Report of the Committee on Franchises of 
 the National Municipal League^^ 
 
 Submitted at the Conference for Good City Government Held at 
 
 Toronto, November, 1913 
 
 To the National ^M^unicipal League: 
 
 Your committee on franchises begs to 
 submit the following report: 
 
 It has been suggested that the growth of 
 the state commission idea is rendering the 
 subject of franchises of diminishing impor¬ 
 tance to the public. It is our view that just 
 at present there is a tendency toward too 
 great centralization in the control of public 
 utilities. The idea of state regulation has 
 gained great headway, and under some of 
 the forms of public utility laws being en¬ 
 acted, or recommended for enactment, the 
 powers of the municipalities to control local 
 utilities, either through franchise contract 
 or through regulation by means of ordi¬ 
 nances or local commissions, are being se¬ 
 riously curtailed or taken away entirely. 
 Nevertheless, we cannot recall a time when 
 a greater number of interesting local fran¬ 
 chise situations presented themselves to the 
 various cities of the country than now. The 
 National Municipal League has always been 
 friendly to the idea of municipal home rule, 
 and the home rule movement has been gain¬ 
 ing very considerable headway in recent 
 years. It is especially important, therefore, 
 in the judgment of your committee, that the 
 League should inquire carefully into the 
 significance of this counter movement for 
 exclusive state control in the matter of pub¬ 
 lic utilities, hitherto regarded as one of the 
 most important fields for municipal activity. 
 Upon this matter, as well as upon certain 
 other fundamental issues involved in the 
 general problem of public utility franchises, 
 the League should be prepared to throw 
 light and furnish leadership. 
 
 Municipal Home Rule in Its Relation to the 
 Control of Public Utilities 
 
 The public utility laws providing for ex¬ 
 clusive state regulation do not necessarily 
 and directly strike at the principle of muni¬ 
 cipal ownership, although in some cases 
 they bring municipally owned utilities under 
 supervision to the same extent as utilities 
 owned and operated by private corpora¬ 
 tions. Nevertheless, there are certain fea¬ 
 tures of exclusive state regulation which 
 tend to make the municipalization of utili¬ 
 ties more difficult, and to that extent inter¬ 
 fere with one of the most fundamental pro¬ 
 visions of the home rule program. 
 
 Several points are made in favor of ex¬ 
 clusive state regulation. 
 
 It is said that at the present time there 
 are practically no utilities of a purely local 
 character. Local telephone systems overlap 
 municipal boundaries and are linked up with 
 long distance telephones reaching to distant 
 cities and even transcending state limits. 
 Street railways frequently operate beyond 
 the city limits and even form the nucleus 
 of a great network of interurban lines. 
 Since the development of hydro-electric 
 power, electric current for local distribution 
 is in many cases brought from far distant 
 sources and the same transmission lines 
 often serve many different cities. The same 
 is true of natural gas supplies. It is urged 
 that these conditions make municipal con¬ 
 trol of these utilities illogical and imprac¬ 
 ticable. 
 
 It is also said that public service corpora¬ 
 tions receive their charters from the state, 
 and, therefore, must be regulated by state 
 
 1 
 
authority. On behalf of the corporations 
 it is urged that regulation of rates and ser¬ 
 vices involves a corresponding obligation 
 for the protection of the investment, and 
 that such protection is impossible unless the 
 regulating authority is an independent state 
 body, not subject to immediate political 
 pressure from the voters who as consumers 
 of a particular utility clamor for lower rates 
 and better services irrespective of the ef¥ect 
 upon the company’s financial interests. 
 
 It is also said that only the very largest 
 cities are able to bear the expense of sup¬ 
 porting local commissions equipped for sci¬ 
 entific regulation Ind that even where a 
 city could afford this expense it is seldom 
 willing to incur it. 
 
 It cannot be denied that these arguments 
 have considerable weight. In the opinion 
 of your committee, however, it would be a 
 mistake to forego entirely, on account of 
 these arguments, the principle of municipal 
 home rule and take away from the muni¬ 
 cipal authorities all control over public util¬ 
 ity services within the city limits. Several 
 considerations may be urged in behalf of 
 this view. 
 
 Granting the undisputed facts as to the 
 development of interurban, state-wide and 
 even national utility systems, it remains 
 true that what are commonly known as pub¬ 
 lic utilities are primarily urban in their 
 character and that they are developed pri¬ 
 marily in relation to one or more urban cen¬ 
 ters. After all, almost every important city 
 furnishes not only the nucleus, but the 
 major part, of the business of the public 
 utilities operated within its limits. With 
 the extension of public utilities to rural 
 and semi-rural districts and with the growth 
 of cities so that in many cases they touch 
 each other, sanitary drainage and the supply 
 of water, both of which are generally rec¬ 
 ognized as proper municipal functions, 
 over-reach local boundaries as far as any 
 other utilities. From the standpoint of the 
 city, at least so long as it maintains itself 
 as a separate political unit charged with the 
 performance of cooperative functions for 
 the benefit of its inhabitants, the supply of 
 
 all the standard utilities will remain a mat¬ 
 ter of vital local concern, and the transfer 
 of all control of these services, so long as 
 they remain under private ownership, to a 
 distant administrative authority will be in 
 fact as well as in theory a distinct violation 
 of the principle of municipal home rule. 
 
