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fornia, both the Railroad Commission and the Courts have recently
prevented privately owned public utilities from entering a municipality
which is already being served adequately by another privately owned
public utility of the same class. Yet municipalities of this State are
exempt from such legal restrictions, and our highest Federal Courts
have confirmed the right of the public to invade the field of a privately



418 KATES OF MUNICIPALLY OWNED PUBLIC UTILITIES

owned utility in competition, without the legal obligation either to
condemn or purchase the privately owned plants. The people have
this inherent right to serve themselves, and though the public should
be able to enjoy the profit and security of their own service, there is a
broad equity involved that requires the protection of the privately
owned plant which has been built in good faith and is being operated
under public regulation so that its rates are just and its service ade-
quate. It would be a public misfortune to confirm the impression that
private investments are to be over-ridden unfairly and in such a way
as to injure legitimate investment. If unfairness is practiced in our
larger centers of population, having substantial bonding resources, it
is apt to delay greatly the development of the back country, where
public credit for large enterprise is lacking.

Eate-fixing commissions must be given credit for stabilizing the
value of public utilities bonds. Stockholders have suffered severely,
and in many instances they should. In California public utility
corporation bonds, approved by State authority, are now sought after.
''The bondholders are usually only loaners of money. It requires stock
"buyers to build extensions and new works. The writer feels that it
would lead to the more rapid development of the State if the Com-
mission's policy were more liberal in the fixing of valuations, and
especially in the permissible rate of interest return allowed. Private
capital invested in utilities should be protected against unjust compe-
tition of publicly owned utilities. The building of private utilities in
California has been practically stopped until it becomes more apparent
what this public policy is to be. In Wisconsin this stage of State
development has been passed.

In so far as known, neither the California Railroad Commission,
nor the California Courts have ever expressed themselves as to what
would be a reasonable rate for a publicly owned utility to charge its
consumers. The Wisconsin Railroad Commission has reviewed this
question, and the trend of its decisions is to the effect that the rate
should be fixed in the same manner as though the utility were privately
owned, the theory being that, where a publicly owned utility is in
competition with one privately owned, it should not be given such
preference as to result in the destruction of the value of the private
plant. For instance, if a city goes into competition with privately
owned plants for the sale of electric energy within its boundaries, and



RATES OF MUNICIPALLY OWNED PUBLIC UTILITIES 419

the interest on the bonds and the sinking fund is paid from the general
tax, it would put such a handicap on the privately owned plant as would
ultimately work its destruction.

The rates for municipally owned utilities in California have often
been fixed rather as a political, than as an economic, question, it being
a popular and easy road to public favor to advocate the reduction of
any rate.

The rate for a public utility service should be based on the fair
value of the properties used and useful in the service, irrespective of
whether the plant is privately or municipally owned. The municipal
plant should be viewed as an investment of public funds by the city,
and it should be operated with the view of obtaining a profit on the
investment.

The rate for a privately owned utility should be adequate to pro-
vide, first, for the expenses of operation and maintenance, second, for
depreciation, and third, for an interest return on the fair value of the
property. This last item will provide interest on the bonded debt and
any profit accruing to the owner. With a municipally owned utility,
in addition to these expenses, there is a bond redemption fund. It has
no counterpart in a privately owned plant, as its bonds are seldom
retired, but, on maturity, are taken care of by a refunding process. In
California, however, the law requires that municipalities retire one-
fortieth of the bond issue each year.

There are four classes of people who should assist in bearing the
cost of a municipally owned public utility :

First. — The city as a whole, or the government;
Second. — The consumer;
Third. — The owner of vacant lots;

Fourth. — The real estate promoter who desires extensions made
to new subdivisions.

First. — The City's Share of the Expense. — The municipality should
contribute from the general tax fund for the cost of all public uses of
water, notwithstanding the fact that the origin of the fund is usually
from the general tax budget. The city should also provide from the
general tax budget the annual contributions to the bond redemption
fund for the utility. If the municipality's credit has been used in
the issuance of bonds for the purchase or construction of the utility



420 RATES OF MUNICIPALLY OWNED PUBLIC UTILITIES

plant, then the refunding of these bonds from the general tax budget
is virtually payment for the plant by the city as a whole.

