steps was to divide the country into five geographical districts, and group the organiza- tion likewise. The appraisal of physical plant, aside from land, is under five members of an Engineer Board, one man for each district. Under him is a district engineer, and in turn under the latter one or more senior field engineers who inventory only track and roadway, a senior structural engineer having juris- diction over bridges, a senior architect for buildings, a senior signal engineer 'for signals and interlocking plants, a senior mechanical engineer for rolling stock and equipment, a senior elec- trical engineer for electrical apparatus. PROBLEMS OF RAILWAY RATES 199 The Valuation Director has with him also, besides counsel, a Supervisor of Land Appraisals, and five land attorneys each in charge of a district. There is similarly a Supervisor of Accounts and five valuation accountants; this bureau has the investigation of history, organization, -and financial arrangements, and the determination of original cost to date. A Cost Bureau is collecting data to make up unit prices for applying to the in- ventories. The five district land attorneys form a Land Board, and the five district accountants form an Accounting Board for the country. There is also a General Advisory Board of engi- neers, economists, publicists, lawyers, etc., which confers with the Valuation Division on the more important questions that have to be settled. The valuation act requires the railways to cooperate in the work of valuation besides furnishing information, maps, con- tracts, reports, etc. The roads organized a " Railroad Presi- dents' Conference Committee " of 18 members to be the buffer between the Valuation Division and the carriers, and this com- mittee in turn has appointed law, engineering, land and account- ing sub-committees to confer with the Valuation Division. The government put out field parties to make an inventory of the various railway properties, the roads furnishing maps, inventories of terminals, etc. The federal parties were ac- companied by a company " pilot " (a representative of the road who was intimately acquainted with the present construction, history, etc., and could point out obscure and hidden property like foundations, subsided roadbed, etc., and check computers). After the work was well under way an average accomplishment was the inventory of some 4000 miles per month. As already noted the roads are necessarily put to great expense in the aggre- gate because of the appraisal. Valuation departments have been created, records have been assembled and in some cases prelimi- nary private inventories have been made all so as to be in proper shape to cooperate in the government's studies, or to be prepared to controvert any undesirable tendencies shown.* * For typical details of the government and corporate activities necessi- tated by this valuation work see: "Chicago & Northwestern Ry. Valuation Work." Engineering News, Oct. 28, 1915, p. 843; "Railway Valuation Office System," by H. J. Saunders, Engineering News, Nov. 4, 1915; and "The Federal Valuation of the Boston & Maine R. R.," by F. C. Shepherd, Boston Society of Civil Engineers, November, 1915. 200 PUBLIC UTILITY RATES Suggested Economics in Railroad Operation. In 1914 the Interstate Commission made a very careful study of rates and service east of the Mississippi to judge of the reasonableness of a flat 5% increase in freight rates (Five Per Cent Case; 31 I. C. C. 351; 32 I. C. C. 325). Some advances were allowed at first but not the scheme as a whole until 1915. An elaborate presenta- tion was made of the ways in which operating revenue could be legitimately increased and expenses cut down. For instance (1) the general increase of passenger fares in New England was cited and carriers urged to work for repeal of low-fare statutes in the Middle West; (2) freight-rate schedules were recom- mended to be overhauled to weed out many individual items which had become unremunerative under ancient and fierce competition; (3) more logical charges for special services, like time allowances for loading and unloading, collecting and de- livering, storing, refrigerating, switching, lighterage, etc.; (4) reducing travel on passes which had been shown to be over 10% of total passenger travel, in spite of the Federal anti-pass laws and allowing fewer free private-car services for minor officials and families of major officials; (5) intensifying the use of freight cars which in a typical case were moving loaded in trains only two days a month and then carrying 58% of their capacity; (6) reducing the coal consumption which on one road had been cut 9.5% through greater knowledge and care of employees; (7) greater effectiveness of labor and elimination of penalties for infraction of commerce laws, the latter aggregating $814,000 in three years; (8) sale of property not used in trans- portation service; (9) purchasing supplies and contracting for construction only from concerns in which the officials of the paying railroad have no interest; (10) revision of sleeping-car and railway-mail contracts. CHAPTER XI PROBLEMS OF EXPRESS TRANSPORTATION RATES THE fast carriage of small railway freights, combined with house collection and delivery, now universally known in America as " express service " is a peculiar American institution which has grown up superimposed from the first upon the regular rail- way services instead of being here, as abroad, developed as an integral part of the railways' business. The failure of the government early to adopt a parcel post was an important factor in the growth of the express companies, since for decades they gave the only means which any shipper had of quick transfer of goods, and were the sole reliance of all who had more than a letter or a paper or a few ounces of merchandise to send away. , The first express service was instituted some 65 years ago by a messenger with a big carpet bag traveling between Boston and New York City, paying his regular railway fare. The business has grown by natural steps and practically out of the profits of the business until there are now 11 concerns operating over practically the entire mileage of railway line in America. These companies are the Adams, American, Wells Fargo, National, Southern, Great Northern, Northern, West- ern, Globe, Canadian and Canadian Northern. These are by no means all the companies that have flourished they are the suc- cessors and assigns of many smaller companies, some of which bore the same names. Relations of Express Companies. While all these are dis- tinctly separate companies, and to a certain extent are com- petitors, yet the strongest community of interest appears. Indeed the whole express system has been called a family af- fair, so interlocked is it by the stock ownership of a few persons. The Adams and Southern companies are affiliated; the National is subsidiary to the American, and the American is the second largest stockholder in the Wells Fargo. The largest stock- holder in the United States company (now out of business) was 201 202 PUBLIC UTILITY RATES also the largest in the Wells Fargo. Large stockholders in the country's trunk railways are stockholders and directors of vari- ous express companies. The Great Northern, Northern and Globe companies are owned and controlled by the railways over which they principally operate. For many years the country was geographically divided among the important express companies and they did not seriously press beyond their limits. For instance, Wells Fargo kept west of the Mississippi River and the others east but now in the Central States the Wells Fargo, Adams, and American appear in active competition. The Southern dominates the South from Washington to New Orleans, although the American has broken in. New England is still the home of the American (and the affiliated National) and the Adams. The Northwest is served by the Great Northern, Northern, Wells Fargo, and Western. The American company operates over a central route (Union Pacific) to the coast, as does the Globe (over the Denver & Rio Grande). Wells Fargo reaches the Pacific through the South- west also, but this territory has been opened by all the compa- nies except the Southern and those in the Northwest. The Canadian companies named operate mostly within the Domin- ion but enter the states of Maine, New Hampshire, Vermont, New York, Michigan and Minnesota where Canadian railway lines operate. Worth of Express Companies. The property owned and used by the express companies is worth somewhat over $27,000,000 including horses and wagons, motor trucks, office equipment, safes, trunks, etc. out of which probably not more than $1,000,000 represents original investment of outside capital. The vital assets of the companies, however, are the contracts with the railways by virtue of which the latter provide the en- gines, cars and railway terminals, and haul the goods for the express companies, which are but an auxiliary arm of the rail- way service. These contracts have formed to a considerable extent the basis of capitalization as disclosed by history. There is reported some $63,500,000 in stock, $36,000,000 in funded debt, and $59,000,000 in undivided profits. Recent Improvements in Express Rates. The whole fabric of express rates was recast in 1913 by the Interstate Commerce Commission and put into effect Feb. 1, 1914. The change put PROBLEMS OF EXPRESS TRANSPORTATION RATES 203 the service on a cost-of-service basis and arranged the charges as though all the companies together formed one grand con- cern covering the entire country with a unified system. The quick shift to cost-of-service was feasible because the factors causing departure from it in the case of railway freight tariffs - like water-route competition, protection of vested interests, etc. are of less consequence when the size of each shipment is as small as in express service, and the number and variety of shipments to any one important receiver is so large. The Old Express Rate System. Under the practices which prevailed up to 1914 there were two main classes of express shipments: (1) "merchandise" and (2) "general-special" the latter covering articles of rougher character and smaller value, generally food arid agricultural products, which nevertheless needed to be moved under express service though they would not support the rates of more valuable goods. The old " merchandise " charges were proportioned per pound according to a tariff for 100-lb. shipments, lesser weights taking higher graduated charges per pound when the hundredweight tariff was under $2. When the base tariff was over $2 the higher graduated charges were applied only to shipments of less than 50 Ib. The graduations bore heavily on the small- shipment business the pound rates for 10 Ib. running to three or four times the pound rates on a hundredweight. Multiple graduation was also used; for over 7-pound weights where there was only one company in the place of destination and two com- panies shared the carriage, the base tariffs were graduated before addition, raising the final charge over that from a single gradu- ation on the aggregate of base tariffs. The express agent in figuring charges for a customer had tariff sheets, giving the 100-lb. rate, and graduation tables giving the actual charges for a given weight and base tariff. The " general-special " goods were billed by the pound accord- ing to 100-lb. rates which were from 60 to 80% of the merchan- dise rate. A 35^ minimum charge was commonly imposed, though where two companies had part in the carriage each col- lected a 25^ minimum. Where a single shipment comprised several packages, charges were on the aggregate where the average weight was over 20 Ib. Insurance charges for declared valuations of over $50 (or 50^ per Ib. on over 100 Ib.) have 204 PUBLIC UTILITY RATES ranged from 10 to 20f per $100, according to the tariff for car- riage. Upon this simple base all sorts of special schemes had be- come grafted, and these were used for various favors and dis- criminations to shippers who understood the loopholes. Such were the notorious " Sections A, D and E " and " Scales J, K, L, M, N, O and Z." The three " sections " were created to meet postal competition. " E " was confided to manufacturers and large shippers; any merchandise package marked "Value not exceeding $10," unsealed and prepaid, went to any express office in the country for 16^ per Ib. which was to be compared with 25 to 40^ under the ordinary rates. " Section D " was intended for large advertisers and was for printed matter; packages marked with a designation of contents and the legend " Value not exceeding $10" were carried at \i per ounce with a 2 discount on packages of 50 ounces or more. " Section A" car- ried the same goods at merchandise pound rates which were lower than " Section D " rates where a package weighed over 4| pounds for any tariff under $8 per 100 pounds. "Scale J" made a carload rate .on horses about half the rail- road freight rate; " K " made a rate of 60 to 80% merchandise rates on beer and temperance beverages with a 30^ minimum charge; "L" applied package rates to crated berries 5j to $12, depending on size of crate and length of haul in place of the 100-pound berry rate which was 60 to 80% of the mer- chandise rate; " M " gave a case rate for eggs of 14^ to $3.30; "N" covered the "general-specials" noted before; "O" let live poultry in crates pass at 74 to 80% of merchandise rates; " Z " gave cheese 60 to 80% merchandise rates with 25^ minimum. The tariff system was so complicated that experts could not surely compute the possible rates which numbered over 600,000,000. No relation prevailed between railway freight and express rates except that the express charges were not (with rare exceptions), and properly should not have been, lower than the railway-freight charges. Many of the operating con- tracts between express companies and railroads provided that express charges should be not less than 1| times, the freight. In many cases the express was some three times the freight though up to six times had been noted. PROBLEMS OF EXPRESS TRANSPORTATION RATES 205 The Interstate Express-rate System. -- The rate system evolved by the Interstate Commerce Commission was much like what some of the express-officials had been working towards for many years, but which they had been unable to put into effect in spite of the marked community of interests inside the small group of men who controlled all the express companies of the country. All goods have been reduced to a simple classification of three groups merchandise (Class 1), articles of food and drink (Class 2) and very small packages (Class 3). Class 1 is the standard, the rate for which is multiplied on risky, valuable or bulky articles two times for crated marble, scenery, type- writers unboxed, etc., three times for camels and elephants un- crated, eight times for airships unboxed. A very few articles, like fruit-basket material and newspapers, go for half first-class rates. Class 2 rates in general are 75% of first class with a mini- mum of 25^. Empty containers, crates, boxes, etc., are returned at specified sums running from 10 to 50ff. Third-class rates are \i for each 2 ounces or fraction thereof with a minimum of 15 but not to exceed Class 1 charges. Where two or more packages form a single shipment, with an average weight of 10 pounds per package, the charge is based on the aggregate weight. Where the average weight is under 10 pounds per package, the charge is to be figured upon 10 pounds per package. The receipts, waybills, etc., of all the companies were im- proved and made uniform, and chances of double charge elimi- nated. The ordinary insurance liability of a company was limited to $50 per shipment of 100 pounds or less; excess value carries an extra charge varying from 25^ per $100 where the Class 1 rate is $1, to 50^ where the Class 1 rate is $8 or over. On live stock 1 to 2|% is charged above fixed sums. Rates Made Between Geographical Blocks. The greatest innovation of the Interstate Commission's order was in the system of computing specific shipper's charges. This is built up as though one great express company served the whole country there are no multiple graduations, etc. The country has been divided into geographical blocks, bounded by paral- lels and meridians, and rates computed for carriage (including pick-up and delivery) from each block into every other block where interstate commerce can occur. Every office in the block 206 PUBLIC UTILITY RATES takes the same rate. By duplication and approximation all these charges reduce to 294 base rates applying to 100-pound shipments. By having 294 graduation tables for weights of 1 to 100 pounds the scheme is completed. The way these charges ran is seen from the following extracts from the scales as first announced: Rate Scale No. and Charge Weight, Lb. 1 5 25 50 100 200 294 1 0.21 0.21 0.22 0.23 0.26 0.31 35 5 0.22 0.23 0.28 0.34 0.46 71 95 10 0.23 0.25 0.35 0.48 0.73 1.23 1.70 25 0.29 0.34 0.59 0.90 1.52 2.77 3 95 50 0.37 0.47 0.97 1.60 2.85 5.35 7.70 75 0.46 0.61 1.36 2.30 4.17 7 92 11 45 100 0.55 0.75 1.75 3.00 5.50 10.50 15 20 To give fair rates between offices in the same or adjacent blocks, each block has been divided into 16 squares and rates computed from each square into every other square in the same and adjacent blocks. The rates, shown in the table just given, were based on three factors, (1) a charge of 20^ per shipment for collection and delivery, (2) a charge of 25^ per 100 pounds for railway ter- minal charges, and (3) a sum depending on weight and distance of carriage. This latter the Commission stated it varied for different localities according to the density of traffic and popu- lation therein and the cost of operating railroads, the country being divided into five zones. Zone I was north of the Ohio and Potomac Rivers and east of the Mississippi; it is the cor- ner of the country having densest population and lowest freight and passenger rates. South of this region was Zone II. Zone III lay to the west, roughly between the 92nd and 105th merid- ians but including also northern Wisconsin and Michigan, above 43. Zone IV spread west to the Sierra Nevada Mts. and Zone V was the strip between mountains and ocean. There was still apparent wide variation in the rail factor inside a zone in analyzing the rates in Zone I, for instance, about $1 per 100 miles on 100 pounds may be seen over some routes and in others only 40^. The variations are best seen by PROBLEMS OF EXPRESS TRANSPORTATION .RATES 207 analyzing the rate tables, which are given in extenso in Re Ex- press Rates (24 I. C. C. 381, 28 I. C. C. 131 and 35 I. C. C. 3). While the Commission had authority over interstate commerce only, the companies affected took hold of the plan with ready cooperation and adjusted their intra-state business upon the same plan, in order to give the scheme a fair trial. Even the contracts with the railways, by which the latter used to re- ceive from 35 to 60% of the express revenues, were modified in view of the showing that nothing was due the roads from what the express companies collected for pick-up and delivery. Tentative Scheme Inadequate. After two years' trial of the system and rates outlined in the foregoing paragraphs, the case was reopened by the Commission on complaint of the companies that they were not securing adequate revenue. The number of shipments was shown to have increased from 191,644,891 in 1914 (2 months under the old plan and 10 under the new) to 193,870,819 in 1915; the average charge fell from 75.6^ to 67. 7ff. In these years the operating expenses of the companies decreased $4,111,992. The gross transportation revenue in 1915 was $131,173,670. $66,470,551 was paid the railways, $67,084,013 went into operating expenses, taxes, etc., leaving $2,380,894 deficit from operation. An increase of 3.86% was asked amounting to $5,062,634; this was what it was estimated would be secured by interchanging the 20 j collection- delivery allowance and the 25 rail-terminal charge. This in- crease was seen to bear heaviest on the small-package business - which was a desired effect since the heaviest cuts in the new system over the old had been in that field. The effect on the charges is shown in the following extracts from the modified scales, comparable with the table already given: Rate Scale No. and Charge Weight, Lb. 1 5 25 50 100 200 294 1 0.26 0.26 0.26 0.28 0.30 0.35 0.40 5 0.26 0.27 0.32 0.39 0.51 0.76 1.00 10 0.28 0.30 0.40 0.52 0.77 1.27 1.74 25 0.32 0.37 0.62 0.94 1.56 2.81 3.99 50 0.40 0.50 1.00 1.62 2.87 5.37 7.72 75 0.47 0.62 1.37 2.31 4.19 7.94 11.46 100 0.55 0.75 1.75 3.00 5.50 10.50 15.20 CHAPTER XII RATE PROBLEMS OF STREET AND INTERURBAN RAILWAY TRANSPORTATION Rise of City Transit. While industrial tramways, with iron rails on cross sleepers or stone blocks, were used abroad as early as 1770, such a railway in city streets for urban passenger transportation seems to have originated in 1831 with Stephen- son's Bowery line in New York; the cars were practically horse- drawn omnibuses. The road was reported not to be a great success. Cars more like the present type appeared in 1845, and about 1855 came the prototype of the present track con- struction 1| by 2|-in. strap-iron rails spiked to a stringer on cross ties. The ballast was the excavated material, in a few cases topped with beach or field stone. By 1870 most of the important cities in America had some form of horse railway. The system of cars hauled by a cable driven through a small under-track conduit by a stationary steam engine appeared in New York in 1869, in San Francisco in 1873, and in Chicago in 1881. The scheme was technically successful and only the development of the more flexible electric traction caused the abandonment of the cable. Surface cars were seen to be necessarily slow in busy streets, so that with the growth of American cities, the need of urban rapid transit became gradually pressing. The elevated road with stations say each five blocks was the first improvement, and construction was undertaken on a considerable scale in New York from 1878 on. Operation with steam locomotives was seen until 1901 when a third-rail electric-traction system was found successful, employing motor-equipped passenger cars. From as early as 1835 various attempts to propel vehicles by electric motors had been attempted, but no great progress was possible until engine-driven generators and the distribution of power over extended conductor systems became feasible. The first successful commercial line was opened at the Berlin 208 . RATE PROBLEMS OF STREET RAILWAYS 209 Exposition in 1879; in 1881 this was developed into a public line at Lichtenfelde. In 1883 a light third -rail line was oper- ated between Saratoga Springs and Mt. McGregor (N. Y.) some 10 miles. In 1884 a conduit road was opened in Cleve- land and also a line in Kansas City with an overhead contact or trolley wire. The line in Appleton, Wis. (1886), is commonly considered the first commercially successful American electric railway. By 1888 F. J. Sprague had completed the Richmond (Va.) installation where were laid the foundations of present practice separation of car body and motor trucks, the under- running trolley, flexible motor suspension, etc. In 1886 there were 3268 miles of street railways and only two electric lines. In 1889 there were 5285 miles of street railways and 70 electric lines. By 1907 there had come to be 25,547 miles of line (34,382 miles of track) with 70,000 cars, 580 power houses of 2,520,000 kw. capacity representing in the aggre- gate with auxiliary equipment $3,774,772,000. By 1912 (the last U. S. Census of this industry) there were 30,438 miles of line, 41,065 miles of tracks (only 256 miles of which were not operated by electricity), 76,160 passenger and 7790 freight cars, 500 power houses of 3,665,000 kw. capacity representing in all $4,708,568,000. Some Technical Features. Street, suburban and interur- ban lines have general technical features much alike the chief differences being mechanical, on account of the progressively heavier cars and higher speeds required for attractive subur- ban and interurban service. All roads are alike in that they generate electric energy at a central station and transmit it over a system of feeders and running conductors from which the cars derive their power (except of course those few lines which are satisfactorily served by self-propelled gasoline-engine or stor- age-battery cars). For street railways the preferred running conductor is a bare copper wire about | inch in diameter strung on insulating hang- ers over the center of the track from cross wires or brackets. The trolley wire hangs in a series of drooping curves which are none too sightly where conspicuous, and not very serviceable if high speeds have to be attained. For fast running, a more expensive overhead construction known as the catenary type is employed : A steel messenger cable takes the place of the 210 PUBLIC UTILITY RATES trolley wire between main supports and hangs in more pro- nounced curves; from the messenger in turn the trolley or run- ning wire is supported at frequent intervals by hangers of such length that the running wire is practically parallel with the rails. Every layman even is familiar with the construction, if not with the function of the trolley-arm collector the long pole carrying a small deep-grooved bronze wheel running under- neath the trolley wire. An insulated cable rings the current from the pole to the controller and motor whence it returns to the station or substation via the running wheels and track. Departure from the trolley-pole equipment is seen on a number of high-speed interurban cars which have pantograph frames with sliding bows or rollers to make contact. In a few important cities where traffic is heavy enough to warrant the expense (notably New York and Washington) the running conductors are steel T-rails, placed in a slotted conduit open to the street; suspended from the car trucks are plows which carry slippers in contact with the conductors. For elevated or subway rapid-transit lines, the running con- ductor commonly is a steel third rail supported on insulators at one side of the track. The current collectors are then short hinged arms, or shoes or slippers, on brackets carried by insulated frames on the sides of the trucks. The collectors on such urban lines commonly slide along on top of the contact rail, though an under-running design has been found satisfactory in heavy railroad electrification (New York Central Railroad met- ropolitan zone). The most common power-supply schemes involve the use of direct current at 500 to 600 volts. In recent years this has become a combined alternating- and direct-current system, since the primary supply is from three-phase generators and this is transmitted at high voltage to rotary converters located at favorable feeding points along the railway system. Cars are controlled and operated by a motorman while a conductor is in charge and collects fares. On account of the inconvenience of the conductors passing back and forth through crowded aisles of city cars, because of fares missed, and on ac- count of greater chance of accidents when the conductor is away from the entrance, a new type of car has been evolved to remedy these evils. This is the " prepayment " or " pay-as-you- RATE PROBLEMS OF STREET RAILWAYS 211 enter" design, with separate entrance and exit; the conductor has a fixed post at the entrance and collects fares as passengers pass into the body of the car. " Pay-as-you leave" cars are also used. Recently, to meet the competition of motor-busses, light one- man cars have been successfully put into extensive service in a large number of the smaller cities. One man serves as both motorman and conductor, the passengers entering and paying at the front vestibule. This cuts the labor costs in two, and, the lighter cars being smaller, appreciably reduces energy and maintenance charges. A frequent fly-away service with fewer stops is furnished which seems to be the attraction of the motor-bus. Depth of Organization. While the platform labor con- ductors and motormen is what the public comes most in con- tact with, yet it should be remembered in studying rates that there are other needed organizations of size and importance, and expense. The tracks, wires and rolling stock have to be re- paired day by day; there are a certain number of service in- spectors, dispatchers, switchmen and flagmen; there are the firemen, enginemen, oilers and switchboard attendants in the power plants and substations; the funds collected by the con- "ductors have to be received, the men paid, the company's pur- chases audited. All this demands an important system but one which the public rarely touches. Then over all and gather- ing together the several departments in a concern of size there have to be a number of general executive officers; and the satisfaction of the public depends to a marked degree on the calibre and ability of these men. Reasons for Nickel Fares.* The universal fare on the early * Before these notes on fare problems of electric-railway transportation were completed, the official manual on street-railway traffic, costs and fares of the American Electric Railway Association had appeared "Cost of Urban Transportation Service" by F. W. Doolittle, Chief of the Bureau of Fare Research. That book makes use of many of the same important published papers referred to in this section and it covers the economics of costs and fares in much greater detail. Although to some persons it neces- sarily must appear as a partisan discussion, yet it will be seen to be broadly based on data and studies of regulating commissions as well as of officials of supporting railways. Its appearance has made possible the omission of some detail originally covered in this section. 212 PUBLIC UTILITY RATES horse railways was a nickel from convenience in collection and from belief that patrons would yield that sum quite as willingly as any smaller one. As city lines were first extended the five-cent fare was adhered to by managements partly from the overestimated inconvenience of making penny change, part- ly to encourage travel and partly knowing that a dime was too great a sum for the service. But with the growth of suburban lines the necessity of extra fares for the longer hauls became appreciated and nickel zones grew up. Growth of City Systems. The expansion of cities and the absorption of outlying municipalities within city limits has brought very serious problems to electric-railway companies, for in many cases extensions have been governed by new fran- chises which fixed the fare limits and frequency of service without adequate consideration of what it would cost a com- pany. To see the growth of cities and some of the burdens thrust upon the street-railway systems a few scattered typical cities, for which data have been collected, may be cited. Thus De- troit in 1870 had only 11 square miles within city limits, but this area has jumped to 13.7, 20.2, 27.3, 39.7 and 41.8 square miles a gain of 300% in 45 years. The population served had risen from some 80,000 in 1870, to 465,766 in 1910, and 674,000 in' 1915. The maximum length of single-fare ride had gone to 12.5 miles in 1901, and 13.5 in 1910, and 13.5 in 1915. In these years the car-miles (number of cars times miles of trips) had jumped from 14,614,000 to 22,847,000 and 33,696,000, and the revenue per car-mile from 17.78^ to 23.20^ and 25.81j. Milwaukee, Wis., rose from an area of 10.3 square miles in 1870 to 25.9 in 1915 (35.40 inside first-fare limits), while the population grew from 14,000 to 425,000 (455,000 inside first- fare limits). Tracks extended from 25 miles to 136. . In 1890 the longest single-fare ride was 4 miles; in 1910 it was 12.1 miles; in 1915 it was 10.8 miles. In these years the car-mile record shifted from 8,395,000 to 13,813,000, and to 14,323,000; the earnings per car-mile went from 22.04 to 27.42^ and 27.31 i. Milwaukee is of special interest because of the zone system re- cently installed, giving fares based on cost of service in the different districts as noted more in detail in a later para- graph. RATE PROBLEMS OF STREET RAILWAYS 213 Memphis, Tenn., had only 2.8 square miles area in 1870 but 19.3 in 1914 a total growth of some 560%. Meantime the population rose from 40,226 to 155,000. In 1906 there were 68.6 miles of street-railway track and in 1910 it was 110.4 miles; in these years the maximum single-fare rides were 9.6 and 16.1 miles respectively; in 1915 it was 15.7 miles. The car-miles of 1906 were 6,221,000; in 1910 they were 6,895,000, and in 1914, 7,966,000. The passenger-car-mile revenues in these years were 22.96^, 26.14^ and 25.09^. Birmingham, Ala., gives a remarkable case of territorial ex- tension. In 1870 the city area was about | square mile, which has jumped to 50.1 (in 1915) although only 20 square miles has a typical city development. The early population was insignificant about 1000; in 1910 it was 132,700; and in 1915, 198,000. By 1890 the system had 81 miles of track and in 1910, 133 miles. In 1900 the longest single-fare ride was 7.3 miles; in 1910 it was 13.6, and in 1915 it was 14.9. In 1902 about 3,519,000 car-miles were recorded, in 1910, 6,195,000 and in 1915, 8,044,000. The passenger earnings per car-mile were 20.74^ in 1902, 26.32 in 1910 and 19.8 in 1915. This city has imposed single-fare limits coincident with the city boundaries; beyond this the company has several 5 zones. Early Departures from Nickel Fares. Probably few people realize that there was a general small-unit rise in fares on horse- railways toward the close of the Civil War when Congress saw fit to impose a revenue tax of |j per passenger. This, coin- cident with increased cost of labor and supplies, caused most companies to increase the fare from 5 to 6ff. Indeed in 1865 Congress expressly authorized such a move. In New York City * it was 1880 before all the lines had gone back to 5^. In Brooklyn, the 5 was made 6^ in 1865-1870; 8 and 10 j was charged beyond city limits up to 1895 when 5^ be- came the universal unit. In Boston the original 5^ fare was made 6^ in 1866 and held there until 1880; thereafter 5, 10, 15, 18 and 20j were collected on the longer lines. But after con- solidation and electrification the nickel fare again became uni- versal. In Philadelphia the street (horse) railways started about 1858 with 5 fares but raised them to 6^ in 1864 and to * F. R. Ford, in Report of Committee on Basis of Rates, and Fares, Amer- ican Electric Ry. Assoc., Oct., 1911. 214 PUBLIC UTILITY RATES 7j in 1866. In 1877 a reduction to Q was made, exchange and transfer tickets remaining 9^. Between 1877 and 1887 the city councils made 5^ fares a condition of extensions. Electric Traction has not Prevented Congestion. Many early sociological students expected that quick and cheap trans- portation, afforded from the environs of a city or town of in- dustrial importance, would automatically prevent all undesirable congestion of population. Undoubtedly it has materially modi- fied and checked the congestion that would have accompanied modern commercial and manufacturing developments had easy transportation not been available (assuming the questionable position that this industrial development could have been possible at all without the growth in transit facilities). It has, however, only enabled those workers who preferred rural environment to secure it those whose tastes or income dictated living in crowded districts have remained in such numbers that the tenements have not disappeared. Natural Step to Suburban and Interurban Lines. It was a simple and natural matter to extend the strictly city line out into the thinly settled areas. This was welcomed by the real-estate promoters, and it greatly encouraged the develop- ment of residential districts but it is doubtful if the railway people realized their dreams of profitable traffic in any case as quickly as they were led to expect. The successful transmission of power over long stretches of territory, and its easy conversion into forms of current suit- able for street-railway operation, probably suggested continu- ous lines of electric railway from town to town. The early pro- moters cherished the illusion that light tracks along highways, with sharp curves and heavy grades, abolition of locomotives and expensive passenger stations, etc., would result in greatly decreased investment, operating costs and fares, over those for steam railways, and in grand profits. But it became neces- sary to carry baggage, and then express and package freight and mail were taken on. The necessity for heavier track con- struction and reduced grades and curves began to be felt; bet- ter schedules, train-dispatching systems, safety devices, terminal and way stations, and private rights of way had to be pro- vided. The economies over steam road operation began to diminish. RATE PROBLEMS OF STREET RAILWAYS 215 Financial Status of the Industry. According to the 1912 U. S. Census of this industry there was outstanding $2,324,224,000 in bonds or equivalent and $2,384,344,000 in stock. For 1912 the average return on stock was but 2.65% and on bonds 4.90%. According to the Census reports there is basis for the claim that the fair value of street railway property was not less than the stocks and bonds $4,708,568,000. Of course this poor showing was caused by the companies which paid little or no dividends. In Wisconsin where the aver- age rates of return are as good as anywhere in the country - with probably fewer extremes, only 44% of the lines declared dividends the rate averaging 5.55%. In Massachusetts the average dividend over a period of 20 years was 5.28 and the average divisible net income was 5.68%. The investment in a normal electric street-railway property is apparently of the order of $4 for each $1 of gross earnings - for both large and small companies. This would be on the basis of present values, including intangibles, and would neglect the effects of large sums lost in obsolete items like cable roads. It would not apply to unusual conditions where, for instance, an expensive underground conduit line was required, as in New York City and Washington. This figure is borne out by figures presented by H. G. Bradlee in 1912.* Nine companies having gross annual receipts of over $1,000,000, had investments of respectively $3.03, $3.15, $3.25, $3.30, $3.90, $4.00, $4.40, $4.97, $5.55 per $1 of gross receipts. One company of between $750,000 and $1,000,000 gross receipts had $3. Two concerns of gross earnings between $500,000 and $750,000 showed $3.00 and $3.90 respectively. Four railways having between $250,000 and $500,000 gross had unit investments of $3.80, $4.20, $4.40 and $4.40 respectively. Four companies having annual gross earnings of less than $250,000 had investments of $3.70, $3.70, $4.20 and $4.50. The average of all these 20 companies was $3.92. Peculiarities as an Utility. In considering the application of general discussions of utility problems to electric-railway service, it becomes obvious first that here is a service-type utility * Appendix B. 1912 Report of Committee on Proper Basis of Fares, American Electric Railway Association; "Actual Figures of Existing Street Railways," H. G. Bradlee, of Stone and Webster, Boston. 