 It may also be urged on general principles 
 that the control of all public functions 
 should be localized' as much as possible. In 
 this way only can the active and intelligent 
 interest of the voters be aroused and main¬ 
 tained, and the entire machinery of govern¬ 
 ment be kept close to the people for whose 
 benefit it has been created. Also, in this 
 way only can advantage be taken of the 
 local knowledge and the local interest 
 which, given a sound public opinion, are of 
 incalculable benefit in public administration. 
 This consideration would lead us to give the 
 benefit of the doubt to local rather than 
 state regulation and to extend the principle 
 oi state control only so fast and so far as 
 the facts make it logical and practically 
 necessary to appeal to a central authority. 
 The soundness of this view is supported by 
 a consideration of the results that would 
 follow from the strict application of the 
 opposite policy. As already noted, many 
 utilities are not merely interurban, but in¬ 
 terstate, and according to the logic of those 
 who favor exclusive state control, the utili¬ 
 ties that overlap state boundaries should be 
 subject to exclusive national control. This 
 argument would in some cases even require 
 international control for public utilities op¬ 
 erated in border cities. 
 
 It may further be urged, as a practical 
 matter, that the more powerful the corpora¬ 
 tions become and the more widespread their 
 services, the more important it is that they 
 should be directly answerable to the local 
 communities which they serve. It may eas¬ 
 ily be possible that an appointive state com¬ 
 mission will fall more or less completely 
 under the domination of the powerful inter¬ 
 ests which control the public utilities of the 
 state, and thus the very machinery provided 
 for the regulation of utilities be captured by 
 the interests presumed to be regulated by it. 
 

 This is a very real danger. It may be neces- . 
 sary to array against the powerful financial 
 interests of the companies the direct mass 
 interest of the local consumers in order to 
 preserve the vitality of the regulatory func¬ 
 tion. It should never be forgotten that pub¬ 
 lic utility corporations exist to serve the 
 people, not to control them. 
 
 After careful consideration of the va¬ 
 rious arguments for and against exclusive 
 state regulation, including the arugments 
 presented at the Los Angeles conference by 
 the Hon. John M. Eshleman on the side of 
 state regulation and by Lewis R. Works, 
 Esq., on the side of local regulation, we are 
 of the opinion that in most cases regulation 
 cannot be either logical or effective without 
 the active cooperation of both- state and 
 local authorities. It is dear that in a large 
 city with a powerful and highly developed 
 local government upon which devolves the 
 obligation of meeting the complex problems 
 of urban life and of actively guiding the 
 development of the community along ra¬ 
 tional and progressive lines, it would be a 
 mistake to divest the local authorities of all 
 control over public utilities, even though 
 operated by private corporations. 
 
 First of all, a city must havcincontrol of 
 its streets. This necessity becomes more 
 acute as cities increase in population and 
 the congestion of street traffic and of the 
 surface, underground and overhead street 
 uses develops. 
 
 Then, too, when the problems of conges¬ 
 tion of population become serious, a city 
 finds it necessary actively to initiate and 
 control the development of its public utili¬ 
 ties, particularly its local transportation sys¬ 
 tem. No adequate city planning is possible 
 without effective control of the development 
 of the public utility systems. 
 
 Moreover, as a city increases in size the 
 utilities that in rural communities and in 
 smaller towns are luxuries, come to be ab¬ 
 solute necessities of life. Not only must 
 the people of large cities have the various 
 utilities, but they must have a high grade 
 of service at fair rates. 
 
 So long as we stand for the idea of 
 
 throwing upon the people of a city the re¬ 
 sponsibility for working out their own mu¬ 
 nicipal salvation under home rule, we can- 
 'not for a moment accept the proposition' 
 that the entire control of the utilities using 
 the city streets should be transferred to a 
 distant authority not politically responsible' 
 to the people of the city, and not thoroughly 
 acquainted, by residence in the city, witN 
 local conditions and local needs. 
 
 At the same time it is clear that in the 
 country and in small towns, the public 
 authorities are wholly lacking in equipment 
 for the regulation and control of public 
 utility corporations. This is especially true 
 where utilities of an interurban or state¬ 
 wide character merely p’ass through the 
 local communities. For a country town to 
 attempt to regulate an interurban railroad, 
 except as to the most rudimentary questions 
 relating to the occupation of the streets, 
 would be illogical and practically impos¬ 
 sible. It appears to be desirable, therefore, 
 that the state public service commission 
 should be given general jurisdiction over 
 public utilities throughout the state, so that 
 there shall be no “twilight zone” within 
 which the companies may escape adequate 
 regulation. We are of the opinion, how¬ 
 ever, that at least every city of sufficient 
 importance to enjoy powers of home rule 
 in the framing of its charter should have 
 the right to establish a separate depart- 
 ment, bureau or commission for the purpose 
 of supervising the utilities operating within 
 its limits, to such extent as may be neces¬ 
 sary for the protection of the distinctively 
 local interests of the community.^ Even m 
 the largest city, with the best equipped util¬ 
 ity department, the state commission should 
 still have jurisdiction over certain impor- 
 t3,rit matters# 
 