Second. — The Consumer's Share of the Expense. — The consumer
should, manifestly, pay for the operation and maintenance of the sys-
tem, and, if the municipally owned utility is to be treated on the same
plane with one privately owned, then it follows that the depreciation
account and interest on the fair value of the property should be also
charged to the consumer. To deduct from the rates the depreciation
and interest would put such a handicap on competing privately owned
utilities that they probably could not live. This situation, however, is
one that cannot be treated by a hard and fast rule. For instance, if a
municipality is looking broadly into the future for its public neces-
sities, as is being done by the Cities of Santa Barbara and Los Angeles
in the building of their aqueducts, and the depreciation and interest
charges on these large expenditures are put solely on the present con-
sumers, it may result in a rate that would prevent adequate and de-
sired uses of the utility. Apparently, some latitude must be exercised
in every instance, in determining how this distribution should be
made, in order to obtain a rate which is a feasible operating one.

Assuming that the city can borrow money on its bonds at 5%, and
that a reasonable service rate for the utility will provide interest on
the fair value of the property at 7%, there accrues a 2% differential
which is in effect the profit in operating the utility. This profit should
be expended in the ordinary extensions and betterments of the system,
so as to avoid the necessity for frequent bond issues to make these im-
provements. These, in fairness, should be paid for by appropriations by
the city council from the general tax fund. However, those who have
had to do with these matters know that such allotments of money can-
not be obtained, as a practical working proposition. Only when a
large and substantial improvement is to be made should it be done by
means of a bond issue. If any surplus accrues from the profit of the
system, over and above the expenditures for improvements and better-
ments, this surplus should be turned into the general funds of the city,
for the purpose of reducing taxes rather than rates.

There are two classes of consumers under the municipally owned
plant, those who are not taxpayers in the community, and those who
are. The consumer who does not contribute taxes is paying a fair
price for the service received, and is not entitled to have the cost of



KATES OF MUNICIPALLY OWNED PUBLIC UTILITIES 421

this service reduced simply because he happens to be temporarily a
resident in a commimity owning the utility. He has no investment
there, and has assumed no liabilities on its account.

Property owners have guaranteed the payment of public debts. If
the bond redemption fund is provided for from the general tax levy,
all taxpayers are proportionate owners of the utility. A share of the
profits accruing from this ownership should revert to the taxpayers
through the general fund, so that the consumer who is a taxpayer re-
ceives an indirect benefit from the ownership of the utility in this
way. This system would encourage property ownership.

Third. — The Vacant Lot Owner's Share of the Expense. — The va-
cant lot owner in our Western towns is a source of great expense and
burden to all utilities. It is probable that one-half the mileage of
distribution mains is caused by his speculation in land values. The
utility is standing ready to serve at any time, and the value of the
vacant property depends largely on its privilege to be benefited thereby.
Unless a charge is assessed against vacant lot owners, they are secur-
ing benefits without adequate contributions to the expense of the
plants. Some system of assessment on such vacant property on a front-
foot basis should be developed to cover this element, as is often done
in street paving and sewer work.

A portion of the cost of building the utility is borne by the vacant
lot owner in that he is a taxpayer and has assumed the liability for
the debts of the community. He enjoys the broad and general benefits
that result from the operation and ownership of the plant, which the
consumers alone should not pay for. There are many vacant lots in
the old and established portions of the city where the plant has long
been built, and such lot owners cannot be assessed as in the case of
an extension to a new subdivision. Possibly they should be charged
an assessment each year, which should go into a fund for ordinary
betterments of the system or into the public treasury.

Fourth. — The Real Estate Promoter's Share of the Expense. — The
real estate promoter is continually making new subdivisions and peti-
tioning the utilities, whether publicly or privately owned, to make
extensions therefor. With privately owned utilities it is usually de-
manded that the promoter shall pay for the cost of the extensions.
This policy has also been followed in many of the publicly owned utili-
ties, but it has resulted in political agitation, and has been vigorously



422 RATES OF MUNICIPALLY OWNED PUBLIC UTILITIES

resisted by the interests who are active in their eSorts to speculate on
the community.

The vacant lands exploited by the real estate promoter may be
divided into two classes: first, those lying within the corporate limits
of the municipality owning the public utility; and second, those out-
side these corporate limits.