216 PUBLIC UTILITY RATES and not a product dispenser. The service of most roads has the pioneer-day feature that all the customers are put in one big class and all charged a single flat-rate fare, though there is an evident desire to break away from this by the use of several small-fare zones which serve to classify customers by length of journey. It has apparently been considered to be of little or no use to cultivate off-peak classes by special rates which might be permissible since the service is such an intimately personal matter that the equity of such discrimination between persons and classes would not be recognized and the differences would be resented. Moreover, the people who seek preferential treat- ment like workingmen's tickets seek it on social grounds unrelated to the railway business, and for peak-load periods when oftentimes the real cost of added facilities rises faster than the added income at full rates. The load factor on city lines is perhaps the lowest of all the public utilities about 33% of the traffic is handled in four hours of each day. This arises of course from the desire of workers to travel morning and night or morning, noon and night, Sharp peak loads are produced by such a concentration of traffic, and it is short-hour concentration which excuses strap-hangers for it may be a physical impossibility to operate cars enough to give seats for all who attempt to board at once. In many cases possibly in most to order a company to furnish rush- hour cars up to the absolute limit of ability to run them over a given line may cause unremunerative operation. Obviously various data can be used in comparing the con- centration of traffic on one line with another, and in one hour or another; the "concentration factor" employed by the Fare Re- search Bureau of the American Electric Railway Association is the ratio of number of passengers who would be carried in 24 hours at maximum peak figures to the actual number in 24 hours/ What is called "diversity-factor" in other utilities does not enter electric-railway operation as such, for a person either rides or does not ride; there is no quarter or half load so far as one customer is concerned. There is used, however, a figure which is indeed called " diversity factor," and it needs to be carefully distinguished from the diversity factor of other utilities. The street railways' diversity-factor (according to the use of the American Electric Railway Association Fare Research Bureau) RATE PROBLEMS OF STREET RAILWAYS 217 shows the difference of traffic carried by consecutive cars over a given line in a definite interval. Numerically it is the percent- age ratio of average number of passengers per car to maximum for the period and place selected. The costs of operation in different cities, expressed for the units most nearly comparable, like car-hours, car-miles, passengers, passenger-miles, etc., have been found to vary extraordinarily even when each company under discussion is operating as effi- ciently and satisfactorily as possible under its local conditions. This means simply that even after giving consideration to the usual evident conditions there remain so many variables un- disclosed that direct unweighted comparisons are untrustworthy. In many cases certain units of operation may, on careful scrutiny, be valid bases of study; but these same units may lead to wild results in other cases. Each case is to be judged largely by itself in ascertaining proper and reasonable fares or, better expressed for most cases, the limitations to be placed on travel for a single fixed common fare. The commonly seen units on which roads have been compared are, for example, operating and fixed cost per passenger, per track-mile, per car-mile and per car-hour. Each may be of use at times but they should not be held up as universal in- dices. Number of passengers alone gives unreliable results since the length of travel varies from place to place, line to line, season to season and hour to hour. Passenger-miles comes nearer to wide application but again here curves, grades, sched- ules and peak loads materially alter the showing. Moreover, the length of a passenger's trip is not easily ascertained, special counts having to be made over typical periods and the results taken as applying to continuous operation. Tests for Fixed Charges, Etc. The tests for fixed charges previously outlined perhaps need special interpretation for appli- cation to electric-railway studies. Peak-load distinctions in fares are not practicable so that apportionment of fixed charges on that basis is usually out of the question. Fixed charges may be grouped by scrutinizing and dividing the annual expense accounts as fixed, operating and customer's in accordance with such test questions as: "Is this most con- cerned with merely providing equipment? " " Is this item de- pendent on amount of ultimate service given? " "Is this item 218 PUBLIC UTILITY RATES caused by dealings with individual customers? " It can be seen that there are a few small customer costs but their close deter- mination is difficult and they are generally allowed to merge with fixed and operating costs. It is seen that some items of expenditure are to be split be- tween fixed and operating charges. This should be done in accordance with any real knowledge of the proper proportions - such as in regard to retirance for weather- and wear-deteriora- tion, and expenses of the engineering department. But where definite knowledge of proper apportionment is lacking it is often sufficient to split the aggregate of such items like costs of administration, general office expense, working capital, amor- tization of intangibles according to degree of utilization of plant. This can be done according to the ratio of actual passen- ger-miles to possible passenger-miles with the cars as run, or it can be done by dividing in proportion to the ascertainable fixed and service charge. But the use of such a segregation is not so obvious as with most other utilities where peak loads fix participation in fixed costs. Fixing the Fare. One way of looking at the fare problem considers that there is a potential service available to every customer a readiness to serve, the charge for which is the total of fixed charges as above determined divided by the num- ber of passengers the system is expected to carry without more equipment. This is a sort of minimum charge which must be collected from every customer and to which would have to be added, of course, the other-customer costs if any. If a zone system were in effect, the shortest possible ride should yield this sum at least. Some might expect that these fixed costs should be divided among the passengers actually carried rather than the passengers for which the equipment is sufficient as it normally flows; but to divide it among actual customers is like dividing all the fixed charges in a water or electricity works among the units of actual peak-load instead of units of peak-load capacity of equipment which at once is recognized to be in- equitable and to place a premium on careless over development. However, on account of the inflexibility of street-railway fares and fare zones, greater latitude may be allowed in the calcu- lations. Then the second group of expenses, rising closely with the RATE PROBLEMS OF STREET RAILWAYS 219 number and distance of passengers carried, expressed say as an average cost per passenger-mile would give the additions to the minimum charge for each unit length traversed. For ex- ample it might turn out that each customer should yield up ?>i minimum plus 1^ per mile carried. Then in a central zone of 2-mile radius from the transportation center or such dis- tance out as studies showed resulted in an average of 2 miles per trip there could be the usual 5 fare and for each mile or two miles beyond there could be the collection of 2^ more. No case is recorded of precisely this sort of rate fixing but the New Jersey Commission once indicated (So. Englewood Imp. Assoc. v. N. J. & H. R. Ry.; Dec., 1911) that a scheme somewhat resembling it might have to be put into effect. Wisconsin Idea of Fares. A somewhat different apportion- ment of expenses designed to secure the same ends and leading up to a zone system of fares was worked out very carefully by the Wisconsin Railroad Commission in 1914 (Milwaukee v. T. M. E. R. & L. Co., 10 Wis. R. R. Comm. Rep. 1). The fixed costs were defined as those which would exist if there were no traffic which is seen to be another way of stating "expenses of providing equipment" covering most of interest on in- vestment, the compensation for depreciation due to the ele- ments alone, a part of the maintenance and repair costs, and the part of power costs usually assessed on demand. These were called " terminal " costs. Because a certain minimum amount of car service was re- quired on definite schedules in spite of very light traffic in some hours, the expenses of conducting transportation, the out- put costs of the power plants and the part of maintenance and depreciation caused by wear were held to be part "ter- minal " and part " movement " in their nature. The exact divi- sion of .this group was made according to the ratio of average carload to " comfortable " carload. (It would seem to have been more logical to make the division according to utilization more strictly say inversely by the ratio of actual passenger- miles to possible passenger-miles for the cars as run.) Certain expenses were held to vary directly with the traffic items like cost of injuries, and part of conducting-transpor- tation expense, and these were considered to be purely " move- ment" charges. Certain other expenditures, as for general 220 PUBLIC UTILITY RATES administration, could not be definitely allocated and so were divided according to the proportions of the ascertainable termi- nal and movement costs. The terminal costs were assessed by the Wisconsin Commis- sion on the probable number of passengers to be carried as a minimum charge and the movement costs were distributed as cost per passenger-mile in fixing the width of traffic zones. Apportionment of Standard-account Items. After running through the uniform system of accounts prescribed for electric railways by the Interstate Commerce Commission, and adopted by the American Electric Railway Association, the following division into fixed and movement costs has been made as show- ing the probable results of applying the ideas already noted as acceptable. Obviously this cannot be an accurate indication of what would be found advisable for each account of every railway. In a specific case the actual accounts studied in the light of the Interstate Commerce Commission recommendations * will indicate the proper division. One practice of this commission has been followed in this illustrative tabulation dividing accounts not directly scrutinizable according to the division of aggregate related accounts. (See " Rules Governing Sepa- ration of Operating Expenses between Freight and Passenger Service on Large Steam Railways," Interstate Commerce Commission, 1915.) * Bulletins: "Uniform System of Accounts for Electric Railways," "De- cisions on Questions, Uniform Accounts for Electric Railways, Interstate Commerce Commission. RATE PROBLEMS OF STREET RAILWAYS 221 TABLE ILLUSTRATING TYPICAL APPORTIONMENT OF ELECTRIC-RAILWAY EXPENSE ACCOUNTS AS FIXED OR TERMINAL AND VARIABLE OR MOVEMENT CHARGES: FOLLOWING INTERSTATE UNIFORM SYSTEM OF ACCOUNTS Account Number Description Fixed % Variable % Income * 215 216 217 218 220-1 222 224 225 \ccounts Debits Taxes 100 100 90 90 100 100 100 90 10 10 10 Rental, leased lines Miscellaneous rent Miscellaneous taxes Interest on funded and unfunded debt. . . . Amortization, funded debt Maintenance of organization Miscellaneous Operating 1 2 3 4-6 7 8-9 j \ 10 i J1-12J 13 14-15 j 16-18 1 j V"i 19 * 20-22 j 23 24 25 26-27 j 29 30-31 32 33 34-37 \ 38 39 40-41 42-43 j ; Accounts Expense Superintendence, way and structures. . . < Ballast , According sion of A 90 80 10 90 Accordin vision counts 90 100 100 90 100 According sion of A< 100 100 70 60 According sion of A According sion of A 20 40 10 Accordin vision counts According sion of A< According sion of Ac 20 Accordin vision counts ; to divi- ccts. 2-25 10 20 90 10 g to di- of Ac- 2-6 10 10 ; to divi- jcts. 10-18 30 40 ; to divi- ccts. 2-25 ; to divi- jcts. 30-43 80 60 90 g to di- of Ac- 30-33 ; to divi- ;cts. 20-37 ; to divi- scts. 30-35 80 g to di- of Ac- 30-41 Ties Rails, fastenings, joints and special work. . Repairs, underground, construction Track and roadway labor and miscella- f neous expense. ( Paving Cleaning and sanding track, removing / snow and ice j Repairs, tunnels and subways. Repairs, elevated structures, bridges, / trestles, culverts -f Repairs, crossings, fences, signs, signals, ) interlocking, telephones and telegraphs \ Miscellaneous way expenses < Repairs, electric-line poles, conduits, i distribution system. ) Miscellaneous electric-line expenses Repairs, buildings and grounds Depreciation, way and structures Balance, expense chargeable to way and ( structures. \ Superintendence, equipment \ Repairs, revenue cars Repairs, service cars Repairs, car electric equipment Repairs, locomotives, floating equipment, > shop equipment; shop expenses. ) Expense of vehicles and animals < Miscellaneous equipment expense < Depreciation and retirement, rolling stock Balance, operating expenses chargeable \ to maintenance rolling stock. ) 222 PUBLIC UTILITY RATES TABLE ILLUSTRATING TYPICAL APPORTIONMENT OP ELECTRIC-RAILWAY EXPENSE ACCOUNTS AS FIXED OR TERMINAL AND VARIABLE OR MOVEMENT CHARGES: FOLLOWING INTERSTATE UNIFORM SYSTEM OP ACCOUNTS. Continued Account Number Description Fixed % Variable % 45 46 47-48 j 49 50 | 56 and 58 52-57 59 60-62 63 64 60-67 | 68-69 70-71 72-73 \ 74 { 78 Superintendence, power < According sionof A 80 10 100 30 10 According sionof A According sionof A 60 80 20 100 100 Accordinj sionof A( ; to divi- icts. 46-62 20 90 70 90 100 100 ; to divi- 3cts. 52-58 5 to divi- 3cts.64-78 100 40 20 80 ; to divi- jcts. 64-74 Repairs, power stations and substations. . Repairs, power station and substation ) equipment. ) Repairs, transmission system Depreciation of power plants, substa- ) tions and transmission system. ) Power plant and substation supplies Power plant, fuel, water, oil, labor. . . . Purchased power Balance, power exchanges, etc. . . s Superintendence, transportation < Platform labor, passenger car service ... . Miscellaneous car service, labor and ex- ) pense. ) Passenger station labor and expense Carhouse labor and expense Operating labor and supplies; signals, ) interlocking, telephones and tele- ? graphs. ) Labor and expense, passenger marine I equipment ) Miscellaneous transportation expense . . . ] 79-80 81 82 Solicitation of traffic advertising Where ac 100 missible 100 100 Parks and resorts < Miscellaneous traffic expense . . 83 84 85 86 87-88 89 90 91 92 93 94 95 96 97 98 99 General officers, salaries and expenses. . . . General office clerks, salaries and expenses. General office supplies 80 70 60 100 According sion of t and sala According sionof A< 100 100 90 20 100 According sionof A( 100 According sionof Ac 20 30 40 ; to divi- otal labor ries ; to divi- jcts. 83-86 100 10 80 ; to divi- ;ets.20-37 100 ; to divi- :cts. 83-98 Legal expenses Relief department expenses; pensions.. . < Miscellaneous general expenses < Valuation expense Amortization, franchises Injuries and damages Insurance Printing stationary, tickets, etc Storehouse expense Garage and stable expense i Rental, tracks and terminals Rental, equipment Balance, miscellaneous operations < RATE PROBLEMS OF STREET RAILWAYS 223 Substituting Car Unit for Passenger. Instead of using pas- senger-miles in the foregoing studies of fare limits, the more easily obtained unit, the car-mile, may be used. The fixed charges do not depend on ultimate service length of car trip but can be apportioned to the equipment in service shown by number of car trips. The service charges do depend on ulti- mate quantity of service and hence are apportioned on car-miles. If the average revenue per car trip is known, deducting the fixed charges per trip will leave a sum which divided by the car- mile operating cost gives the length of haul possible with profit. The effect of a change in fares on number of passengers should be studied and possibly a modified calculation made of earnings. Effect of Peak Loads. The effect of high or low load factor - that is, of travel in off-peak or in rush hours is reflected in the fixed costs to be carried by a passenger, through the division of some important items according to utilization of equipment. It is also reflected in the operating cost per passenger- or per car-mile through spreading the arbitrarily split expenses over more units. The ultimate effect of good load factor is thus made similar to the case of utilities where peak loads directly deter- mine participation in fixed costs. In the general case the mini- mum or ready-to-serve charge is reduced and the unit operating cost is improved; and for the street railway the length of profitable haul, or the width of single-fare zones, is increased. Reasonable Length of Trips on Individual Lines. In the foregoing all the lines have been aggregated and the results as to length of haul, etc., apply as an average over the system. In many cases this is sufficient but in others notably larger cities and suburban lines it is desired to treat each line on its merits. To do this the costs for the line must be found. Where possible the accounts, of course, will be drawn on for the apportionment, but this is more apt to be possible on the subur- ban and interurban lines. For cities it is more often necessary to approximate the costs by applying to suitable construction and service units, the fixed and variable costs for such units applying to the whole system for instance, multiplying a line's miles of track by the system's fixed costs per track mile, and the actual line's car-miles by the system's service cost per car-mile, or using whatever units best fit the local conditions. Having located the fixed and service costs for a line, and know- 224 PUBLIC UTILITY RATES ing the number of passengers and passenger-miles on the line, makes it possible to treat the line as was the system. That is, the minimum charge for the shortest possible ride is found; and the difference between this and the unit fare, divided by the movement cost per passenger-mile, gives the length of ride, or average width of zone. Practical Fixing of Zone Fares. An extension of the ideas involved in the scrutiny of profitable haul on individual lines has been developed * for fixing actual and workable zone rates. Briefly sketched, the process starts by fixing the length of zones, arbitrarily or otherwise, and apportioning the fixed and service costs on the basis of track- and car-miles respectively, or by passengers and passenger-miles after a traffic census, or by car trips and car-miles on the record. Then various rates of fare (a fixed-cost factor plus a mileage unit) are computed which would meet the cost of service. These are applied to the traffic found in the zones to see how nearly they make each zone pay its own costs. Finally such practical changes are made as are needed to present the most convenient and accept- able provisions. Traffic Surveys. The need in any rate case of specific data, beyond those yielded by the ordinary records of the company, have been evident throughout the foregoing discussions in- formation for instance on passengers boarding and alighting all or typical cars at various points from hour to hour, passen- gers on each car at maximum load points, length of passenger travel, etc. The questions of adequate service are so ultimately connected with fares and costs that most surveys of notable value have been much more comprehensive than the cost data alone would require covering number of persons standing, number of empty seats, occupational classes of passengers, de- lays and their causes, effect of weather, of municipal events and of street vehicles. How these studies may be made suggests itself by a survey of local conditions but may be Understood by scrutinizing such reports as those of B. J. Arnold on trans- portation problems in Chicago (1902-'06-'08-'10-'11-'13), Pittsburg (1910), Providence (1911), San Francisco (1912-'13); of Ford, Bacon and Davis on Philadelphia (1911); of A. M. Taylor on Philadelphia (1913); Wisconsin Railroad Commission * Doolittle, "Cost of Urban Transportation Service," 1916, p. 256-263. RATE PROBLEMS OF STREET RAILWAYS 225 on Milwaukee (1912 and 1913); Barclay Parsons and Klapp on Detroit (1915). Constitution of Good Service. The several city-transit re- ports named, and other similar ones, review what was judged to be adequate and reasonable service for the place and time - within the ability of the people to support it. In New York City sufficient cars are required in any 15-minute period to provide 10% excess capacity (or failing that 25 cars per hour in each direction); and no less than 6 per hour in each direction during the day or night.* In Milwaukee f a headway of 10 minutes in non-rush day hours was required, with 20 minutes at night; in rush periods during any half hour seats must be provided for 67% of the passengers offered and for 133% in each other half , hour. In Providence for non-rush hours it was recommended that each 20 minutes should see as many seats as passengers; for rush hours, seats for 50% of the offered passen- gers.f The reasonableness of demands for a particular degree of service cannot be wholly judged on the comfort and convenience of the riders, for this may depend largely on the location and practices of industries, local customs and topography, city plan, etc., matters beyond the control of a traction company. Any study of reasonable service must include the cost effects. For example if it were physically possible to operate over a system's tracks cars enough to provide seats for all rush-hour passengers it might cost so much more that the company would face a serious deficit. The motormen and conductors would all have to get pay for a full day's work, and some cars would not be needed but an hour or two out of the day; both fixed and movement costs per car trip would be too great for the traffic to support. Contrasts Between Old and Present Costs. In place of the light track construction already described for the early days of street railways, today the rails weigh from 70 to 120 Ib. per yard and are laid on heavy ties, 6 X 8 in. X 8 ft., 2 ft. apart and ballasted with rock or gravel or bedded in concrete. In * N. Y. Public Service Comm. First Dist., Rep., 1908-10. t Milwaukee Suburban Fares, 13 Wis. R. R. Comm. Rep. 245. t B. J. Arnold, "Traction Improvement and Development in Provi- dence District," 1911. 226 PUBLIC UTILITY RATES streets, paving between rails and for 1 to 2 feet on each side is required of granite, brick or wood block. The whole cost today is in the order of $15 to $20 per yard compared with $3 to $6 at first. The cost of a bobtail horse car and horses was some $2500, while a modern electric car runs from $5000 to $12,000. The cost of light track alone, where no paving or similar street im- provement is involved, runs to $25,000 per mile; in cities it may be $40,000 in both cases without rolling stock, power plants, etc. According to the 1912 U. S. Census of the industry, the average cost per mile of equipped American electric railways has gone from $48,000 in 1890 to $96,000 in 1902 and $113,600 in 1912. This rise has been due not only to the heavier equip- ment but to increased cost of work in streets due to pipes, sewers and conduits, grade crossing elimination on interurban lines, etc. There has been some effect too on the census data from expensive subway work in Boston, New York and Philadelphia. There has been a marked tendency for taxes on electric rail- ways to increase; according to the 1912 Census the taxes on operating and lessor companies in 1902 was 4.8% of gross earn- ings and 5.6% in 1912. This is due probably to the continu- ation of a movement which antedates the now popular commis- sion regulation and which aimed to secure for the public a share of the profits of public monopolies. It was in effect an attempt at regulation which however has now no place alongside com- mission supervision. The growth in taxation has been nominally about 16% but actually the effect has been greater, for the operating expenses of the roads have climbed meanwhile, and the unit fare has re- mained the nickel. Longer rides, more transfers, greater in- terest rates on bonds, etc., have conspired to heighten the ac- tual burden of taxation on net income. Wages of trades most involved have risen some 35% over the figures for 1890-1900 * keeping pace with the cost of family living. Prices of materials of repair by July, 1916, had gone up over the average for the 1 890^1 900 decade approximately as follows: 10% for metals, 11% for paints, 13% for. building materials, 16% for tools, 50% for coal, and 57% for lumber. * A more detailed study of various authorities on such points is given in Doolittle's "Cost of Urban Railway Transportation." RATE PROBLEMS OF STREET RAILWAYS 227 Depreciation of Electric-railway Property. The sacrifice of investment in street-railway properties experienced up to 1900 was perhaps more by obsolescence than by deterioration and unfortunately the need of making good this loss out of the current earnings was realized too late. From 1900 to 1910, there was still some loss by obsolescence but a greater part by deterioration. Since 1910 there has been comparatively little change in the industry as a whole and, consequently, only small loss by pure obsolescence. Prior to 1900 there was the progressive scrapping of horse cars and light railway track, cable cars and conduit, and all the early experimental electrical equipment before standard- ization set in. In the decade 1900-1910 the obsolescence was due to discard of medium-weight track and single-track cars in those localities where heavier traffic developed or was hoped for. In this period, too, came the prepayment-type of car and the greater use of steam turbines in place of reciprocating engines for prime motive power. A well-kept modern electric railway city, suburban or interur- ban should show on examination that its physical property is worth about 85% the first cost of all the several items which can be inventoried. That takes no account of big works which have been discarded and disappeared from the sight of the appraiser. There is some chance that where adequate records have been kept of the companies' investments and supersessions of appa- ratus it may still be possible to recover some of the money spent in good faith but unproductively. Such treatment is to be seen in the bond issues of the Binghamton company approved in April, 1916, by the New York Public Service Commission, Second District. Out of a total of $1,000,000, some $100,000 went for improvements and the rest to fund a floating debt which funded debt, however, is to be carried in a suspense ac- count with at least $7500 paid back to bondholders each year. But for the most part all such developments expenses are now pure conjecture and more than apt to be ruled out by commis- sion and court, on the argument also that the early ventures were largely speculative the early investors taking great risks and expecting great profits. Securing Retirance. In the street-railway industry at the present moment it does not seem feasible to establish any one 228 PUBLIC UTILITY RATES single way of treating depreciation of properties and its com- pensation what has here before been called retirance. A com- bination of methods seems desirable though they may all be regarded as of the direct-repayment type discussed before (see Chapter VIII). First a study of the property, records and accounts may establish satisfactorily the accumulated losses due to obsolescence, inadequacy, etc., which have never been made good out of earnings and which properly may enter the capitalization, or rate-basis worth, as part of the business development unless that element has been computed in such a way that this brings duplication. It may, in many cases, prove better to put such losses of capital into a suspense ac- count which is reduced by contributions out of earnings, as in the Binghamton case already noted. Then there is a second element of depreciation to be observed an annual wear-deterioration that is made good by the re- placement in course of general maintenance of wires, supports, rails, ties, poles, paving, and the other small units which exist in great quantities in all stages of life. This variety of retir- ance is well covered by the cost of maintenance and at the present time in most cases there appears no necessity of compli- cating the records by separate accounts. (It should be noted, however, that some parts of trackwork like special work in cities which is heavy, expensive and not duplicated, or like granite- block paving on concrete foundations, may require little re- newal from year to year but will demand replacement in large amounts after few years. This sort of retirance then is better cared for as noted in the next paragraph.) There is finally that sort of depreciation and retirance which have been most discussed among utility men those on large important items slowly wearing out or become antiquated. This retirance is to be secured by one of the sanctioned plans which deducts proper sums from the earnings preferably the concave-curve scheme or straight-line plan, depending on the extent to which depreciation causes an increase in operating cost or a decrease in capacity and efficiency. In this class is the retirance on cars, power plants, barns, shops, stations, etc. In a few roads of normal condition and history where re- tirance is handled on some such basis, there is a direct repay- RATE PROBLEMS OF STREET RAILWAYS 229 ment equal to some 4% of the gross annual earnings. Retir- ance covered up in maintenance and repairs may amount to 6 of the 10% of gross earnings needed for this item. The item of compensation for old obsolescences, or reductions of a suspense account, may reasonably take 3% in good years if it can be secured. Expressed in terms of physical property value not necessarily full rate-basis worth the 4% of gross earnings becomes some 1.0%, the 6% becomes 1.5% and the 3% becomes 0.75% the total amounting to 3.25% of the physical value. This would appear to be an altogether too small sum to accord with experience in other utilities as to what con- stituted safe financing; that some of these companies are safe is due to other appropriations going back into the property - extensions, surplus funds, etc., amounting to another 1 or 2% in good properties. Because of the great changes in the technique of street-rail- way construction and operation in the various decades up to 1910, it is obvious that life-experience tables of electric rail- way apparatus are of much less value in the study of depre- ciation and retirance here than the life-experience tables which may be used in some of the other utilities which have become more stabilized technically water-works particularly. The divergences of experience and conditions like climate, degree of maintenance, adequacy, quality of labor, public demands, earn- ings, etc., are marked, not only between different companies but for a single company * so that no conclusions can be drawn. On the other hand there is the quoted experience of bodies like the Wisconsin Railroad Commission's Engineering Department that their life tables, carefully handled and regarded more as bases for departure in specific cases, are most useful. Rapid Transit and Rates. As cities grow and develop more or less extensive districts of concentrated business, the appear- ances of traffic congestion multiply and the time of transit be- tween homes and places of work lengthens. Then the more thoughtful citizens begin to consider the possibility of sub- ways the appeal of elevated lines at present not being great in the absence of experience with heavy masonry (concrete) * Reports of Joint Committee on Life of Railway Physical Property, American Electric Railway Engineering and Accountants Associations, 1911-12-13. 230 PUBLIC UTILITY RATES viaducts and rock-ballasted tracks on steel structures. If they are well advised they soon see that the feasibility of a rapid- transit line or system of lines depends on the fares which the riders are willing to pay for the saving in time or the personal convenience. They find that it is only in the places of greatest population or with peculiar geographical arrangements that rapid transit is possible for surface-car fares or that the city's commercial development is hampered by the lack of a rapid- transit system. The citizens have to realize soon that common- fare operation becomes possible only where the density of traffic probably will decrease the operating cost per passenger trip enough to make up the interest on large investment. How much this saving must be is seen after noting that the cost of a rapid-transit line will be from $60,000 to $2,500,000 per mile more than an ordinary city surface line (experience showing the order of costs as $40,000 per mile for the surface line, without rolling stock; $120,000 for the steel elevated line; $330,000 for the concrete viaduct; $220,000 for an open-cut railway; $400,000 to $1,200,000 per mile for the subway depending on the difficulty of excavation and the interference with traffic; and $2,700,000 for subaqueous tunnels). To make a $500,000-per-mile rapid- transit line pay (including return on extra investment in rolling stock and other necessary operating equipment) would require 4300 passengers per working day for each mile of line.* The principles of rapid-transit planning have been well sum- marized in the following seven paragraphs.! 1. Locate rapid-transit lines in general along direct routes where the congestion has become too great for surface lines to run at fair speed and properly to take care of the traffic; the main object of rapid-transit lines in a unified system is to supplement the surface car service by removing therefrom a large part of the passenger traffic and placing this traffic above or below the street level where, being free from interference with other traffic, much higher speed can be maintained and larger and heavier trains operated. 2. Construct each line in progressive steps, completing the most * From figures in "Provision for Rapid Transit in Cities," a paper by J. V. Da vies before the National Conference on City Planning; see Engineering News, June 11, 1914. t W. S. Twining, "The Problem of Passenger Transportation in Phila- delphia," a report to the Select and Common Councils, March 29, 1916. RATE PROBLEMS OF STREET RAILWAYS 231 urgently needed section first and adding extensions or branches only as their necessity or feasibility is demonstrated. 3. Plan the system as a comprehensive whole conforming to the ideal plan as nearly as local conditions permit and with the underlying idea of operating all trains on the principle of through-routing as far as pos- sible, as this is now universally conceded to be the proper method of operation. Avoid the so-called " looping ' method of operation wherever possible. 4. Construct the minimum amount of subway line, as this is the most expensive form of construction and hence carries the highest, interest charge per mile. As a corollary of this, subways should be built only where no other form can be used or accepted on account of high property damages resulting from the use of any other form, or for esthetic reasons, or where some special or peculiar conformation of the streets makes a subway im- perative. 5. Construct rapid-transit lines to only such points in the outlying districts as will provide sufficient traffic to load the lines to an economical amount. Beyond such points the traffic should be carried by either surface lines or by other cheaper forms of high-speed construction. 6. Locate rapid-transit lines in the business district so they will act as channels through which the main traffic flow between the residential and business districts may be conveyed without confusion or congestion, and so as to require a minimum of transferring to reach the rider's desti- nation. 7. Utilize existing surface car facilities to the fullest extent possible and supplement them by high-speed surface extensions into the sub- urbs, located on wide streets or private right-of-way so as to provide economically for the development of the territory adjacent or tributary to the rapid-transit lines. It is true in general that before subways are profitable every resource of police power for the regulating and routing of traffic will have to be exhausted. After that, it is probable that com- paratively short elevated or subway routes for surface cars across congested districts will prove the economical first step in reducing the delays and operating costs. The revision of the Newark (N. J.) lines of the Public Service Ry. is an example of this action.* Here very short subway and elevated lines lead to a three-deck exchange station. The first cost of a railway ter- minal (which, as a rule, is too heavy a burden for economy) is here diminished by the superposition of a much-needed huge office building on the terminal structure. * See Engineering News, Oct. 7 and 28, 1915. 232 PUBLIC UTILITY RATES The Transfer Problem. The extensive use of transfer tickets -enabling passengers to complete their journeys over various routes for the original fare has become one of the pressing problems of street-railway operation. The transfer ticket was at first highly regarded by street-railway managers (as the proceedings of early conventions of street-railway men show) as a device which con- tinued the attractions of a multiplicity of old single-fare through routes without the necessity of continuing an expensive and complicated schedule of tortuous trips after the consolidation of several lines. It was believed that the use of transfers would stimulate traffic and undoubtedly it had and still has a cer- tain effect. But with the increasing costs of electric-railway operation the transfer came to be more and more frowned on by railway officials as a device that strings out the ride beyond the ever shortening length that a nickel will profitably cover, and in many cases that gives one fare when two would other- wise be yielded. The possibilities of abuse too have proved considerable. Yet a considerable part of the hostility toward free transfers has been due to its statistical effect which perhaps exagger- ates its economic disadvantages. If a " passenger " is con- sidered as any person who boards any car at any point, irre- spective of origin, destination, route or length of ride, then it is obvious that the total cash fares collected divided by the aggre- gate number of " passengers " will result in showing an average revenue unit or fare of less than a nickel 4j, ?