 speaking generally, all those elements of 
 regulation which have to do with the activi¬ 
 ties of corporations as such and which in- 
 i vite uniform treatment without reference 
 to widely varying local conditions will 
 naturally fall to the lot of the state com¬ 
 mission. These matters include the regula¬ 
 tion of stock and bond issues, the fixing of 
 
a uniform system of accounts, the require¬ 
 ment of public reports and the determina¬ 
 tion of certain fundamental questions 
 which relate to the stability of the invest¬ 
 ment. On the other hand, the city, if it 
 chooses to exercise it, should have broad 
 power of control in all matters relating to 
 the occupation of the streets and the char¬ 
 acter of the services rendered and should 
 be in a position to municipalize the utilities 
 whenever it desires to do so, and for that 
 purpose should have a continuing right to 
 enter into franchise contracts by the terms 
 of which municipalization can be made 
 practicable. 
 
 A state-wide,public utility law which pro¬ 
 vides that every franchise granted by local 
 authorities shall be an indeterminate per¬ 
 mit, terminable only upon purchase of the 
 property of the utility at a price fixed by 
 the state commission, is, in our judgment, 
 inadequate to protect the interests of the 
 city, and in fact tends strongly to hamper 
 the city in future efforts to municipalize 
 the utilities. This might not be true if the 
 law should provide for the taking over of 
 utilities subject in part to outstanding in¬ 
 debtedness. But in so far as such a law 
 makes it necessary, for all time to come, 
 that when a city wishes to municipailze it 
 must pay in cash the entire value of the 
 property in a lump sum before taking pos¬ 
 session, a serious obstacle is placed in the 
 way of future acquisition of utilities. The 
 rapid increase of municipal debt for non¬ 
 revenue-producing investments is a notor¬ 
 ious development of the present day. It is 
 also notorious that the legitimate investment 
 in practically every utility, to say nothing of 
 the unearned increment of land values and 
 the possible allowance by a state commission 
 or by the courts for going value and de¬ 
 velopmental expenses, is piling up year by 
 year. A state law, therefore, that would 
 prevent a city, once having granted a fran¬ 
 chise, from ever resettling its relations 
 with the particular utility by means of a 
 new franchise contract, with provision for 
 the amortization of all or a part of the pur¬ 
 chase price out of earnings, or with the 
 
 option to take over the property subject tO' 
 outstanding indebtedness, is a bad law from 
 the standpoint of municipal home rule in 
 general and of municipal control of public 
 utilities in particular. 
 
 While we do not favor, as a general 
 principle, competition between municipal 
 and private plants, we believe that a city 
 should have the right to build a competing 
 plant rather than buy out an existing util¬ 
 ity at an exorbitant price built up by allow¬ 
 ances for franchise values, good will, lost 
 investments and other intangible elements- 
 often claimed by the companies. If the 
 purchase price is not fixed in accordance 
 with the terms of a franchise contract, the 
 city ought not to be compelled to buy the 
 existing plant as a preliminary to municipal 
 ownership except on the basis of the actual, 
 legitimate investment, with proper allow¬ 
 ance for depreciation. 
 
 There are certain elements of regulation 
 which lie on the border-line between state 
 and local functions. One of these is the 
 regulation of rates. We are inclined to the 
 opinion that the fixing of rates, which has 
 to do fundamentally with the protection of 
 the investment as well as with the rights of 
 the patrons of the utility, should be recog¬ 
 nized as a function in which local and state 
 authorities may properly cooperate. Any 
 city which does not choose to invite the 
 state commission to assume jurisdiction in 
 the fixing of local utility rates and which is 
 willing to bear the expense of an adequate 
 investigation of the facts upon which scien¬ 
 tific rate regulation is based should have 
 the right to fix local rates either by con¬ 
 tract or by ordinance, subject in either case 
 to an appeal to the state commission to de¬ 
 termine whether or not the city has made 
 an adequate investigation and whether or 
 not the rates fixed would injuriously affect 
 the rights of individual consumers outside 
 the city limits or of other communities 
 necessarily or conveniently served by the 
 same utility plant or system. In the inter¬ 
 est of intelligent cooperation between city 
 and state authorities, it might be a good 
 thing to require the state commission to 
 
 4 
 
loan its experts to cities for rate investiga¬ 
 tions for a reasonable compensation wher¬ 
 ever the city does not choose to maintain a 
 local commission or employ its own tech¬ 
 nical assistance. 
 
 Another matter requiring the cooperation 
 of local and state authorities is the exten¬ 
 sion of street railways and other utilities 
 to keep pace with the growth of population 
 and the development of suburban areas. 
 Here the interest of the city is fundamental, 
 while at the same time the investors have 
 a right to protection against the arbitrary 
 demands of local land speculators and over- 
 zealous aldermen. 
 