In the first instance it would be equitable to require the owner of
the property to pay a frontage tax to cover the cost of the distribu-
tion system fronting the property in question, this contribution to be
returned when this part of the plant is on an earning basis. It would
not be proper to charge a portion of the cost of the mother plant
against these extensions, because the property will already have paid
some proportion of the cost thereof in taxes, and will pay more as its
value increases. The assessments for the extensions to the new sub-
division within the corporate limits of the city should be in the
nature of a temporary donation.

If the lands to be exploited are outside the corporate limits of the
community, it would again be just to require the owner temporarily
to advance the funds necessary to make the extensions. So far as
concerns storage reservoirs and conduit systems, or any of the mother
plant built for the distant future, and which may equitably be as-
sumed to involve the promoter's lands, a portion of the cost of this
excess capacity should justly be charged to the promoter.

This whole problem cannot be solved rigidly with a rule which
will apply to all cases. There is, however, the necessity for outlining
some general theory, on which municipalities should proceed. Even
if it is clearly defined, and is endorsed by high authority, there will be
the practical political difficulties of fixing and maintaining rates at a
just point. Obstacles will have to be overcome in case it is necessary
to increase a rate. There is great inertia inherent in communities,
and this it is necessary to prevail against, in order to make a change
of any sort.

Our cities are becoming great business concerns, and should be
managed fairly and scientifically, not only for the interests of the
citizens therein, but also for those who have financed in one way or
another their utilities and early development.



DISCUSSION : MUNICIPALLY OWNED PUBLIC UTILITIES 423

I3ISCXJS sioisr



Frank S. M. Harris,* Assoc. M. Am. Soc. C. E. (by letter). — Mr. Mr.
Lippincott has taken a thoroughly commendable stand in insisting
that municipalities enter a public utility field which is more or less
adequately served by a privately owned utility under rate conditions
equivalent to those confronting the private enterprise. It is only as
a result of such an equitable attitude that private capital may be
expected to "pioneer" in those fields into which the public is not for
the time desirous of entering. It is decisions such as that in the
hearing of the City and County of San Francisco in the matter of
special crossing privileges for its Municipal Railways,! in which the
municipality was reduced to the standing of a private corporation,
which have operated to remove the bitterest of the criticism heaped
on the heads of utility commissions by the public service corporations
which have been "regulated".

The writer has but recently completed an exhaustive survey of
the whole franchise situation for the City of Oakland, Cal., in the
course of which there was indirectly revealed the devious if not
perilous path traversed by the average public utility company prior
to 1900. The manifold injustices, at the hand of shifting political
regimes under which they labored, were but equalled by the corrupt
advantage which they in turn took of the municipality. It is re-
freshing, therefore, to find set forth so fair a basis for square dealing
between the municipality and the private corporation.

Mr. Lippincott, however, considers only the case in which the
municipally owned utility exists side by side with, but completely
independent of, the privately owned utility.

Of late years, an innovation is being written into the franchises
of privately owned utilities, in which the municipality is an active
partner in all development and extension programmes, as well as in
the formulation of financial and operating policies. Such a provision
is but a corollary of the principles advocated by Mr. Lippincott.

For the new blanket resettlement franchise, now being sought by
the San Francisco-Oakland Terminal Railways in exchange for its
130 or more parcel franchises, the following provisions are found:

(1) — A board of control composed of one representative of the
city and one representative of the company shall have juris-
diction over such matters as extension, outlay for equipment,
allowance for depreciation, and the like; and

(2) — After payment of operating expenses, taxes, depreciation as
fixed by the board of control, and a 6% return on its agreed

t Oakland, Cal.

J Engineering News, Vol. 74, p. 181.



424 DISCUSSION': municipally owned public utilities

Mr. physical valuation, at least 55% of the net revenue remaining

^^'■"^- shall be paid to the city.

These clauses are in addition to the usual machinery of the inde-
terminate franchise, providing for the taking over of the ownership
by the city on 6 months' notice at the agreed physical value.

It would seem that, until such time as public ownership is the
accomplished fact which it now bids fair rapidly to become, either an
equitable rate-making policy for the municipal competitor or an implied
co-operation between the municipality and the privately owned public
utility are the essentials of any thoroughly satisfactory solution of
the existing difficulties.

Mr. T. Kennard Thomson,* M. Am. Soc. C. E. — Mr. Lippincott de-

serves the thanks of the Society for his very clear presentation of a
most vital issue.