>i or even less. Such a statement is naturally alarming to a manager and ought to be at least significant to an intelligent public. Its harm and exaggeration arises from its lack of significance standing alone and the distraction it induces from the main issue cost of carrying a passenger. Such a diluted average fare becomes significant only when stated beside the cost of the average trip taken by the " passenger." If the fare is diluted by dividing the cash collection by total number of boarders it is obvious that the cost per passenger trip should be also diluted, the terminal costs being distributed over more persons and the movement costs being divided a greater number of shorter rides. This dilution of cost figures is apt to give a misconception of unit cost per paying passenger for it is logical to assess each paying passenger with fixed costs only once whether he transfers or not. RATE PROBLEMS OF STREET RAILWAYS 233 The transfer problem then should not be a distinct problem; it should be another phase of the vital problem of making the average ride over the system, or perhaps on each line thereof, approximately not greater than the profitable distance. Attempts to cut off transfers, instead of general equitable re- striction of trip length over all routes, is sure to arouse greater hostility and to result in an irritating impression of a discrimi- nation whereby passengers on through routes are to be carried further for a single fare than those who have to suffer the in- convenience of change in order to get to their destination. The actual curtailment of transfer privileges in many situations is apt to cause a demand for multiplicity of through routes which may not be economical. One significance of a heavy statistical dilution of unit fares by transfer " passengers " is that there may be a heavy transfer movement which could be economically handled by through routing of some cars or revising the main trunk route. Such a reduction of transfers reduces expense through delays, stops (which affect minor repairs and renewals), injuries, etc. Jitney-bus Competition. No other one phenomenon in elec- tric-railway operation has raised any such tempest as has the competition of the small motor cab or bus the " jitney." Crazes for jitney riding seem to have possessed large parts of the riding public in some cities for a time, and distracted railway officials have seen ruin staring out of their shrunken gross earn- ings. At this early date, when the jitney is only a couple years old, it is not possible clearly to foresee its future position; how- ever, as far as costs show, the jitney may be expected to be more of a short acute attack than a chronic continued disease. Such cost figures on the operation of light automobiles as are commonly available leads to the expectation that a free-lance owner-driver will have an actual cash expenditure so nearly approaching his maximum possible revenue that he can earn only a motorman's wage for a long day's work and that after neglecting interest on his small investment, depreciation, etc. Where a company operates, say 50 to 100 jitneys, the stated costs rise above the expenditures of the free-lance, for hired men do not work as long hours, the repairs are made by a special force, and interest is not neglected. Jitney companies are not inviting prospects and the continuance of this type of service seems to depend, 234 PUBLIC UTILITY RATES each year, on a fresh crop of enthusiastic owner-drivers each with an investment of a few hundred dollars which he may sacrifice. The appeal of the jitney bus comes from its fair-weather ad- vantages under light traffic smoother carriage, better air, higher speeds, and fewer stops. It is obvious that if a two-mile trip is made by an automobile with four passengers and a 40- seat filled car, there may be up to ten times as many stops by the car as by the auto a matter affecting the comfort of the long- est riders, and the speed of the journey. Cleveland 3 Fare Campaigns. The street-railway system of Cleveland, Ohio, is unique among American roads in its oper- ating arrangements and no review of street-railway rates and services would be complete without calling attention to it. The events of 1903-1910 leading up to the change have become historical and only the briefest review is needed to show the development of the present plan. One Tom L. Johnson was elected in 1903 on a platform of 3f fares, competing railways, universal transfers and eventual municipal ownership. Immediately there started a most tangled series of moves on the part of every interest involved. Some of the franchises of the old concern, the Cleveland Electric Railway Co., were expiring, and renewals and rights for ex- tended lines were desired. In response to the mayor's appeal the company tried 3^ and 4jzf fares without transfers on several lines and reported the earnings insufficient. A rival enterprise, the Forest City Street Ry. Co., and its successor, the Municipal Traction Co., had secured franchises but the courts prevented any great utilization of the rights granted. There were pro- posals and counter-proposals, injunction suits, spectacular at- tempts to secure possession of streets, contempt-of-court pro- ceedings, etc. No real progress was evident, however. In 1907 Johnson ran for office again and on a 3^-fare. plat- form winning the race. Shortly after, the old company agreed to certain of his proposals, became the Cleveland Railway Co., and leased its lines to the Municipal Traction Co., under a 6% guaranteed dividend. A city fare of 3^ with 1^ for transfers was put into effect. Consequent reductions of service caused such dissatisfaction that the whole arrangement was upset again, the Municipal Traction Co. going into receivers' hands. RATE PROBLEMS OF STREET RAILWAYS 235 By court orders the maximum fares allowed in the franchises were put on 5^ on some lines and 3^ on others. Suburban fares remained at 5. Various attempts were made to force the Cleveland Railway Co. to accept a franchise providing for 4ff fares, a revaluation of property, arbitration of disputes, right of city to name a purchaser, city control of operation, appointment of a city railway commissioner to be paid by the company. The company balked at some of these steps but negotiations proceeded and finally the troublesome points - maximum fare and valuation went to Judge Tayler of the U.S. Circuit Court, as arbitrator. While the arbitrator was con- sidering the case, Johnson was defeated in his third campaign for the mayoralty, but the arbitrator's report was made, the ordinance was passed in December, 1909, and accepted before the new administration came in. It was approved by referen- dum in February, 1910. Cleveland City-Control Ordinance. The 1909 settlement ordinance (commonly known around the country as the " Tayler Ordinance ") was designed, in the language of the statute, to secure to the owners of property invested in street railroads security as to their property, and a fair and fixed rate of return thereon, at the same time securing to the public the largest powers of regulation in the interest of public service, and the best street-railroad transportation at cost consistent with the security of the property, and the certainty of a fixed return thereon, and no more. The railway company by this scheme operated the property and the City prescribed the service through the Council and the Railway Commissioner. The fare was started in the middle of a sliding scale at 3^ cash with 1^ for transfer without rebate. Revenues were credited to an " interest fund " established at $500,000 to start with by a company payment. The company was allowed for maintenance, depreciation and renewals, 4^ per car mile in January, February, March, April, May and December; 5j in November; and 6^ in June, July, August, September and October. For operation the allowance was 11 A per car mile. Interest on funded debt was allowed as paid. From the interest fund, each month a proper portion of 6% per year on the valuation was drawn. If, after 8 months' trial, the interest fund rose to over $700,000, a lower rate of fare was to 236 PUBLIC UTILITY RATES go into effect and if the fund sank below $300,000, a higher rate was to be permitted. The sliding scale of fares was as follows: (a) 4ff cash, 7 tickets for 25 ff, Iff transfer, no rebate; (6) 4ff cash, 7 tickets for 25 , Iff transfer, Iff rebate; (c) 4ff cash, 3 ticket for 10 ff, Iff transfer, no rebate; (d) 4ff cash, 3 tickets for 10 ff, Iff transfer, Iff rebate; (e) 3ff cash, Iff transfer, no rebate; (/) 3ff cash, Iff transfer, Iff rebate; (g) 3 cash, 2 tickets for 5ff, Iff transfer, no rebate; (K) 3ff cash, 2 tickets for 5?f, Iff transfer, Iff rebate; (i) 2ff cash, Iff transfer, no rebate; (j) 2ff cash, Iff transfer, Iff rebate. The first eight months (to Nov. 30, 1910) showed an increase of $50,000 in the interest fund so that the first fares (at e in the sliding scale) were held to. In May, 1911, the Railway Commissioner found the interest fund $200,000 high, and the Council decreased the fare by one step (to /). This continued up to Sept. 1, 1914, when fares were raised. Meantime the allowances of the ordinance for operating ex- pense, and for maintenance and renewals had proved insuffi- cient so that deficits had been created in these departments in spite of a growing interest fund which called for lower fares. The City, nevertheless, demanded still lower fares and, under a wise provision of the ordinance, the dispute went to a board of three arbitrators. These men reported after due deliberation that, in the three years' operation to Feb. 28, 1913, there had accumulated a necessary over-expenditure of $259,593 for oper- ation, 2.63% on an allowance of $9,860,816. The over-ex- penditure for maintenance was $323,597, 7.8% on $4,155,459. The arbitrators recommended that the operating allowance be increased from 11.5 f to I2.l per car mile. The accumulated operating deficit they recommended should be taken from the interest fund at once. No added annual allowance for main- tenance was granted, although the deficit had included no figure for retirance on long-lived property. The maintenance deficit was to be cared for by such occasional drafts on the interest fund as would not draw it down below $400,000. There had accumulated surpluses in the accounts for insur- ance and for injuries and damages amounting to $63,049 and $152,954. The arbitrators found that unexpected balances of RATE PROBLEMS OF STREET RAILWAYS 237 allowances for insurance and injuries and damages should have been annually credited to the interest fund. The several findings of the board were put into effect by the City Council, the Railroad Commissioner and the company. The low fare of 3^ with 1^ for transfer has been continued through an unusual cooperation of Council, people and company to keep costs down, although the service is better than in many other cities of the country. The topography and arrangement of residential districts is favorable. Shortened routes are per- mitted, to concentrate crowds for longer distances and to increase car intervals on longer lines. Cars do not stop at all streets, which, together with use of trailers and special loading methods, gives some 20% faster schedules than seen in other American cities. The speedy loading is secured by running cars so far as possible on a pay-as-you-leave scheme outbound and pay-as- you-enter coming back. Special rolling stock favors such oper- ation. Police control of vehicular street traffic is strict. All of the lines (16) radiate from the commercial center of the city and most cars go around some one of several loops in this district. Objections to the Cleveland Scheme. Electric-railway men outside of Cleveland who have examined the operation in de- tail are not satisfied that it should be copied elsewhere. The arguments of the rest of the industry to it are: (1) rigid spe- cific allowances for operation and maintenance are insufficient, (2) there are no damage and insurance reserve funds, (3) depre- ciation is not cared for adequately, (4) the fixed rate of return (6%) is too small to attract capital, (5) the extension of lines is checked, (6) the service is below the Wisconsin Commission's standards, etc. Milwaukee Zone System. For two years a well-planned zone system of fares has been in force on the lines of the Mil- waukee Electric Ry. and Light Co., apparently working well, and certainly better than the old rate system before in effect. Before the new system became effective there had been 5^ zones of 0.99 to 7.17 miles length depending on boundaries fixed by franchises or concessions. Various overlaps had been estab- lished to meet local demands. In the system there were some 404 miles of tracks 175 in the city of Milwaukee, 20| in Racine, 60 miles suburban and 238 PUBLIC UTILITY RATES 16| miles inter urban. Under the old plan, 5 cash fares were collected going in, into and across each zone. On some subur- ban lines 7|^ commutation ticket books were sold. A few reduced-rate round-trip tickets were sold to some interurban parts. With such a field of discrimination over which the company had no control, it was inevitable that a flood of com- plaints should have come to the Railroad Commission, newly endowed with broader powers. By mutual agreement the Commission undertook the study of the fare question in Mil- waukee in August, 1913, and in January, 1914, recommended a new zone system. There were provided seven zones, outside the central city district. This last was 9 miles long and 6 miles wide roughly semi-circular (for Milwaukee is on the shore of Lake Michigan). The first-fare district extends out from the center of gravity of traffic from 2.7 to 5.8 miles roughly cor- responding to the then city boundaries. Surrounding this are the other zones each about 1 mile wide but shifted reasonably to important traffic points. Inside the central district a single 5 fare is charged and the usual transfers are given. For a ride from the central district into or across each zone 2^ is collected in addition to the 5j fare. For local traffic outside the central district 2^ is collected for each zone traveled in, the minimum being 5jz, however, for a single ride. On the interurban lines beyond the suburban zones 2^ per mile is charged, except that where the lines pass through important towns a single 5^ fare is provided within that munic- ipality's limits in place of the 2 per mile. For through inter- urban service the central-district part of the fare is made 4j. The fare between any two outlying towns on the same interur- ban line is equal to the difference between the through rates to these places. Children under three years of age are carried free; children of three to ten years at half fare. The Commission in its opinion * establishing this zone system, noted that the actual costs justified rates that would yield about 2.75^ per passenger-mile but placed the fares below such a basis in hope of encouraging traffic to such an extent that an ad- equate return would be gained over all expenses. The weighted average over-all earning per passenger-mile for the city and * Re Application of T. M. E. R. & L. Co. for Reasonable Rates, 13 Wis. R. R. Comm. Rep. 475. RATE PROBLEMS OF STREET RAILWAYS 239 suburban system was reported * to be 1.18j before the change and 1.50f after. Milwaukee Ticket System. The collection of fares on the zone system described has not been insuperably difficult, al- though considerable study and experimenting has been needed. The city and suburban cars are of prepayment types and a light portable fare box is used. The first problem was the handling of small zone fares. A 2^ zone ticket was provided, marked with a conspicuous red band across it, and sold in quan- tities. These have eliminated trouble in collecting pennies; the conductors carry no more change than under the old system. The second pressing problem was to show the zones into which each passenger had paid to travel. The transfers from central district to suburban lines were changed so that the zone to which fare had been paid could be punched. On the longest line, with seven 2 zones, a special receipt is issued be- cause of lack of space on the transfer ticket. As outbound passengers may pay the city fare first and zone fares later, the conductor goes through the car at the first zone, carrying the portable farebox, collecting the extra fares from those who have not paid through and issuing special or transfer receipts. When passengers leave they surrender the receipts and if the amount paid has been too small the difference is then collected. In the case of inbound passengers no receipts are given except on the longest line; the passengers deposit through fares to desti- nation. This collection system is reported to work satisfactorily, not causing delays or congestion. On special occasions when crowds are presented at definite points for loading, extra collectors are put on for as long periods as needed and the cars (prepayment type) are loaded at both ends. Rapid loading is also helped by setting up portable ticket booths at suburban resorts. * For detailed figures and notes on the system here described see " A Zone System of Fares in Practice," by R. B. Stearns, of Milwaukee, before the American Electric Ry. Assoc., October, 1914. CHAPTER XIII PROBLEMS OF WATER RATES Development and Magnitude of Industry.* The first Ameri- can water- works probably was that in Boston in 1652 having a 12-foot tank near Dock Square supplied by pipes from springs and used for both fire protection and domestic supply. It was not until 1796, when the population was 21,000, that an " Aque- duct Corporation " was formed to bring in water five miles from Jamaica Pond. This private system was relied upon until 1848 when the first steps toward the present system were taken. Bethlehem, Penn., appears next (1754) with its 5-in. lignum- vitse pump, log-pipe line and wooden reservoir. In 1762 the town installed three 4 X 18-inch iron pumps which were in service for 70 odd years. The earliest New York City project was a municipal one and started in 1774 when the city had 22,000 population; there was to be a reservoir and well east of Broadway, 1^ miles above the Battery. The Revolution prevented completion of the system. In 1799 the City, then having a population of 60,000, took stock in the Manhattan Corporation which built a tank of cast-iron plates and pumped from a well by two 18-hp. engines. By 1823 there were 25 miles of pipes and 2000 taps. In 1830 another well and reservoir were built further uptown. About this time the city built its own works for fire service, which rap- idly grew and developed into the Croton River system launched in 1835. In 1791 the Morristown, N. J., Water Co. began collecting and distributing water from the local hillsides. Up to 1798 Philadelphia, with 80,000 people, had drawn its water from wells; then it started a municipal supply project which was com- * See a series of papers on the History and Statistics of American Water- Works, in Engineering News, 1881 to 1887. These studies led to J. J. R. Croes' "Statistical Tables of American Water-Works," and M. N. Baker's "Manual of American Water- Works, " the last edition of which appeared in 1897. 240 PROBLEMS OF WATER RATES 241 pleted in 1800, using water from the Schuylkill River. Here were (for America) the first big steam water-works pumps, the first cast-iron water mains, the first successful municipal water-works development. The first prominent advance in American water-works engineering was the construction of the water-power pumping station at the Schuylkill River, 1818-1822. (A log-crib dam gave a head of 1 to 7 feet for three breast wheels driving large double-acting horizontal force pumps; turbines were later substituted.) In 1798 Worcester, Mass., and Portsmouth, N. H., started water- works; in Albany, N. Y., a private system was started in 1799. The first works of magnitude in the several New England states appeared as follows: New Hampshire, 1798; Massachusetts, 1801; Vermont, 1820; Connecticut, 1832; Maine, 1851; Rhode Island, 1876. The development in im- portant and typical cities is shown by a few cases : New Orleans (founded in 1718) had no water-works until 1836. Buffalo (founded in 1801) had none until 1852; Chicago (laid out in 1833) had water service in 1840; Cleveland (settled in 1810) waited until 1853; San Francisco (settled in 1776) had no works before 1857. In 1800 there were 16 water-works in this country and in ' 1850 there were only 83. In 1890 the number had grown to 1878, and in 1897 there were 3196. At the present time there are perhaps 6000, complete figures not having been collected in recent years. In Canada there were 528 works in 1915. In 1800 only one of the 16 existing water-works was munic- ipally owned. In 1835, 28% had come under the local govern- ments; in 1855 the figure had risen to 45%. In 1875, 54% were owned by the public but the addition of many private works in the next few years brought the figure down to 43% in 1890. However, it rose to 54% in 1897, and today is probably above 70%. In 1888 there were 1666 water-works serving a population of 14,858,000 and having an investment of $432,226,000. The revenue was $39,363,000. No accurate figures are available at the present moment for the whole industry in spite of the great activity of the United States Census Bureau.* * Attention should be called to the very complete data for 1915 on serv- ice equipment and rates in cities of over 30,000 population, in "General 242 PUBLIC UTILITY RATES What meager evidence there is, however, points to a total investment of $1,500,000,000 in the 6000 plants already men- tioned as existing, to a population served of about 40,000,000, and to an annual revenue of $115,000,000. But of course such estimates can only be " educated guesses." It is greatly to be regretted that as accurate a survey of the development of this most important of all utilities has not been kept up as has been in the case of the railroads, electric railways, electricity-supply works, and telephone companies. This will be changed undoubt- edly, as the necessity is more completely recognized of placing water-works under the same regulation as other utilities. Water-works as Utilities. A complete works for the dis- tribution of a supply of potable water to inhabitants of a community may be, as to its general place among public utili- ties, either a service or a product type as earlier defined. If it captures a surface supply of water and impounds it for con- veying by gravity in aqueducts and mains to the consumers, obviously it is of the product type for the magnitude of its works depends on the total quantity supplied during some oper- ating cycle more than on the peaks of demand, maximum rates of draft, etc.* If, however, it pumps from an underground or low-level body into the supply mains and the supply and pres- sure are pump maintained, then much investment in plant is fixed by the peak service and the water-works becomes a service- type utility to which the principles of demand, quantity and customer costs may apply to greater or less extent. These principles would apply here without reservation if it were not for the superimposition of fire-protection; the physical plant developed for the combined services is not what it would be for either alone. Notwithstanding the complication of fire service, Statistics of Cities, 1915" issued in 1916 by the U. S. Bureau. Information on the personnel, equipment, treatment, service and rates of a large per- centage of American water-works is to be found in the 1915 "Waterworks Directory" of the McGraw Publishing Co., New York City. * Speaking of the ordinary consumer's requirements only, and not in- cluding the effect of municipal fire service which may be regarded as super- imposed on the domestic-supply service (or trice versa). For the first approach to a study of water-works rate-making, the domestic-supply and fire-pro- tection works may be considered as superimposed departments, the functions and technology of which may be discussed separately, leaving the effect of the superimposition on rate-making to appear later. PROBLEMS OF WATER RATES 243 the demand, quantity and customer costs may be assessed on a consumer fairly in accordance with his maximum demand, diver- sity factor, quantity furnished and the number of customers supplied. Regulation of Water Utilities. The regulation of rates, serv- ice, capitalization and development of water-supply utilities and projects has been caught between various regulating bodies so that there are in some cases uncertainty and inconvenience for the utility, and, in other cases, general lack of that control which the public may fairly and reasonably exercise. There is as yet only a tendency to escape this condition by a more logical development of state supervision, 'though it is plainly evident that such is the best course. Every state has a department of health of greater or less effectiveness, depending on its authority, personnel, and ap- propriations; and to these boards sanitary control over the water-works private company or municipal department - is commonly given, so widespread is the knowledge that the lives of the people at large depend on the quality of the water. The best, and a considerable number, of these boards have well- equipped and well-manned laboratory and field-engineering de- partments so that their control of water-supplies, along with the parallel matters of sewage disposal and disease control, is highly intelligent, efficient, effective and beneficial. The approach to this situation has been gradual and fairly logical. Alongside the boards of health have sprung up the state public-utility commissions exercising more or less complete super- vision over character of service and size of rates for various pub- lic services. Legislatures . have apparently hesitated to give utility commissions the same powers over water utilities that they exercise over railroad, gas, electric and telephone com- panies. They have evidently realized the health menace that would result by transferring sanitary control from an experi- enced and equipped department to a green organization; they have seen as well the intimate relation between sanitary control of water-works and general public-health work. Legislatures have hesitated to put the financial operations under utility commissions, perhaps because of the great preponderance of municipally owned works 2 to 1. In few states has as com- plete oversight over municipal as over private utilities been 244 PUBLIC UTILITY RATES secured. In only one known case Massachusetts, for private companies, only was rate control placed in the health board's hands, presumably because of the apparent remoteness of rates from matters of public health. But nevertheless the control of water-works service, as to pressure, fire protection, adequate and safe structures and the scrutiny of rates, has con- tinued to grow steadily as an utility-commission function. There is no reason why this bifurcated supervision should not continue to give good results, though such division of govern- mental function in general is hardly to be encouraged. If there should arise any tendency to friction or deadlock, it can be eliminated, without the sacrifice of prestige on either side, by following the course taken in 1915 by the Wisconsin Rail- road and Industrial Commissions in regard to safety of electric circuits; they sat jointly and produced a single code of rules under which either or both may act with full knowledge that no one will escape the provisions of the law by litigation over re- spective jurisdictions. Between the sanitary and financial supervision exercised by health and utility commissions there has sprung up in a few states the control of water-shed acquisition and development by a third body commonly styled a water-supply commission. Apportionment of water between rival claimants also has been settled by such boards. This may be regarded as a non-per- manent development not apt to extend greatly and then only for special conditions. The work of a water-supply board is in some ways closely analogous to the valuation and rate-making activities of an utility commission, and in any event the engi- neering and legal departments of the latter are in an excellent position to handle all the matters which the water-supply com- mission could take up. Better regulation of water utilities is one of the greatest needs of present-day public-utility service. By leaving water com- panies and municipal departments the latter particularly - too much to themselves, there have been encouraged wide- spread continuance of unfair rates, unintelligent accounting, and inefficient and inadequate service. With all these there is a sur- prising narrow-mindedness of managing officials as to the place of a water-works among the other utilities and as to the occu- pancy of streets, the assumption of fire-protection duties, etc. PROBLEMS OF WATER RATES 245 The ease with which a fair supply is distributed through a com- munity, the inherently simple and almost fool-proof nature of many moderate-pressure gravity-supply works, and the wide discrepancy prevailing between the cost and the value of water service, have conspired to keep knowledge of this situation from spreading widely. Had the shortcomings of municipal water departments been fully investigated the opponents of municipal ownership of public utilities would not have lacked campaign ammunition; and they would not have sidestepped the issue in the water-supply field or excused municipal ownership here on the ground of close public interest in matters like public health and fire protection. Varied Requirements for Good Water. There are a mul- titude of services for which the supply of a local water-works is drawn on that most people do not realize. The ordinary do- mestic consumption and the fire-fighting supply are obvious but few of the others are. The requirements defining a good water differ widely and few indeed are the supplies which are ideal for all the purposes to which they are put. Water is needed in large quantities, particularly for feeding steam boilers, for paper and pulp mills, textile-finishing works, food-product factories, for soap, glue and chemical works, etc. Many of the waters supplied, by companies and municipal departments alike, contain considerable dissolved lime, mag- nesia and iron, being then called " hard." Such burdens do not affect the healthfulness of a supply, though for steam-power plants and some manufacturing processes its use is very un- desirable. There is an appreciable money loss even for ordi- nary domestic consumers on account of the greater amount of soap used in washing. Hard waters interfere with the treatment of fabrics and waste the chemicals used in breaking up wood fiber and in finishing paper. In steam boilers the hard waters let down a precipitate which incrusts the heat-transfer surfaces and leads to pitting and overheating, besides giving a direct loss of efficiency of evaporation. Iron is a particularly un- desirable content for manufacturing plants on account of the discolorations produced on papers, textiles, foods, etc. Inert suspended matter is objectionable for similar reasons. While stain, turbidity and taste are not entirely pleasant in a potable water they are seldom really unhealthful. It is 246 PUBLIC UTILITY RATES bacterial content which at present is the common criterion of quality in a domestic supply. Stimulated by state and local boards of health, great attention is paid to removing bacteria from municipal supplies. In a few cases hard waters are sof- tened at the water-works and in many cases by manufacturing customers. Where iron is carried there ultimately develops a demand for its removal. Water-works Technology. The water company or munici- pality which has a " gravity " system usually owns or controls an elevated drainage area on which there is preferably little or no population. It collects part of the run-off in impounding reservoirs, holding the needed supply, and lets the rest waste over the spillways. The all-important question about such a supply is the matter of sewage pollution. Prevention of pollution is sought by sanitary control of the drainage area, though this does not necessarily require depopulation control of wastes may be sufficient, but purification may be needed. For municipalities on low plains or above possible reservoirs, the use of pumps ordinarily becomes imperative, to lift water from low-lying surface bodies or from wells tapping water-bear- ing strata, and to maintain pressure on the distributing pipes - often with an elevated tank or tall standpipe to equalize small flow and pressure fluctuations or to carry through the night when little water is required. The supply mains from reservoirs, or the force mains from pumps to distributing lines, may be of steel plate, cast iron, reinforced concrete or wood staves, depending on the pres- sures, local conditions and preferences, etc. The distributing mains in a large majority of installations are of cast-iron pipe, though there is some welded steel pipe and a little cement-lined iron- and steel-plate pipe still used. The latter was popular up to about 1885. The service lines branching off to the con- sumers' premises are commonly of small galvanized or lead-lined iron and steel pipes. Many are of lead. So far as public appreciation has shown itself, clear and whole- some ground water rising from considerable depths is the pre- ferred supply for domestic consumption. The supply next in favor seems to be a surface water from distant unpopulated or very sparsely settled mountain drainage areas. Ground waters which have to be softened or otherwise improved, or surface PROBLEMS OF WATER RATES 247 waters which have to be purified seem to occupy the rear place in popularity. The use of water unpolluted as originally captured is desir- able and it inspires public confidence. But the use of a supply that is contaminated as first taken, is safe so long as the man- agement of the water-works is in the hands of competent tech- nical men, for the art and science of water purification have been carried to a certainty of results that may well beget pub- lic confidence. Whereas with a good water low rates and adequate service depend on keeping the evils of politics out of the water department, on the other hand if the source be pol- luted, the very lives of the people may depend on freedom from political dictation. The incrusting substances precipitated in a boiler by the effect of heat are the iron, calcium, aluminum and silicon ox- ides, and the calcium and magnesium carbonates and sulphates. Acids that pit boiler shells may be released by the depositions of these compounds, or they may come from organic matter. Foaming may be due to concentration of sodium and potassium salts which remain soluble. Blowing off some of the boiler water and replacing with a fresh supply is the common remedy for foaming; loose precipitates are also swept out in the blow- ing down. The softening and removal of scale-forming salts may be done cold by a chemical precipitation (commonly with lime and soda ash) and settlement or screening, or it may be done by heating, dosing and rapidly filtering. Also the use of artificial and natural zeolites has been seen; these are peculiar sodium-aluminum silicates which possess the property of ex- changing their sodium for calcium and magnesium as hard water flows over them. The material is crushed and placed in filter tanks, and after the exchange of sodium is completed a solution of common salt is allowed to flow through slowly when the reverse restoring exchange is effected. The calcium salts are then washed out of the zeolite bed by a reverse current of water. The removal of both suspended matter and bacteria is com- monly secured by filtration. This may be by the " slow " proc- ess of percolating (at a rate of 2,000,000 to 4,000,000 gallons per acre per day) through 3 or 4 feet of sand overlying coarse gravel and drain tiles; or it may be by the more rapid " mechani- 248 PUBLIC UTILITY RATES cal" filtration where a coagulant like alum (aluminum sul- phate) is added, to form a flocculent precipitate and enmesh the coloring particles and the bacteria, 3 or 4 hours before forcing through small beds of graded sand on strainers at rates of 100,000,000 to 120,000,000 gallons per acre per day. In the slow-sand filters when the top is fouled the beds are drained and about a half-inch is scraped off and washed for replacing when the beds have been scraped down 20 to 25 times. In a few places a little coagulant is used with slow sand filtration to bring down temporary burdens of clay. When the rapid filter is once clogged, the water flow is reversed and the sand agitated by mechanical raking or by blowing in air. Purification plants add greatly to the investment in and operating costs of a water- works; they demand skilled attention and unharassed manage- ment. When water has to be pumped continually the lowest-duty unit commonly permitted is the compound non-condensing du- plex pump. It is satisfactory for small works because of its simplicity of operation and ease of maintenance, but it is rela- tively low in economy (50-60 million foot-pounds per 1000 pounds of steam) compared with more expensive equipment. The first step above is the use of a condensing type of compound duplex pump. This introduces only the complication of a condenser and raises the duty to 70-80 million foot-pounds per 1000 pounds steam, increasing the station economies somewhat more than in- dicated by engine figures alone. Where constant use of good-sized pumps is needed, it pays to go to double- or triple-expansion crank-and-flywheel units for here the heavier costs are spread over such large quantities furnished that the best of mechanics, attendants and works engineers can be afforded. These units have got up to duties of over 200 million foot-pounds per 1000 pounds steam (though the use of superheated steam makes the apparent gain greater than the actual, as disclosed by the more scientific comparison of foot-pounds per million heat unite in the steam). Electric-motor or steam-turbine driven centrifugal pumps are becoming more and more formidable competitors of all the older water-works engines. They can be had already in de- signs showing 80% of the duty records of the best reciprocating machines and their first cost is sufficiently less to make the PROBLEMS OF WATER RATES 249 total cost of pumping as low or lower, in the majority of cases. An important part of the water-works equipment from the standpoint of rates is the consumer's meter. The types in most extended use are the positive-action and inferential. The first named are largely miniature rotary-piston engines having either a spur pinion rolling around on a larger internal annular gear or else a disk wabbling around between two conical frus- tums placed peak to peak in a spherical chamber. In lesser use are the inferential meters which measure the flow by the impact of the flowing supply on buckets or vanes of a wheel. In all types the moving parts actuate a counting gear train, the pointer or numbered disk of which shows on an indicator-dial. Water Consumption. A community's draft has marked peaks which may become of importance in finding the capacity required for a system having no fire-protection provisions. There has not been much done in finding this draft of water from hour to hour. It can be approached however from the studies made for sewerage.* The domestic service rises from about 75% of the average during the early morning hours to a sharp peak from 5-9 (125% of average), a drop to 110% at 10 A.M., a peak of 120% at 12-1 P.M., a drop to 100% at 4. P.M., another peak of 115% at 5 o'clock and a slow return through the night. A city having a number of industrial works drawing water, besides the residence drafts from hour to hour as shown, would be expected to have the peak rise to some 140% of average, sustain itself for 2 to 4 hours and steadily drop down to a mini- mum of 50-60% at 1-4 A.M. Between such cities are those which rise from 70-80% of average between 1 and 4 A.M., and sustain a peak of 120-130% of the average from 7 A.M. to 3 P.M. and then steadily drop off. On Sundays both quantity and peak drop off. On Mondays (washday?) both total amount and height of peak increase. The figures quoted are deduced from the flow of sewage at outlets, the corresponding flows of sewage coming about two hours later than the stated water drafts. In studying peak loads of water draft, via the sewage, it must be remembered that in specific locations and instances there may be an inleak- age of ground water and discharge of industrial-plant water * Metcalf and Eddy, "American Sewerage Practice," 1914, pp. 187-206. 250 PUBLIC UTILITY RATES originally drawn from private wells instead of the water-works system. The sewage flow of Cincinnati, however, for instance, shows in a residential district (Ross Run Sewer) a rise from 5 to 9 A.M. of 50% to 179% of the average, slowly and steadily decreasing for the rest of the day and night, showing that the noon and evening peaks may sometimes be suppressed. The corresponding heavy water draft comes probably from 3 to 7 A.M. There would not be expected to be any great difference in peaks or totals for summer and winter such as exist in electric and gas service unless the place has a summer or winter increase of population like some resorts. Fire Service or Domestic Supply First? The discussions of water-works officials show that in some places fire protection is regarded as the primary service for which their works were instituted; others regard this as incidental, even though of ex- treme importance, to the domestic supply. Which view prevails or should prevail in any given case may decidedly affect the rates for fire-protection service. The extreme comes when the charges are based on what a plant solely for the given fire pro- tection would cost and this may approach the cost of the given system less purification works, service pipes, etc., and with less expensive lower-efficiency pumping equipment where pumps are used. At the other extreme, where the fire service is con- sidered as grafted upon the domestic supply, the minimum burden may be considered as the enlargement of the physical works demanded by the fire protection over that sufficient for adequate domestic and manufacturing supply. If such a view prevailed, as it will in perhaps the majority of instances, it might be necessary to burden the fire service with the larger purifi- cation works needed to meet the possible drafts of water in case of a conflagration, the larger pumping units, mains, etc., as discussed in detail later. A good fire stream requires about 250 gallons per minute at a pressure of 50 to 60 pounds per square inch at the hydrant, though both quantity and pressure may reasonably drop to 150-200 gallons and 40 pounds in purely residential areas. The number of streams possible to be concentrated on any point should depend on the character of the locality as to popula- tion, density and height of buildings, width of streets and factors PROBLEMS OF WATER RATES 251 fixing the dangers of conflagration. The number of streams which it is conceded * need to be available at once runs from 3 in a 1000-population town to 12 for 10,000 people, 15 for 20,000 people and in proportion up to 30 for 100,000 population. In the congested districts two-thirds of these streams should be concentrated on any square or on each important hazard with a minimum of 10 streams; the hose lengths should not be over 250 feet. Six-inch pipe mains are commonly held to be the safe minimum for good fire pressure whereas 4-inch often would do for ordinary supplies. Charges for Fire Protection. It is only in very recent years that intelligent study has been made of the proper charges for the fire-protection service afforded a community by its water- works for what commonly is called " hydrant rental." It is now seen that in a large number of cases an appreciable injustice has been done on the one hand to the water company or munici- pal department, or on the other hand to the customers as con- trasted with the taxpayers. Where a community has long paid, say, $10 a year per hydrant, it is loath to pay $50 when it real- izes that comparatively little water is drawn and few hydrants are opened at all. Some large measure of responsibility must be assumed by the utility managers for the widespread failure of the public to realize that there is a considerable investment in hydrants and hydrant connections, and in larger mains, reser- voirs and pumps, which would not have been made if fire protec- tion had not been considered. Reduced to its fundamental terms the way is simple to find out what charges ought to be made for fire-protection service, or " hydrant rental " as it is inadequately termed. It is as- sumed of course that the company is to secure a return covering the actual cost of rendering the fire service plus a reasonable return on the investment required for this alone. The question of super-profits to induce maximum economy and superior service usually disappears as most water-utility managers real- ize that fire protection acts, to insure the uninterrupted con- tinuance of each customer's service and payments and is to be encouraged in every way. The community should pay a reason- * J. R. Freeman, "Arrangement of Hydrants and Pipes For Protection of a City Against Fire," Journal of the New England Water-Works Association, Vol. 7. 