 The extent to which state control of utili¬ 
 ties is necessary and the extent to which 
 local control is possible vary greatly in dif¬ 
 ferent parts of the country. In states 
 where cities are widely separated, each ur¬ 
 ban community naturally forms a more or 
 less independent utility center, and muni- 
 pal control may be developed to a great ex¬ 
 tent without interfering with the rights of 
 other communities. Moreover, in the case 
 of a great city where the bulk of the service 
 of any particular utility is rendered within 
 the corporate limits, the city’s overwhelm¬ 
 ing “majority interest’^ in the utility re¬ 
 quires the city, for its own protection, to 
 maintain a large measure of local control. 
 Under other circumstances, where cities are 
 bunched together, as they are in eastern 
 Massachusetts and northern New Jersey, it 
 is obvious that unless some new form of co¬ 
 operation among neighboring municipalities 
 is developed, state control of the utilities 
 will necessarily go much further than is 
 necessary where cities are physically re¬ 
 mote from one another. 
 
 In view of these various considerations, 
 we suggest that where a city has assumed 
 actively to exercise the functions of regu¬ 
 lation, it shall have substantially final au¬ 
 thority with relation to the occupation of 
 the streets, the quality of service rendered 
 and the nature of the franchise contract 
 which it may desire to make for the purpose 
 of facilitating the transfer of the property 
 from private to public ownership. In all 
 
 matters where an appeal lies from the de¬ 
 cision of the local authorities, as in the 
 matter of rates or extensions, and in all 
 matters where the state commission has pri¬ 
 mary jurisdiction, especially in (juestions 
 relating to competition, accounts and pub¬ 
 licity, we suggest that the local department 
 or commission, representing the city’s inter¬ 
 est and its intelligence on public utilities, 
 have the right to appear officially before 
 the state commission to present the city’s 
 case. In other words, in certain important 
 lines of regulation the city should have final 
 authority; in certain other matters the city 
 should have 'primary jurisdiction, and, in 
 case of appeal, should have the right to be 
 represented officially before the state com¬ 
 mission by its local utility experts; while 
 in still other matters the jurisdiction of the 
 state commission should be regarded as nor¬ 
 mal and complete, but even in these matters 
 the city should have the right to appear in 
 its corporate capacity to make suggestions 
 or to protest against any proposed action 
 affecting utilities that operate within the 
 city limits. 
 
 We shall now proceed to discuss certain 
 important questions that arise in connec¬ 
 tion with franchise contracts between cities 
 and public utility companies. 
 
 Control and Financing of Extensions 
 
 We believe that a public utility within a 
 given urban community is a natural monop¬ 
 oly, and that one of the first and absolutely 
 essential obligations of such a monopoly is 
 to extend its services to meet all the legiti¬ 
 mate needs of the community. In prac¬ 
 tically every city where the street railway 
 situation presents an acute problem, one of 
 the greatest difficulties is found in the ab¬ 
 sence of public control in the matter of ex¬ 
 tensions. To a much less extent the prob¬ 
 lem of extensions also affects the other 
 principal utilities. There is nothing which 
 the people of a growing city so insistently 
 demand as extensions of the street railway 
 system, and there is no point where the 
 street railway companies more strenuously 
 refuse to recognize public initiative and 
 
 
control than in this matter of building ad¬ 
 ditional lines. A few cities have covered 
 the problem of extensions more or less suc¬ 
 cessfully in their franchise contracts. This 
 is notably the case in Chicago and Cleve¬ 
 land, and the principle is recognized in the 
 new subway contracts in New York. 
 
 We are often told that under private in¬ 
 itiative American cities have much less to 
 complain of as to the lack of proper street 
 railway extensions than the British cities, 
 where, in many cases, the street railway 
 systems are owned and operated by the mu¬ 
 nicipality. It is true, undoubtedly, that in 
 many cities during certain periods there 
 has been a ’liberal expansion. It is prob¬ 
 able that in some cities, even without the 
 stimulus of competition, there has been an 
 over-building of street car lines. It is to 
 be noted, however, that street railway ex¬ 
 pansion in American cities has not always 
 been determined by an intelligent regard 
 for the interests of the community as a 
 whole. So long as private corporations, 
 organized for profit, have the initiative 
 with regard to all extensions, it is to be 
 expected that additional construction will 
 be undertaken only where it promises to 
 add to the profits of the enterprise. In 
 other words, a street railway corporation 
 will not of its own volition extend a line 
 for an additional half-mile when all the 
 people who would be accommodated by the 
 extension would simply be receiving addi¬ 
 tional service without being required to pay 
 additional fares. Congestion of population, 
 except at the very heart of the city, is ex¬ 
 tremely profitable to the street railways. 
 It is patent to everybody that it requires 
 something more than a purely selfish or 
 profit-seeking motive to compel an adequate 
 and logical expansion of a city’s transit 
 facilities as the public need arises. 
 
 In dealing with the problem of exten¬ 
 sions without any procedure fixed by fran¬ 
 chise contract, the city can only guess what 
 the company’s controlling motives are and 
 must cast about for substantial inducements 
 with which to overcome the company’s 
 financial reluctance. Threatened or real 
 
 competition has often been used to secure 
 extensions, but competition has almost in¬ 
 variably proven to be an unsatisfactory and 
 expensive weapon for the city to use. In 
 many cases extensions have been forced 
 upon a corporation as the price of the re¬ 
 newal of franchise rights. This method is 
 of course impossible wherever the perpet¬ 
 ual or indeterminate franchise without time 
 limit is in use. Often, also, a situation 
 arises where the company is greatly in need 
 of additional privileges for its own accom¬ 
 modation, and at such times it is possible 
 for the city to drive a bargain by exacting 
 grudged extensions and other concessions 
 as a consideration for the granting of the 
 privileges applied for. 
 