252 PUBLIC UTILITY RATES able return (including retirance) on the difference in the value of the plant as it exists and as it would be if no fire-protection serv- ice were given; the community should also pay the actual cost of maintaining the hydrants, hydrant connections, extra pumps and reservoirs and in most cases the excess cost of maintaining the mains and supply lines over what would be required for the domestic system alone. The actual determination of the extra investment in the several parts of any specific water-works is properly the work of an engineer and is to a certain extent a matter of judgment as well as of computation. The allocation of maintenance costs is a matter of proper accounting and scrutiny of records. Each case should be studied by itself, but there are various comparisons which may be made to afford a general check on the reasonableness of the results obtained. The Delusions of " Hydrant Rentals." Not only is the use of the term " hydrant rentals " unfortunate in its inadequate public impression of what is back of water-works fire protection, but also the term has no logical or consistent relation in differ- ent localities. That is to say, the cost of fire protection divided by the number of hydrants is not necessarily the same in two places of the same size. It depends on the character of the city (residential, industrial, etc.), the configuration of the town- site (long and narrow, circular, square, etc.), the extent of con- gestion in business and population, the peculiarities of business and of building construction, the history of the water-works, and other factors. The costs of fire protection, figured on the hydrant basis are of service for comparison only when the effect of such matters is taken into account. The use of hydrant-rental figures, in spite of their uncertain basis, is largely seen in statements of fire-protection charges. The figures range all the way from $10 per year to $100 with the majority running between $30 and $60 (see accompanying tabulation of rates from a study of 315 towns and cities, printed in the Journal of The American Water- Works Association, June, 1914). The results of rate investigations in a few cities give rise to the expectation that in few cases will the actual annual cost per hydrant fall below $40. This is confirmed by a study of the number of hydrants in American cities, as reported by the U. S. Bureau of the Census, in connection with the experience PROBLEMS OF WATER RATES 253 of per capita cost of fire protection in cities of various classes * as follows: Population Group Aggregate Population Number of Hydrants Cost of Fire Protection per Capita Annual Cost per Hydrant Above 300,000 12,375,463 133,068 $0.60 $56 100,000-300,000 50,000-100,000 3,285,351 2,364,110 55,053 40,865 0.75 1.00 42 58 30,000- 50.000 1,543,286 34,700 1.25 55 Lump-sum Charge for Fire Protection. Since the proper amount to be received by a water company or department from any community depends so much on local conditions an equi- table lump-sum charge may be fixed in each case which was reasonable on a given date. To this from year to year should equitably be added the fixed charges and operating expenses of new hydrants, new hydrant connections and excess size of new mains. In places where the annual determination of these ad- ditions by engineering methods demands unwarranted expense, an approximate substitute should be figured out beforehand, based on number of new hydrants, miles of new line or even increase in population. Effect of Fire Service on Water-works Costs. It has been one of the classic statements of water-works men that half of the cost of the entire equipment was made necessary for fire protection. Experience of many engineers shows that this is more or less true in very many cases, and is probably based on conditions which prevail in cities of 25,000 to 50,000 population. But that figure is not necessarily true in any one city, so in- fluential are the special local conditions. It has been stated by well-known experts f that the cost of that part of the physi- cal water-works plant required for fire protection over domestic and commercial service probably ranges from 10 to 20% in the largest cities, and 20 to 30% in cities of about 100,000 population, to 60 or 80% for places of 5000 or less. Quantity of Water to be Provided for Fire Service. There have been several investigations of the amount of water which * "Reasonable Return For Public Fire Hydrant Service," by Metcalf, Kuichling and Hawley, Proceedings of the American Water- Works Associ- ation, 1911. t Metcalf, Kuichling and Hawley; 1911 Proceedings, American Water- Works Association, p. 66. 254 PUBLIC UTILITY RATES should be provided for in the design of mains and supply lines to insure adequate fire protection. One of the earliest is that of J. R. Freeman;* this was followed by one by Emil Kuich- ling,f one by Allen Hazen J and one by Metcalf, Kuichling and Hawley, making use of reports of the National Board of Fire Underwriters for data of requirements in 143 cities. The re- 60 60 100 150 _ 200 50 X= Population in Thousands WATER REQUIREMENTS AND FIRE-PROTECTION COSTS suits obtained by all these men are in fair agreement and are sufficiently represented by the simple Kuichling curve given in the accompanying diagram (which curve has the equation Y = ~Vx) . The maximum flow due to domestic, industrial and public consumption, without fire protection, is also plotted for two conditions one on the assumption that the fluctuations of domestic, industrial and public services require a carrying capacity of double the average daily rate, and the other on the assumption that a capacity of 1? times the average flow is required. These curves have the equations respectively of Y = 0.064 X$ and Y = 0.048 X*. In both cases the consumption * Journal, New England Water-Works Assoc., Vol. 7, p. 49 (1892). t Transactions, American Society of Civil Engineers, Vol. 38, p. 15. t "American Civil Engineers Poqketbook," 1911, p. 947. "Determination of Reasonable Return For Public Fire Hydrant Serv- ice," Proceedings American Water- Works Assoc., 1911, p. 67. PROBLEMS OF WATER RATES 255 is computed on the basis of 50 gallons per capita per day for a place of 100,000 population, 80 gallons for a place of 100,000 and 100 gallons for one of 300,000. The maximum draft then to be provided for is the sum of the domestic and fire-protection demands. The fact should be taken into account that the enlargement of plant for fire service helps the domestic service requirements except in brief times of emergency, when diminished domestic service becomes of second- ary importance. This is done by adding to the fire-protection requirements the domestic needs based on a maximum of 1| times the average instead of the larger figures which would otherwise be expected. The curve of total maximum, quantity to be provided is plotted on the same diagram (and is repre- sented by the expression VX + 0.048 X$). The ratio of the difference in capacity between the systems with and without fire protection to the capacity of the system with fire protection is then VX + 0.48 X* - 0.064 X* = VX - 0.016 X VX + 0.48 X% ~ VX + 0.048 X* ' In the case of mains this ranges from 50-80% for small cities to 10-20% for the largest. The same studies obviously are to be applied to the pumping and various reservoir services. These engineers after reviewing their experience and that of others as to division of cost of water-works plants among supply, pumping, reservoir, distribution, filter, real estate and rights, organization and interest during construction conclude that the portion of total cost of water-works necessitated by fire service is as shown in the accompanying curve for the equation 147 z =: ~x i ~ 12>1 * These curves are to be regarded as showing the experience of these men and are of value in indicating only in a very genera? way what may be expected in specific cases. Per Capita Cost of Fire Protection. Messrs. Metcalf , Kuichling and Hawley, in the paper referred to, have used the figures already shown to estimate the probable per capita cost of fire-protection service which it is reasonable to expect may prevail in most ordinary cases. Their results are best shown in the accompanying table, which is self-explanatory. 256 PUBLIC UTILITY RATES ESTIMATED APPROXIMATE ANNUAL PER CAPITA COST OF WATER-WORKS FIRE-PROTECTION SERVICE Towns of 5000 Pop. Cities of 50,000 Pop. Largest Cities Per capita value of works * $20 $30 $35 Percentage charged to fire service. . 77 32 15 Per capita value charged to fire service. . . Annual operation and maintenance charges t $15.40 0.30 $9.60 0.28 $5.25 0.21 Annual retirance and interest (8%) on value charged to fire service 1.23 0.77 0.42 Total annual charges per capita 1.53 1.05 0.63 Annual charges for fire service in per cent of value of water-works 7.6 3.5 1.8 * Value here indicates reproduction cost, including engineering, contingencies, organization, interest during construction, and business development. t For the towns of 5000 population, 10% of annual gross income which is 15% of total value or 1.5%; for cities of 50,000 population, 7.5% of gross income which is 12.5% of total value or 1.0%; for largest cities, 6% of 10% or 0.6%. Any such a table is to be used with great caution and in a specific case has little weight against a careful determination by a competent engineer. The most it should be taken to show is that the annual cost per capita of water-works fire-protection varies in round numbers from $0.40 to $1.75 and the total annual cost to the community may be expected to be, say from 1.5% to 10% of the value of the entire water-works. What is the Value of Fire-protection Service. At the outset these notes on rates for fire-protection service were predicated on the cost-of-service idea. In some cases it may be worth while to find out what the value-of-service idea discloses, for probably there is something grossly wrong with the water- works where the cost of the fire protection is above the value. The reports of the National Board of Fire Underwriters show insurance rates varying from 2.46% in Nevada to 0.53% in the District of Columbia. Probably at least half of this difference is due to the protection afforded by adequate water supplies - and the other half perhaps to organized fire-fighting forces and fire-resistant construction. If all the combustible property in a community with excellent water-works protection were insured (and here is a measure of the cost of fire risk) according to the above figures about 0.95% of the insured value would represent the total annual saving in cost of insurance over no adequate fire protection. This same amount may be directly compared PROBLEMS OF WATER RATES 257 with the aggregate annual payment made by the community to the water department or company. Thus in New York State about $6,000,000,000 of fire risks are underwritten and this is probably close to the total value of combustible property. The average rate for the State is 0.82%, which gives a saving of 1.65% over Nevada 0.82% being probably due to good water-works fire protection. The 0.82% of $6,000,000,000 is $49,200,000; and for a population 9,000,000 represents $5.50 per capita. This is to be compared with about $1.00 per capita cost of water-works fire protection. Charges for Private Fire Protection. The charges which it is proper for a water company or department to make against a customer for private hydrants or hose or sprinkler connections remains one of the most troublesome problems of water-works rate making. In most communities the number of private fire- protection connections is comparatively small and the amount of water drawn (for legitimate purposes) will always be negligible. In most cases it will be advisable to put on a detector meter to prevent surreptitious drafts or to show up mistaken connec- tions. Some utility men have urged that rates for this service should be based on what it would cost the private consumer to fur- nish equivalent protection himself. Others advocate a charge based on the saving in fire-insurance premiums that can be traced to the fire-protection facilities connected to the water-works system. But neither of these schemes can be universally recom- mended for in the great majority of cases such a procedure is a most undesirable resort to " all the traffic will stand " without regard to the cost-of-service principle which, especially in such a public benefit as fire protection, is a proper basis. Where the private fire-service connections are numerous and large enough to increase the size of mains over requirements for ordinary domestic or manufacturing supply and street-hydrant pressure, they may well be studied as a distinct superimposed fire-protection system and the proper charges may be figured as already noted in connection with the municipal street-hydrant service. Once a gross lump sum is determined it can be dis- tributed according to number and size of connections, etc. In many places it may prove to be equitable to consider the public and private fire-protection facilities consolidated into a 258 PUBLIC UTILITY RATES single system for finding the extra plant required prior to deter- mining a gross fire-protection charge. The division of this charge between the municipality and the private group also can be fairly approached through some basis of number and size of connections. The further distribution of the gross sum applicable to the private group can similarly be apportioned; in some cases it may appear more logical to apportion this gross sum according to the importance of the private connection - measured perhaps by number of hose lines or number of sprinkler heads connected, though these ought to be reflected in the size of the fire-service connection. If it should be regarded, as it may properly be in many cases, that no charge should be made against the private fire protection for any part of the largest mains required to satisfy the public fire department (the argument being that sprinklers, etc., are more effective fire protection than hose lines from public hydrants and materially lighten the fire department's burdens) then the fixed charges that can be assessed are only those on the extension from existing mains, the safety shut-off valves, detector meters, etc. All the operating expenses that can be fairly levied then cover inspection, maintenance, meter reading and related items. Private fire protection figured on such a basis will be relatively very inexpensive. Distributing Costs of Comprehensive System. Obviously when a large water-supply system supplies several communities in a given district, as does the Boston Metropolitan Water Board, a pressing problem arises as to the fair division of the fixed and operating charges. What was done by this board is of inter- est in this connection. It was first provided that in general the assessment on a town should be in proportion to its tax valuation and its population; water consumption was later sub- stituted for population. Boston's share was laid in proportion only to the ratio of its valuation to the total valuation of the district, towns not applying for water or obtaining a supply from their own sources being entered at their full valuation. The remaining costs were apportioned among the various communi- ties f according to valuation and ^ according to consumption. It has been suggested * that a water company would be * J. W. Alvord, Journal of the Am. Water- Works Assoc., 1914, Vol. 1, p. 95. PROBLEMS OF WATER RATES 259 stimulated to keep up a proper fire-protection equipment if the lump sum found equitable, as already noted, should be ap- portioned over the company's mains as an annual charge pe,r "inch-foot" of main feet of length times inches in diameter (plus a nominal sum per hydrant). This has the advantage also of providing easy adjustment of annual compensation where the system is still extending. Probably for a rapidly growing plant it would be advisable to revise the inch-foot charge about once in five years. Cost Accounting for Water-works. The need of more complete regulation of the water-works of the country, irrespec- tive of their having private or public ownership, is well shown by the lack of comparable data on operating costs around the country, and in the lack of a generally accepted or generally imposed uniform system of accounts such as are used by prac- tically all other utilities. Much work has been done inside the water-works industry, and the U. S. Census Bureau in 1908 outlined a desirable system based on the" work of water-works associations, etc.* There is little or no difficulty in assembling from such a sys- tem of accounts all the various information needed in computing the cost of service for the various classes of customers in accord- ance with the general scheme previously set forth. Inability to secure the necessary information can be traced generally to lack of that proper system of service and financial accounts which enables the managers to comprehend what their works are actually doing. Assuming, however, that the account books are ample for such studies as may be needed in rate studies, only a few hints as to handling specific items are necessary. For instance, it should be known how much water is supplied to the municipality itself, and what revenues are paid over to the water-works definitely for the water supplied and the fire protection afforded. It may be necessary also to know how much water is furnished free to charitable institutions, and how much is required inside the water-works for purification and other operating processes. All costs met out of the general city treasury must be given in * M. N. Baker, "Appendix B, Uniform Accounts and Reports of Water- Supply Systems"; Special Report of U. S. Census Bureau of Statistics of Cities of over 30,000 Population, 1908. 260 PUBLIC UTILITY RATES order to allow intelligent rate study, but it is probably imprac- tical to try to cover such overhead items as allowances for service, time and office expenses of a mayor, councilmen and their subordinates. Office facilities in a public building, etc., ought properly to be taken account of even though it involves no cash rental. Where the city comptroller, or equivalent offi- cer, devotes an appreciable part of his time to the water-works department, that should be covered both for him and his office force. The same applies to the city engineers and bacteriol- ogists if they assist the works superintendent. Special attention will often be required to see that cost of repairs and cost of renewals are fairly differentiated. The mat- ter of depreciation is also apt to be troublesome. (U. S. Bureau of Census used 10 years' life for horses, carriages, autos, labora- tory fixtures, meters; 15 years for office furniture and general equipment; 20 years for boilers, steam lines, filter apparatus; 25 years for pumping machinery; 50 years for masonry, cribs, iron water mains, hydrants, standpipes and buildings; 100 years for aqueducts, reservoirs, tunnels; 50 years for a system as a whole.) Whether taxes are to be included for a municipal plant is a debated point to be decided as a local issue; in any event, taxes are seldom entirely escaped for a municipality may pay taxes in- directly to some higher civil division on water-works bonds, etc. Preventing Water Waste. Before 'meters were as much used as now, the most extravagant claims were made about the reduc- tion of water used in cities through prevention of waste when customers had to pay for it. This was a pretty theory but after 20 years of meter use it was found * that the consumption in a large number of important cities had not been checked. The high per capita use of water is in most places affected by other uses than that of immediate personal consumption or domestic use, and, in all of these, great chances for waste exist that are not caught by ordinary customers' meters. These other services are (1) for fires, street flushing, fountains, public schools, and various municipal consumption; (2) leakage from mains and service pipes, and seepage from storage reservoirs; (3) for manufacturing plants. Moreover, it is now realized that * "New Facts on Effect of Meters on Consumption of Water," by W. S. Johnson, New England Water- Works Association, March, 1907; Engineering News, March 28, 1907. PROBLEMS OF WATER RATES 261 the small steady leaks in ordinary domestic plumbing are, more often than not, just small enough so that the meter is not oper- ated by that flow. It is now recognized that where the water supply is not of the best, as regards color or taste, the users are sure to let their taps run in hope that the trouble is local to certain service or house pipes. Moreover, the trend in residences is to the mul- tiplication of outlets more ' bath rooms, hot-water systems, lavatories, toilets, laundry tubs, quick-opening faucets, etc., even in modest homes. It is a common experience in all utility service that the more convenient the facilities for service the greater the use, though of course in this case it is not directly in proportion to the increase in number of outlets. Various cities show the influence of this. Thus Richmond, Va., had a record of about 170 gallons per capita per day in 1890 and as the per cent of meters rose from zero to 25 in 1898 the per capita daily consumption dropped to 118 gallons. But the movement did not continue steadily; in 1905 it had climbed back to 150 gal- lons though the percentage of metered services was 45. Attle- boro, Mass., in 1894 had a record of 32 gallons per capita per day with 60% of services metered; in 1906 it ran 48 gallons and 1-00% metered. The truth evidently is that the extreme waste will be reduced if there is a meter on every outlet from which water can be drawn, except hydrants, and if excessive and unreasonable drafts by non- revenue consumers, like schools, hospitals, public buildings, etc., are persistently checked. In such ways the per capita daily con- sumption probably can usually be brought down from 300-700 gallons (found in. Burlington, Vt., with 680 gallons and 87^% of taps metered; Portland, Ore., with 325 gallons and 24% of taps metered; and Sacramento, Calif., with 318 gallons and 100% of taps metered, as may be seen in the accompanying tables of rates and service in American cities) to 50-150 gallons (found typically in Des Moines, Iowa, with its 62 gallons and 97% of taps metered; in Winthrop, Mass., with 70 gallons and 100% metered; in Battle Creek, Mich., with 80 gallons and 100% metered; in Aurora, 111., with 77 gallons and 100% metered; and Geneva, N. Y., with 53 gallons and 100% metered). But the reduction of consumption which may be possible to below 100 gallons per capita per day evidently does not directly result from the mere presence of meters 262 PUBLIC UTILITY RATES and meter rates; for Denison, Tex., typically shows 77 gallons with 87% of taps metered; Passaic, N. L, shows 98 gallons for 50% metered; and Burlington, Iowa, shows 90 gallons for only 5% metered. The great use of meters then remains as a means of selling water service more nearly in accordance with the cost of facili- ties furnished, and of eliminating extreme waste. A large number of metered-service rates throughout the country are made in a simple stepped schedule like the follow- ing example: For to 2,000 cu. ft. per quarter $2. 20 per 1000 cu. ft. 2,000 to 10,000 " " 1.40 " 1000 " 10,000 to 100,000 " " 0.40 " 1000 " 100,000 to 200,000 " " 0.20 " 1000 " Over 200,000 " " 0.10 " 1000 " Useful efforts have been made to make the steps smaller so as to eliminate the waste of water induced by users who natur- ally fall close to a dividing line and who by wasting a little can get the water at a lower rate and a lower total bill than if they used less water. Thus: For Oto 1,000 cu. ft. per quarter $2. 20 per 1000 1,000 to 2,000 11 It 2. 10 u 1000 2,000 to 3,000 11 11 2. 00 11 1000 3,000 to 4,000 11 l( 1 90 It 1000 4,000 to 5,000 fl 11 1. 80 (1 1000 5,000 to 7,000 11 (I 1 60 II 1000 7,000 to 10,000 it <{ 1 .40 II 1000 10,000 to 14,000 11 11 1 20 11 1000 14,000 to 19,000 II II 1 00 11 1000 19,000 to 29,000 11 11 80 n 1000 29,000 to 49,000 It II 60 It 1000 49,000 to 99,000 11 ft 40 1C 1000 99,000 to 199,000 It It 20 11 1000 Over 199,000 11 (I .10 It 1000 This reduces the trouble by reducing the inducement to waste. A still better plan is seen in such a schedule as follows: First 1,000 cu. ft. per quarter $2. 20 per 1000 cu. ft. Second 1,000 " " 2.10 " 1000 " Third 1,000 " " 2.00 " 1000 " Fourth 1,000 " " 1.90 " 1000 " Fifth 1,000 " " 1.80 " 1000 i' PROBLEMS OF WATER RATES 263 Next 2,000 cu. ft. per quarter $1 .60 per 1000 cu. ft 1.40 1000 1.20 1000 1.00 1000 0.80 1000 0.60 1000 0.40 1000 0.20 1000 0.10 1000 3,000 4,000 5,000 10,000 20,000 50,000 100,000 100,000 The objection to such a schedule has been the extra labor and time required to compute the bill. But short cuts are open making the calculation about as easy and inexpensive as with any schedule. For instance a table can be made up in an hour or so which the billing clerks -can enter at any point and com- plete the calculation in a moment. Such a table arranged for the schedule just given might be as follows: For less than 1000 cu. ft. reading, multiply by $2.20. For over 1000; multiply excess by $2.10 and add $2.20. For over 2000; multiply excess by $2.00 and add $4.30. For over 3000; multiply excess by $1.90 and add $6.30. For over 4000; multiply excess by $1.80 and add $8.20. For over 5000; multiply excess by $1.60 and add $10.00. For over 7000; multiply excess by $1.40 and add $11.60. Etc. Such a rate schedule, however, is not the most logical or satis- factory that can be derived, as appears later. Minimum Charges for Water. Minimum or service charges have long been recognized to be as equitable in water-works practice as in other utilities. Because of custom, the minimum charge is generally found easier to impose on water customers than the service charge. There has not been as much study of classifying water customers as there has been in electricity supply so that some hardships of overwide averaging are often seen. Substantial justice can be dealt to all if only closer at- tention is paid to classification such as perhaps may be made by size of service pipe or size of meter. The annual service charge then is made up of about 10% of the investment in the average cost of the service connection and meter (assuming that the company or department installs them), plus the average cost of metering, bookkeeping and billing say $1.00 to $1.50- plus the average cost of unregistered water. The first and third items vary for each class more than the second, both the invest- 264 PUBLIC UTILITY RATES ment and the unregistered flow through the meter increasing with the size of connection. The expense of unregistered flow could be computed at the lowest figure charged for water since it is an all-day leakage and does not appreciably affect peak drafts; this may be expected to run from $2 to $200 per year per customer with water at a minimum of 10j per 1000 gallons. Unaccounted water has been studied by the New England Water- Works Association, through its Meter Committee. They were able to get sufficient data on 29 systems and in these it averaged 27% of the total output. While it was not found possible to separate the unaccounted amounts into (1) leakage from mains, (2) leakage from services, (3) under-registration of meters, (4) unmetered services like street and sewer flushing, these were recognized as the causes of loss. It was recommended that service charge for meters should be based in a general way upon their carrying capacity, (1) because of the interest on the meter and service pipe, and (2) because of the leakage past the meter. Both these expenses are always present and dependent on the size of meter. The responsibility for leakage past the meters was loaded by the New England Asso- ciation Committee (Allen Hazen, chairman) upon the several sizes, as follows, after various studies of the delivering capacity and leakage of meters in service, and the possible distribution of un- accounted losses among services: Size of Meter, Inches Relative Capacity Charge for Leakage 1 1.0 $ 2.00 I 1.7. 3.40 1 3.0 6.00 1* 6.0 12.00 2 10.0 20.00 3 20.0 40.00 4 30.0 60.00 6 60.0 120.00 When it is advisable to use a minimum rate instead of a bald service charge, the conversion is simple. Some measurement or estimate must first be made of the average quantity most apt to be drawn by the minimum-rate customers of the given classes. The charge for that water is to be made, excluding the expense items entering the service charge, and then added to the service PROBLEMS OF WATER RATES 265 charge. This will fix a minimum charge below which a cus- tomer's bill should not go. It can be so stated, or it can be divided by the average draft of minimum-charge customers for a given class and that rate quoted as the first step of the schedule. The subsequent steps of the schedule will be materi- ally less of course since they are not burdened with the serv- ice-expense items. Proposed Standard Rate Form. After several years of dis- cussion and committee reports, the New England Water- Works Association in November, 1916, adopted a standard form of rate for metered service comprising (1) a fixed charge depending on the size of the meter and (2) a varying charge proportional to the meter reading and customer's class. The committee's proposed form was essentially as follows : For each service supplied by a ...... inch meter, there shall be a charge for the service and meter per annum (or per quarter, or per month) of $ ........... In addition thereto, for all water drawn there shall be charged: For the first 300,000 gallons of water per annum (or the first 75,000 gallons per quarter, or the first 25,000 gallons per month, or the first 10,000 cubic feet per quarter, or the first 3300 cubic feet per month) the f cents per 1000 gallons (or Domestic Rate of ............ { c ^ ^ m mb[c ^ For water in excess of 300,000 gallons (or the substitute figures quoted) and under 3,000,000 gallons (or under 10 times the substitute figures (cents per 1000 gallons (or quoted), the /fifarme&ofe Rate of ........... j ^ m cubic For water in excess of 3,000,000 gallons per year (or in excess of 10 times the substitute figures quoted), the , , , . D , . f cents per 1000 gallons (or Manufacturing Rate of .............. \ & \ I cents per 100 cubic feet). At the same time the Association accepted, with this standard, a suggestion (adopted only as such) that the fixed or service charge might be made up of three factors: (1) 10% of the cost of the meter and service pipe, where those were owned by the company; (2) $1 per year for reading, billing and collecting; and (3) from $2 to $120 per year for unregistered water leaking through the meter depending on the size of the meter, as already noted. Had the Association generalized this mere suggestion, it might have become an integral part of the proposed standard rate form. 266 PUBLIC UTILITY RATES A broader statement of the service charge might have been: (1) X% of the cost of meter and service pipe, (2) Y% of the cost of equipment needed to carry the peak load demand of customers, (3) $A per year for reading, billing and collecting, and (4) from $J5 to $C per year for water passed unregistered through the 'meter. The actual amounts, X, Y, A, B and C, as well as the unit price for water registered on the meter, would be determined from the accounts of the company or department. Y would be highly im- portant only for the service type of water-works, as contrasted with the product-storing type whose peak-load equipment con- sists mainly of a possible addition to the diameter of mains and even this addition may be considered as absorbed by the provisions for fire protection. Such a rate form carried to its logical development in many cases automatically clears away much of the worry about rates to manufacturers. If one of these industrial customers arranges not to draw during peak-load hours, then the Y factor disappears and an attractive rate can be made to him that still will render a re- spectable profit to the water-works or when profit is not sought, make a more continuous use of plant and increase the spread of some of the fixed charges. If a manufacturer's load cannot be secured except at a true loss, it would be better to let him develop his independent supply. The development of the two-part water rate, as outlined with X, Y, A, B and C factors, materially reduces the differences between the domestic-, intermediate- and manu- facturing-quantity charges, and often even make the three dis- tinctions useless and unnecessary. PROBLEMS OF WATER RATES 267 M B O 0001 'aopdomeuoo CO O S 3 : 00 t~- l-H^ eg s" CO " !!- 15 ~ ! 111 o_2 a . eniq 30IAJ3g OS a a a a = O O 3 c5 1 o O 11 o o 1 "5 t- o 111 * JIOAJ9S8^J jo 'adidpaB^g SUIBJ\[ in dum,j da SS 3 3 PL.PH 02 a E 3 CH < a 1 I Pump and Grav. Res. Pump, M. o ft i g O o. > > gg( OO o. .&4 B > S > Sg O O i o is made. It s same time; tuse new cons O5 of I U *j ON[ 'Xd n jo aojnog a . w6 JS "3 S "3 03 ^ 4 ? ' - t? -A i 0003 H ' aic cases beet M *Tsr' | |So i il 1 1 1 10 35 3 * a ^ C."** S 3 .J ||J.3 S 'FO OOOT J3d Mtl9^) "UTW-" XHIiff *91'BTT J849T\I ^3 w 3 i 1 1 i S O 1 JS 00 O S f J i! tf saa^ajv Q CO O Cc o. o 1 M 8 & 8 ; 8. : CO * CO g g .s. COIM 8 8 CO CNI 8 ifill 3 9snojj ^ raoaa 9 8 8 : oo : . 8 8 g 88 5"5 8 S '* -r 8 o S S 0*3 - o o s_s I jo (BdiDiunj^j; a! d 1 6 d a s 8 d a . a os a 1 a d|Jt| Id 32 OI6T Is 2 t- o S3 S" IM * : 5- 00 I || co iO Ci S 2 " o CO 00_ 06" M js o ; t Cents per y< 268 PUBLIC UTILITY RATES ! B OOOOI 'nondmnsnoQ A"(IBQ .ini.'.M \\- 8 2 r 00 <- rt s a a ; aaaaasa a a aaa a a a UIBJ^'OI duin ^ > > 9 .^ a a n p p a as S S8 jad ' SS SSS 8 S 8 Aq paniB^aiB s . .s . , C3 p O s CO *-H Co rtrtt^CO^ OJto COi-H aad anuaAajj : S S 2 ; S -O MO 0001 - RE i^ com co oo h~ 5 o (MO rH O 8.8 . 8-8 ...88 8 R CO *# 8-8 . esnojj uiooa 9 8 : 8- : 8 S : 8 B CO CO >O 1C ; s. s CO O 8:8 d d 3 3 O S S daaaaa 01 61 8 If s 2 i 8 13 -S Jl .2 .5 a! O Od P i-i - a 8 "3 la PROBLEMS OF WATER RATES 269 '1 B O 0001 'nopdumsuoQ -*to coo OS CMCM-H CO CM TJ* CM^ i < i O CO O t~- O O CM T^CM C* m * Ui *-* ** CO i-Ti-r : 58 eui'j eatAjag a aaa a a aaaaaa a aa a a aaa 33 3 33 s ",; S2 0202 OQ JO A^lAUIQ 0,0.0. o. a, PH PH 0,0, a, c. a, o, o, Q, c. , : SEEESS E ^ _ 333333 3 S PHM OH pMPn D SSS 3 " vj ^? ^? 5 3 HH ss sss^^s ^ ss : 11 S ccS 58 S $ |g s 8| S O^ [>J 05 jad ' g g 3 gg aa aaaasio^o * oSfl 1-1 t- CO CO t-OlTtl t- cncoco 1-1 ^ co t co coc OO OCO r"cO 83 : : g : 8 ' M B O 0001 i i& O OOCM * CM S i-H rt CM "DO MiO S.IOJO]\[ CO O-1-* ^i or-oo -*o coco CO CM kO O 1O"-I * 5 00 in CM ~H co" CM'CM t t-- o oco CM^Co" CO* o"co' PUB spnwjg .2 . g g CM CO H g .8 : |8 : CM -i-l -CM g . OOO O oot- o oo oooooo 88 g : 8 CMCM CO -CO CM COCMCM (M CM gg sggggg COCO lOCOCOCOCOlO o o o >.- CM CM CM CM esnoji raooa 9 g 8 CM CO ss gsgggg . s. : CO OO IO C 3 d s a aa alaall d 3 as d a d s 3 as s OT6I >i- CM CM * 00 i-l CM .2 o ns P., si iis ndianaCon Evansvill P 111 1 1 ws s rt ffi S b~ Q- O '-2 E* gg .S'ggSgE i - > M O B l| *1 fi : S a S "8 a is IK ,2,3 ki 2/ r o PUBLIC UTILITY RATES '1 B O 0001 'uoTidtnnsuoQ 8 s I S 1- S | S 8 i 8 B S S A"q panuisuj a a a : :d"S'Sca"S'Sd ani^ aoiAjag ooa ^a -^ -g^^a^^^ag Continued.) jtOAjasa'jj 'SUIBW 0$ duinj JO A^tABJQ 5 {it n i { n M { i } 1 4 o l c 1 !)O>J JO 5 ^. ^ ^ ^1 ^ fl ' fl ' ^ o >5 h' ^ a ' ^ - c >-"| ) - .. -t, 1 " 1 i i o i i jo aojnog ED 1 rt oi^^tuo^ny -|: :S*o wIS8$ oa>: .'oSS gsoooo-g fc c I !)Ut3JpA'jT jad 'a^By 1 i | i 1 1 1 Illllill 3 P s Xq pauTB^uiBj\[ ^UBJpAjJ lla ll lla I M s^nBjpXjj jo jaquin^i S j j S 1 | 3 i i 1 i i 1 : i ^UBJp^H SO <*<. .OO-OOIO'- O -I * * >OO'iO.^.^< .CO5M M J3 esnojj ... SSS-SSSSS.SSSS < 0S ;^t-,t- .0.0- * s B^JOyW Au^dUIOQ jo iBdiomnpj a .a a t a a a a a a a a a a a a ;- H OT6T s I 1 lSilii03lllSi S ' ' uop^ndod S? 1-1 -H QQ i a : J :::::;: g :::: ? jiiijjliliijjlijy PROBLEMS OF WATER RATES 271 M^O 0001 S CO fi S^ *IN ooo 00 |2 1 B 5 | 00 o 8 A*iiBrr aSujaAy OO O IN I IN (NIM 2 T 1 1-H ei ^* ** C9> " CO *"* A'q panB^su]" ourj aoiAjag d a EJ ?. 8 O 1 m aa al o O C fl J 1 d a a a a a i a s (5 a s jioAjasa^j 3 jo adidpuBjg s d a a PH' CO a as m 8 a a a 1 1 OD CO S 'suiBjv'o?dmn 5 P T3 d P 14 . d g| f a 33 MM d 1 3 4 M d S tH 03 h-l d d o 3 d & 1 D 3 a^B'jr jai^Tuudg H OllBtUOin\T H 1* TV 1 A P 1 a o 80 O .g &* o o ^ 8 : S ' c 1 1 s 1 a I g S i I ^UBJpXjJ \ aad 'a^B^j j JUBJpA'jJ ajBAUJ 8 6 1 1 o S a) 8 :| OO s c 8 | X 8 00 % c X S 8 q jfq pauiBiuiBj\[ 5 ijuBjpA'jj 1 J.S o"S i 3"S s .1" c3 d"S BOS 4J S C, +_, o ^ aS 5^ S2 rJ-" d, -^, %.- a -*-j 03 s *, -3^C J_s c; ' o > jo jaquin^ H 8 ^o (N 00 o rt 8 i 5 'I B D 0001 fd S s sjamo^snQ jo S s o (M CO IS oo as OO 00 o 1 1 1 s i 03 1 8 OO - sdB T jo jaquin NJ a 2 2 U) IN -H(N CO US 2 IN(N <0 *^ 04 '* - CO rt 1-1 . s q n x o 8 O o O iS Q 8 ; -% puB spuB^g 1 (N ~ ' o O .'* o 10 " CO-* CO ^HT* w JO ' CN CO coco sH t^ ^00 g CO | O CO I 1 * ^ 3 3 CO s CO o OIN -HN CD COIN CO ** i *~ s o O IMassachusett s (Cot New Bedford. 2 ~S c j Taunton 1 Winthrop - C C3 111 IAnn Arbor. . . Battle Creek. 1 Detroit IEscanaba. . . . Ishpeming 1 Jackson I Ludington. . . 1 Marquette. . . i d 1 Minnesota Duluth 1 CO 1 Stillwater 1 Virginia 272 PUBLIC UTILITY RATES "I B O 0001 uondmnsuoQ oToT c4-* c^Tod co" 6 63 63 d '4 6 3 S 6 66 6 jo '9didpaB^g 'saiBjfl a> duinj JO A^IABJQ ^ S oiw pL,di aQ( -.ii fl -f P S3 33 3 PL, PMPH pHPn (l^ OPnO d d d d d d d J sss^ess 3 3335333 Oi P4 P4 PLJ O PnPn PH 'Ajddng JO 93JtlOg - 8 8 S 8 8 8 O OO o Aq psuiB^ui S'S. SS.'S. S' ooo 3 i-HO T : : 8 : SS : : S : ~. : : : : : S : : |*O 0001 8*O aiju- 9TBH 1 r- cq ,J, i OI O CO 00 t--t T-H*-I OO CO "^ t--t T-H* iJ^ ci CC OJ COC O co IM -"-i ^9SO|Q oo cso cico 8 88 88 88 S 8 8 88 - -88 o to co ocJ t^ r~ -H CO co -H r- Ol Ol ^t CO^ fe O PROBLEMS OF WATER RATES 273 |o oooi 'uorjduinsuoQ 3 S 'M Co" O a a 8 a a g a S S 'S ' 3 a aaaa a a a aa s a a duinj , ss ODocW ,..* K* c. & a. ^S aas a SS fi ft PM CM JO 3 JJlltK< - - d o OO 'S.'S.S'S. O *-H T-H jad a nBjpA'H oijqnj OO OO oo COCO i CO MO OOOI C^?O TcM" A"q p9TIt?^SUT SUIT 90TAJ9g a a a Illllllll 11 1 II "g JtOAJ9S9^J S jo '9didpuB^g H 'eurejvaf duinj g JO A^tABJQ , a 3 PH a 3 PH S PH PH PnS O2 PH 02 S 02 PH aaalatcias la ^ t 333333>-33 33 B ^S3 PH PH PH PnPn PnOPHPM PH PH O Ofl, JO P9-JB9JJ, H i fl ' fl ' d S3 H' EH EH FH 5 ^ ' P PP [_. 0? P 55 jo 9oanog 1 1 1 3 l mcl> tn ' n *'CJcD( CO Q & ^ SS^-^-*t^fl>> S> > "^ ""! 1 s s H M a s s s s s e-i of n 1 8||8|88S || cis 2cO ^uuipA'jj jgd 5 '9^tf}J ^U^jp O ~^J3. WJUAIJJ S' : o * 1 l5od2^ SSgg ;_ pc4^pE^fepL4 ^^ C^ O ^ J2J S ^HTJJpA'jJ 3 a 1 c3 .t3 .S O c3 3 "'"' cS^cSGJcS c3c3 .^3^ .i^^JcS^ EJ i CO OO T-HCOOi- COCi O COCO *O *^ Ol t^- Cfl Tt* i-H !> O iQ Ol g i o o : ::^:::i: :: : K '^nBjpA"jj oiiqn j 03 8 s ; r :.: ti ::::.: :: : g ::r M ::::: :: :^^ 'I B O 0001 Jd 00 1 i to co S co'oo 2 : oo 2 S 7 1-1 i-H rt ' CM to sja>9H o c? i CM OO CO O to O COtO toto CM CO 1 a rt ^ CM CM i-H TH S 6I9UIO?SnQ JO SdB T s i 1 1 11111 II 5 S '1 j jo jequm^ CO CM O CO 00 CMCM COi-HMlOO i-HO -- ^OOCOO O- -OCMCO OCO O, iCOO fn fa uiooy 9 < ^ b-^i . -*-co to jo rBdiomnjq; o a d 1 d c d d d d d d q fl a Pfl ^^j3oSS3^3 PS S F3^ OT6T 5! OO C<|W5iOC
  • J C^ Ci O < noT^ndoj S p 00 s SCO i-t COCO 1OCOOOQ ^H-^ t* _H* ^' CDOOi lrHC>|T-(i>-C'l *-HCO O ICi-H CO i-l CSJ OQ O 1 North Carolina Durham IATorM Dakota Grand Forks. ' S3 : ^ : : l^i : ^* "a I o33 -O * jSS . ""rt *** fe 'rt r 1 1 tl 1 "j 1 1 ii s ill i 1 1 1 if J S L 1 11-^' sf 11 1 S5 C a Is & P! iS tg 35 g | |q 1 O O O Q, PROBLEMS OF WATER RATES 275 TO oooi 1 g S CN ~. 00 00 (M O 2 8 1 XjTBQ 83t3J8Ay 1O ooj CO C-l co r- * CO 01 rt CO coco CO CN Xq panBisui d a '. c a c3 o III II II tn m a a o o 00 a 6 a ? s 1 1 1 1 S PH 02 1 1 S 1 sl 1 f r^ 'enrepj o^ duin jo pa^Baj j, 'X]ddng jo eojnog CD gig H H 1 ^ PH 02 f 3 J" fe S t3 > > w S S a t- if . PH *C - 02 pE a a 6 p jj 6 J. I p a^Byr jaiTrnudg oi^Buio^nv" fa 8 2fa fa 8 3 2 t- 00 o o o o CO CO CO (D "S Or"- 1 cqfa S CO fa ?: 5 ^u'BjpA'jj jad -XjJ aiEAUJ B 9 fa o & 8 fa - 8 8 o o 8 v ' ID f g fa O CB . m kO t" "Mfa o CO fa S s 5 ^SSST 11 If 3-dl aSal to ao a ~ _ a>."S ts o> "a <" qo Q ^Q 1^1 D. 5 "S.S oS 0) o3 Q ^Q fi. .4-) C3 S a r S'^cS' 5 H-f jo .KJQuinM' 00 (MOO (MCN (M CN a> o co" -^ 04 CO kO ~- >o * o CO *_ CO (N O iO TJ< S : i-iO coo 3 ^. ,SENTA1 nJ.U'BJp^TT (D a IO O = c !Z !Z i^t AH 3 8. ^ iO OO O 1 1 O 0) S3 a O OO 8 CO 0) a o I tf M B O OOOI -K*J S^UaQ 'UIJ^-'XBpJ O SI OS * S o 2 CO W3 CN 3l I 2 y. tt m jo jaquin^j CO o 3 s 1 1 00 O S g S i-l O IO (M CM" co O 't 4 CN" co o - sqnj. 8 88 8 . 8 -8 8 y. 3 puB spuBjg S CM-H i-l >O CO O coco * 0.10 *Q *** O CO * < 5t>. CO * S3JJOM A"UBdUIOQ a d 31 a d 3 3 d a e a s a a* a* 3 3 a* a* 3 3 a* a! d d a ^ pi OT6I S ego i i S CO CN i I 00 CO CO 2 CO CO C3 si 1 g < S S CO CD *o o> "5i-H 03 CO 3S C -H 1* CO CO CN CM S S ~ CO O3O eui'j aotAaag .a a s a . . 633 33 3 3 jioAjasay; jo 'adidpuB^g SUTBJ^'O^ dumj JO A^JAttlQ o u OO a a a d c e d fl III I PM O RA S Ajddng d & . J3 I P H i t L .s eg a s S .-.- ^ .& c tftf ^ tf u^ fe o a) J3 s s X O O _: 88 S S g^l S'l S aad . 1 3 . .s. t^ CD^-l Dl ^T J9d an S : : 88 8 S 'TO OOOT - g S CJ CS OO ^< CN t^. Oi IQ rH lOCO'* CO OO 1C CO O OS jo i I O ^ N CO i-l t^ C^ O Oi US CfcCOCO t~CO "8 -8 -8 pUB SpUBlg S. S 88 8 S -8 gS 8 88 S g So o o * 'Jl O CO ' Q> < 'SSg, is 3 IE 3 &CQ tf .g^ tH fc t^ c *O -c 5 = S? 15 111, II III !3oJ aa co,o CHAPTER XIV RATE PROBLEMS OF GAS UTILITIES Development and Magnitude of Gas Industry. While there had been some experimentation with distilling gases from coal (such as by Mincklers at Louvain in 1784, by Dundonald in England in 1785, and by Lebon in Paris in 1786) William Mur- dock is commonly accredited originator of the use of coal gas for illumination. He began his experiments at Redruth, Cornwall, England, in 1792. In 1797 he lighted his premises at Old Cum- mock, Ayrshire. About that time he became connected with the famous firm of engine builders, Boulton & Watt of Soho, Birmingham, England, and this firm built a large generator to make gas for lighting their works. There was a public display at Soho in 1802. News of the progress of Lebon's experiments at Paris stimulated the firm to push the invention. However it was due probably to the imagination and ingenuity of a con- temporary, F. A. Winsor, that the distribution of illuminating gas from a central station was then started. He appears to have been the original utility promoter, the prototype of the later generation. After many rebuffs, in 1812 a gas and coke company was incorporated in London; in 1813 Westminster Bridge was gas lighted. In 1813, one Samuel Clegg of the Boulton & Watt works was engaged as engineer for the pioneer concern, the Chartered Gas-Light and Coke Co. Clegg is credited as having invented the gas meter, pressure governor, cylindrical holder, and having first commercialized city gas lighting on a large scale. Before the second London gas company was chartered, Bal- timore in 1816 granted a charter to the first American com- pany, and here also the first American gas meters were made. Nevertheless, the real history of American gas lighting runs farther back than the Baltimore project. In 1806, one Daniel Melville, of Newport, R. I., lighted his premises with coal gas made in his own apparatus. In 1813 he secured a patent and built a plant for a cotton mill in Watertown, Mass. In 1822 277 278 PUBLIC UTILITY RATES Boston adopted the innovation; in 1823 a company was or- ganized in New York City, and in 1825 one in Brooklyn. Gas was introduced in New Orleans in 1835, in Philadelphia and Pittsburgh 1836, Louisville 1838, Cincinnati 1841, Albany 1845, and in other cities soon after. Gas was a great success in both house and street illumination as it was, up to 1878, unrivalled as a means of central-station lighting. The electric arc appeared in that year, but its use was restricted and not until after 1881 was there any menace of com- petition; then came the Edison incandescent electric lamp. While the great advantages of the electric lamp in safety, heat- ing effect, steadiness of illumination and easy control caused alarm among gas men, yet the history of both systems shows no permanent disaster. Gas lamps were improved and cheap- ened, and with reduced prices for gas came greater and greater uses for it as a special fuel, as in domestic cooking, in small industrial furnaces, etc. The natural fields in which gas and electricity showed their special advantages slowly defined them- selves and all idea of one completely outrivaling the other gradu- ally was lost by about 1900. Competition in lighting service has been less active, no doubt, as a result of the wide consoli- dation in the past 15 years of gas and electric concerns into single companies. Under present conditions, the major use for gas is for heating of one sort or. another, with lighting and power as minor services; the major uses for electricity are light and pow- er with heating quite minor. The two utilities fit well together and there has been apparent no serious public hardship in their consolidation. The last government census of the American gas industry (1914) shows 1183 gas utilities compared with about the same number in 1909. The larger number (427) produced carburetted water gas 90,017,725,000 cubic feet valued at $74,516,534. Straight coal gas was produced in 274 plants 10,509,946,000 cubic feet valued at $10,726,514. Oil gas was made in 85 works - roughly 8,300,000,000 cubic feet worth $7,500,000; and mixed coal, water and oil gas in 156 plants 86,281,339,000 cubic feet valued at $72,012,021. Finally 129 plants made acetylene (not including concerns distributing in containers), and 112 made gasoline gas. Of the last two, the outputs were 16,453,000 and 181,412,000 cubic feet valued at $319,316 and $254,718. RATE PROBLEMS OF GAS UTILITIES 279 The coke and byproducts disposed of aggregated $13,378,000 in value. There was an income of $20,815,800 from resale of purchased gas, and $10,977,774 from rental and sales of lamps and heating appliances. The coke retort ovens in 1914 made 61,364,375,000 cubic feet of gas, valued at $6,009,600 compared with 15,791,200,000 cubic feet in 1907 worth $2,609,200. Of this 1914 product, 28,351,774,000 cubic feet was sold to gas utilities for $8,883,016. From 1909 to 1914 the gas companies output increased by 35.1% in quantity and 26.3% in value. The quantity of coal gas decreased in this time by 47.4% and gasoline gas by 16.3%. Carburetted water gas increased 10.9% and mixed coal and water gas by 111.6%. All-oil gas increased 91.1%, due to growth of the industry on the Pacific coast. The 1914 income of these 1183 gas utilities (United States only) as reported by the census, was about $165,330,000. An estimate of the value of property then used in their service is $1,040,000,000. Current estimates of the status of the gas in- dustry for 1916 give 1350 plants in both United States and Canada, with an investment of $1,100,000,000, and an output of 190,000,000,000 cubic feet per year. Of all these companies only some 125 are municipal utilities, and of these three fourths are small concerns producing acetylene and gasoline vapor in places unattractive to private capital. The gas-utility business cannot be discussed without some mention of the natural-gas output. The studies of the U. S. Geological Survey showed that for 1914 the used output of wells was 591,887,000,000 cubic feet worth $94,115,5242% over the year previous. Some 34% was supplied directly to domestic consumers at an average of 28.04^ per 1000 cubic feet; 66% went to commercial customers at 9.56^. Gas Works Technology. Artificial gas fuel for domestic lighting and cooking and for industrial heating is manufactured at a central plant and distributed, at a pressure of a few ounces per square inch, in iron or steel pipes under street pavements, etc. The gas may be transmitted in long mains, or in feeders at higher pressures to reducing stations feeding the distributing mains. From the mains there branch off service lines to the private premises. A meter is interposed between the service line and the house piping. For lighting, the oldest and simplest 280 PUBLIC UTILITY RATES burners were simple slot orifices supporting an open flame. These have been largely supplanted now by the more eco- nomical Welsbach-type burners high-temperature Bunsen burners with a mantle of refractory rare oxides surrounding the flame. Gas stoves for domestic cooking are but adaptations of Bunsen-burner groups in which a complete and smokeless combustion is secured. Industrial gas-fired furnaces largely employ Bunsen burners though using large amounts of gas. Evidence points to the facts that (1) for lighting, the old open flame burners are steadily going out of use, (2) the greater part of the gas used today in American towns and cities is for heating appliances of one sort or another. A good example of this is afforded by a careful survey made by the gas company in Middletown, N. Y.* Summed up, the results showed that of 1139 consumers, 46% used gas only for cooking or heat; 65% used all their gas in a way for which calorific value controlled as in heating appliances and mantle burners; 6% used no lighting gas in mantles, and 5% used no gas for cooking and heating. The majority of open-flame burners in place were for occasional use such as in cellars, spare rooms, storehouses, etc., where the greater ruggedness and readiness of the simple open flame over- comes its lack of economy and where the candle-power of the flame is a very minor matter. In a large city there are undoubt- edly proportionately more open flame burners than in the smaller places but this is offset by the greater use of industrial heating appliances. It is probably true that 90% of the gas output of the country is used in Bunsen-type burners. When this situation is uni- versally recognized there will be a general discarding of the public requirements that the gas supply have a certain candle- power value (when burned at a specified rate in an open burner). For this will be substituted the requirement of heat units re- leased in the combustion of a given quantity. This will re- lieve gas works of the uneconomical burden of enriching their output with high illuminants, and tend toward the desirable end of cheaper gas. When gas is held at high pressures or low temperatures, or when forced through long lines at moderate * Reported by C. H. Stone, Proceedings of the American Gas Institute, 1913, p. 76. RATE PROBLEMS OF GAS UTILITIES 281 pressures and temperatures, the changes in candle-power are much greater than in calorific value. At the gas manufacturing plant any one or more of several processes may be found. The simplest and oldest consists in the destructive distillation of bituminous coal, making it yield up its volatile hydrocarbons as fixed gases and leaving a residue of solid carbon and ash coke. The coal is charged into re- torts, commonly large horizontal closed fireclay tubes projecting into or passing through a furnace burning coke, coal or even gas. In recent years inclined and vertical retorts have been introduced to treat the coal in larger quantities and at reduced cost of handling. The gas .as generated is drawn from the re- torts and passed through a closed water-loaded trough where it deposits much of its tar and oil vapor. It passes through tar extractors, vapor condensers, and a series of purifying and byproduct-recovery washers and scrubbers; finally it goes through a station meter and into the holders and mains. Some 4 to 6 cubic feet of gas can be made from a pound of coal. It consists typically of about 30-40% methane, 5-8% heavy hydrocarbons, 40-50% hydrogen, 2-15% carbon monoxide and 1-3% nitrogen. The byproducts of value are coke, tar oils and pitches, ammonia, and cyanides; their recovery is of importance to utility customers so far as it decreases the net cost of gas. A notable advance has been the use of by- product-recovery coke ovens in connection with the manu- facture of illuminating gas. In these, coke of a superior quality is made in great quantities, and the surplus gas from the dis- tillation is saved instead of burned in the open air as with the old beehive coke ovens. Often only gas secured in the early part of the coking period is rich enough to replace the older coal gas; gas from the last stages of the process then is of low calorific and illuminating value and it must be used solely as special fuel and not discharged into the mains. It is possible, however, to utilize all the gas from these ovens and this is done in some places.* * Use of coke-oven gas introduces a difficult problem in gas-rate making> for the return to be allowed on an industrial and non-utility plant like coke ovens is not easily fixed. Even the actual cost of the oven gas is a matter of debate depending on whether the gas or the other products are to be regarded as the main output and to bear the fixed charges. When oven gas is bought, any purchase price notably below the cost of making coal, water, oil or mixed gas is apt to be regarded as reasonable. 282 PUBLIC UTILITY RATES An illuminating gas is made out of coal, steam and oil. Coal or coke is burned with a deficiency of air in a gas generator yielding carbon monoxide, which is later burned to dioxide in passages filled with refractory checkerwork the superheater and carbureter. When maximum temperature is reached all the air is shut off and steam is turned on under the generator grates. The water vapor is split up and finally a mixture of hydrogen and carbon monoxide secured in the first checkerwork or carbureter. Oil is sprayed in, to be converted to a fixed gas in the superheater. This is carried on nearly until the temperature of fuel bed and checkerwork are too reduced in temperature to function as intended. Then steam is turned off, air put on and the cycle repeated giving a series of "blows" and "runs." This gas burns with a whiter and more brilliant flame than coal gas, and the illuminants are fixed gases which do not condense out much under reduced temperature or in- creased pressure. In such a gas the carbon monoxide consti- tutes about 31%, the unsaturated hydrocarbons 14%, the satu- rated hydrocarbons 16%, hydrogen 32%, the rest being mostly nitrogen and carbon dioxide. Where coal is expensive and oil plentiful, as in California, an illuminating gas is produced with oil, air and steam alone. In the production of the all-oil water gas, the generators con- sist of two upright shells, one short and the other tall, both filled with fire-brick checkerwork. The short shell serves as the generator and the long shell as the superheater. The discharge lor heating-blast gases is at the top of the second shell; the take-off for illuminating gas is at the middle of the same shell. In operation, oil and steam are blown into the top of the gen- erator shell and air blast is admitted at the center. After a heating period of 12 minutes the blast is turned off, additional oil and steam let in at the top of the second shell, and gas taken off to the purifiers and scrubbers. The injection of oil is rapid at first but is diminished steadily for 8 minutes. .There is a final 2-minute period to the run when only steam is injected to clean the shells. This gas more nearly resembles coal than water gas. These machines have many points of advantage affecting gas rates. They can be made in large units so that labor costs are diminished, and no time is lost in removing ash and clinker. They can be worked continuously, and a reduction in holder capacity might be expected, though it has not been observed. RATE PROBLEMS OF GAS UTILITIES 283 The price of gas oil, in the eastern states at least, has continu- ally increased and so much as to cause uneasiness of operating men as to their ability to produce gas without general increases in rates that would discourage business. It seems probable therefore that less and less oil will be used especially as its bene- fit beyond a certain point is largely in increasing candle-power rather than calorific value. Gas service is now universally metered, except for definite use of street lamps. There were a few early attempts to rely on flat rates but they did not long persist. Indeed one of the im- portant inventions of the pioneer gas engineer, Samuel Clegg, was a bellows gas meter. The most common type of meter is a large tin case with two compartments separated by a tight diaphragm, each chamber having a bellows alternately con- nected to the service and house pipes by a slide valve and, in emptying and filling, working a train of gears which records the displacement. There are other meters, like the rotary- vane type, though in somewhat less extended use. Uniform Rate Persists. Long before scientific rate making was attempted, the gas utilities were engaged in stiff competi- tion with the invader electricity, under which conditions per- sistence of the simple uniform rate was not unexpected. Even when it was realized that this burdened the largest customers for the benefit of the smallest, it appears to have been feared that a sliding schedule would seriously discourage the small users and interrupt the business. Some such feeling persists today but is fading owing to experience under commission- made sliding schedules and to deeper study by the gas men themselves. .Accurate data as to the amount of discrimination existing through single-unit prices is not at hand, but a few opinions based on experience have been published. Some report * that two-thirds of the customers carry the other third. One state- ment f is to the effect that one-third of the customers do not pay their expenses, one-third do not pay any profit, and one- third pay the profit for the other two-thirds plus some of the cost of one-third. But it appears that the fair increase in charges to the unprofitable two-thirds need not be large. * A. S. Miller, Proceedings, Am. Gas Inst.; 1913, p. 197. t A. E. Forstall, Proceedings, Am. Gas Inst.: 1913, p. 203. 284 PUBLIC UTILITY RATES The reaction in a few gas men's minds has been so great, however, that the mental pendulum has swung far in the other direction and more cost items are often advocated loaded upon the small customer and upon the customer's demand than can be supported with reason. One reason why the urged move- ment away from a uniform price is sometimes over-violent is probably due to the misconception which some may have that all the fixed charges are to be allocated over customers in accord- ance with their maximum demands irrespective of whether a part of the investment is working steadily against storage regardless of peak loads. If a division of plant is working steadily the fixed charges, including retirance, can fairly be com- bined with labor, supplies, repairs, etc., and apportioned over the output of that division. Only when there is a marked peak load on a division or would be if the no-load valleys were not filled with low-price service won by competition with other kinds of service can it logically be regarded that apparatus is reserved to meet the customers' demand, and that the fixed charges on such equipment are to be apportioned on the basis of demand. If there is a small peak effect there can be a small apportionment of fixed charges upon demand and a large one upon output. To illustrate: the gas manufacturing plant is commonly de- signed to meet the maximum daily output about ^^ to ?kv of the aggregate annual output, instead of 3 y for no peak at all. The distributing system is designed to carry the maximum hourly draft, which is 7T ^ T to 55 V peak demand. About half the cost of the works is in the distribution system. Under these conditions it often may be sufficient to hold that all the fixed charges on the manufacturing and storage division may be lumped with operating costs and spread over the entire output; while all the fixed charges on the distribution half of the plant may be assessed on the basis of customers' demand or size of meter (increased or diminished by the ratio of peak hourly draft to aggregate maximum capacity of meters). If a closer approximation to ideal charges is attempted, it would be to ap- portion 31.5% of the fixed charges on the manufacturing divi- sion according to customers maximum demand, or to some equivalent (the excess capacity required for the typical peak RATE PROBLEMS OF GAS UTILITIES 285 is 31.5% of the actual capacity), and 68.5% according to out- put. Then 77.3% of fixed charges on the distribution division would properly be assessed on demand and 22.7% on output (since the excess capacity of mains is 77.3% of the steady-flow requirement) . Some would favor apportioning all the fixed charges on holders to the customers' demand on the ground that if there was no peak demand at all there would need be no holder. In many cases, however, the gas holder has a storage capacity equal to the daily manufacturing capacity and in few cases probably does it fall below 85% of the latter. Therefore there is good reason for considering it a part of the manufacturing plant. If the capacity is 85% of the daily manufacturing capacity, or 3^5 of the annual output, then 19.6% of the fixed charges on the holder might go to' demand and 80.6% to output, instead of in proportion to the 31.5% and 68.5% holding for the rest of the manufacturing plant. It would be fair then to charge a customer a sum more or less depending on the size of his meter, plus a sum depending on the meter reading, and plus a customer charge for meter reading, billing, etc. (about $0.50 per month is commonly found to cover these). If these fixed and customer costs be spread over only the first one, two, three or four thousand cubic feet of gas (depending on the size of the meter) there is not found such an initial price that small consumers need be scared away. An easy way to change over from the common uniform metered rate to a logical system is to establish a transition period in which there is for all a high price for the first 1000 cubic feet, then a lower charge for the next 3000 cubic feet and a still lower one for the next 6000, etc. This has been done in Wisconsin. In an altogether new place, or in an old one after the transi- tion period is past, the high rate may apply to the first X 1000 cubic feet X depending on the size of the meters installed or some equivalent way of measuring maximum demand. The high rate for X 1000 cubic feet would cover the customer and de- mand charges and might be accompanied by a minimum charge to insure their receipt. Variation in Gas Cost for Large Use. How the quantity of gas used by different customers can change the true unit cost may be illustrated in a hypothetical case where the output cost was 286 PUBLIC UTILITY RATES assumed to be 60^ per 1000 cubic feet, and the customer cost was taken as follows: 3-light meter 180 per month. 5- 10- 20- 30- 45- 60- 210 240 270 320 410 500 The demand costs were: 3-light meter $ 4.00 per year 5- " 9.00 10- " " 20.00 20- " " 35.00 30- " " 50.00 45- " " 90.00 60- " " 130.00 Then the cost to customers would decrease thus: Size of Meter Cu. Ft. per Month per Month Cus- tomer Cost De- mand Cost Output Costs Total Cost Cost per 1000 Cu. Ft. Pub- lished Rate Minimum Monthly Bill 3-light .... 1,000 $0.18 $0.33 $1.20 $1.11 $1.11 $1.15 $0.60 5- 3,000 0.21 0.75 2.70 2.76 0.92 0.95 1.15 10- 8,000 0.24 1.66 6.00 6.70 0.84 0.85 2.30 20- 17,500 0.27 2.90 10.50 13.67 0.78 0.78 3.75 30- 25,000 0.32 4.15 15.00 19.47 0.78 0.78 5.50 45- 50,000 0.41 7.50 30.00 37.91 0.76 0.76 9.90 60- 75,000 0.50 10.80 45.00 56.30 0.75 0.74 14.30 Gas-utility Accounting. Through the control exercised by state commissions over gas-companies, satisfactory and uni- form accounts in recent years have been more employed than before. The matter has also been studied by the organizations of the industry. Possibly not as much has been done as with electric and street-railway accounts, but certainly more than in the water-works field. The adopted standard accounts will permit of the analysis of cost items as laid down in the general notes on cost of service. Little more needs to be said about building up a schedule of true costs under demand, output and customer heads beyond that just given in connection with pro- portioning the fixed charges for the manufacturing and distrib- uting divisions. It may be well to recall, however, that the RATE PROBLEMS OF GAS UTILITIES 287 customer charge should include interest, depreciation and re- pairs on meters and service lines. Some managers would push their analysis so far as to separate from the customer charge, and place in the output group, a portion of interest, depreci- ation and repairs on meters and services, depending on the capacity ratio of a no-peak-load equipment to the actual. These distinctions may be justified in some places but the amounts are not large enough to cause very great differences in rates. Some accounting difficulties are encountered when a single concern gives both gas and electric service. The majority of expense items entering into a study of the cost of service can be directly apportioned to the proper department. But there is a class of expenses, the "overhead" or "indirect" costs, which are not directly assignable on any physical evidence. It is common to apportion them between the two departments ac- cording to the ratio of the direct expenses. Such a practice is justified on the ground that each increment of direct expense leads to a proportionate increment in the overhead; in other words, the overhead expenses depend on the relative activities and magnitudes of the two branches, and these in turn are well measured by the aggregates of the direct expenses. Such prac- tice has been permitted by the Wisconsin and other state com- missions, and is very similar to the apportionment of unassign- able items in railway accounts practiced by the Interstate Commerce Commission. Such a division of overhead costs be- tween two departments is based on the assumption that the two utilities are fairly similar in their administration, financing, char- acter of business, etc. When that is not approximately true it may be advisable to devise some modified or substitute ap- portionment based on the demands of local conditions. Natural-gas Utilities. Natural gas of high calorific value is sold, in districts within piping distance of the oil and coal regions where gas may be obtained, at rates usually beyond competition of manufactured gas. There are no raw materials to be con- sumed and handled, and there is no manufacturing plant to con- tribute fixed charges (though there are wells and collecting lines) . But in spite of this, natural gas is no free gift of nature as it comes to the consumer's premises, and its use is not unchal- lenged. Natural gas varies in composition markedly according to the field; its value depends on its content of methane (50 288 PUBLIC UTILITY RATES to 90%) and hydrogen (5 to 35%). The Baltimore artificial- gas low-rate new-business campaign of 1916 was based on the assumption and argument that the high hydrogen content and the impurities of natural gas made it necessary to lead the burned gases off with higher temperatures and more water vapor so that the artificial gas became economical in spite of its lower heat value (600 B.t.u. per cubic foot instead of 1100). A company supplying natural gas has no manufacturing plant or holders but its wells and distributing works, constituting about all the physical plant, have to be large enough to permit peak-load flow with good service conditions as to pressure, fluc- tuation, etc. The rates that can be made therefore should vary as markedly for long hours of use, small peak and off-peak drafts as does electric central-station service. The rate of re- turn to be allowed a natural-gas utility in justice must be con- siderably higher than for an artificial-gas concern or an electric company, or else the earnings must be large enough to give heavy amortization of investment. This results from the in- herent hazards of the natural-gas business. It is essentially a mining venture with most of the usual uncertainties. Promising ground has to be secured, and money sunk in prospecting; soon after the field lines have been laid down the supply may give out. A good example of natural-gas rates is shown in the accom- panying 1915 schedule of the Louisville (Ky.) Gas and Electric Co.* Here an effort was made to have the rates include proper demand and customer charges, although not announced as such. The schedule was not quite ideal but was forced as a compromise measure in place of smoother scale and a .service charge. It is reported that both company and consumers are satisfied. LOUISVILLE GAS AND ELECTRIC Co. NATURAL GAS RATES. Effective March 4, 1915. The following will be the classification under which consumers will be sup- plied with natural gas: SCHEDULE A. Domestic consumers, gas engine consumers and other consumers who require continuous service. * As described by Donald McDonald before the Natural-Gas Association, in the paper "Equitable Rates For Natural Gas"; see "Gas Age" June 15, 1915. RATE PROBLEMS OF GAS UTILITIES 289 Rate. For the consumption in one month of 100 cu. ft. or less $0.40 1,100 cu. ft $0.83 200 cu. ft 0.47 1,200 cu. ft 0.83 300 cu. ft 0.62 1,300 cu. ft 0.94 400 cu. ft 0.62 1,400 cu. ft. 0.94 500 cu. ft 0.62 1,500 cu. ft 1.02 600 cu. ft 0. 62 1,600 cu. ft 1 .08 700 cu. ft 0.72 1,700 cu. ft 1.16 800 cu. ft 0.72 1,800 cu. ft 1.21 900 cu. ft 0.72 1,900 cu. ft 1.33 1,000 cu. ft 0.72 2,000 cu. ft 1.33 All additional gas over the first 2,000 cu. ft. per month at the rate of 38.88 cents per 1,000 cu. ft. Cash Discount. A discount of 10 per cent will be allowed for payment of bills within ten days from their date. SCHEDULE B. Commercial consumers who do not require contin- uous service, who are prepared and willing to substitute other fuel on short notice, and who agree to have their supply of gas shut off either temporarily or permanently for the purpose of giving Schedule A consumers sufficient supply of gas. Rate. Based on monthly consumption First 200,000 cu. ft. at 38.88 cents per 1,000 cu. ft. Next 200,000 cu. ft. at 33.33 cents per 1,000 cu. ft. Next 200,000 cu. ft. at 22.22 cents per 1,000 cu. ft. All over 600,000 cu. ft. at 13.33 cents per 1,000 cu. ft. Cash Discount. A discount of 10 per cent will be allowed for payment of bills within ten days from their date. NOTE. Consumers served at Schedule B rate whose consumption is less than 100,000 cu. ft. shall revert to Schedule A rate. SCHEDULE C. Industrial consumers whose monthly consumption is not less than 200,000 cu. ft. who do not require continuous service and who are prepared and willing to substitute fuel on short notice and who agree to have their supply of gas shut off either temporarily or permanently for the the purpose of giving Schedule A and Schedule B consumers sufficient supply of gas. Rate. Based on monthly consumption First 100,000 cu. ft. at 38.88 cents per 1,000 cu. ft. Next 100,000 cu. ft. at 22.22 cents per 1,000 cu. ft. All over 200,000 cu. ft. at 13.33 cents per 1,000 cu. ft. Cash Discount. A discount of 10 per cent will be allowed for payment of bills within ten days from their date. NOTE. Consumers in Schedule C whose consumption is less then 200,000 cu. ft. shall revert to Schedule B. In the event it becomes necessary for the company to cut off the supply of gas to consumers in Schedule C, the largest consumers will be cut off first. The same will apply should it be necessary to cut off consumers in Schedule B. 290 PUBLIC UTILITY RATES In consideration of the rates named in Schedules B and C and having regard for the obligations of its franchise, the company reserves the right to discontinue service without notice to customers using gas under these schedules, provided it should become necessary to do this in order to main- tarn a proper supply of gas in any district to Schedule A consumers. In the event it becomes necessary to shut off the supply of gas to consumers using gas under Schedules B and C, those using gas under Schedule C will be shut off first and those under Schedule B next, and as between individual consumers the company will select those, the shutting off of which will do the most to improve the service to its domestic or Schedule A consumers. The rates named in Schedules B and C are quoted solely for the purpose of disposing of surplus gas. No extension or enlargement of mains will be made to serve customers under these schedules. The consumer expressly waives any claim for loss or damage on account of discontinuance or interruption of service and waives any claim for priority of service over any other con- sumer. New Baltimore Schedules. The greatest departure in gas- utility practice of recent years undoubtedly is the gas-rate system placed in effect February 1916 by the Consolidated Gas Electric Light and Power Co., Baltimore, Md. To encourage the use of gas as domestic fuel a net rate of 35^ per 1000 cu. ft. was made for consumption over the old normal a lower price than for what manufactured gas had ever been known to be sold. For these consumers, the primary rate was 75 $ net for up to 1000 cu. ft. per month per room for domestic use (counting all the main rooms in a house less two, and with a minimum primary amount of 4000 cu. ft.) and for up to 150 hours use of maximum rate of consumption in commercial service. To make the scheme applicable without the delay incident to examining and rating each domestic-customer's premises, the customer's maximum monthly draft during 1915, provided it exceeded 4000 cu. ft., was taken as the primary amount. The gas schedules of the Baltimore company can be set forth in general as in the following four paragraphs. The particularly interesting schedules, "C" and "D" are also presented in their official form. Schedule "K," covering industrial service is notable as showing a concrete case of a demand (and customer) plus an output factor. SCHEDULE C YEARLY CONTRACT GENERAL GAS RATES. For convenience, called the Commercial Schedule. 75 cents net per 1,000 cubic feet, with an excess rate of 35 cents net for over 150 hours' use of the demand per month. Primary Rating reduced one-half for bakers, using gas RATE PROBLEMS OF GAS UTILITIES 291 chiefly between the hours of 8 P.M. and 6 A.M. Minimum Primary Rating 4,000 cubic feet per month. SCHEDULE D RATES FOR DOMESTIC SERVICE. 75 cents net per 1,000 cubic feet, with an excess rate of 35 cents net for consumption (a) over last year's maximum month for present customers, or (b) over a scheduled room basis for new customers; with the right of the (a) customers to apply the (b) basis upon request. Minimum Primary Rating 4,000 cubic feet per month. SCHEDULE E NON-CONTRACT GENERAL GAS RATES. 75 cents net per 1,000 cubic feet per month; for 50,000 cubic feet per month or over, 70 cents; for 100,000 cubic feet or over per monthj 65 cents. SCHEDULE K INDUSTRIAL GAS RATES, GENERAL SERVICE. Three-year contract; Fixed Costs $204.00 per year for 300 cubic feet of demand, $48.00 per 100 cubic feet for excess demand; Running Costs, 35 cents net per 1,000 cubic feet up to 1,000,000 cubic feet per month, 30 cents for excess. SCHEDULE C YEARLY CONTRACT GENERAL GAS RATES. Gas for any purpose will be sold under this Schedule, upon application, to any Customer who has signed an agreement for yearly gas service, em- bodying the usual terms and conditions of the Company now or hereafter in force. PRIMARY RATE: Eighty-five cents gross per thousand cubic feet, seventy- five cents net when bills are paid on or before the last discount day. SECONDARY RATE: Forty-five cents gross per thousand cubic feet, thirty- five cents net when bills are paid on or before the last discount day. This rate will apply to all gas used per month in excess of the amount here- inafter specified as the Primary Rating, and only to such excess. The Pri- mary Rating is the number of cubic feet per month which must be used at the Primary Rate before the Secondary. Rate applies. The Primary Rating under this Schedule will be placed at the number of thousands of cubic feet corresponding most nearly to one hundred and fifty times the Customer's Demand, the Demand being defined as the maximum hourly rate of consumption in cubic feet. This is equivalent to one hundred and fifty hours' use of the Demand per month, figured to the nearest number of even thousands of cubic feet. The Primary Rating shall remain fixed, and a fixed element in billing, so long as the Customer's conditions of maximum rate of use do not increase, but shall in no event be taken at less than 4,000 cubic feet per month (Three Dollars net). DEMAND: The demand is the maximum rate of use by the Customer and is defined as the greatest number of cubic feet used in any one hour. It may be specified in the contract and estimated by the Company from the burner rating or otherwise, and may be redetermined from time to time according to the Customer's normal use of gas. The Demand shall not be substantially decreased during any twelve-month term of the contract, but shall be increased in accordance with and for all billing after any increase in maximum use which may from time to time occur. The Primary Rating will be changed accordingly. Upon extraordinary occasions for a certain limited period the 292 PUBLIC UTILITY RATES Company may, at its option, give permission to exceed the determined maxi- mum rate of use by a stated amount without increasing the estimated Demand upon which the Primary Rating is based. METERS: Not over two meters will be furnished by the Company at its expense at any one contract location under this schedule, unless installed for the Company's convenience. Additional meters will be furnished at a rental of $2.50 per month each, for meters on which demands are determined, and at a rental of $1.00 per month each for sub-meters. Where more than one meter is installed for the convenience of the Customer, the consumption shall be billed separately for each meter and the Demand and the Primary Rating determined separately for each meter. SCHEDULE "C" NIGHT SERVICE: For installations in which gas is chiefly used for such processes as require its consumption between the hours of 8 P.M. and 6 A.M., such as the processes used by bakers, the specified Demand, or the Demand upon which the Primary Rating is based, may be taken as one-half of the maximum demand occurring between above said hours, provided that the demand upon which the Primary Rating is based shall not be less than the maximum demand during any other hour and that the Pri- mary Rating shall not be reduced below 4000 cubic feet per month. COMBINATION DOMESTIC AND GENERAL SERVICE: For a Customer using domestic service on the same meter with service for other uses than are pro- vided for under the Domestic Schedule D, the Primary Rating will be taken as the sum of the Domestic Primary Rating under Schedule D and of the Pri- mary Rating under this Schedule C. TERMINATION: When the Customer has used the Company's service at the contract premises for over one year, the contract may be terminated at any time after ten days' written notice from either party to the other. Upon proper notice of removal, the contract will be terminated. SCHEDULE D RATES FOR DOMESTIC SERVICE. Gas for domestic use will be sold under this Schedule to any Domestic Customer of this Company who has signed an agreement for the service under the usual terms and conditions now or hereafter in force. This Schedule will become effective on all consumption after the regular meter readings taken in Feb- ruary, 1916. PRIMARY RATE: 85 cents gross per 1000 cubic feet, 75 cents net when bills are paid on or before the last discount day. SECONDARY RATE: When the Customer's use of gas is in excess of the amount hereinafter specified under Primary Rating, the additional consump- tion so used will be at the rate of 45 cents gross per 1000 cubic feet, 35 cents net when bills are paid on or before the last discount day. This Secondary Rate will be applied only where the said additional service is supplied through the regular house meter furnished for all consumption, and only to the consump- tion in excess of the estimated ordinary use by the Customer, which ordinary use will be designated the Primary Rating. PRIMARY RATING : The Primary Rating for new Customers and for present Customers at new locations will be determined as follows, it being under- stood that all ordinary rooms, such as living rooms, dining-rooms, kitchens, bedrooms, servants' quarters, bathrooms and laundries will be included in RATE PROBLEMS OF GAS UTILITIES 293 the list of rooms, but that cellars, closets, pantries and storerooms will not be included: PRIVATE HOUSES of 6 rooms or less 4,000 cubic feet per month. of 7 " 5,000 of 8 " 6,000 " " of 9 " 7,000 " " of 10 " 8,000 " of 11 " 9,000 of 12 " 10,000 with an excess of 1000 cubic feet per room for each room over 12. Individual apartments will be rated on the same basis as private houses. Boarding houses and rooming houses shall be taken at 1000 cubic feet per room per month. In putting this Schedule into general effect for all Domestic Customers on the lines of the Company at the time of the said February meter readings, the Primary Rating will be taken in each case as the number of thousands of cubic feet per month that is nearest to the maximum consumption by the Customer in any month during the preceding twelve months at the same premises, and such maximum consumption will control the determination of the Primary Rating for all such Customers so long as they may continue at their present premises. Where the Customer has occupied premises for less than eight months, the Company shall have the right to determine the Primary Rating in accordance with the Schedule herein. The Primary Rating shall in no event be taken at less than 4000 cubic feet per month for any of the classes of Customers specified herein, and where the Customer's maximum consumption has been less than 4000 cubic feet per month, his Primary Rating shall be taken at 4000 cubic feet and the Secondary Rate shall apply for all consumption in excess thereof. How Baltimore Schedules were Made. The new schedules were the result of two years study of the possibilities in com- peting with other fuels, particularly where large quantities were used. A study of operating characteristics for years back showed prior to 1908 a load factor of 23 to 29% and since then improvement to 37% (peak-hour day, 1914) and 48% (maxi- mum-output day, 1914). A typical daily load curve (1910-1914) showed a consumption rate of some 500,000 cubic feet per day from 6 A.M. to 3 P.M., a sharp peak rise to 1,500,000 cubic feet per day at 6 P.M. and a steady decline to 150,000 cubic feet per day at 12 A.M. and a gradual recovery. All customers using over 50,000 cubic feet per month were clas- sified according to use apartment houses, boarding-houses, churches, bowling alleys, bakeries, meat shops, and their demand estimated by hourly readings during heavy-load periods in test 294 PUBLIC UTILITY RATES cases. Recording devices were attached to meter dials and gear- ing to give a graphic record. The individual load factors varied from 6 to 100%. The average for the classes varied from 9% (shoe manufacturers and office buildings) to 39% (newspapers). Lunch rooms showed the best combination of high load factor (29%) and large number of customers. The various expenses were grouped into customer, demand and output classes. Prior to making tentative schedules, the total customer cost was divided by the number of customers to give the unit cost per customer per year; the total demand costs divided by the aggregate customers' demands gave the unit cost per thousand cubic feet per hour demand; the output costs were divided by the sales. Several special modifications were made: (1) An allowance was added to the customer unit cost to cover cost of finding demand and applying this to rates; the customer and demand charge were merged for simplicity; (2) the output charge contained a sum for covering fixed operat- ing cost of some special customers including meter reading and billing; (3) ample margin was left to cover contingencies and to avoid embarrassment; (4) large spread was left between the rate curves for large and small customers to induce larger use; it was aimed to have the slope of each rate curve steep enough so that individual customers could see the advantages of im- proving their load. Results in Baltimore. During the first month after the 35^ secondary rate went into effect, it benefited about 6000 domestic customers, out of a total of some 130,000 consumers of all sorts. In practically all cases there was no installation of new consuming equipment at this early period, but the in- stallations rose very rapidly toward summer. The gas distributed by the Baltimore Company is a mixed coke-oven and carburetted-water gas. The coke-oven gas is purchased from the Maryland Steel Co., at Sparrows Point, Md., and is piped Yl\ miles. The quantity available varied in 1914 from zero to 4,800,000 cubic feet. The carburetted water gas is added to make up the daily demand and the quality is adjusted so as to keep the final distributed product of 20 c.p. The coke- oven gas has varied from 7 to 14 c.p. value and from 517 to 606 B.t.u. thermal value. It is purchased on a candle-power basis and in 1914 cost per candle-power the same as carburetted water RATE PROBLEMS OF GAS UTILITIES 295 gas. The last had a thermal value of 570 B.t.u. per cubic foot. The average thermal value of the mixed gas distributed was reported in 1916 as 591.2 B.t.u. The average net holder cost of the gas made by this company in 1913-1914 gross cost for labor' and materials was 27^ per 1000 cubic feet, not including interest, depreciation and other fixed charges. After the addition of charges to cover distribution, metering, new business, general expense, taxes, etc., the average cost was 52^ at the burner. Gas Rates in American Cities. The gas rates in certain American cities are assembled with other pertinent data in ap- pended tables (taken from published compilations made by J. C. Dickerman for the Utilities Bureau) . All such tables show inher- ent limitations of usefulness, in spite of their interesting nature. No matter how careful the citation of variable affecting conditions, the ability to transfer information from one situation to another is extremely restricted, and possible general deductions are few. For example, in the following table, Boston is shown as having 80^ gas, while it is generally reported that the price was put down (under a dividing scale) below cost so that the holding concern might distribute some real-estate profits used to swell the surplus fund. These tables lead one to the view that the differences in cost of gas diminish with increased sales, being more pronounced among concerns with sales of less than 30,000,000 cubic feet per year. Differences in manufacturing cost due to different costs of fuel are evident but apparently are not of first importance. Taxes are a heavier burden on the smaller companies than the larger ones. The operating costs seem to have held up above $1 per 1000 cubic feet where less than 20,000,000 cubic feet per year was made by a works; these costs seemed to have dropped down to 80^ for works producing about 50,000,000 cubic feet, to 7Q for 100,000,000 cubic feet and to 50^ for 500,000,000 cubic feet. 296 PUBLIC UTILITY RATES COST OF ARTIFICIAL ILLUMINATING GAS IN AMERICAN CITIES Compiled by J. C. Dickerman from published reports and printed in " Utilities Magazine" (Utilities Bureau, Philadelphia), July and November, 1915. FOR NINETEEN LARGER CITIES - Annual Sales Oper- ating Taxes Gas City Years (Inclu- sive) Cost per Thou- per Thou- sand Net Selling Price U Approxi- mate per Meter or Kind and Quality tt sand Sold Total Con- Sold (1000 Cu. Ft.) sumer (Cu. Ft.) Milwaukee, Wis.