 An even more difficult and subtle situa¬ 
 tion arises where the company is induced 
 for special reasons to make extensions 
 which, from the community point of view, 
 are premature. Such extensions are either 
 made for the sake of helping the real estate 
 speculations of the officials, or principal 
 stockholders of the company, or else they 
 are made by reason of subsidies given to 
 the company by other persons interested 
 in certain real estate developments. With¬ 
 out any public supervision, the policy of re¬ 
 quiring the owners of benefited property to 
 pay for certain street railway extensions 
 has acquired considerable standing in some 
 cities. Indeed, it is well known that certain 
 street railway systems have been over- 
 expanded for the benefit of certain real 
 estate interests, with the result that for 
 many years the prematurely constructed 
 lines are a financial drag upon the system 
 as a whole, and tend to hinder the construc¬ 
 tion of other extensions which, in the gen¬ 
 eral interest of the community, ought to be 
 built. 
 
 The problem of extensions is a delicate 
 and difficult one. Obviously some power 
 of initiative as well as of veto on the part 
 of the public authorities is necessary. At 
 the same time it is clear that any company 
 could be driven into bankruptcy by the arbi¬ 
 trary exercise on the part of the local au¬ 
 thorities of unlimited control over exten- 
 
 * 
 
 6 
 
 
sions. The construction of an extension 
 means an additional capital investment, and 
 the power of the city to order a private 
 company to build an extension is the power 
 to compel the stockholders to put more 
 capital into the enterprise, either out of 
 their own pockets or out of the proceeds of 
 bond issues. While it is our opinion that 
 the local authorities should have the right 
 to initiate extensions, it seems to us neces¬ 
 sary that the company should have an ap¬ 
 peal to an impartial authority, preferably 
 the state public utilities commission, for a 
 review of the question of the necessity and 
 financial feasibility of any particular ex¬ 
 tension ordered by the city authorities. It 
 should not be necessary for the city to 
 show that any particular extension which 
 public need demands would be self-support¬ 
 ing as a separate part of the street railway 
 system, but the earning power of the entire 
 system and the effect of the extension upon 
 the financial condition of the company, 
 taken as a whole, should be among the de¬ 
 termining factors. 
 
 In many cases it may be found that an 
 extension is desirable, the cost of which 
 would, nevertheless, prove an unreasonable 
 drag upon the system as a whole if paid out 
 of capital account. Under such conditions, 
 the persons who will receive the greatest 
 financial benefit from the construction and 
 operation of the extension are, undoubt¬ 
 edly, the owners of the land that will be 
 made valuable for residential or business 
 purposes by reason of the extension. In 
 our opinion, therefore, provision should be 
 made by which an extension could be built 
 out of the proceeds of special assessments, 
 or directly by the property owners, in cases 
 where the construction of the extension 
 would not otherwise be justified, but where 
 the operation of the extension without the 
 burden of fixed charges would not be an un¬ 
 reasonable burden upon the street railway 
 system as a whole and would be of benefit 
 to the community. 
 
 Recently, there has been considerable 
 agitation in a number of cities for the use 
 of the assessment plan in the construction 
 
 of utility distributing systems under public 
 ownership. The same principle should 
 apply, so far as assessments are concerned, 
 whether the utility is to be owned by a cor¬ 
 poration or by the city, and in neither case 
 should the portion of the cost of the plant 
 contributed by the abutters be added to 
 capital account. In this way the general 
 public would get the benefit of lower 
 charges or better service, and, when a pri¬ 
 vate plant was municipalized, the city 
 would get the benefit in a lower purchase 
 price. 
 
 With the growth of the great cities, ele¬ 
 vated railroads assume large importance 
 locally—though everybody wishes that it 
 were possible to dispense with them in nar¬ 
 row streets and 'crowded residence sec¬ 
 tions. When elevated railroads are built 
 in streets, the abutters often recover heavy 
 damages on account of the interference 
 with their “easements of light, aid and ac¬ 
 cess.” It might help to get rid of the ele¬ 
 vated roads where they are not wanted, 
 and, in any case, would lighten the burden 
 on the transportation system involved in 
 the removal and relocation of expensive 
 structures, if the principle of special assess¬ 
 ments for benefits were applied to pay the 
 cost of relocations. Certainly, this could 
 be done with justice where the property to 
 be assessed for the benefits of the removal 
 had already been compensated for the dam¬ 
 ages due to the original erection of the 
 structures. 
 