* 1909-1913 $0.3184 SO 0658 $0.75-0.50s.s. 2,820,000 36,000 98% 630 B.t.u. coal Boston, Mass.f. . 1910-1914 0.4074 0.0727 0.80 5,600,000 32,600 Mixed, 650 B.t.u. 51% water Baltimore, Md.f. 1911-1914 0.4225 0.0655 0.90-0.80 3,540,000 32,000 Mixed, 20 c.p. 25% New York, N.Y. 1909-1912 0.4227 0.0576 0.80 26,040,000 32,000 coal Mixed, 23 c p. mostly water Racine, Wis.. . 1G09-1913 0.4322 0.0603 1.00-0. 60 s.s. 238,000 22,000 Coal 612 B.t.u.' Lynn, Mass.... . 1910-1914 0.4464 0.0595 0.75-0.50 s.s. 745,000 26,700 Mixed, Over 10 55% c.p. water Minneapolis, 1911-1914 0.4480 0.0508 0.85-0.80 2,213,000 33,650 Mixed, 18 c.p. Minn. 65% water Philadelphia, 1910-1914 0.4500 0.0025 1.00 18Q.OOO 27,000 Coal 15 c.p. Pa. l| Hartford, Conn. 1912-1914 0.4511 0.0294 0.90-0.75 657,000 26,700 Mostly 19 c.p. water Brooklyn, N. Y. 1909-1912 0.4516 0.0449 0.80 11,930,000 29,800 Water 23 c.p. New Bedford, 1910-1914 0.4558 0.0804 0.80 480,000 25,500 60% 18 c.p. Mass. water Washington, 1911-1914 0.4560 0.0635 0.85 2,500,000 42,100 Mixed 23 c.p. B.C. 95% water Rochester, N. Y. 1909-1913 0.4683 0648 0.95 1,300,000 24,000 80% 20 c.p. water New Haven, 1912-1914 0.4790 0.0601 0.90 1,230,000 26,400 Mixed, 19 c.p. Conn. 60% water Worcester, Mass. 1910-1914 0.4902 0.0664 75 780,000 30,500 Mixed, 18.2 c.p. 40% water Fall River, Mass. 1910-1914 0.4913 0.0720 0.80 560,000 24,200 Water 20 c.p. Bridgeport, Conn. 1912-1914 0.5009 0.0605 . $1.00 545,000 22,500 Water 20 c.p. Syracuse, N. Y. 1909-1913 0.5508 0.0738 0.95-0.63 s.s. 650,000 21,500 Mixed 18 c.p. Westchester and 1909-1913 0.6215 0.0626 1 50-1 00 1,480,000 25,700 Water 23 c.p. suburbs of New York City** * This company purchases very large portions of its gas from by-product coke ovens and sells coke at high price. t This company purchases about 50% of its supply from coke ovens, and sells about 14% to other companies. | Purchases coke-oven gas and manufactures water-gas. Coke sold to more than pay for all gas coal used. I) This is not the big city plant, but a small independent company operating with vertical retorts. The cost given is a maximum. Taxes estimated indirectly, but are practically nothing for city and state purposes. ** This company operates in 23 towns and villages under suburban conditions near New York City. tt Calorific or candle-power values used. Ji S.S. = Sliding Scale. [Not the British dividing scale.] Exclusive of taxes and depreciation. RATE PROBLEMS OF GAS UTILITIES 297 -Cai^ttv -O(M m ,1)1)11) .ajo) a) tp aj , '''''''' 88888888 iOTjcot>'-Hi-ioooor^o5occa)C OOQOOOO i . 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The most in- clusive generalized discussions of rate-making problems par- ticularly as regards most such matters as bearing of cost of service, peak loads, non-peak business, reserved equipment for maximum demand, classified customers, diversity factors, effect of apportioning retirances and other true expense items, minimum charges, lack of investment records and need of appraisals, franchise questions, land and water rights, discarded equip- ment, reasonable return, promoting initiative, discrimination, etc., seem to apply more completely and with fewer special exceptions to electric-supply undertakings than to the other utilities like water-works and gas supplies, or railroads and electric railways. Illustrations and applications of general prin- ciples therefore have been more frequently taken from electric utilities than the others throughout this whole work. This has rendered unnecessary a lengthy presentation of electric rate-making problems. To preserve the balance of treat- ment and for ready information, brief review has been made in the following paragraphs of the history, growth and technol- ogy of the industry, and a few special problems have been mentioned. History of the Electric Central Station. The very early history of electricity supply is of course the history of the de- velopment of magneto-electric machinery, for there was no pros- pect of commercial service before the conversion of mechanical energy into electrical became practical and cheap. The first step was the discovery of magneto-electric induction, by Henry in 1831 and independently by Faraday about the same time. Primi- tive generators were made shortly thereafter but the modern machine was not possible until the principle was established of using self-supplied electro-magnets in place of weak permanent magnets to produce the necessary magnetic fields in which wire coils were to be rotated. This development was independently 300 RATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 301 given by Siemens and Wheatstone in 1867. A good arma- ture had been produced in 1860 by Pacinotti but it was more of a laboratory device than an engineering machine, and it was reinvented on the latter plane by Gramme in 1870. The Sie- mens I-shuttle and Gramme ring armature were combined into the drum armature in 1873 by Hefner- Alteneck. Probably because of the lack of a cheap and convenient source of electric current, the development of a practical electric lamp had lagged. Crude low-resistance incandescent electric lamps had been made, for instance by Starr and King in 1845; and arc lamps had been built by Davy in 1812, Jablochkoff in 1876, and Serrin in 1857. But there had been no attempt at a whole system of lighting prime movers, generators, distribution lines, and lamps until 1878. Indeed it is probable that gen- eral mechanical and electrical engineering progress up to then had not been great enough to permit it. Finally at about the same time three systems were brought out: (1) that of Jab- lochkoff in France, using alternating current and arc " candles," or two thin vertical carbon pencils separated by a strip of clay; (2) that of Brush using a special direct constant-current gen- erator and automatic arc lamps connected in series, (3) that of Edison using an improved constant-potential direct-current generator supplying high-resistance carbon-filament vacuum-bulb lamps connected in parallel. Secrets of Early Success. Probably the secrets of Edison's success lay in the use of a high-resistance (about 100 ohms) carbon filament where others had always attempted to use low resistances (say 10 ohms). This gave him a system of lamps connected in parallel instead of the old constant-current series- circuit idea to which others clung. He secured at once the great advantages of subdivision of light units and non-interfering control of each lamp. The economy of distribution secured by Edison with his arrangement of a supply network connected to the generating station by feeders was also novel others having proceeded from pipe-line experiences to develop only mains and branches, all increasing in size from the customer to the station. In further search for economy he developed the three-wire double-voltage distribution, but this was independently conceived by Hop- kinson in England and Siemens in Germany. Some 60 to 70% 302 PUBLIC UTILITY RATES of the cost of copper was saved. The Edison system aroused a veritable furor of discussion both favorable and adverse. Gas company stocks dropped, and the newspapers and maga- zines were full of arguments, pro and con. The Brush system achieved immediate success for street lighting, though it was of very limited use for interior illumi- nation. The generator, regulator and lamps were each good and serviceable, and were well combined. The Brush system soon had a strong competitor in the Thomson and Houston arc system which was marked by a somewhat better generator and regulator. The Edison system was a good complement to the Brush and Thomson-Houston; it was, if anything, even better commer- cialized. The Edison distribution system soon had to meet com- petition with the Stanley-Westinghouse development of the Goulard-Gibbs alternating-current transformer; and the Sawyer- Mann, Swan and Fox incandescent lamps came on the market. In all these developments, plus the high-speed steam engine, the multipole generator, the steam turbine and the so-called Francis hydraulic turbine, rests the technology of the modern central-station industry. The direct-current generating and distributing system of Edison have been restricted to short dis- tances and congested districts but so well conceived were the details of his system that many persist today unchanged, al- though the lamps may be supplied with alternating-current. The Brush and Thomson-Houston generators and arc lamps have about completely disappeared but they paved the way for the later enclosed and luminous arcs on existing series street circuits. First Central Station. As a result of Edison's experimental work in the development of the multiple lamp, underground network and feeders, and three-wire system, plans were made for a station in lower Manhattan, New York City. A terri- tory 2000 feet square was canvassed to find the number of lamps, and the number and size of motors probably required. The plant had a capacity of 2000 horsepower, using water-tube boilers, direct- connected high-speed (350 r.p.m.) generators, and a steel skel- eton-frame support. Edison and his assistants, after designing the station and system down to ultimate details, had to organize and manage shops for the manufacture of the equipment. But capitalists hesitated to embark, though the new station paid financially before its technical success was admitted. Construe- RATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 303 tion had to be cheapened and adapted to smaller municipalities and in that form stations were soon built in Massachusetts, Pennsylvania, and Ohio. The Pearl Street Station, New York City, started Sept. 5, 1882, with 5500 lamps. In 14 months it had 12,732 lamps. Soon a station was built at 26th St. and another at 39th St. Then one rose in Boston and one in Brook- lyn. In 1887 the first Chicago Station was started. An im- portant technical contribution was made by the Berlin (Ger- many) Electricity Works about 1889 when it used vertical marine engines and multipolar generators. There were, in 1886, 47 Edison illuminating companies, capitalized at $5,000,000; 47 stations were in operation and 10 in construction. The 57 stations supplied 160,000 lamps. Series street-lighting systems were devised for incandescent lamps and installed in Lockport, N. Y., Portland, Me., Law- rence, Mass., Jacksonville, Fla., Brookline, Mass., Denver, Col., and Lachine Canal, P. Q. Stationary power service was sup- plied. By 1890, 60 cities had stations. The growth of the central-station industry in recent years is shown by the accom- panying table prepared by the United States Census Bureau. The early rates (1890) were from $150 to $75 per horsepower-year, for 24-hour power; the average cost then to Edison stations was from $25 to $40 (not including fixed charges and profit). An ampere-hour electrolytic meter was early developed, but flat rates were common. For example in Hazelton, Pa., \\i per hour per 10-candle-power lamp was charged; in Tamaqua, 75^ down to lOjzf per 10-candle-power lamp per month was fixed depending on the number of lamps. The early stations were calculated to yield 10 to 20% on the investment. This return included the then unstudied item of depreciation, simple interest, and all the rewards for capital. Uses for Electricity. The main uses for electric energy are : (1) general distribution for light, power, and heat, (2) electric railways, (3) electrochemistry. The first of these services was the original field of the central-station industry but railway supply has been found an attractive load for the electric com- panies because it adds diversity. Electrochemistry offers re- markable possibilities for non-peak and off-peak service, but comparatively little benefit has been secured by the great num- ber of central stations. The ability of a central station to ac- 304 PUBLIC UTILITY RATES GROWTH OP COMMERCIAL AND MUNICIPAL CENTRAL ELECTRIC STATIONS * 1912 1907 1902 Per Cent Increase 1902-1912 Number of stations f 5,221 3,659 1,562 $302,115,599 $286,980,858 $15,134,741 $234,419,478 79,335 7,528,648 7,844 4,946,532 2,933 2,471,081 1,116 111,035 5,134,689 11,532,963,006 505,395 76,507,142 435,473 4,130,619 4,714 3,462 1,252 $175,642,338 $169,614,691 $6,027,647 $134,196,911 47,632 4,098,188 8,054 2,693,273 2,481 1,349,087 463 55,828 2,709,225 5,862,276,737 If 562,795 1f 41,876,332 167,184 1,649,026 3,620 2,805 815 $85,700,605 $84,186,605 $1,514,000 $68,081,375 30,326 1,845,048 6,295 1,394,395 1,390 438,472 165 12,181 1,212,235 2,507,051,115 385,698 18,194,044 101,064 438,005 44.2 30.4 91.7 252.5 240.9 899.7 244.3 161.6 308.0 24.6 254.7 111.0 463.6 576.4 811.5 323.6 360.0 31.0 320.5 330.9 843.1 Commercial . Municipal Total income f Light, heat, and power, including free service . All other sources Total expenses, including salaries and wages . Total number of persons employed Total horsepower. . . . Steam engines and steam turbines: || Number Horsepower Water wheels: Number Horsepower Gas and oil engines: Number Horsepower Kilowatt capacity of dy- namos .... Output of stations in kilowatt hours Estimated No. of lamps wired for service; Arc Incandescent and other varieties Stationary motors served : Number Horsepower capacity. . . * From Bulletin 124, U. S. Bureau of the Census. t The term " station," as here used, may represent a single electric station or a number of stations operated under the same ownership. t Exclusive of $36,500,030 in 1912, $20,093,302 in 1907, and $7,703,574 in 1902 reported by street- and electric-railway companies as income from sale of electric current for light or power, or from sale of current to other public-service corporations. In addition to salaries and wages, includes the cost of supplies and materials used for ordi- nary repairs and replacement, advertising, fuel, mechanical power, electrical energy purchased, taxes, and all other expenses incident to operation and maintenance, and for 1912 charges for depreciation and charges for sinking fund. II Includes auxiliary engines. U Includes for purposes of comparisons 7082 arc and 267,997 incandescent lamps reported by the electric companies to light their own properties. Lamps used for such service were included in the total number reported in 1912. BATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 305 quire a railway and electrochemical load depends on its ability to make a low price for energy, and this means that such custom- ers will carry comparatively little of the fixed charge, compared with some other classes of customers. The proportion between power and lighting loads depends on the town served; it varies all the way from that of small cities where practically all current is used for street and house lighting, to the large industrial district where most of the power is sup- plied to mills and factories, and only a small domestic- and street-lighting load is carried in the evening. The requirements on different parts of a central-station sys- tem are somewhat conflicting. Power can be used in the great majority of cases only at low potentials say up to 600 volts. Economical transmission requires high potential. For elec- trolytic processes direct-current is imperative; and it is de- sirable for street railways. For furnaces alternating current is preferable. Technology of Supply. The fundamental feature of a modern electricity-supply system is of course the generating plant. This is commonly a steam power station located as close to the load center of the area served as is compatible with a cheap supply of coal and water. In it then are the familiar boilers, engines or turbines, generators, switchboards, transformers, etc. In a few cases the stations have been located in coal fields close to the cheapest fuel supplies and transmitting energy over con- siderable distances to markets. In a number of instances, while coal remains the fuel, gas producers have been substituted for the boilers, and internal-combustion motors for the steam en- gines or turbines. The possibility of converting the energy of falling water to electricity has brought the hydro-electric station into importance, wherever the economy of having to purchase no fuel is not offset by the increased interest charges on extra investment and the added losses from long-distance transmission. The smaller central stations may generate direct-current to be distributed over a restricted area. The larger plants have to employ alternating current on account of the ease of utilizing high voltages which enable economical transmission. Where a district to be served is considerable in extent, a number of sub- stations are used, each situated near some important sub-center 306 PUBLIC UTILITY RATES of the load. Generally the high voltage is stepped down in a substation to one which is safer for the local distribution on radiating lines. For special services, where the frequency of the alternating current or the current itself is unsuitable, the substation may house rotating machinery for producing a differ- ent frequency or for direct current. At the larger customers' premises, or in the vicinity of a group of smaller customers, the current if it be alternating is again reduced to about 110 or 220 volts, at which potential it enters the customers' wires. In America 110 volts at the lamp is standard practice, and abroad 220. There is a saving in cost of wires and in line-voltage drop by using 220 volts, but it is more than overcome for lighting installations by the 10-15% inherently lower efficiency of 220- over 110-volt lamps. In specific cities the voltage runs from 100 to 130; this was early brought about by the impossibility of making each vacuum- tube carbon-filament lamp of a certain rigidly fixed voltage for economical service. In large cities with underground distribution, the alternating cur- rent is at a disadvantage compared with direct, for the inductive voltage drop of the former is additive to the resistance loss with direct current, and since a multiplicity of comparatively small conductors becomes better than one or a few very large ones. In the early days of alternating-current distribution, a small transformer was placed for each customer. It was soon realized that this was undesirable for each transformer had to be able to carry the occasional maximum so the devices were lightly loaded most of the time. But the full magnetic losses continued all day, and commonly the power drawn and paid for by the customer was only 35% of that furnished in a day's time to the transformer. By having one transformer serving a group of customers, a more efficient loading was secured, making use of the diversity of customers' demand so that the revenue power jumped to 70% of the total furnished. Besides the transformer losses there are also line loss and leak- age, meter loss and error, .and possible unaccounted losses. At full load all these may be 15 to 18% of the full-load capacity, resulting in a maximum-hour capacity of 82 to 85%. The all- day losses, however, may easily be 33% of the total supply, resulting in a system efficiency of only 66%. RATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 307 Development of Lighting. Incandescent-filament lamps can be made to run on either constant-voltage or constant-current circuits, but the electric arc is essentially unstable without a constant-current supply, for the voltage drop decreases as the current increases and vice versa. Arc lamps are commonly designed for constant-current circuits, though by placing a steadying resistance in series with the arc it can be run on a constant-voltage circuit at reduced efficiency. The arc-light generator was necessarily a small machine, since 100 to 150 lamps in series gave as high potential as safe to use on such circuits 4000 to 10,000 volts. It has been made obsolete by the development of the movable-secondary constant-current, or " tub," transformer used alone for alternating-current arcs or with mercury-arc rectifiers for direct-current lamps. This of course is supplied from constant-potential alternating-current generators of ordinary types. In the old simple carbon-arc lamp practically all the light came from the incandescent tips of the pencils. A modern development is to incorporate in the carbon electrodes materials which are luminous in the arc, stream, such as calcium and titanium. This gives increased efficiency of light production. A mercury electrode is used with the arc in a vacuum tube. An earlier improvement of the open arc consisted of using a loose enclosing globe which retarded the consumption of car- bon and increased the hours of burning. The latest form of direct-current arc substitutes an electrode of iron and titanium oxides, resulting in a highly efficient, brilliant arc stream and long hours of burning. A luminous arc for alternating cur- rents has been developed using titanium-carbide electrodes. Edison in developing his incandescent-filament lamps early discarded metals, but later scientific researches (1905) and gen- eral advance in metallurgy made possible the tungsten filaments which have all but driven the carbon type out of the market. These have a specific consumption of 0.5 to 1.5 watts per candle compared with 3.1 to 3.5 for carbon. While miscellaneous uses for central-station electricity supply have been developed yet practically every central station has to supply lighting current so that the great majority of gener- ators are built for the close regulation slight voltage fluctua- tion required for such service. 308 PUBLIC UTILITY RATES Difficulties of Continuous Service. Continuity of current supply is one matter of great importance in the real success of an electric utility and the satisfaction of customers; yet it has been painfully accomplished by the application of great amount of engineering study and no small expenditure of money. The lack of easy storage for the electric current, the dependence on rotating machinery, the delay incident to pressing idle gener- ators into service, the local destruction wrought by the concen- tration of energy at a fault, etc., have conspired to make this problem of first magnitude. One important provision is ample spare capacity in generators, feeder-lines, etc., and the distri- bution of the fixed charges on these should be carefully studied. In many cases it will be found inequitable to include these wholly with other charges allocated upon peak-customers' de- mand; it may be fair to charge them in part on output on the grounds of an expense of general maintenance of business. Importance of the Meter. The customer's meter consti- tutes one of the most important and highly developed parts of an electric-supply system. Meters are almost universally owned, maintained, and read by the utility company. They are virtually light and delicate direct- or alternating-current motors with jewel bearings; one winding takes current proportional to the line voltage and another winding to the customer's current. They are loaded with a copper disk rotating in a magnetic field so that the speed is always proportional to the energy drawn in the circuit of which they are a part. Great advance has been made in producing a low-priced but reliable and accurate watt-hour meter. Yet no meter retains its accuracy indefinitely, and occasional inspection and re-test is advisable both for the company's and the customer's interest. The required accuracy of electricity meters is commonly placed at 3, 4, or 5% fast or slow as tested. The lower limit is fair for most alternating-cur- rent meters but the higher may have to be allowed for direct- current meters. Under some rules when a meter is over-fast a rebate is ordered for the known fast period, and the company is allowed to collect an added sum from the consumer when the meter is slower than prescribed. The meter investment remains so large and the annual cost of maintenance, reading, book-keeping, etc., commonly aggre- gate so much in excess of $6 per year that the unit cost of RATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 309 service to very small consumers is prohibitive. A meter also absorbs 12 to 20 kw.-hr. per year, non-revenue energy. The small customer has been successfully cultivated abroad on unmetered service with flat rates, and is longingly regarded in America as an aid to diversified use. A barrier to use by small consumers has been the cost of interior wiring (from $1 to $6 per outlet, depending on the building and whether wires are exposed or concealed) . An inexpensive simplified system of exposed wiring (the " Concentric ") has recently been intro- duced in America to reduce cost of such work. Maximum Demands of Electric Customers. Much study has been made of the probable maximum demands of various PER CENT OF CONNECTED CAPACITY THAT is ACTIVE LOAD Class Ripon* Madison t Wisconsin Companies Using Demand Indicator t Chi- cago t Residences, flats and rooming houses . . 40 60 0.3 kilowatt connected capacity 60 90 0.5 " " " . 60 64 1.0 " " " 60 and 33 48 2.0 " " " 60 and 33 46 Public buildings 40 55 33 Churches 55 55 56-85 Schools 55 55 37-52 Stores, retail 75 70 40-100 66 Stores, wholesale 70 Offices, banks 75 70 57-87 72 Theatres .... 75 70 49-89 Depots 75 70 75-95 Hotels 60 55 28 29 Libraries 60 55 Stables 60 55 52-58 60 Factories 55 55 53-56 Saloons 75 70 62-92 Clubs 75 55 28 29 Electric signs 100 100 86 Street lamps 100 Motor installations: single, under 10 h.p 90 several, aggregating 10 h.p 80 10-20 h.p. . ... 70 20-50 h.p. 60 50-100 h.p 55 over 100 h.p 50 Shops 55 58 Machine shops 37-54 Blacksmith shops 66 * Ripon v. Ripon Light and Water Co., 1910; 5 Wis. R. R. Comm. 1. * Re Madison Gas and Electric Co., 1911; 7 Wis. R. R. Comm. 152, 167. + E. W. Lloyd, " Load Factors," Nat. El. Light Assoc., 1909; G. A. McKenzie and B. F. McGuire, " Significance of Statistics," Nat. El. Light Assoc., 1910. 310 PUBLIC UTILITY RATES electricity consumers, for the need of properly distributing the heavy fixed charges, locked up in plant reserved for maximum demand, has been felt more in this utility field than in others. It is desired to find probable maximum demand without ex- pense and complication of a demand meter in regular use. The work of the Wisconsin Commission is notable in this field. The preceding table gives some of this body's data, and a few from Chicago studies. Diversity of Central Station Loads. An electric plant is a true service-type of utility (as defined on page 15); there is re- quired generating and distributing capacity sufficient to satisfy the maximum demand of the year, and this is in some part idle all during the rest of the year. In winter the load curve of a typical winter day for a small utility rises slowly from 10% output at 2 A.M. to 25% at 2 P.M., then more sharply to 100% at 5 or 6 P.M. and then steadily drops off to 10% at 2 A.M. again. For a summer day the first rise is from 10% at 2 A.M. to 25% at 7 P.M., and an 80% peak comes at 8 to 9. On a large system, say of 100,000 kilowatts capacity, supplying light, sta- tionary and traction power, there is typically a low 15% period from 2 to 5 A.M., a rise to 75% output at 9 A.M., a 65% period from 10 A.M. to 4 P.M., a 100% peak at 6 P.M., and a steady decline thereafter. The general phenomena of time-diversity of utility demand and its effect on investment has already been discussed (page 32) and illustrated by reference to electricity-supply works. It is neces- sary only to append here for illustration some experience data * on " diversity factors" (ratio of sum of maximum demands of sub- divisions to actual experienced maximum demand on the system or main division thereof). The following applies to Chicago, but is undoubtedly typical of the larger American cities. CHICAGO LIGHTING SYSTEM, DIVERSITY FACTORS Residence Lighting Commercial Lighting Retail Power Large Users Meter to transformer 3.35 1.46 1.44 1.0 Transformer to feeder 1.3 1.3 1.35 1.15 Feeders to substation 1.15 1.15 1.15 1.15 Substation to generating station Meter to generating station 1.1 5.5 1.1 2.4 1.1 2.46 11 1.45 * From "Application of Diversity Factor," by H. B. Gear; Proceedings, National Electric Light Assoc., June 1915. RATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 311 Residence Tariffs. The problem of securing a good rate schedule for residence-supply customers is particularly difficult, compared with industrial-supply customers. The latter are more apt to have enough technical knowledge to understand a two- or three-part charge and their long hours of use generally result in satisfactory low cost of energy. The former require a very simple tariff for them to understand, while their service is in peak-load hours and of short duration so that their cost of en- ergy is apt to be comparatively high although they cannot readily see how. It is universally desirable that the residence consumed should be well satisfied and that the tariff should be so framed as to stimulate longer hours of use. A simple classi- fication into size classes, with various unit prices for each, or- dinarily is not sufficient to attain all the desired ends. Some of the simpler differential schemes that have been employed to make the charges approximate true costs are noted below. " Norwich " Tariff. The two- or three-part rate with a Wright (or substitute) maximum-demand indicator has not been well received by the ordinary residence consumer and where tried has added to the investment, accounting and adjustment expenses of lighting service. One of the attempts to sugar-coat the pill, named after Norwich, England, where it was early tried, was to charge the consumer a fixed sum equal to such a percentage of his tax " rateable valuation " as would return on the average, his probable demand and customer cost, the plausible argument being used that the peak demand for current de- pended on the size of and investment in the dwelling. This has been found to work fairly well in a community where all the residences are rated on the same basis. But, in most cases, position in the town and in the block affect the renting value of the dwelling house, and so does the extensiveness of the grounds, while neither condition appreciably affects lighting. There is apt to be, for America, undue discrimination. The percentage figure used has commonly been of the order of 10 to 15% of the "rateable values." To it of course has been added an energy charge, say 1 to 3^ per kilowatt-hour, for whatever quantity the watt-hour meter recorded. The British " Point Five Association " has successfully exploited this scheme with a lj (0.5d) energy charge. " Telephone " Tariff. The obvious shortcomings of the " Norwich " tariff have led to other schemes, prominent among 312 PUBLIC UTILITY RATES which is one called in England the "Telephone" tariff be- cause of its similarity to systems of charging for telephone service. The customers were assessed an advance charge intended to cover the demand and customer costs, plus a per- unit energy charge in accordance with the watt-hour meter reading. The best example of this probably was at St. Marylebone, England,* where 70% of the capacity of the lamps (not count- ing mere " convenience " lamps in storerooms, cellars, etc., or decorative sockets) was charged at about $70 per kilowatt per year as the primary factor. The secondary charge was 2 per kilowatt-hour. In connection with such a tariff, the customer contracted to use only electricity for lighting, and the low secondary unit charge stimulated miscellaneous services and longer hours of lighting. Maximum-demand indicators were used for accumu-> lating experience about the demand factors of residence in- stallations. These showed that the small dwellings had a de- mand equal to about 80% of the total installed lamps while the largest residences showed only 33%; the elimination of deco- rative and convenience lamps made 70% fair for all. It was necessary, however, in considering decorative lighting to rule that there should be a service lighting of 1 watt per square foot of floor area. Wisconsin System. The earlier Wisconsin studies f of the various classes of customers showed notable uniformity in the use of their installed capacity, the proportion of " active " to " connected " load running from 40 to 50% for residences, 50 to 80% for stores, etc., as has already been stated in detail. It has been considered that 60% of the first 500 watts connected capacity in a residence should be considered as active and 33% of all over that. A typical schedule called for 12^ per kilowatt- hour for the first 30 hours' use of each kilowatt of active load, 6^ per kilowatt-hour for the next 60 hours use, and 2 per kilowatt-hour for all hours use beyond that. Making up a cus- tomer's bill may be shown by an illustration: * See the paper "Residence Tariffs," by A. H. Seabrook, before the Brit- ish Institution of Electrical Engineers, Dec. 14, 1911. t "Rates For Electric Plants," by Halford Erickson, Ohio Electrical Assoc., July 1914. RATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 313 Monthly meter reading 100 kilowatt-hours Connected load 1100 watts Rated active load 700 watts 30 hr. use of active load, 21 kilowatt-hour @ 12. . . . $2. 52 60 hr. use, 42 kilowatt-hour @ G $2. 52 Balance of use, 37 kilowatt-hour @ 2^. ... $0.74 Total $5.78 The Wisconsin scheme, it is seen, modifies the strictly logical use-of-demand plan (which would make the secondary charges proportional to only operating expenses the fixed and cus- tomer charge being paid by the first period of use of the cus- tomers' lamps) . The break is eased more gradually, apparently for commercial reasons. The Detroit System. A scheme was worked out about 1908 by the Detroit Edison Co., based on the number of rooms in the residence. A net charge of 12.6^ per kilowatt-hour is im- posed for up to 2 kilowatt-hours per month for the principal rooms; only 3.6^ per kilowatt-hour is charged for all in excess. Lavatories, baths, kitchens, storerooms, closets, stairways and halls, pantries, porches, vestibules, servants' rooms and bedrooms up to three are not counted. Once the number of units to be charged at the primary rates is fixed, it is subject to change only by structural alteration of the house. Unless a house has altogether less than three rooms, the net minimum charge is $0.76 six units at the primary rate. In the experience of the Detroit company, the residence rate in 1916 averaged about 5.8^ per kilowatt-hour and tended to fall. For commercial lighting installations this company uses the maximum-demand indicator in connection with the watt-hour meter. The gross charge is 10^ per kilowatt-hour for the first 30 hours' use per month of the maximum demand, plus 4j per kilowatt-hour for the next 120 hours use, and plus 2^ per kilowatt-hour for the remainder. There is a discount of 10% for prompt payment on bills of less than $50 per month, 15% on $50 to $100, 20% on $100 to $200, and 25% on $200 and over. Lighting rates include free renewals of tungsten lamps 314 PUBLIC UTILITY RATES in 40-, 60- and 100-watt sizes, and reduced prices on larger lamps. Alternating-current power is sold in Detroit on a two-part rate $4.50 gross per month per kilowatt of demand up to 20 kilowatts, and $3 for over that figure, plus lj per kilowatt- hour for all current. Direct-current power is sold at $4.50 per kilowatt of demand for up to 100 kilowatts and $3 for the excess, plus 1 per kilowatt-hour for the first 250 hours use of maximum demand per month and 0.6^ per unit for the excess. Power is also sold at 4j per kilowatt-hour for those who require short- term contracts. Where such power is incidental to lighting, as in department stores, it may be recorded on the lighting meter (but then is not shown on the demand indicator) and all current in excess of the first 30 hours use of the lighting demand is charged at 4j per kilowatt-hour. Both customer and company benefit by this last arrangement; the customer reduces his lighting bill and the company saves the cost of a separate meter and separate account. Canadian Cities System. Several Canadian cities and towns taking current from the Ontario Hydro-Electric Commission have adopted two-part rate schemes recommended by the Commission. The residence lighting schedule resembles that in use in Detroit, substituting square feet of floor area for num- ber of rooms. There is typically (City of London in 1915) a primary charge (neglecting 10% prompt-payment discount) of 3j per 100 square feet of floor space plus 2j per kilowatt- hour for all consumption up to 4 kilowatt-hours per month per 1000 square feet of floor area for the first 1000 square feet, and up to 3 kilowatt-hours per month for eacn 1000 square feet additional; plus \i per kilowatt-hour for all additional. The floor area is taken as the product of outside dimensions, excluding bay windows, porches, etc., multiplied by the number of floors. Thus basements, verandas, unfinished attics, etc., are not included. The foregoing is for domestic service; for commercial, lighting, the charge is 5j per kilowatt-hour for the first 30 hours use of load, plus 2^ per kilowatt-hour for the next 70 hours use, plus 0.5^ per kilowatt-hour for all additional consumption. For 24-hour unrestricted power there is a service charge of $1 per horsepower per month, plus 2f per kilowatt-hour for the first RATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 315 50 hours use of load, plus 1.7^ per kilowatt-hour for the next 50 hours use and 0.2^ per kilowatt-hour for all additional en- ergy. Over this is 10% off for prompt payment. The Kapp Rate System. Any review of electric rates would be incomplete without at least passing mention of the Kapp or two-rate system of metering. As first planned, it was decided what weight off-peak energy should have compared with peak, and then the meter was rigged to record full quantities at peak hours and some fraction of actual delivery at off-peak hours. The meter reading, of course, was multiplied, by some price for peak-load current. The name is now often stretched some- what to cover separate metering of peak and off-peak con- sumption, there being different prices for the two. Comparison of Rates in American Cities. There is a marked lack of published tabulations of American electricity rates, in con- trast with the tables cited herein for gas and water utilities. The U. S. Census reports, the central-station directories and even the various state-commission utility-statistics reports show this lack. This seems to be because no tabulation fairly discloses operations and rates without special study of each concern and conversion to some common basis of comparison which conversion itself, how- ever, prevents seeing the form in which rates are promulgated. This need of conversion in turn arises from the many classes and qualities of service given, the spread of supply systems to several unlike communities, etc. Therefore attempts to tabulate rates for typical cities have been abandoned here and in place of such figures the preceding notes on important types of schedules have been substituted. Isolated Plants and Breakdown Service. The thorn in the flesh of central-station sales stimulators and contract agents is the so-called " isolated plant" in the larger cities. There are those who claim, on the one hand, that in the majority of cases a large building will save money to generate its own current for lighting, elevators and tenants' power especially if exhaust steam can be used for winter heating. There are, on the other hand, those who claim that if all the true costs, rental, losses, etc., are included in the accounts, the isolated-plant expenses will mount up so rapidly that central-station service must be cheaper. The truth, as common in controversies, probably lies between the two extremes. Surely there are cases where the 316 PUBLIC UTILITY RATES private interior plant can be so favored as to conspire with the handicap of expensive transmission and distribution from the outside plant to make self-service the more economical. Ob- viously there are plants where insufficient economies are possi- ble to come down to the cost of outside current. Into which class a given project might fall cannot be settled off-hand; the determination requires careful engineering study and use of good judgment. Any isolated plant is of course less certain as to continuity of supply than a large system with perhaps several prime sources of energy. On this account so-called breakdown service has been furnished at times and indeed can be required on pay- ment of proper costs. Such service means peak-load capacity set aside more or less in proportion to the possible demand of all such customers; little or no current is drawn. The rate which is fair gives the central station a return on the capacity held in reserve and a little for special inspection, regular cus- tomer charges, and, at a low rate, for what current had been used. Charges for Street Lighting. Rates for street and park lighting are commonly on a flat or a lump-sum basis, and this is logical as the number of lamps, power requirement and hours of* use can be accurately ascertained in advance. Street lighting results in long hours use of the special generating machinery and distributing lines so that the unit price for energy is fairly low; however it is a peak-load service and the unit price in a given locality cannot ordinarily come down as low as for some in- dustrial-power services. The cost of maintenance of arc-lamp systems is high on account of the necessity of continual cleaning and trimming. The introduction of high-candle-power tungsten- filament incandescent lamps, having a specific consumption (0.5 watt per candle) about as low as the arc, has eliminated most of the inspection and trimming expense. For example in New York City between Nov. 1, 1914, and Jan. 1, 1916, 15,000 of the 300- and 400-watt tungsten lamps were substituted for arcs, and 50,000 of the 200-watt tungstens for various electric, gas and naphtha lamps. A novel indeterminate-term contract for street lighting was made possible for the smaller cities of Wisconsin by an act of the state legislature in 1915. Under this plan the lighting rate RATE PROBLEMS OF ELECTRICITY SUPPLY WORKS 317 would depend upon the fixed charges on equipment, both special and joint, and upon the direct and joint operating expenses. Should the contract be terminated, the municipality would take over the special lighting equipment at the difference between cost (Jess scrap value) and the aggregate repaid retirance.* Charges for Ornamental Street Lighting. One of the most conspicuous of recent movements in municipal street lighting has been the development of large-powered ornamental systems for the business districts, making what have been popularly termed "white ways." Such street lighting was first exploited by asso- ciated retail merchants to make the local business streets more attractive after working hours of prospective customers. But the effect was so popularly appreciated that it came to be re- garded by municipal authorities as a civic improvement. Installations of such systems have been financed in various ways, and the annual expenses have been covered as variously. In the older cases, some local organization, like a Chamber of Commerce, has raised a special fund to pay for the initial instal- lation and has provided the annual revenue required for electric current and maintenance. Contracts for the standards, globes, lamps and circuits (generally underground) in some cases have been let to the local central station, as well as (separately) for the maintenance and current. Sometimes the central station has made an annual figure per lamp for energy and care, and in other cases the total annual expense has been subdivided on a frontage basis, the electric company collecting. A logical development has been to have the municipality assume the annual burden. In a few cases the central-station companies themselves own the complete installation, the city, or some local association, pay- ing a lump sum, or a lamp rate, that covers interest, retirance, care and current. In other cases popular clamor (stimulated a little perhaps) has led the city to pay both first and annual cost. Whatever basis of financing is adopted, plans seem to be growing in favor by which the central-station company makes a two-part lamp rate, one part covering interest on investment, retirance (if fixtures are company owned), and maintenance, and the other part covering energy supplied. This plan facilitates various adjustments of hours of burning, etc. * Details of such a contract were described by G. W. Vanderzee, before the Wisconsin Electrical Association, March 17, 1916. CHAPTER XVI PROBLEMS OF TELEPHONE RATE-MAKING Some Telephone History. The history of the development of electric speech transmission as a public service is perhaps the most interesting story in utility fields. The struggles of the inventor of the telephone, the early indifference of capitalists and their later scrambles to get inside the industry, the assaults of the organized telegraph industry, the victory of a few un- recognized men of limited means over the many of prestige and backing, the rapid multiplication of subscribers, the spread of long-distance lines all these topics combine into a tale of absorbing interest. The very good showing of the telephone monopoly, conducted first as a private enterprise, when later subjected to the searching scrutiny of public regulation, has taught utility officials everywhere the value of conservative capitalization combined with liberal provision for maintenance, development, and retirance. The electric telephone was invented by Alexander Graham Bell in the period of 1874-1876. The date of his fundamental patent was March 7, 1876, but the various ideas involved gradually took shape in the previous years while the inventor was work- ing on a harmonic telegraph. Indeed Bell's conception laid a broad basis for the whole modern development of telephony for he realized that a " talking telegraph " must be forced to respond to the resultant of complex air impulses sound waves and must transmit these from place to place as undulating or oscil- latory currents of high frequency. Bell's telephone was but the prototype of what is today the ear receiver, the sound reproducer of the spoken message. The earliest telephone outfit was merely a pair of similar simple in- struments in each an iron disk vibrating before a polarized electromagnet connected by a simple circuit. Each machine could be worked as the transmitter or the receiver as desired. But as the possibilities of a telephone system, providing im- 318 PROBLEMS OF TELEPHONE RATE-MAKING 319 mediate local intercommunication, became more and more ob- vious, the simple early apparatus showed limitations due to the small amounts of energy in the telephonic currents. Indeed in the earliest days Bell had recognized the feeble nature of these induced currents and only by chance found that unreinforced they were sufficient for practical operation. The first change was when the battery-operated transmitter was employed to send stronger impulses out on the line. The open road was to cause changes in liquid or solid resistance by the movement of a transmitter diaphragm, and thus to set up stronger undulatory currents. Bell had made this scheme one of the claims in his patent of March 7, 1876, but it was the ver- satile T. A. Edison who constructed the first practical trans- mitter of this sort. He had been retained by the Western Union Telegraph Co., in its endeavor to wrest the telephone business from Bell and his associates. Edison's patent speci- fications, however, did not disclose the true nature of the ac- tions involved so that it was possible for Emile Berliner, 1877, David Hughes, 1878, and Francis Blake, 1878, to employ the true principle and reach the same goal. Berliner and Blake were employed by the Bell company and gave the pioneer system a device superior to that of their great competitor. The Su- preme Court also gave Berliner priority over Edison. To the latter, however, belongs credit for the use at that time of an induction coil to step up the potential of the transmitter's un- dulatory battery currents for sending out on the lines and through the receivers. The first telephones were intended for connecting always the same two places like the customer's residence and factory - although an undeveloped idea of widespread flexible popular intercommunication by word of mouth was disclosed by Bell in 1877. This idea of a possible telephone central station no doubt was inspired by the telegraph intercommunicating sys- tems already in use in England (1865), Philadelphia (1867), and New York (1869). The American District Telegraph Co. early used telephones as adjuncts of their messenger call lines; they were introduced also by the New York Law Telegraph system and the Holmes Boston Burglar Alarm service. But the first true commercial telephone exchange is commonly ac- counted as the Bell plant established in New Haven, in Jan- 320 PUBLIC UTILITY RATES uary, 1878, though it was quickly followed by similar ones in Bridgeport, Meriden, New York, Philadelphia, and Chicago. The switchboard adopted by the Bell licencees was an adap- tation of the telegraph board with its multiplicity of cross strips and connecting pegs. The modern type of switchboard, which even in its crudest forms was a radical departure from old tele- graph ideas, strangely enough was developed by the Western Electric Co., then the manufacturing associate of the Bell rival - the Western Union Telegraph Co. Development of the Business. The business development of the telephone industry is as interesting to utility students as the technical history and even more significant. The Bell system, while a natural monopoly, is unique among utilities, in that the early conceptions of the organizers of the business seem to have been broad enough so that the same concern, or group of concerns, has accommodated the growth of succeeding years while keeping their procedures always economically sound enough to weather strange and unforeseen business conditions. The Bell corporation is unique too in that the present head (1916) is the same mind that gave the industry its first adequate organization. The whole development of this utility seems to have been toward the goal of universal service practically accomplished by 1915 with generally satisfied patrons in all the years, with constantly improved and extended lines, with increasing convenience and simplicity for the users, with all the tremendous costs of development constantly amortized, with the value of final physical plant greater than the issued stocks and bonds, with rates widely acceptable, and with usually pleas- ant public relations in spite of a nation-wide aversion to great monopolies and aggregations of capital. In August, 1877, a " Bell Telephone Association " was formed by Bell, Gardner G. Hubbard and Thomas Sanders, who had financed the early experiments, and Thomas A. Watson, Bell's technical assistant. In 1878 the New England Telephone Co., and the Bell Telephone Co., were formed to use, licence and manufacture telephones; they were consolidated in 1879. Theodore N. Vail, the present head of the Bell system (1916), then the head of the Federal Mail Service and an intimate of Hubbard, was secured as general manager of the parent company. His first task was stiffening up the defense of the PROBLEMS OF TELEPHONE RATE-MAKING 321 little company against its formidable opponent, the Western Union. The assault of the telegraph company on the Bell patents was unsuccessful and the Western Union abandoned the field, the telephone company agreeing not to enter the tele- graph industry. Vail formulated a consistent business policy and practice in the matter of licences and contracts, confining agents to cities and reserving all the toll lines and an interest in local concerns to the parent concern. He started out for standardization of equipment. Apparently all his acts were guided by the great motive of this organization a single uni- versal country-wide system. The financial means and resources of Bell, Hubbard and Sanders were early overtaxed. Vail himself secured a few small stockholders in his venture. Finally Boston capitalists were interested and W. H. Forbes a man of much local influence became President of the company. After the Western Union agreement was made, in 1880, the business was reorganized as the American Bell Telephone Co., with $6,000,000 capital. About this time Bell, Sanders, Hubbard, and Watson retired from active participation in the company's affairs apparently wealthy and not attracted by the prospective magnitude of the concern. On March 1, 1880, there were 138 exchanges with about 30,400 stations (complete sets of talking instruments). On March 1, 1881, there were 408 exchanges with some 66,300 stations, including 10,440 taken over from the Western Union. By 1889 there were 743 main exchanges in this country with 158,700 stations or subscribers. The status of company then is shown by a few figures: 127,902 miles of wire on poles, 9458 miles of wire on buildings, 8009 miles under water; 6182 em- ployes, and 369,203,705 connections, or conversations, com- pleted in a year.* Long-distance Service. In the first few years, long-distance conversation was only on an experimental scale owing to the more pressing matters of local exchanges and patent litigation. But the commercial possibilities were not lost sight of, and only the local rights were contracted out. The first commercial attempt at long-distance conversation seems to have been between Boston and Lowell in 1879 (ex- * From a summary of figures in American Bell Telephone Co. reports, by J. E. Kingsbury in "The Telephone and Telegraph Exchanges," 1915. 322 PUBLIC UTILITY RATES eluding the Boston-Cambridge and Boston-Somerville private lines of 1877). The next jump was across the 45 miles from Boston to Providence. This was successful after the circuit was made all metallic the earth return abandoned. In 1884 Boston was connected with New York. In 1885, after the Massachusetts legislature refused to allow a larger capitaliza- tion for the American Bell Telephone Co., the American Tele- phone and Telegraph Co. was formed under the New York laws to carry on the long-distance work. The lines spread rapidly from place to place after 1885 so that when Chicago and New York were connected (1892) the company had some 140,000 miles of wire strung compared with the 13,600 miles in use at the time just before Boston could talk to New York. In 1899 this new company, by reason of its broader powers, ab- sorbed the Bell Company, assuming an interest in all the local operating companies, owning the talking instruments, handling all inventions, developments, patents, legal troubles, and financ- ing. In 1911, when New York and Denver were connected, the company's "long-distance" wires totaled 1,805,000 miles. By 1913, the service was pushed to Salt Lake City and by 1915 to San Francisco. This distance is 3400 miles. The talking dis- tance a little later was increased by connecting Florida with Cali- fornia 4300 miles of line. At that time there were 2,438,000 miles of wire in toll service. By the beginning of 1916, it was possible to talk from some point, at least, in each state of the Union to some point in every other state. It was possible to talk between all the more im- portant centers in the great majority of the states. The Bell system connects almost every city, town and village in the country though a great many of the small places are reached by independent companies having only connection privileges. In 1912 * the Bell system operated 74.6 per cent of the total mileage of wire, 58.3 per cent of total number of telephones in the country, and 51.0 per cent of the exchanges. Of the 1916 more important systems (with annual incomes of $5000 or more) the Bell interests controlled only 9.2 per cent (or 176), but this smaller number handled 65.5 per cent of the traffic, produced 80.8 per cent of the income, possessed 72 per cent of the assets, * See "Report of U. S. Census Bureau on Telephones and Telegraphs in 1912," published in 1915. PROBLEMS OF TELEPHONE RATE-MAKING 323 ' ^9 i '*" i and employed 77.4 per cent of the persons engaged. Bell com- panies operated then in every state of the Union, and the independents in all but Rhode Island and the District of Co- lumbia. The independent companies were strongest in South Dakota with 88.1 per cent of the telephones. The Bell com- panies were strongest in New England where they controlled 92.7 per cent of the telephones. At the beginning of the year 1916, the Bell system proper comprised 5300 exchanges, 16,050,000 miles of wire in exchange lines, 2,450,000 miles of wire in toll lines, 6,155,900 subscribers' stations. There were in addition 2,995,321 stations of 28,306 connecting systems. The daily average of completed local ex- change connections was about 25,184,000 and of toll-line con- nections 819,000. The per cent of telephones in the country connecting with the Bell system had risen to some 65. The present condition and operations of the Bell system are of interest, and the following comparative figures are appended from the -annual reports for 1915. REVENUE AND EXPENSES OF BELL SYSTEM, 1915 EXCLUDING DUPLICATIONS AND PAYMENTS BY ASSOCIATED COMPANIES Stocks, bonds and notes outstanding in hands of public $796,352,584 Book value plant, tools and supplies 896,021,102 Appraisal value, tools and supplies 957,021,102 Gross revenue. . . . 239,909;649 Expenses: Operation $84,550,665 Maintenance 31,171,272 Depreciation 44,888,702 Taxes 13,117,253 Total $173,727,892 Net revenue 48,086,114 Deduct dividends paid 32,897,065 Deduct interest 18,095,643 Balance for surplus $ 15, 189,049 324 PUBLIC UTILITY RATES AVERAGE OPERATING UNITS OF ASSOCIATED BELL OPERATING COMPANIES, 1895 TO 1915 COVERING ALL THE EXCHANGES AND TOLL LINES OF THE BELL TELEPHONE SYSTEM EXCEPT THE LONG-DISTANCE LINES OF AMERICAN TELEPHONE AND TELEGRAPH CO. Average per Exchange Station 1895 1900 1910 1914 1915 Annual earnings: Exchange service $ 69.75 $ 44.68 $ 31.28 $ 29.81 $ 29.80 Toll service 11.35 12.60 9.47 8.60 8.65 Total $ 81.10 $ 57.28 $ 40.75 $ 38.41 $ 38.45 Expenses: Operation $ 29.15 $ 21.63 $ 15.14 $ 15.88 $ 15.61 Taxes 2.23 2.37 2.00 2.00 2.02 Total $ 31.38 $ 24.00 $ 17.14 $ 17.88 $ 17.63 Balance 49.72 33.28 23.61 20.53 20.82 Maintenance and depreciation.. Net earnings 26.20 23.52 17.68 15.60 13.46 10.15 12.62 7.91 12.38 8.44 Per cent operation expense to telephone earnings 35.9 37.8 37.2 41.4 40.6 Per cent telephone expense to telephone earnings 71.0 72.8 75.1 79.4 78.1 Per 'cent maintenance and depre- ciation to average plant, sup- plies, etc 9.1 8.4 9.5 8.9 8.8 Per cent increase exchange sta- tions * 15.7 26.5 11.8 6.4 6.9 Per cent increase miles exchange wire * 15.9 33.2 12.0 9.2 6.8 Per cent increase miles toll wire * (excluding long-distance lines) Average plant cost per exchange station (exchange and toll con- struction, excluding long-dis- tance lines) 21.3 $260 25.2 $199 11.5 $142 5.5 $141 0.9t $138 Average cost per mile of toll wire (including poles and conduits, excluding long-distance lines). . Per cent gross telephone earnings to average plant $ 81 29.7 $ 71 28.4 $ 66 28.8 $ 69 27.6 $ 70 27.7 Per cent total net earnings to average capital obligations Per cent total net earnings to plant and other assets f. 9.76 9 36 8.85 7.96 7.52 6.65 6V 66 5.51 7.20 5.84 Per cent paid out on an average capital obligations 5.13 6.10 6.01 5.88 5.88 Per cent paid out on plant and other assets J 5.09 5.57 5.31 4.87 4.76 * Increase during year shown, over previous year. t Small increase mainly due to increase in radius covered by exchange rates. t Book value of plant taken which was less than reproduction value. PROBLEMS OF TELEPHONE RATE-MAKING 325 Telephone Technology. For communication between a couple of relatively near points, only simple equipment is neces- sary a couple of telephone sets (transmitter, battery, re- ceiver and call bell) and a line wire. When telephones are idle, call circuits are ready for use. When more than two points are to be intercommunicating, a wire, or a pair of wires, may enter each set from all the others and run to the same number of se- lector switches. For the more complicated exchange systems in a town, all the subscribers are connected by separate circuits which enter a central switching office and go to an indicator and " jack " or set of spring contacts. In a small place the jacks are disposed in numbered rows and two subscribers are placed in communication by flexible conductors between jacks. But this simple switchboard serves for only a few hundred subscribers at most and it is necessary after that to go to the " multiple board. " A " multiple board " is, in-its ordinary form, a switchboard on which the subscribers' line jacks are duplicated on each section, or at each third operator's position, so that each operator usually has within reach a line jack for each subscriber in that exchange. Subscribers then are divided into groups of about 300 and call- ing jacks and indicators for each group are placed before a group of operators. Within reach of each group of operators are line jacks for the entire number of subscribers, so that any one in these operators' groups can be immediately connected to any other subscriber in the exchange. This requires a great duplica- tion of jacks, and arrangements are necessary for showing when a desired subscriber's line is busy and when a conversation between two subscribers has ended. If an exchange provides for 4900 subscribers (the usual limit of an ordinary multiple board, after which a second exchange is established and connected by trunk lines), the switchboard com- monly shows 16 sections with three operators at each section. Each section usually has seven panels on each of which 700 lines would terminate on jacks making 78,400 jacks on the complete board. But only 307 of the lines coming to a section are con- nected to indicators and answering jacks. Each operator's manipulation of panels overlaps her neighbor's in that section, which helps one from becoming overtaxed and another idle. A few standard boards have been made for 9600 subscribers there being then 40 sections of eight panels each, 240 indicators 326 PUBLIC UTILITY RATES and answering jacks for the three operators of each section, and 1200 multiple jacks per panel or 384,000 for the exchange. These figures really apply to boards for average conditions only. The actual number of sections and panels depends on the rate at which subscribers call. Special requirements arise also to cause various departures from ordinary arrangements of a board. It should be noted that, for a little less than double capacity rise between the 4900 and 9600 subscriber exchanges, the number of jacks and line extensions has had to be increased nearly five times; this is one of the elements entering into the added ex- pense of service in large exchanges. If it were attempted to serve 24,000 subscribers from one exchange there would be re- quired an impossible board of 100 sections, 2000 panels, 2,400,000 multiple jacks, and 300 to 700 operators. The multiple would be out of the operator's reach entirely. This shows why it is necessary to limit a city exchange to a certain district and connect the exchanges by special lines. When there is more than one exchange in a city, two separate boards are provided commonly designated as the " A " and " B " boards. The "A" board is a regular multiple board as noted. The "B" board usually is a full multiple; each subscriber's line has aline jack within reach of each " B " operator. From trunk jacks on each " A " board, lines run to plugs on the " B " boards in every other exchange in the city (as many lines as experience shows necessary to handle the traffic). Similarly, auxiliary "order" circuits run from the " A " to the " B " operators. Then if a subscriber calls some one outside his own exchange district, his " A " operator informs the proper distant " B " operator who connects to the desired subscriber's jack one of "A's" trunk plugs and the "A" operator uses the corresponding trunk jack as though it were a subscriber's line jack on her own board. In most cities the " common-battery " system is used in which a single battery at the central office operates all the transmitters and a single generator rings all the bells. The voltage of the common battery is higher than was that of the local batteries used at each subscriber's instrument. This introduces many important changes in the equipments. The central . operator is called by switchboard lamps operated on central-battery cur- rent controlled by the subscriber. PROBLEMS OF TELEPHONE RATE-MAKING 327 The common-battery system was preceded by the magneto system which is still largely used in the smaller places. Each subscriber's set had a hand generator, or " magneto," for calling central, and a battery for working the transmitter. Most business offices having several telephone lines have a " private-branch exchange " or a small board tended by private employees. With these, internal communication is made easy and much fewer lines to the city exchanges are required. The " P. B. X." boards of some concerns have upward of 15 operators. In rural districts where the expense of long single- or few- party lines is prohibitive, a large number are placed on one line and code ringing resorted to. As many as 20 subscribers may be on one such circuit, compared with two or four on town lines; the service, of course, is inferior as the number at' parties rises. Automatic Telephone Systems. To avoid the large number of operators required in an exchange, several automatic systems have been devised substituting mechanism controlled directly by the subscribers. In general, the subscriber moves a dial on his telephone, or works some similar contrivance, to send various groups of electrical impulses to the exchange where re- lays step up contact bars accordingly, to connect with the de- sired lines and ring. The argument against automatic systems is that the subscriber really does the switching which an operator does for him in the manual system; the subscriber being less expert is apt to be slow and to multiply mistakes. The delicate apparatus re- quires very expert supervision and maintenance to preserve good service. Several semi-automatic systems have been brought out, one by the Bell interests. This one replaces the " B " operator in a city exchange (whose duties are largely mechanical) with a selective mechanism. Telephone Service Compared with Transportation. Tele- phone utilities are most decidedly of the service type (as defined on page 5); they .cannot acquire or store a product against the hours of maximum demand, and their plant investment is greatly increased by effect of peak loads. The service is a pe- culiarly personal one that of bridging distance and time, and placing in communication, in contact, the minds of two persons. 328 PUBLIC UTILITY RATES It is even more personal a service than railway passenger trans- portation. Telephone service resembles railway freight trans- portation in that usually a great variety of service is furnished by each important company and that distributed over a great geographical area. The large number of different services, or classes of service or diverse uses of service, and the distribution of activities over many different communities and states, impose somewhat the same difficulties to the accurate apportionment of expenses, to the definite location of cost of an individual service, and to the use of a cost-of-service rate basis, that are encountered in rail- way work. Anyone who takes up in detail the study of telephone service costs and rates immediately realizes the complexity in- troduced by serving separated communities in different ways, compared with the simple cases of water, gas and electric com- panies operating within the confines of a single district and giving one or a few classes of impersonal service. In the case of the simpler utilities, cost-of-service becomes the logical basis of scrutinizing indiv dual rates. As an utility's activities spread greatly and become diversified, then value-of -service looms up of greater and greater importance in the practical adjustment of charges. Importance of Adequate Telephone Service. Earlier in these discussions it has been stated that adequate utility serv- ice generally is placed ahead of low rates, and that, in any scru- tiny of rates, a question as to adequacy of service is necessarily involved. A query then must arise about what constitutes ad- equate telephone service. Is it merely furnishing facilities in each of the communities served by a company in accordance with the prices which the inhabitants are willing to support, or is it something more comprehensive? Asked another way: Does " adequate service " necessitate considering the interrelations of the various communities hamlets, villages, towns, suburban districts, cities, manufacturing centers, residential districts, agri- cultural areas? In considering each question it becomes ob- vious that the peculiar personal character of telephone service, as well as the multiplication of classes of subscribers and the geographical stretch of required communication, make stand- ards of adequate service different from those applicable to a water, gas, or electric company operating within the confines PROBLEMS OF TELEPHONE RATE-MAKING 329 of a single district and having any one customer little aware of the existence or absence of all other customers. *jj In the United States the spread and development of tele- phone service is very much greater than in any other nation, and to a very great measure this has been accomplished without the present public regulation and under the Bell organization's idea that adequate service meant an universal system with in- dividual rates adjusted one to another more in proportion to ratios of their respective values to subscribers than their respec- tive "costs" "costs" being here considered for the moment as the annual expense of giving a subscriber the means of origina- ting traffic, not distributed at all on subscribers called. (There is some evidence that the future will see a different definition of cost one that (1) will place on some subscribers some of the expense of extending into unremunerative districts and that (2) will apportion between both parties to a telephone conversation the expense of the connection. Such a definition it must be emphasized still will be one of costs and not of rates, though there may be a closer relation between costs, so defined, and rates.) Peculiarities l>-t^GOOOOOOOOOOOOOOO T c c u c 350 PUBLIC UTILITY RATES The diagrams, of course, do not apply to the abnormally high prices prevail- ing from 1915 to 1917, but their use is probably justified for work where the value sought is for recent normal prices. The various prices on which such curves may be based are stated by Mr. Main as follows: 1903 1907 1916 Excavation (including backfill), per cu. yd. 50 Concrete (including forms), per cu. yd. . . . 7 00 Brickwork in walls, per M 15 00 18 00 22 00 Floors, per sq. ft 25 32 35 Roofs, per sq. ft 0.20 25 30 Window openings, wood sash, per sq. ft... . Stairs, including partitions, each 0.33 100 00 0.40 100 00 0.67 150 00 Plumbing sets; fixtures, piping and parti- tions, each 75 00 75 00 100 00 Columns; southern pine, incl. piers, etc., each 12 00 15 00 18 00 nnnmiiiiiiiiiiiiim; ! IFIG, 3-Th 1.80 : : |\| 1 1 1 1 ' 1 1 1 1 1 1 1 1 1 1 1 1 i2 LTO ;;|;;i;;|;;;;;|;;;; i REE STORY lflc : 4' : FIG 4- F i7offisffly^^ffip ^-Ifillii OUR STORY :|;::::::WI*ti 53: t: f3j i " ff" in 50 100 150 ZOO Z Length Flti 1 InTR mrm '^flNWI ^N!]^ H::::::::::::*::::: IZ5 m .|:::::::: j::: ffl3S 50 300 350 400 450 600 07 5 00 " ''50 200 ? inft Length i:::::: i I!:!!!! ii 50 50 300 350 400 450 500 in ft ill i TO. 5- P I ||i\i| i \\mM lltll ;!;iif;j r IVE STORY ** iii ijiriG 6- SIX STORY & iilBMill 1 ' j: i jiijijjijjijijijii "ill i '0 60 WO 150 ZOO Z Length uo feEb.^;:::: :::: 5uo||pj|; 50 300 350 400 450 500 070 50 ' loo 150 ZOO ' 25 Length liiiiililiiiiiii ;w 75 JOO 350 400 450 500 SIZE COST DIAGRAMS FOR BRICK MILL BUILDINGS (351) APPENDIX B TABLES FOR SINKING-FUND AND PRESENT-VALUE COMPUTATIONS For Annually Compounded Interest. The first two appended tables (reprinted from Engineering News, Jan. 25, 1894) were prepared by John W. Hill, of Cincinnati, for his consulting practice. They have since been found of great use to engineers, being more convenient than some available actuarial tables. The first table is of use in compound-interest (sinking-fund) compu- tations for depreciation and retirance. The second table is for present worths of annual charges. The third table shows the growth of depreciation when a definite life is assumed and the effect of interest is not neglected. 352 APPENDIX B 353 O Q TP OOt- CO i-H - < l-H pOGOl Oii-Ht^iC' rH CO (M OO CO >Ct--.cOOrH rH CO CO I-H (M CDOrHt^rH iO >O rH rH OOOrHIMlM COrH OGOrH GO TH .< IM 000 t^. CO CO p CO 1C O O 1C rH CO IM TH I-H CD CO CO t-^. l> OGO GO CO 1C OIM oo i> oo (MOOOt^CO I GO rH O? 1C GO 1C O t>- IM CO CO iiC O O TH CO 1C OO O CO rH O ! O t>- CO TH GO O CO IrH COCOCOIMi-H T-H IM I O5 O5 CO OO GO O CO oo i i co oo rH rHCOlM THTH TH 1C O 1C I-H !>. rH I-H O COiCiCrHrH CO CO CO IM O rHO CQ TH TH rH Ol> iCrH OlM TH b- T- i co oo rH CO IM TH i 1 IM O OOO t^ S CO rH TH CO O I OO t^- TH 1C TH GO CO 1C t^OI>-OOiC l^-t--(MTH' COCOICCOIM COIMOOi-Hi O5 OOCO IM OO OO i I CO OO -^ * CO C<) ^H i-H COIM Ot^ 1C co 00 ) TH CO OO rH IMOOOOt> O O O CO (Ncoioco O5 O (Mr^ 010 Tti o C<) CO 00 iO "^ co c^ i i t-n CO 00 (M CD 1C t> CO OOO CO CO 1C i I (M CO GOO lM r-H T-H t-- i-H ! 1 t CO C- iiCt>-CO Ot>-GO(MiC THI>ICTHI (NIM O5 !N rt< co O5 (M cq >C^H oco co CO CO OiC (MCOO3 OOrfi oca co oo 10 *CO(N --H-H OlM 00 t^ OO CO I-H C5 GO !> r-H i-H OCO piCC I-H t>.rH I-H O CO i rH< CO O OOCO OS ^H "H t>rHTHOO CNOOrHIM rHrHrHcOC^I C^THI-HI i GO OrH t^ CO M GO rH (M O OO 1C C<1 O O COOiCCOiH rH rH rH rH CO N TH i I i-H TH lOCO IM -O5'-HCOkOOO'-H APPENDIX B 355 ECONOMIC DEPRECIATION AND EARNING CONDITION OP UTILITY PHYSICAI/- PROPERTY ITEMS OF DEFINITE LIFE AND INTEREST RATE * Arranged for lives of from 5 to 50 years and for interest at from 4 to 7 per cent. Interest annually compounded. "Depreciation" is that during the year named; " Value " is that at the end of the year. 5- YEAR LIFE. kg 8><5 jl Interest Rate. 4% Interest Rate. 5% Interest Rate. 6% Interest Rate, ?% Value. Dep. Value. Dep. Value. Dep. Value. Dep. 100.0000 100.0000 100.0000 100.0000 18.4627 18.0975 17.7396 17.3891 1 81.5373 81.9025 82.2604 82.6109 19.2012 19.0023 18.8041 18.6063 2 62.3361 62.9002 63.4563 64.0046 19.9693 19.9525 19.9322 19.9087 3 42.3668 42.9477 43.5241 44.0959 20.7680 20.9501 21.1282 21.3024 4 21.5988 21.9976 22.3959 22.7935 21.5988 21.9976 22.3959 22.7935 5 0.0000 0.0000 0.0000 0.0000 100.0000 100.0000 100.0000 100.0000 10- YEAR LIFE. 100.0000 100.0000 100.0000 100.0000 8.3291 7.9505 7.5868 7.2377 i 91.6709 92.0495 92.4132 92.7623 8.6623 8.3480 8.0420 7.7444 2 83.0086 83.7015 84.3712 85.0179 9.0088 8.7654 8.5245 8.2865 3 73.9998 74.9361 75.8467 76.7314 9.3690 9.2037 9.0360 8.8666 4 64.6308 65.7324 66.8107 67.8648 9.7439 9.6638 9.5782 9.4872 5 54.8869 56.0686 57.2325 58.3776 10.1336 10.1470 10.1528 10.1513 6 44.7533 45.9216 47.0797 48.2263 10.5389 10.6544 10.7620 10.8619 7 34.2144 35.2672 36.3177 37.3644 10.9606 11.1871 11.4078 11.6223 8 23.2538 24.0801 24.9099 25.7421 11.3989 11.7464 12.0922 12.4358 9 11.8549 12.3337 12.8177 13.3063 11.8549 12.3337 12.8177 13.3063 10 0.0000 0.0000 0.0000 0.0000 100.0000 100.0000 100.0000 100.0000 15- YEAR LIFE. 100.0000 100.0000 100.0000 100.0000 4.9941 4.6342 4.2963 3.9795 i 95.0059 95.3658 95.7037 96.0205 5.1939 4.8660 4.5540 4.2580 2 89.8120 90.4998 91.1497 91.7625 5.4016 5.1092 4.8273 4.5561 3 84.4104 85.3906 86.3224 87.2064 5.6177 5.3646 5.1170 4.8750 4 78.7927 80.0260 81.2054 82.3314 5.8424 5.6330 5.4239 5.2162 5 72.9503 74.3930 75.7815 77.1152 6.0760 5.9146 5.7493 5.5814 6 66.8743 68.4784 70.0322 71.5338 6.3192 6.2103 6.0944 5.9722 Embodying the compound-interest depreciation tables of the Valuation Committee of the American Society of Civil Engineers, accompanying its 1914 (progress) and 1916 (final) reports. See the Proceedings of the American Society of Civil Engineers, December 1916, p. 1937. The committee's tables go to 100 years life. 356 PUBLIC UTILITY RATES 15- YEAR LIFE. (Continued.) *t 0) c8 SK Interest Rate. 4% Interest Rate. 5% Interest Rate. 6% Interest Rate. 7% Value. Dep. Value. Dep. Value. Dep. Value. Dep. 7 60.5551 62.2681 63.9878 65.5616 6.5719 6.5209 6.4601 6.3901 8 53.9832 55.7472 57.4777 59.1715 6.8348 6.8468 6.8476 6.8375 9 47.1484 48.9004 50.6301 52.3340 7.1081 7.1892 7.2584 7.3160 10 40.0403 41.7112 43.3717 45.0180 7.3925 7.5487 7.6941 7.8282 11 82.6478 84.1625 35.6776 37.1898 7.6882 7.9261 8.1555 8.3762 12 24.9596 26.2364 27.5221 28.8136 7.9957 8.3224 8.6450 8.9625 IS 16.9639 17.9140 18.8771 19.8511 8.3156 8.7385 9.1636 9.5899 14 8.6483 9.1755 9.7135 10.2612 8.6483 9.1755 9.7135 10.2612 15 0.0000 0.0000 0.0000 0.0000 100.0000 100.0000 100.0000 100.0000 20-YEAR LIFE. 100.0000 100.0000 100.0000 100.0000 3.3582 3.0243 2.7185 2.4393 1 96.6418 96.9757 97.2815 97.5607 3.4925 3.1755 2.8815 2.6100 2 93.1493 93.8002 94.4000 94.9507 8.6322 3.3342 3.0545 2.7928 3 89.5171 90.4660 91.3455 92.1579 3.7775 3.5010 3.2377 2.9882 4 85.7396 86.9650 88.1078 89.1697 3.9286 3.6760 3.4320 3.1974 5 81.8110 83.2890 84.6758 85.9723 4.0857 8.8598 3.6379 3.4213 6 77.7253 79.4292 81.0379 82.5510 4.2492 4.0528 3.8561 3.6607 7 73.4761 75.3764 77.1818 78.8903 4.4191 4.2554 4.0876 3.9169 8 69.0570 71.1210 73.0942 74.9734 4.5959 4.4682 4.3328 4.1912 9 64.4611 66.6528 68.7614 70.7822 4.7797 4.6916 4.5928 4.4845 10 59.6814 61.9612 64.1686 66.2977 4.9709 4.9262 4.8684 4.7985 11 54.7105 57.0350 59.3002 61.4992 5.1698 5.1725 5.1604 5.1348 12 49.5407 51.8625 54.1398 56.3649 5.3766 5.4311 5.4701 5.4938 13 44.1641 46.4314 48.6697 50.8711 5.5916 5.7027 5.7982 5.8783 14 88.5725 40.7287 42.8715 44.9928 5.8152 5.9878 6.1462 6.2898 15 32.7573 34.7409 36.7253 88.7030 6.0479 6.2872 6.5149 6.7301 16 26.7094 28.4537 80.2104 81.9729 6.2898 6.6016 6.9059 7.2012 17 20.4196 21.8521 23.3045 24.7717 6.5414 6.9817 7.3202 7.7052 18 13.8782 14.9204 15.9843 17.0665 6.8031 7.8783 7.7593 8.2446 19 7.0751 7.6421 8.2250 8.8219 7.0741 7.6421 8.2250 8.8219 80 0.0000 0.0000 0.0000 0.0000 100.0000 100.0000 100.0000 100.0000 APPENDIX B 357 25-YEAR LIFE. 2 QQ fcjr 0) <* Interest Rate. 4% Interest Rate. 5% - Interest Rate. 6% Interest Rate. 7% Value. Dep. Value. Dep. Value. Dep. Value. Dep. 100.0000 100.0000 100.0000 100.0000 2.4012 2.0952 1.8227 1.5811 1 97.5988 97.9048 98.1773 98.4189 2.4972 2.2001 1.9320 1.6917 2 95.1016 95.7047 96.2453 96.7272 2.5972 2.3100 2.0480 1.8101 3 92.5044 93.3947 94.1973 94.9171 2.7010 2.4254 2.1708 1.9369 4 89.8034 90.9693 92.0265 92.9802 2.8091 2.5468 2.3011 2.0724 5 86.9943 88.4225 89.7254 90.9078 2.9214 2.6742 2.4391 2.2175 6 84.0729 85.7488 87.2863 88.6903 8.0383 2.8078 2.5855 2.8728 7 81.0346 82.9405 84.7008 86.3175 8.1598 2.9482 2.7406 2.5388 8 77.8748 79.9923 81.9602 83.7787 3.2862 8.0957 2.9051 2.7165 9 74.5886 76.8966 79.0551 81.0622 3.4176 8.2504 3.0794 2.9067 10 71.1710 73.6462 75.9757 78.1555 8.5544 3.4129 3.2641 3.1102 11 67.6166 70.2333 72.7116 75.0453 8.6965 8.5886 3.4600 3.8279 13 63.9201 66.6497 69.2516 71.7174 3.8444 3.7627 3.6675 3.5608 13 60.0757 62.8870 65.5841 68.1566 3.9982 3.9509 3.8877 3.8101 14 56.0775 58.9361 61.6964 64.3465 4.1581 4.1485 4.1208 4.0768 15 51.9194 54.7876 57.5756 60.2697 4.3244 4.3559 4.3682 4.3622 16 47.5950 50.4317 53.2074 55.9075 4.4974 4.5736 4.6302 4.6675 17 48.0976 45.8581 48.5772 51.2400 4.6773 4.8024 4.9081 4.9942 18 88.4203 41.0557 43.6691 46.2458 4.8643 5.0424 5.2025 5.3439 19 33.5560 36.0133 38.4666 40.9019 5.0590 5.2946 5.5147 5.7179 20 28.4970 30.7187 32.9519 35.1840 5.2613 5.5593 5.8455 6.1181 21 23.2357 25.1594 27.1064 29.0659 5.4718 5.8373 6.1963 6.5465 22 17.7639 19.3221 20.9101 22.5194 5.6906 6.1291 6.5681 7.0047 23 12.0733 13.1930 14.3420 15.5147 5.9183 6.4356 6.9621 7.4950 24 6.1550 6.7574 7.3799 8.0197 6.1550 6.7574 7.3799 8.0197 25 0.0000 0.0000 0.0000 0.0000 100.0000 100.0000 100.0000 100.0000 30- YEAR LIFE. 100.0000 100.0000 100.0000 100.0000 1.7830 1.5051 1.2649 1.0586 1 98.2170 98.4949 98.7351 98.9414 1.8543 1.6804 1.3408 1.1328 2 96.3627 96.9145 97.3943 97.8086 1.9285 1.6595 1.4212 1.2120 8 94.4342 95.2550 95.9731 96.5966 2.0057 1.7423 1.5065 1.2969 358 PUBLIC UTILITY RATES 30-YEAR LIFE. (Continued.) 3 oj CtCQ) * Interest Rate. 4% Interest Rate. 5% Interest Rate. e% Interest Rate. 7% Value. Dep. Value. Dep. Value. Dep. Value. Dep. 4 92.4285 98.5127 94.4666 95.2997 2.0859 1.8296 1.5969 1.3877 5 90.8426 91.6881 92.8697 93.9120 2.1698 1.9209 1.6927 1.4848 6 88.1788 89.7622 91.1770 92.4272 2.2560 2.0171 1.7948 1.5887 7 85.9173 87.7451 89.8827 90.8385 2.3463 2.1179 1.9019 1.6999 8 83.5710 85.6272 87.4808 89.1386 2.4402 2.2238 2.0161 1.8190 9 81.1808 83.4084 85.4647 87.8196 2.5378 2.3349 2.1370 1.9462 10 78.5980 81.0685 83.3277 85.3734 2.6893 2.4518 2.2652 2.0825 11 75.9537 78.6167 81.0625 83.2909 2.7449 2.5748 2.4011 2.2288 12 73.2088 76.0424 78.6614 81.0626 2.8545 2.7030 2.5452 2.3843 13 70.8543 73.3394 76.1162 78.6783 2.9689 2.8382 2.6980 2.5511 14 67.8854 70.5012 73.4182 76.1272 8.0877 2.9800 2.8597 2.7297 15 64.2977 67.5212 70.5585 73.8975 8.2111 8.1291 8.0814 2.9209 16 61.0866 64.8921 67.5271 70.4766 8.8395 3.2856 8.2133 8.1254 17 57.7471 61.1065 64.3138 67.8512 8.4781 3.4498 8.4061 8.3489 18 54.2740 57.6567 60.9077 64.0078 8.6121 8.6223 8.6104 8.5782 19 50.6619 54.0344 57.2973 60.4291 3.7565 8.8034 3.8271 8.8286 20 46.9054 50.2810 53.4702 56.6005 8.9068 3.9936 4.0566 4.0966 21 42.9986 46.2374 49.4186 52.5039 4.0681 4.1933 4.8001 4.8883 22 88.9855 42.0441 45.1135 48.1206 4.2256 4.4029 4.5581 4.6902 28 84.7099 87.6412 40.5554 48.4304 4.3946 4.6231 4.8316 5.0186 24 80.8153 88.0181 85.7288 88.4118 4.5704 4.8543 5.1214 5.3698 25 25.7449 28.1638 80.6024 33.0420 4.7532 5.0968 5.4288 5.7457 26 20.9917 23.0670 25.1786 27.2963 4.9483 5.8519 5.7544 6.1479 27 16.0484 17.7151 19.4192 21.1484 6.1411 5.6194 6.0998 6.5782 28 10.9078 12.0957 13.8194 14.5702 5.8467 5.9005 6.4657 7.0887 29 5.5606 6.1952 6.8537 7.5815 5.5606 6.1952 6.8587 7.5815 80 0.0000 0.0000 0.0000 0.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 100.0000 35-YEAR LIFE. 100.0000 100.0000 100.0000 100.0000 1.8577 1.1072 0.8974 0.7234 i 98.6428 98.8928 99.1026 99.2766 1.4121 1.1625 0.9512 0.7740 2 97.2802 97.7308 98.1514 98.5026 1.4685 1.2207 1.0083 0.8283 8 95.7617 96.5096 97.1481 97.6744 1.5273 1.2816 1.0688 0.8862 APPENDIX B 359 35-YEAR LIFE. (Continued.) 