 Duration of Franchises 
 
 In Los Angeles last year (1912) there 
 was considerable controversy among the 
 local people as to whether the indeterminate 
 franchise should be with or without a 
 maximum time limit! While there has been 
 a strong development of sentiment in recent 
 years in favor of the indeterminate fran¬ 
 chise as a general principle, there appears 
 to be in some quarters a strong counter sen¬ 
 timent against it, unless it has a maximum 
 time limit. This counter sentiment is based 
 on the fear that without any time limit at 
 all the indeterminate franchise will prac- 
 
tically amount to a perpetual franchise. 
 The pure indeterminate franchise, as found 
 in the street railway law of Massachusetts 
 and in the District of Columbia, merely pro¬ 
 vides that the rights of a company may be 
 terminated at any time at the option of the 
 public authorities. This form of the inde¬ 
 terminate franchise makes no provision for 
 the purchase of the property of a utility at 
 the time the franchise is terminated. The 
 Wisconsin type of indeterminate permit 
 follows Massachusetts and the District of 
 Columbia in not establishing any maximum 
 time limit, but includes the provision that 
 a franchise shall not be terminated unless, 
 at the time of termination, the city acquires 
 the property of the utility at a price to be 
 fixed by the state icommission. At the 
 same time the public utilities act of Wiscon¬ 
 sin gives municipalities full power to ac¬ 
 quire and operate utilities. 
 
 It is clear that the Wisconsin type of 
 indeterminate franchise is a sufficient guar¬ 
 anty of the integrity of the investment, so 
 that, from the standpoint of the companies, 
 there can be no reason to complain of it, if 
 they once grant that investments in public 
 utilities are devoted to a public use and 
 should be subject to public control. The 
 advocates of ultimate municipal ownership, 
 however, see considerable danger in the 
 indeterminate permit of the Wisconsin type, 
 for the reason that the franchise runs on 
 forever, unless the city finds itself in a 
 position to pay in cash for the entire value 
 of the utility, and the longer the city waits 
 the greater will be the sum required to 
 effect a purchase. 
 
 Possibly, under the Wisconsin indetermi¬ 
 nate permit a city, in making an original 
 grant of a new franchise, might provide for 
 the amortization of the cost, or a part of 
 the cost, out of earnings within a specific 
 period, or perhaps provide for taking over 
 the property subject to outstanding bonds, 
 or provide that payment shall be accepted 
 in whole or in part, in bonds secured upon 
 the property itself, and not a charge against, 
 the general credit of the city. But it is to 
 be noted that if the city imprudently fails. 
 
 in its original grant, to make any such con¬ 
 tract provision, it is forever debarred from 
 revising the terms of the grant and compel¬ 
 ling the company to enter into a new con¬ 
 tract under which municipal ownership 
 could be made easy. 
 
 Chicago, Cleveland and New York, in 
 their recent street railway and rapid tran¬ 
 sit settlements, have granted indeterminate 
 franchises within maximum time limits. 
 Chicago provides for the accumulation of 
 a street railway purchase fund out of the 
 city’s share of the profits. This provision 
 appears to be wholly inadequate, although 
 it recognizes a correct principle. Cleveland 
 provides that if the franchise is ever per¬ 
 mitted to come within fifteen years of ex¬ 
 piration without being renewed, the com¬ 
 pany may begin to charge the maximum 
 fares set forth in the franchise schedule, 
 and use all surplus for the amortization of 
 capital. The New York subway contracts 
 provide explicitly for the amortization of 
 the entire capital within a definite term of 
 years, and so at the expiration of the con¬ 
 tracts the subways and their equipment will 
 come into the possession of the city without 
 payment at that time. In our opinion, it is 
 important that the franchise should be 
 granted for a definite maximum term, sub¬ 
 ject to the right of the city to terminate 
 the grant in case it is willing to purchase 
 the property at a fair price prior to the ex¬ 
 piration of the grant. The pure indeter¬ 
 minate franchise would be relieved of some 
 of its dangers if the policy of requiring 
 public utilities to adopt an amortization 
 scheme for the gradual reduction of their 
 capital investment for the benefit of the city 
 should be embodied in the general law as a 
 universal and positive obligation. 
 
 Amorlization of the Investment Out of 
 Earnings 
 
 Experience has demonstrated that one of 
 the most dangerous, and at the same time 
 one of the most powerful, tendencies of the 
 private management of public utilities is to 
 overload the capital account. Aside from 
 the deliberate watering which was a com- 
 
mon feature of public utility financing in 
 days gone by, it is customary among utility 
 men to stretch the powers of reasoning to 
 the utmost limits for the purpose of justify¬ 
 ing the inclusion of additional items in the 
 capital account. While it is difficult to de¬ 
 fend this policy when stated broadly, it 
 seems very easy for a mind friendly to 
 over-capitalization to invent excuses for 
 carrying out the policy in any particu¬ 
 lar case. It is not our intention in this 
 report to go into the merits of the tem¬ 
 porary capitalization of such items as 
 development expenses, losses due to ob¬ 
 soleteness and inadequacy, etc. We desire, 
 however, to state emphatically that in our 
 opinion the experience of the utilities of the 
 country, and perhaps especially the trans¬ 
 portation utilities, has been such as to give 
 a distinct warning against the policy of per¬ 
 manently capitalizing superseded property, 
 accumulated deficits and intangible ele¬ 
 ments of value. Whatever may be neces¬ 
 sary in an adjustment of the capital ac¬ 
 count, fair alike to the investor and to the 
 public, we are of the opinion that all these 
 elements—sometimes included in appraisals 
 in excess of the permanent value of the 
 physical property—should be written out of 
 capital within a comparatively short period 
 of years. The tendency of the investment 
 to bulge is one that should be as firmly re¬ 
 sisted as the tendency to overload a city 
 with debt representing in part improve¬ 
 ments that have outlived their usefulness. 
 This policy of holding down the capital ac¬ 
 count is in our opinion necessary: (i) in 
 order that the investment itself may be safe 
 and stable; (2) in order that rates may be 
 kept within reasonable limits; and (3) in 
 order that the purchase price, which is the 
 touchstone of the franchise contract from 
 the standpoint of possible municipal owner¬ 
 ship, shall be brought within the limits of 
 the city’s financial ability. 
 
 There may be a legitimate difference of 
 i opinion as to the advisability of requiring 
 
 the amortization of the entire capital ac¬ 
 count of a public utility while it is being 
 held under private ownership. It should 
 
 be made perfectly clear that the amortiza¬ 
 tion we refer to is not the amortization of 
 the company’s bonds for the benefit of its 
 stockholders, but the amortization of the 
 investment itself, represented by both stocks 
 and bonds, as a process for the gradual 
 transfer of the ownership of the property 
 from private to public hands. Some of 
 those who are ready to commit the cities 
 now to a definite policy of ultimate muni¬ 
 cipal ownership of public utilities, insist 
 that the amortization process should be set 
 in motion and should be carried through to 
 its ultimate limit as will be done under the 
 New York subway contracts. On the other 
 hand, those who desire only to keep the 
 cities in a position where municipal owner¬ 
 ship will be financially practicable at any 
 time are inclined to oppose the idea of 
 amortization of the entire investment un¬ 
 der the terms of the franchise. They say 
 that the intangible elements and the super¬ 
 seded property should by all means be 
 amortized so that the intrinsic value of the 
 property for operation will at all times be 
 sufficient security for the purchase price. 
 They believe that as a result of this conser¬ 
 vative relation between the capital value as 
 represented at any time in the purchase 
 price and the actual value of the tangible 
 property, it would be possible for any city 
 which had properly conserved its credit to 
 take over the utility and raise all the funds 
 necessary for the purpose, either by the 
 issuance of self-sustaining bonds exempted 
 from the debt limit, or by the issuance of 
 bonds against the property and earnings of 
 the utility itself. 
 
 As between these two theories as to the 
 extent to which the amortization policy 
 should be carried, your committee does not 
 feel called upon to choose at.this'time, but 
 all of us favor going at least as far as the 
 second would carry us. We believe that 
 the time is ripe for urging the recognition 
 of the amortization principle in all fran¬ 
 chise contracts, and would further state 
 that in our opinion the tendency will be to 
 amortize too slowly and too little rather 
 than the reverse. 
 
 9 
 
Resettlement of Outstanding Franchises 
 
 Within the past few months the threat¬ 
 ened repeal of the franchises granted under 
 the so-called Rogers Law in Ohio some 
 years ago has created an intense discussion 
 of the question of good faith in the rela¬ 
 tions between the public authorities and the 
 franchise-holding corporations, especially 
 in Cincinnati. It is claimed by the pro¬ 
 ponents of the proposed repeal that such 
 action may be lawfully taken under an old 
 section of the Ohio constitution which pro¬ 
 vides that no special privilege shall ever be 
 granted which is not subject to revocation 
 by the General Assembly. The usual alle¬ 
 gations of over-capitalization, bad service, 
 corrupting political influence, etc., have 
 been urged against the Cincinnati company 
 as furnishing sufficient reason why the al¬ 
 leged option reserved by the constitution 
 should be exercised. We do not desire to 
 give judgment upon the merits of the 
 Ohio case, but we desire to call atten¬ 
 tion to the fact that the ethics involved 
 in an attack upon outstanding long-term 
 or perpetual franchises by legislation, liti-^ 
 gation, bargaining or other forms of co¬ 
 ercion, is bound to be an issue of far-reach¬ 
 ing importance in many states and cities in 
 the near future. The existence of per¬ 
 petual franchises in the public streets, or of 
 such franchises running past the life of a 
 generation, has come to be considered as 
 being wholly contrary to-sound public pol¬ 
 icy and inimical to the future welfare of 
 the cities. 
 
 It has been hoped that the disadvantages 
 of the perpetual franchise could in some 
 measure be overcome by the exercise of 
 continuous regulation through the police 
 power. One of, the primary difficulties in 
 the way of the success of this policy is that 
 no adequate means has yet been devised 
 and proved to require companies enjoying 
 perpetual, irrevocable franchises actually 
 to extend their lines and render the service 
 which the growth of the community de¬ 
 mands when it demands it. The tenacity 
 with which the companies resist the relo¬ 
 cation of street car lines involving the sur¬ 
 
 render of any portion of any line for which 
 perpetual rights are claimed is a continuing 
 obstacle in the way of the proper develop¬ 
 ment and control of the transit system in 
 any city where perpetual franchises are 
 outstanding. 
 