5 & Interest Rate. 4% Interest Rate. 5% Interest Rate. 6% Interest Rate. 7o/o Value. Dep. Value. Dep. Value. Dep. Value. Dep. 4 94.2344 95.2280 96.0743 96.7882 1.5884 1.3458 1.1329 0.9488 5 92.6460 93.8822 94.9414 95.8399 1.6519 1.4131 1.2010 1.0146 6 90.9941 92.4691 93.7404 94.8253 1.7179 1.4837 1.2729 1.0856 7 89.2762 90.9854 92.4675 93.7397 1.7867 1.5579 1.3493 1.1616 8 87.4895 89.4275 91.1182 92.5781 1.8581 1.6358 1.4303 1.2429 9 85.6314 87.7917 89.6879 91.3352 1.9325 1.7176 1.5162 1.3300 10 . 83.6989 86.0741 88.1717 90.0052 2.0098 1.8035 1.6071 1.4230 11 81.6891 84.2706 86.5646 88.5822 2.0902 1.8936 1.7034 1.5226 12 79.5989 82.3770 84.8612 87.0596 2.1737 1.9883 1.8058 1.6298 13 77.4252 80.3887 83.0554 85.4303 2.2607 2.0877 1.9140 1.7432 14 75.1645 78.3010 81.1414 83.6871 2.3512 2.1922 2.0289 1.8653 15 72.8133 76.1088 79.1125 81.8218 2.4452 2.8017' 2.1506 1.9959 16 70.3681 78.8071 76.9619 79.8259 2.5430 2.4168 2.2797 2.1856 17 67.8251 71.8903 74.6822 77.6903 2.6447 2.5377 2.4165 2.2851 18 65.1804 68.8526 72.2657 75.4052 2.7505 2.6645 2.5614 2.4450 19 62.4299 66.1881 69.7043 72.9602 2.8605 2.7978 2.7152 2.6163 20 59.5694 63.8903 66.9891 70.3440 2.9750 2.9376 2.8780 2.7998 21 56.5944 60.4527 64.1111 67.5447 8.0939 8.0845 8.0507 2.9958 22 53.5005 57.3682 61.0604 64.5494 3.2178 8.2388 3.2338 8.2049 23 50.2827 54.1294 57.8266 61.8445 3.3464 8.4007 8.4278 3.4298 24 46.9363 50.7287 54.8988 57.9152 8.4803 8.5708 3.6334 3.6698 25 43.4560 47.1579 50.7654 54.2459 8.6195 8.7492 8.8515 3.9262 26 39.8365 43.4087 46.9139 50.8197 3.7642 3.9367 4.0826 4.2010 27 36.0723 89.4720 42.8313 46.1197 3.9149 4.1837 4.8275 4.4951 28 32.1574 85.8383 38.5038 41.6236 4.0714 4.8403 4.5871 4.8097 29 28.0860 30.9980 83.9167 86.8139 4.2343 4.5572 4.8624 5.1464 30 23.8517 26.4418 29.0543 81.6675 4.4037 4.7851 5.1541 5.5067 31 19.4480 21.6557 23.9002 26.1608 4.5798 5.0244 5.4684 5.8923 32 14.8682 16.6313 18.4368 20.2686 4.7630 5.2756 5.7911 6.3046 33 10.1052 11.3557 12.6457 13.9640 4.9535 5.5394 6.1887 6.7458 34 5.1517 5.8163 6.5070 7.2181 5.1517 5.8163 6.5070 7.2181 85 0.0000 0.0000 0.0000 . 0.0000 100.0000 100.0000 100.0000 100.0000 360 PUBLIC UTILITY RATES 40- YEAR LIFE. a . * w ~ u .< Det. and Obs Mains, small cast-iron (4 in. and under] Mains, large cast-iron (6 in. and over) small steel or iron (3 in. and under) 50 75 20 Wis. R. R. Comm. Obs. Obs. Det large steel or iron (above 3 in.) . 30 50 ' Det. Obs drums " 20 Det. Meters and governors (consumer's) .... Purifiers 25 50 " " " Det. Obs Scrubbers and condensers 30 .. Det 20 .. .. Det 50 < < .. Obs extractor 40 Obs Water-gas machines 30 Det. Electricity-supply Works 10-20 Wis. R. R Comm Det Arc lamps and hangings 10-15 {Wis. R. R. Comm. 1 Det. and Obs. Belting 20-25 St. Louis P. S. Comm. J Wis. R. R. Comm. Det Boilers, fire-tube 10-15 Det water-tube 20-30 <. Det. Buildings, masonry 75 .. Obs. wood-frame or second class Chimneys and stacks, masonry 50 30 * Det. and Obs. Obs steel 10 * Det Condensers 20-30 jwis. R. R. Comm. 1 Det. Conduits and manholes 30-50 [Chicago Trac. Val. Comm.J Wis. R. R. Comm. Obs. 10 Det ash or combined coal and fvh -.,,,,,,,.,,, . 5 * Det Cross arms 10-15 Wis. R. R. Comm. Det. Engines, gas 10-15 Det. and Obs. steam, high-speed 15-20 < ., Det. steam, slow-speed 25-30 .< .. it Det. and Obs. Feed- water heaters 20-30 .. < Det Fuse boxes 10-12 .1 .. Det. Fuel-oil equipment 25 Chicago Trac. Val. Comm. Det. Generators, motors and converters high-speed 15 * Det. slow-speed 20 * Obs. new types 20 Wis. R. R. Comm. Det. old types 15 Obs 20 .1 .. ,i Det 15-20 Wis R. R Comm. Det Piping and covering 20-30 Obs. and Det. Poles, cedar in concrete 12-18 .. .. . Det. APPENDIX C 369 TYPICAL LIFE-EXPECTATION FIGURES FOR PUBLIC-UTILITY PROPERTY. Concluded Years Authority * Control t Electricity-supply Works Poles, cedar in earth 10-18 Wis. R. R. Comm. Det. iron or steel in concrete 15-30 * 10-15 Wis. R. R. Comm. Det. 50 * Obs Pumps, boiler feed 15-20 Wis. R. R. Comm. Det. small centrifugal 20-30 Det. 10-12 > ii Det. Shafting 2(MO ii < i. Obs. Station wiring, etc 30 ii ii ii Obs. and Det. Stokers . . 20 Chicago Trac. Val. Comm. Det. 15 Wis. R. R. Comm. Det. Switchboard instruments and wiring . . Switchboards, old types 25-30 20-30 Obs. and Det. Obs. new types 15-20 ii ii ii Obs. Turbines, hydraulic, old types 25-40 i< ii Obs. 30-50 i ii ii Obs. steam, large units 20 .1 .i Det. and Obs. auxiliary units 10-20 * Det. and Obs. 10-15 Wis. R. R. Comm. Det. station and substation. . Watt-hour meters (consumer's) 20 10-15 Obs. and Det. Det. 10-15 ii ii Det. lead covered aerial cable underground cable 10-15 20-25 " " " Det. and Obs. Obs. Telephone Utilities Buildings 40 Chicago Tel. Comm. Obs. 12 Wis. R. R. Comm. Det. and Obs. underground Central exchange equipment 20 10 Obs. and Det. Obs. and Det. Conduit ... 50 Chicago Tel. Comm. Obs. Cross arms 8-12 Wis. R. R. Comm. Det. Furniture and tools 7 Det. Poles, wood in earth 12-15 ii Det. Power plant 8 .i ii .i Det. and Obs. Private-branch exchange equipment . . . 8 10 Chicago Tel. Comm. Wis. R. R. Comm. Det. and Obs. Det. and Obs. Wire, copper, line 40 Chicago Tel. Comm. Obs. copper, interior 30 Obs. galv. iron, line 8-15 Wis. R. R. Comm. Det. and Obs. APPENDIX D TYPICAL CITATION ABBREVIATIONS OF LAW REPORTS, ETC., MET WITH IN UTILITY DECISIONS Following these paragraphs is a list of a very few of the abbreviated titles of the most important law reports, etc., apt to be cited in commission and court public-utility cases. The law reports are collections of authoritative exposi- tions by courts, arranged by the court reporters generally and commonly bear- ing their names. Each case reported contains, among other things, the opinion of the court, showing the questions presented and the principles applied, and the judgment which is a summary of the result arrived at. Not all cases in the many courts are published though all are filed. In citations the volume number precedes the abbreviation and the page number follows it. The number of possible titles, including the many state-court reports, is legion and a list may be found in most law dictionaries. Some of the state reports will be found cited simply by the state name, thus; "90 Ala. 300," "30 Ariz. 300," "40 Cal. 400," etc. The court system may require something like the following; "100 N. Y. App. Div. 100," "20 Del. Ch. 200," "30 Ills. App. 300," etc. But the great accumulation of abbreviated titles, for both federal and state reports, exhibits the names of the compilers with such added designation as is needed, for instance; "10 Ben. 100" (Benedict's U. S. Dis- trict Court Reports), "23 How. 230 " (Howard's U. S. Supreme Court Reports), "3 Hughes (U. S.) 300" (Hughes' U. S. Circuit Court Reports), "3 Hughes (Ky.) 300" (Hughes' Kentucky Reports) "12 Ired. 120" (Iredell's North Carolina Law Reports), "8 Ired. Eq. 80" (Iredell's North Carolina Equity Reports), etc. The several state public-utility commission citations are abbreviated in various unstandardized ways, but, whatever the form the meaning is usually apparent, for example; "3 Wis. R. R. Comm. 200" or "3 Wis. R. C. R. 300," "2 111. P. U. Comm. 200," or "2 111. P. U. C. R. 200," "1 Mass. P. S. Comm. 100," etc. Am. Rep., American Reports. Am. State Rep., American State Reports (Bancroft and Whitney). Atl. Rep., Atlantic Reporter. C. C. A., U. S. Circuit Court of Appeals Reports. Cyc., Encyclopedia of Law and Procedure. Fed., Federal Reports. Fed. Rep., Federal Reporter. I. C. C. or I. C. C. R., Interstate Commerce Commission Reports. N. E. Rep., Northeastern Reporter. 370 APPENDIX D 371 N. W. Rep., Northwestern Reporter. P. U. R., Public Utilities Reports, Annotated. (The only compilation exclusively of court and commission public-utility decisions, and the offi- cial publication of the Association of Railroad Commissioners; published by the Lawyers Co- operative Publishing Co., Rochester, N. Y.) Pac. Rep., Pacific Reporter. S. E. Rep., Southeastern Reporter. So. or South Rep., Southern Reporter. Sup. Ct., or Sup. Ct. Rep., Supreme Court Reports. U. S., United States Supreme Court Reports. U. S. App., United States Circuit Court of Appeals Reports. Abbreviations in law citations, (Appendix D), 370. Accounting, as a service cost, 20. for electric and street railway, 220. for gas works, 286. for railway valuation, 199. for telephone systems, 333, 341, 343. for water works, 259. Accounts disclose value, 44. Accrued deficits measure going value, 86. Adams, C. F., 162. Adaptability, value of, 62. Adequate telephone service, 328. Administration, cost of, 77. Advertising as a service cost, 20. Albany, N. Y., water-works, 241. Alternating-current distribution, 301. Alvord, J. W., 258. American District Telegraph Co., telephones, 319. American electricity rates, 315. American Electric Railway Associa- tion, 211, 213, 215, 216, 220, 229. American Gas Institute, 280, 283. American Society of Civil Engineers, 61, 81, 90, 254, 355. American Telephone and Telegraph Co., 318, 323, 324. American Water-works Association, 90, 252, 254, 267. Amortization, apportionment, 25. as service cost, 20. of intangibles, 91. Analysis of telephone costs, 336, 340. Annual costs and depreciation, 120. Annuity tables and formulas, (Appendix B), 352. Antiquation, expense of, 24. Apportioning costs, as fixed and operating expense, 21. on customers, 21. Apportionment, limitations, 28. of administration cost, 26. of amortization, 25. of depreciation expense, 23. of electric-railway costs, 220, 336. of electricity-supply costs, 311. of gas-works costs, 27. of general expenses, 26. of intangible values, 91, 153. of metering expense, 27. of railway costs, 172. of service losses, 27. of taxes, 23. of telephone-utility costs, 340. Appraisal, allowance for omissions, 77. cost of, 53. discloses value, 44. of water rights, 69. problems, 52. short cuts, 56. use of inventories, 54. Appreciation in values, 48. Appreciation of railway property, 195. Arc lamps, 301, 307. Arc-lighting system, Brush, 301. Jablochkoff, 301. Architect's fees, 80. Arnold, B. J., 224. Attention, compensation for, 98. Attleboro, Mass., water consump- tion, 26L Bad accounts as service cost, 20. Baker, M. N., 240, 259. 373 374 INDEX Baltimore gas schedule, 290. Basing-point railway rates, 177. Battle Creek, Mich., water consump- tion, 261, 271. Bell, Alexander Graham, 318. Bell telephone system, 318, 323, 324, 327, 330, 331, 337, 346. Berliner's telephone transmitter, 319. Bethell, U. N., 331. Bethlehem, Perm., water-works, 240. Billing and collecting as service cost, 20. Birmingham, effect of growth on transit, 213. Blake's telephone transmitter, 319. Block, geographical, express rates, 205. Brick mill buildings, cost (Appendix A), 347. life (Appendix C), 366. Bond commissions and discounts, 82. Bonds, ratio to stock, 148. Boston Society of Civil Engineers, 199. Boston telephone zone rates, 337. Boston water-works, 240. Bradlee, H. G., 215. Breakdown service for isolated plants, 315. British Institute of Electrical Engi- neers, 312. Brush arc-lighting system, 301. Buffalo, measured telephone service, 330. Buffalo water-works, 241, 273. Building valuation, 57. (Appendix A), 347. Buildings, life, (Appendix C), 366. Bunsen gas burners predominate, 280. Burdens on officials, 105. Burlington, Iowa, water consump- tion, 261, 269. Burlington, Vt., water consumption, 261, 276. Business development of telephone, 320. By-product-gas rates, 281. Calorific standard for gas, 280. Calorific value of natural gas, 288. Calorific value of Baltimore gas, 294. California oil gas, 282. Canadian cities electric tariff, 314. Candlepower standard for gas, 280. Candlepower values of Baltimore gas, 294. Capacity of gas-works distributing system, 284. manufacturing system, 285. storage holders, 285. Car and passenger units hi street- railway service, 223. Cases, before commissions and courts, see Commissions and Courts. Census Bureau, U. S., 252, 259, 278. Central electric station, first, 302. growth, 304. history, 300. Charges, service, for water, 264. Charges, checking by customers, 13. Charges, minimum, for water, 263. Charges, of railways, 174. Charges, see also Rates. Charging all traffic will bear, 11, 16. Chicago lighting system, 310. Chicago telephone cases, 337. Chicago water-works, 241. Citation of law reports, (Appendix D), 370. Cities, water-works in typical, 267. City control of street railways, 235. City rapid transit and fares, 229. rapid-transit planning, 230. Classes of customers, electricity supply, 303, 311. electric railway, 216. express transportation, 203. gas supply, 283, 285, 289, 293. kinds of, 14. need for, 6, 13. street railway, 216. telephone, 339. water-works, 250, 257, 260, 265. Classification of railway freight, 174. INDEX 375 Classes of rates illustrated, 8. Classes of utilities, 5. Cleveland, Ohio, fares, 234. street-railway history, 234. water-works, 241. Coke-oven gas in Baltimore, 294. Commission Cases, Beloit v. Beloit Water G. & E. Co.; 7 Wis. R. R. Comm. 187, 89. Blue Hill St. Ry.; Mass. P. S. Comm. No. 886, 82. Bogart v. Wis. Tel. Co.; Wis. R. R. Comm., 1916, 341. Boston Edison Co.; 24th An. Rep. Mass. Bd. G. & E. L. Comm., 14. City of Santa Cruz; Calif. R. R. Comm. No. 2666, 67. classification of accounts; I. C. C. 1913 and 1914, 25. express rate cases of Interstate Commerce Commission, 202, 207. Fuhrman v. Cataract Power Co.; 3 N. Y. P. S. Comm. 2nd D. 670, 66. Grafton Light & Power Co.; 4 N. H. P. S. Comm. 178, 67. Hill v. Antigo Water Co.; 3 Wis. R. R. Comm. 623, 88. Janesville v. Janesville Water Co.; 7 Wis. R. R. Comm. 628, 89. Kings County Lighting Co.; N. Y. P. S. Comm. 1st D. 1911, 43, 50. Marinette v. City Water Co.; 8 Wis. R. R. Comm. 334, 89. McGowan v. Rock County Tel. Co.; 14 Wis. R. R. Comm. 529, 338. Middlesex & Boston St. Ry.; Mass. P. S. Comm., 38. Merihew v. Kings County Light- ing Co.; N. Y. P. S. Comm. 1st D. 1914, 43, 50. Milwaukee v. T. M. E. R. & L. Co.; 10 Wis. R. R. Comm. 1, 219. Milwaukee E. R. & L. Co. rates; 13 Wis. R. R. Comm. 475, 238. Commission Cases (cont.), Milwaukee suburban fares; 13 Wis. R. R. Comm. 245, 225. minimum monthly charges; N. J. P. S. Comm. 1912, 33. Monroe v. Clinton Tel. Co.; 10 Wis. R. R. Comm. 598, 338. Montpelier & Barre L. & P. Co.; Vt. P. S. Comm. No. 452, 68. N. E. Tel. & Tel. Co., Boston Rates; Mass. Highway Comm. 1908, 337. N. Y. Central Bonds; 111. P. U. Comm. No. 3629, 83. No. Calif. Power Co.; Calif. R. R. Comm. 1913, 66. Oconto City Water Co.; 7 Wis. R. R. Comm. 497, 89. Passaic 90< Gas Case; N. J. P. S. Comm. 1915, 137. Pocatello Water Co.; 1 Idaho P. S. Comm. 78, 66. Queensborough Gas & Elec. Co.; N. Y. P. S. Comm. 1st D., 1911, 50. Racine v. Racine Gas Lt. Co.; 6 Wis. R. R. Comm. 228, 89. Ripon Water & Lt. Co.; Wis. R. R. Comm. 1910, 309. railway rate cases of Interstate Commerce Commission, 172, 179. St. Croix Tel. Co.; Wis. R. R. Comm. 1915, 338. State Journal v. Madison G. & E. Co.; 4 Wis. R. R. Comm. 580, 59, 88, 309. street-railway service; N. Y. P. S. Comm. IstD. 1908 and 1910, 225. So. Englewood Imp. Assoc. v. N. J. & H. R. Ry.; N. J. P. S. Comm. 1911, 219. Taylor v. N. W. L. & Water Co.; Idaho P. U. Comm. 297, 68. Whiter v. La Crosse Tel. Co.; 15 Wis. R. R. Comm. 36, 338. Commission powers, 136. Commission regulation of telephone rates, 332. 376 INDEX Commission value-of-service tele- phone study, 333. Commissions on bonds, 82. Community rating, for value of tele- phone service, 334. Comparisons of electric-railway costs, 217, 235. Compensation, extra for special serv- ice, economy, etc., 3. Compensation for attention, 98. Compensation for risk, 3, 97. Competition and cost of service, 10. Competition, continuing results under monopoly, 10. Competition of gas and electricity, 278. Competition of electric cars and omnibuses, 233. Competition or monopoly, 151. Competitive business secured at low rates, 14. Compound-interest tables and formu- las, (Appendix B), 352. Concentration factor of electric-rail- way traffic, 216. Condemnation cost, 60. Condemnation powers, 164. Confiscation and rates, 11. Connecticut water-works, 241, 267. Construction interest, 78. Consumption of water, 260, 267. Contingencies, cost of, 81. Continuous electric-supply service, 308. Contractor's profit, 80. Contracts, value of, 43. Control of street railways by city, 235. Cost accounting for water-works, 259. Cost analysis, telephone, 336, 340. Cost of administration, 77. bond discounts and commissions, 82. business development, 85. condemnation, 60. contingencies, 81. electric-railway construction, 225, 230. Cost of engineering, 80. fire protection, 255. gas in American cities, 296. insurance, 79. interest during construction, 78. labor reduced, 155. operation for electric railways, 217, 236. organization, 77. piecemeal work, 79. preliminary work, 77. promotion, 85. natural gas, 288. railways apportioned, 172. rapid transit, 229. taxes during construction, 79. Cost-of-service approach to rates, 10, 18. Cost-of-service fixes prices under competition, 10. Cost-of-service in railway rates, 168, 181. Cost-of-service rate basis, hypo- thetical illustration, 34. Cost-of-service telephone rates, 336. Cost schedules, 19, 29. Cost, vicious spiral of, 154. Costs and utility class, 6. Costs, annual, related to depreciation, 120. Costs, apportioned as fixed and oper- ating expenses, 21. Costs, apportioned on customers, 21. Costs, rising, effect on depreciation, 124. Court Cases, Cedar Rapids Gaslight Co.; 223 U. S. 665, 64. Con. Gas. Co. v. Wilcox; 157 Fed. 849; 212 U. S. 19, 40, 49, 63, 131. Cumberland Tel. & Tel. Co. v. Louisville; 187 Fed. Rep. 637, 129. Des Moines Gas Co.; 199 Fed. 204, 35 Sup. Ct. Rep. 811, 46, 64. Kansas City Water Works; 62 Fed. Rep. 853, 85. INDEX 377 Court Cases (cont.\ Knoxville Water Co.; 29 Sup. Ct. Rep. 148, 113. McGovern v. N. Y.; 130 App. Div. 350, 63. Metropolitan Trust v. Houston & T. C. Ry.; 90 Fed. Rep. 683, 89. Minnesota Rate Cases; 230 U. S. 352, 39, 40, 61, 62. Munn v. Illinois; 94 U. S. 113, 10, 163. Passaic 90(4 Gas Case; N. J. Errors & App. 1915, 137. People ex. rel. Kings County Ltg. Co. v. Wilcox; 210 N. Y. 479, 64. People ex. rel. Manhattan Ry. v. Woodbury, 203 N. Y. 239, 128. Peoria Water Co. v. Central Ry.; U. S. C. C. App. 1910, 144. Pocatello Water Co.; Idaho Sup. Ct.; 150 Pac. 47, 67. Postal Tel., West. U., and L. S. & M. S. R. R. v. C. L. S. & S. B. Ry.; 111. Sup. Ct. 1911, 144. R. R. Comm. Cases, 116 U. S. 307, 12. Reagan v. Farmers Loan & Trust Co.; 154 U. S. 362, 12. San Joaquin & Kings River Co. v. Stanislaus County; 233 U. S. 459, 67. Spring Valley Water Co. v. San Francisco; 165 Fed. Rep. 667, 89. Smyth v. Ames; 169 U. S. 466, 12, 39. Court views on sinking funds, 126. Courts determine only confiscation or extortion, 12. Courts do not fix rates, 12. Customer classes, see Classes. Customer costs, 27. Customer costs of electric railways, 217. Customers checking kills, 13. Customer's demand affects rates, 6. Customers, grouping of, 31, see also Classes of Customers. Customers, telephone, interdepend- ence, 340. Davies, J. V., 230. Decisions of commissions and courts, see Commission Cases and Court Cases. Deficient profits due to plant losses or mismanagement, 18. Deficits, accrued, 86. Definition of public utility, 2. Demand and storage, 5. Demand and service capacity, 5. Demand charge, in Baltimore gas rates, 290. Demand costs of gas, 286. Depreciation, accumulated and annual, 46. and rates, 107. and rising costs, 124. computed, by equal-annual-payment plan, 121. by sinking-fund plan, 117. by straight-line plan, 117. denned, 108. expense apportionment, 21, 24, 25. hen illustration, 131. nomenclature, 108; see also Re- newance, 110, and Retirance, 110. of electric-railway property, 195, 227. of various utility equipment, see life-expectation tables, 366. plans compared, 127, 130, 131. related to annual costs, 20, 120. tables (Appendix B and C), 352, 366. Denison, Tex., water consumption, 262, 275. Delivery and pick-up terminal express charges, 206, 207. Delusions of hydrant rentals, 252. Des Moines, Iowa, water consump- tion, 261, 269. Design and inspection, cost of, 80. 378 INDEX Design, effect on value, 92. Deterioration expense, 24. Detroit, effect of growth on transit, 212. electric rate system, 313. Development of, business, 85. electric service, 303, 307. electric railroads, 208. express transportation, 201. gas works, 277. gas schedules, 285, 288, 293. railroads, 162. telephone service, 320. water-works, 240. Dickerman, J. C., 296. Discarded plant, value of, 83. Discounts on bonds, 82. Discrimination, 4, 146. Distributing costs of extended water- works, 258. Distribution of electricity, Edison network and feeders, 301. Diversity factor affects expense ap- portionment, 31. Diversity factor, 15, 31. in telephone service, 326, 330, 336. individual and group, 15. on electric railways, 216. on electricity supply, 310. on gas works, 284. on water works, 249. Dividing scales of profit, 101. Division of excess profits, 104. Doherty, H. L., 7. Doolittle, F. W., 211. Early Edison electric rates, 303. Economies in railroad operation, 200. in street and electric-railway opera- tion, 215. Economy vs. higher rates, 158. Edison, T. A., 301, 307, 319. Edison lighting system, 278, 301, 307. Edison's telephone transmitter, 319. Electric central station, history, 300. Electric lighting, development, 307. Electric railway, a service-type utility, 215. accounting, 220. and congestion of population, 214. customer costs, 217. depreciation, 227. development, 209, 212, 214, 225. economics and finance, 214, 215. expense apportionment, 220, 336. fare making, 218, 237. fare zones, 218, 223. fares by New Jersey and Wisconsin methods, 219. fixed charges, 217. operating costs, 217. plant life, 227, 366. service units, 223. technology, 209, 214, 225. Electric residence rates, 311. Electricity meters, 308. Electricity-meter energy losses, 309. Electric service, continuity, 308. Electric-service requirements, 305. Electric station diversity, 310. Electric-supply technology, 305. Electricity, field of and uses for, 303. Electricity rates, 300. Eminent-domain powers, 164. Engineering, cost of, 81. design and inspection, 80. tasks in valuation, 52. Engineers, selection of valuation, 52. Equal-annual-payment plan for de- preciation and retirance, 121. Equity, individual, versus general welfare, 16. Erickson, H., 312. Examples of American telephone rates, 346. Expense apportionment, affected by diversity, 31. electric railway, 220. electricity works, 311. express transportation, 206. gas works, 284, 286, 293. railways, 172. INDEX 379 Expense apportionment (cont.), telephone service, 336, 341, 343. water-works, 256, 258, 259. Exchange, telephone, first, 319. Exchange, telephone, practice, 325. Early utility rates, 178, 203, 211, 213, 283, 303, 330. Expectation life tables, (Appendix C), 366. Express transportation, companies' division of territory, 202. companies' interrelations, 201. development, 201. rates changed by Interstate Com- merce Commission, 202, 205. Fair value, bases compared, 37. court decisions, 39. defined, 36. Fallacy of water rights, 75. Fare making for electric railways, 218, 223, 224, 235. Fare Research Bureau, of American Electric Railway Association, 211, 216. Fare zones for electric railways, 218, 223, 237. Fares, Cleveland sliding scale, 235. inflexibility of, 218. Milwaukee zone system, 237. New Jersey and Wisconsin method of making, 219, 237. Fast and slow meters, 308. Finances, electric railway, 215. electricity supply, 303, 304. express transportation, 202. gas works, 278. railways, 162. telephone service, 320, 324, 329. water-works, 242. Fire service of water-works, 250, 251, 253, 255, 257. Fixed charges or costs, apportionment, 25, 31. depreciation as, 25. Fixed charges or costs (cont.), of electric railways, 217, 221, 230, 235. of electricity-supply works, 311. of gas works, 284, 286. of railways, 168. of telephone utilities, 323, 329, 336, 340. of water-works, 251, 259, 266. reduction, 25. schedules, 19, 29. tests for, 21. Flat telephone rates, 330. Forbes, W. H., 321. Formulas for sinking funds, annuities, etc. (Appendix B), 365. Forstall, A. E., 283. Franchise, street-railway, Cleveland, 235. Franchises, as property, 65, 137. indeterminate term, 140. public regard of, 136, 138. short term, 140. value in rates, 137. value of, 65. Freeman, J. R., 251, 254. Gas industry, census statistics, 278. development, 277. Gas lighting, in American cities, 277. in London, 277. Gas meters, 283. Gas, natural, rates, 288. service, 287. Gas rates, 277. Gas-rate system of Baltimore, 290. Gas-works accounting, 286. Gas-works demand costs, 286. Gas-works technology, 279. Gear, H. B., 310. General expense, apportionment of, 26. Geneva, N. Y., water consumption, 261, 273. 380 INDEX Geographical blocks used in making new express rates, 205. Going value, 41, 85. by depreciation method, 91. by reproduction method, 90. by Wisconsin method, 87. Grouping customers, 31. Growth of cities and transit burdens, 212, 214, 225. Hadley, A. T., 162. Hall, E. J., 331. Hawley, W. C., 254, 255. Hazen, A., 254. Health-board supervision of water- works, 244. Hen illustration of depreciation, 131. Hendrick, F., 166. High cost of living, 154, 155. History of, electricity works, 300. express companies, 201. gas works, 277. railroads, 162. street railways, 208, 234. telephone utilities, 318. water-works, 240. Holmes Boston Burglar Alarm Service telephones, 319. Hopkinson, John, originator of de- mand-output rate, 7. Horton, Robert E., 70, 71. Hubbard, G. G., 320. Hughes' telephone transmitter, 319. Hydrant rentals, 252. Incandescent electric-lighting sys- tem, Edison, 301, 307. Increasing-returns law, 170. Increments in value, 48. Insurance and fire protection, 257. Insurance during construction, 79. Independent telephone companies, 322. Intangible values amortized, 91. Interdependence of telephone classes, 340. Interest during construction, 78. Interest, pure, 96. Interference of utilities, 144. Interstate Commerce Commission. accounting rules, 25. early views, 179. established, 166. expense apportionment, 220. express rates, 202, 205. railway rates, 176. valuation division, 197. Interurban electric-railway rate prob- lems, 208, 214, 237. Inventories in valuation, 54. Inventory omissions, 77. Investment, electric railway, 209, 230. electricity-supply works, 304. express companies, 202. funds scarce, 159. gas works, 278. lost by depreciation, 110. railways, 162. rapid-transit lines, 230. repaid by retirance, 110. telephone utilities, 329. water-works, 242. Isolated-plant breakdown rates, 315. Jitney bus, 233. Johnson, W. S., 260. Jordan, F. C., 267. Kapp electric rate system, 315. Knoxville decision of Supreme Court, 113. Kuichling, E., 254, 255. Labor, as a service cost, 20. cost reduced, 155. cause of inefficiency, 156. satisfactions of, 156. position of utility, 158. Lamps and lighting, electric arc, 301, 307. electric incandescent, 301, 307. gas flames and burners, 280. Latitude allowed rate-makers, 2. Law of increasing returns, 170. INDEX 381 Law report citations, (Appendix D), 370. Law, Wisconsin utility, 140. Leakage of water past meters, 264. Life expectation tables, (Appendix C), 366. Life of electric-railway plant, 229. Lighting and power electric-load ratios, 305. Lighting system, Edison, 301, 307. Brush, 301. Jablochkoff, 301. Load curves of Baltimore gas works, 293. Load factor of electric and street rail- ways, 216, 223. Local conditions affect rates, 2. Local-utility services compared with telephone, 327. Location, effect on value, 92. Long-distance telephone service, 321. London gas lighting, 277. Losses caused by electric meters, 309. Losses distributed as service costs, 20. Louisville, Ky., natural-gas rates, 288. Main, C. T., 57, 347. Maine water-works, 241. Main's curves and tables formill costs, (Appendix A), 347. Making Baltimore gas-rate schedules, 293. Maltbie, M. R., 49. Manufacture of artificial illuminating gas, 281. Manufacturing capacity of gas works, 285. Market value of plant, 36. Marks, W. D., 101. Massachusetts, electric-railway dividends, 215. telephone cases, 337. water-rate control, 244. water-works, 241, 270. Maximum demands, electric cus- tomers', 309. McDonald, D., 288. Memphis, effect of growth on transit, 213. Metcalf, L., 254, 255, 367. Metered telephone service, 330. Metering costs, apportionment of, 20, 27. Meters, electric, 308. fast and slow, 308. gas, 277, 283. telephone, 330. water, 249. Meyer, B. H., 166. Monopoly, continuing results of com- petition under, 10. Monopoly or competition, 151. Morristown, N. J., water-works, 240. Morse, J. G., 53. Miller, A. S., 283. Milwaukee, effect of growth on rapid transit, 212. rush-hour street-railway service, 225. telephone-cost apportionment, 343. zone system of fares, 237. Minimum charges, 33, 203, 205, 263, 285, 311. Miscellaneous problems, 134. Municipal electric central stations, 304. Municipal gas works, 279. Municipal-utility discrimination, 4. National Board of Fire Underwriters, 254, 256. National Conference on City Plan- ning, 230. National Electric Light Association, 7, 11, 15, 55, 309, 310. Natural Gas Association, 288. Natural gas rates, Louisville, 288. Natural-gas utilities, 287. Natural gas utility a mining venture, 288. New England Water-works Associa- tion, 251, 260, 264, 265. 382 INDEX New Hampshire water-works, 241, 272. New Haven, first telephone exchange, 319. New Orleans water-works, 241, 270. New York City, changes street lamps, 316. metered telephones, 331. rush-hour street-railway service, 225. water-works, 240. New York Law Telegraph Co. tele- phones, 319. Newark, N. J., street-railway termi- nal, 231. Nickel street-railway fares, 211, 213, 237. Norwich electric residence-rate sys- tem, 311. Obligations of public utility, 3. Obsoletion, expense of, 24. Off-peak business, benefits of, 14. Off-peak electric-railway business, 216, 223. Office expense as a service cost, 20. Omissions in inventory, 77. Omnibus competition with electric cars, 233. Operating costs, and depreciation, 124. electric railway, 217, 221, 226, 235. electricity supply, 311, 316. gas works, 297. railroads, 169, 172. telephone utilities, 336, 341, 343. test for, 21. water-works, 259, 264. Organization, cost of, 77. Original conditions affect value, 45. Originating and terminating traffic, as basis of telephone cost ap- portionment, 343. Output costs of gas works, 284. Overcharges, when justified, 16. Passaic, N. J., water consumption, 262, 272. Passaic 90ji gas case, 137. Paving over mains, 63. Peak-load electric-railway business, 216, 223. Peak-load telephone cost apportion- ment, 343. Peak-loads on gas works, 284, 294. Philadelphia water-works, 241,' 275. Piecemeal-construction costs, 79. Plant, discarded, value of, 83. "Point Five" electricity tariff, 311. Political place of utility regulation, 1. Polleys, T. A., 60. Portland, Ore., water consumption, 261, 274. Portsmouth, N. H., water-works, 241. Power and lighting load ratios, 305. Power of eminent domain, 164. Power rates, electric, 314. Preliminary work, cost of, 77. Present-value tables, (Appendix B), 355. Preventing water waste, 260. Primary rate for gas, Baltimore, 290. Principles of rapid-transit plan, 230. Private fire-protection, charges, 257. Problems of utility rates, all met in electricity supply, 300. electric railway, 208. express companies, 201. gas works, 277. miscellaneous, 134. railroads, 161. telephone utilities, 318. water-works, 240. Product type of utility, 5. gas works as, 283. water-works as, 242. Profits, contractor's, 80. deficiency due to plant losses or mismanagement, 18. extra, 99, 101, 104. from non-utility business, 19. promoter's, 85. Property, appreciation of railway, 195. contracts as, 43. depreciation of railway, 195. INDEX 383 Property (ctmO, express companies, 202. franchises as, 65. used and useful, 65. water rights as, 66. Proportion between electric power and lighting loads, 305. Public burdens, 150, 153. Public policy, 149. Public relations, 160. Public rights hi utility service, 3. Public-service-commission control of water-works, 243. Public utility, see Utility. Publicity, value of, 150. Purpose affects valuation, 42. Quantity of service enters rate, 6. Quantity variation of gas costs, 285. Railroad, appreciation of property, 195. as service utility, 167. charges computed, 174. commissions, 166. common carriers, 163. economies suggested, 200. expenses independent of traffic, 169. expenses segregated, 170, 172. express freight, see express, 201. federal lines, 163. finance, 162, 193. freight classification, 174. Granger attacks, 165. industry, 162. joint costs, 170. regulation, 161, 164. right of eminent domain, 164. state-owned lines, 163. valuation by federal commission, 197. Railroad rates, and law of increasing returns, 170. and natural advantages, 191. basing point, 177. computed, 174. cost of service in, 168, 181. Railroad rates (conO, difficulties of logical schemes, 161. early, 178. effect of competition, 184, 192. effect of distance, 182. effect of market prices, 180. effect of risk, 183. federal versus state, 184. fixed by general public interest, 182, 190. passenger fares, 193. through, and sum of locals, 184. trunk line, 175. value of commodity in, 179. vested interests protected, 189. zone, 176. Rapid transit and fares, 229. Rapid-transit planning, 230. Rate classes illustrated, 8. Rate problems, electric railway, 208. electricity supply, 300. express companies, 201. gas works, 277. miscellaneous, 134. railroads, 161. telephone utilities, 318. water-works, 240. Rates, and confiscation, 11. and customer's demand, 6. and depreciation, 107. and quantity of service, 6. federal versus state, 184. for fire protection, 251, 253, 255, 257. for off-peak business, 14. for water, standard form, 265. reasonable by legislation, 12. residence, electric, 311. secondary to service, 8. simplicity desirable, 30. sound and unsound bases for, 11. two- and three-part, 6. unit and flat, 6. value-of-service telephone, 331, 333. Rating communities for value of tele- phone service, 334. 384 INDEX Rating gas-customer's demands, 290. Real estate appraisal, 59. Reasonable haul on electric roads, 223, 224. Reasonable return, 96. Reduction of fixed charges, 25. Reduction of value, sudden, 94. Regulation of utilities, affecting water rights, 73. avenues of, 135. electric railways, 219. electricity supplies, 300. express companies, 202. future, 135. gas companies, 286. political place of, 1. railroad, 163. telephone utilities, 332. water-works, 243. Renewance, 110. Rentals, 20. Repairs as a service cost, 20. Repayment of depreciation cost, 228. Reservoirs, value of, 76. Residential rates, electric, 311. gas, 290. Retirance, choice of plans, 130. computed, 115, 117, 123. defined, 110. failure to collect, 113. fixed by appraisal, 116. plans compared, 127. provided by maintenance, 115. relation to depreciation, 111. relation to value, 112. subdivided, 111. Return on property as cost of serv- ice, 19. Rhode Island water-works, 241, 275. Richmond, Va., water consumption, 261, 276. Rights of public in utility service, 3. Ripley, W. Z., 168, 174, 176. Risk, a factor in railroad rates, 183. compensation for, 97. factors increasing, 97. Rush-hour electric-service standards, 215. Sacramento, Calif., water consump- tion, 261, 267. Salaries as service cost, 20. Saliers, E. A., 132. San Francisco, measured telephone service, 330. San Francisco water-works, 241, 267. Sanders, Thos., 320. Saunders, H. J., 199. Schedule of service costs, 19, 29. Seabrook, A. H., 312. Secondary rate for gas, Baltimore, 290. Separation of railway expenses, 172. Service, cannot be stored, 5. capacity and demand, 5. ideals needed, 160. quality of street-railway, 225, 236. telephone, adequate, 328. telephone, long distance,"321. type of utilities, 5, 161, 201, 215, 242, 300, 327. water-works requirements, 245, 250. Service charges, electricity-supply, 311, 317. gas works, 285, 290. water-works, 264. Sewage flow and water consumption, 249. Sewerage utilities, 5. Shepherd, F. C., 199. Short cuts in appraisals, 56. Simplicity in rates, 30. Sinking-funds and depreciation, 117. court views, 126. tables (Appendix B), 352. see also Depreciation and Retirance. Sliding scales, electricity rates, 311. gas rates, 283. street-railway fares, 235. telephone rates, 331, 335. water rates, 262. eee also Dividing Scales of Profits, 101. INDEX 385 Slow and fast meters, 308. Spiral of costs, 154. Standard form of water rate, 265. Stock, ratio to bonds, 148. Storage and demand, 5. Storage of utility's product, 5, 242, 284,308,327. Storage reservoirs, value of, 76. Straight-line depreciation, 117. Straight-line retirance plans modified, 120. St. Croix telephone case, cost appor- tionment, 341. Stanley-Westinghouse alternating- current system, 302. Station, central electric, history, 300. Station-load diversity, 310. Statistics of gas industry, 278, 296. Steam-power comparison of water rights, 72. Stearns, F. P., 121. Step schedules of water rates, 262. Stone, C. H., 280. Storage capacity of gas holders, 285. Street-lighting rates, 316. Street and electric railways, accounts, 220. depreciation, 227. development, 209, 212, 214, 228. earnings, 215, 235. economics, 214, 215, 225. finance, 215, 225. nickel fares, 211, 213, 223. retirance, 227. technology, 209. three-cent fares, 235. transfers, 232, 239. Subscribers' (telephone) classes, 339. Subscribers' interdependence, 340. Supplies enter service cost, 20. Surplus, appropriations to, enter serv- ice cost, 20. Suspense accounts, 228. Switchboards, telephone, 326. Switchboard, telephone, develop- ment, 320. Tables for sulking fund and present value computations, (Appendix B), 352. Taxes, apportionment of, 21. Taxes, as service cost, 20. Taxes during construction, 79. Tayler street-railway ordinance, 235. Technology, electric railway, 209. electricity supply, 305. gas-works, 279. telephone utilities, 325. water-works, 246, 250. Telegraph intercommunicating sys- tems, 319. Telegraph rates, 8. Telegraph switchboard for tele- phones, 320. Telephone utilities, adequate service, 328. automatic systems, 327. business development, 320. commission regulation, 332. compared with localized utilities, 327. compared with transportation, 327. cost analysis, 343. cost of service in rates, 336. exchange practice, 325. expense apportionment, 340. history, 318. investment peculiarities, 329. long-distance service, 321. rate-system development, 330. subscribers' classes, 339. switchboard development, 320. technology, 325. toll rates, 8. transmitters, 319. value of service in rates, 331. Telephone-type electricity tariff, 311. Tests for fixed operating and cus- tomer costs, 21, 217. Traffic surveys in Chicago, Pittsburgh, Providence, San Francisco, Phil- adelphia, Milwaukee and De- troit, 224. 386 INDEX Transfer tickets on street railways, 232, 239. Transportation, compared with telephone service, 319. history of, 162, 201, 208, 212, 225, 234. rate problems, 168, 178, 203, 213, 218. Trunk-line railway rates, 175. Twining, W. S., 230. Unaccounted water, 264. Unearned increments, 48. Uniform rate for gas, 283. Uninterrupted electric service, 308. Urban rapid-transit rates, 229. U. S. Census Bureau, 252, 259, 278, 304. Uses for electricity, 303. Utilities Bureau, 54, 296. Utility, all problems met hi electricity supply, 300. burdens, 150. classes, 5. commission regulation, 1, 12, 32, 104, 134, 140, 163, 202, 225, 238, 243, 286, 312, 332. denned, 2. discrimination, 4, 147. improper activity, 145. interference, 144. monopoly, 151. obligations, 3. overcapitalization, 147. product type, 5, 242, 283. public policy, 149. regulation affects water rights, 73. service type, 5, 167, 201, 205, 215, 242, 300, 327. Wisconsin law, 140. Vanderzee, G. W., 317. Vail, T. N., 320. Value of natural gas, 287. Value-of-service in telephone rates, 331, 333. Valuation, cost of, 53. contingency allowances, 81. discarded plant, 83. inventories, 54. overhead allowances, 77. problems, 52. purpose, 42. quick methods, 56. railway, 197. storage reservoirs, 76. water rights, 69. Value, affected by adaptability, 62. affected by original conditions, 45. amortization of intangibles, 91. commodity, in railway rates, 179. disclosed by accounts, 44. disclosed by appraisal, 44. effect of design and location, 92. fire-protection, 256. franchise, 65. going concern, 41, 85. of service, in rates, 10, 11, 178, 256, 258, 331. paving over mains, 63. Variation of gas cost with quantity, 285. Vermont water-works, 241, 261, 276. Water, consumption data, 249. leakage, 264. meters, 249, 260, 264. rates, 240, 265, 267. requirement curves, 254. requirements for good, 245, 250. supply commissions, 243. unaccounted for, 264. uses, 245, 250. waste, 260. Water rights, and utility regulation, 73. are real estate, 69. comparison as basis of approval, 67, 70, 72. nature of, 68. split into elements, 69. INDEX 387 Water-works, accounting, 259. costs of extended, 258. early, 240. fire protection, 250, 253, 255, 257. in typical cities, 267. investment, 242. regulation, 243.. technology, 246, 250. Watson, T. A., 320. Wear-and-tear deterioration expense, 24. Welfare work a service cost, 20. Western Electric Co., 320. Western Union Telegraph Co., 320, 321. Westinghouse-Stanley alternating- current system, 302. Wisconsin, electric companies, 310, 312, 316. electric-railway dividends, 215. Electrical Association, 317. electricity tariff, 312. first electric railway, 209. gas companies, 285, 287, 296, 297. going-value computations, 87. municipal-plant control, 4. Wisconsin (cont.), Railroad Commission, 59, 88, 89, 219, 229, 235, 238, 309, 338, 340. street-lighting contract, 316. street-railway fare schemes, 219, 237. telephone cases, 338, 341. utility law, 140. water-works, 276. Winthrop, Mass., water consump- tion, 261, 271. Worcester, Mass., water-works, 241. Working capital, interest as service cost, 20. Worth, as basis of earnings, 36. of express companies property, 202. of service, 10. see also Value, Valuation and De- preciation. Wright, Arthur, maximum-demand indicator, 7. Zone system, express rates, 205. railroad rates, 176. street-railway rates, 218, 237. UC SOUTHERN REGIONAL LIBRARY FACILITY A 000713859 7