 We do not deem it necessary at this stage 
 of public enlightenment to urge at length the 
 iniquity of perpetual public utility franchises 
 in public streets. If, however, it is true that 
 the perpetual franchise is a perpetual men¬ 
 ace to essential public control and reason¬ 
 able service, it follows not only that no 
 perpetual franchises should be granted, but 
 that means should be devised to recover 
 those now outstanding. In fact, the attempt 
 to mix perpetual franchises with short-term 
 or indeterminate franchises in the same 
 city is a good deal like the attempt to mix 
 oil and water. As a rule, where important 
 perpetual franchises exist they are the old 
 franchises, on the central streets, repre¬ 
 senting the* most profitable field of opera¬ 
 tion. No city can ever adequately control 
 the development of its transit system, for 
 example, unless it can control the portion 
 of the transit system that operates in the 
 business district. It seems to us largely 
 futile, therefore, for charter commissions 
 to write into new charters elaborate pro¬ 
 visions governing the granting of new fran¬ 
 chises, which, if they apply at all, will apply 
 only to outlying areas, to relatively unim¬ 
 portant extensions, or to competing lines in 
 the back streets. A charter full of fran¬ 
 chise safeguards that apply only to future 
 grants, while the entire profitable area of 
 the city is already occupied by utilities op¬ 
 erating under perpetual rights is a delusion 
 in law-making. 
 
 Therefore, in our opinion, it is essential 
 to the proper development of the utilities 
 of any city and to the full realization of 
 the principles of public control, that, in all 
 cases where the outstanding franchises run 
 in perpetuity or for unreasonably long pe¬ 
 riods, the city should definitely set about de¬ 
 vising means for recapturing them. While 
 it is our opinion that every legitimate in¬ 
 vestment in a necessary public utility should 
 
 
 10 
 
be carefully protected, *vve do not believe 
 that franchises as such should be irrevoca¬ 
 ble, or that they should have special value 
 apart from their function of giving life to 
 the property of the utility. 
 
 There is a well-established rule of law 
 that all grants involving franchise rights in 
 the streets should be construed strictly and 
 strongly in favor of the public. In many 
 jurisdictions this rule has come to be known 
 chiefly by the exceptions to its enforcement. 
 We believe that it is a sound rule and 
 should be strictly applied, especially in all 
 cases involving franchises the terms or 
 conditions of which are clearly contrary to 
 sound public policy. We think, therefore, 
 that the municipal and state authorities are 
 justified in using legislation, litigation, tax¬ 
 ation, negotiation and all other available 
 means to secure the termination of perpet¬ 
 ual* and very long-term franchises, and to 
 compel a readjustment of outstanding rights 
 on the basis of thorough-going protection 
 of the investment under the terms of new 
 franchises which will recover to the city 
 the control vitally necessary to its future 
 welfare. 
 
 It was supposed that the Greater New 
 York charter, adopted some sixteen years 
 ago, inaugurated a fairly up-to-date and 
 enlightened franchise policy so far as fu¬ 
 ture grants were concerned. Yet since that 
 time the city granted for practically noth¬ 
 ing a street railway franchise to a terminal 
 freight railroad to operate in certain streets 
 in South Brooklyn. This franchise was 
 granted for a period of twenty-five years, 
 with the grantee having the right of re¬ 
 newal for another period of twenty-five 
 years upon readjustment of the rental. 
 To-day New York city, less than ten years 
 after making this grant, is devising a plan 
 for a municipal railroad along the Brook¬ 
 lyn water front including the route covered 
 by this franchise; and the franchise itself, 
 which the city now thinks of buying back, 
 has been appraised at over two million dol¬ 
 
 lars. We do not believe that it is possible 
 for cities to treat perpetual franchises or 
 999-year grants as worth the face value 
 claimed for them by their owners, and at 
 the same time attempt, either by negotiation 
 or by condemnation, to acquire the utilities, 
 paying the alleged value of the perpetual 
 franchises. We regard it as highly im¬ 
 politic and unethical for the city to per¬ 
 petuate these burdens upon the future so 
 long as there are means left within the 
 power of the state, or the city, to destroy 
 or at least greatly reduce these illegitimate 
 franchise values, which, if capitalized, 
 could never be sustained either under pri¬ 
 vate or under public ownership, except on 
 the basis of exorbitant rates or subsidies 
 from taxation. 
 
 In the foregoing we have discussed as 
 briefly as possible a few of the major points 
 involved in the franchise problems of the 
 country which are now in process of solu¬ 
 tion. There are many other points which 
 might properly be discussed in this report. 
 We have limited ourselves, however, to a 
 few points in order- that our recommenda¬ 
 tions should stand out more clearly and 
 avoid the confusion of fundamental prin¬ 
 ciples with less important details. 
 
 Respectfully submitted, 
 
 Delos F. Wilcox, Chairman. 
 Robert Treat Paine, 
 
 James W. S. Peters, 
 
 Abraham E. Pinanski, 
 Charles Richardson, 
 
 Clinton Rogers Woodruff, 
 Committee on 'Franchises. 
 
 While agreeing in the main with the able 
 views presented in this report, I doubt the 
 wisdom, at the present time, of lodging in 
 any state commission any control of the 
 capitalization, or of the rates of public 
 utilities in the larger cities, especially west 
 of New York State. 
 
 Edward W. Bemis.