We are going through a formative stage at present with such sub-
jects as socialism, suffragettism, unionism, public ownershipism,
anarchism, and general radicalism, and the tendency of the country
is to try everything, even including Wall Street speculation; but,
fortunately — like an intelligent child who has burnt his fingers — the
country profits from the expensive experience, and tries something
else. For instance, a town will elect a Socialist mayor, and then snow
him under at the next election. Again, a State will try the "refer-
. endum and recall", pass a dozen different and contradictory bills on

the same day, and then try to recall both the "recall and the refer-
endum". The experiments which prove profitable will remain, and
even a few, like suffrage, will undoubtedly stick, if adopted, whether
really beneficial or not.

When it comes to public ownership, we have examples in K^ew
York City — the Staten Island Ferry, Brooklyn Bridge, etc. — which,
as everybody knows, are not financially profitable. Even the Rapid
Transit would not pay if entirely owned by the municipality. For
what city would dare to pay a yearly salary of $100 000 or more to
one man, even if he could earn many times that much for the
taxpayers.

Ninety-nine men out of a hundred will say that no man is worth
more than, say, $10 000 a year, and that he (that is, the other man)
has dozens of men under him who could do the work as well or better
for less money; and this in face of the facts found actually all over
the world, for it is hard to make people believe what they see.

To take a single example: The Intercolonial Railroad, one of the
best built railroads in America when constructed by the Canadian
Government, enjoyed an absolute monopoly between Halifax and
Quebec for many years. True, the country was largely undeveloped,

• Ne-w York City.



discussion: muxicipally owned public utilities 425

but not as much so as the vast Canadian Northwest was when the late Mr.
Sir William Van Home finished the Canadian Pacific Railroad; but •^°°^°°-
Van Home saw to it that the great prairies were developed to build
up his road; whereas the men who ran the Government-owned Inter-
colonial stuck strictly to the business of operating the road, instead of
creating business to make the road pay, with the result that for some
40 years the road did not even earn operating expenses, let alone pay
taxes or interest on the money.

The speaker, when recently talking to a prominent Canadian, sug-
gested that, if the Government had engaged a man like the late Sir
William Yan Home, or the late James J. Hill, F. Am. Soc. C. E., or
any one else of that caliber, and offered such a man a salary of, say,
$50 000 plus a bonus, he would have earned his salary, a bonus of
several hundred thousands a year, after having paid the Government
ample taxes and a good interest on the money invested in the railroad,
and, at the same time, would have developed the adjoining territory,
thus benefiting the cotmtry from one end of the Dominion to the other.

My friend contradicted me, saying that the Government at one
time really did engage a man capable of getting these results, and
that he at once began by examining the freight rates, which disclosed
the fact that many of them were ridiculously low. He ordered the
rates raised and made the same for all. To make a long story short,
his days were numbered, and the road ran on as before.

On repeating this story to a very powerful newspaper owner, the
speaker was told that such a state of affairs was quite justifiable,
because it paid to run a road at a loss for the sake of building up the
country. This, however, is exactly what such management never does,
as it considers its duty done when it operates the road.

This is no reflection on the staff of this railroad, which is a very
competent one, whose work is well done — that is, as far as it has any
authority to work — but one man with the necessary power, and induce-
ment, could take the same staff and turn a financial failure into a
great financial success, thereby benefiting the entire country.

To take another example, nearer home; a fatal mistake was com-
mitted in the construction of our magnificent $150 000 000 Barge
Canal (with political "poorsight") in the beginning when it was made
a barge canal, instead of a ship canal. As it is, no boat with a clearance
of more than 15 ft. above the water can pass under the bridges and
use the canal. This mistake was not made on the Canadian canals,
which, with the same or less depth of water as the Barge Canal, are
able to pass vast fleets of masted vessels.

It now remains to be seen whether the same lack of judgment will
be displayed in the operation of the Barge Canal, as on this depends
the profit or loss on the enormous sums paid by the people for this
undertaking. If the canal is properly managed, the State will enjoy



426 DISCUSSION : municipally owned public utilities
Mr. far-reaching results. Moreover, if a man is employed who has the



Thomson



ability and is given the power to make business for the canal, as well
as to see that it is properly operated, the State will be handsomely
rewarded for the sums expended for the construction and maintenance
of this work, which in many ways far surpasses the Panama Canal.

It is just as if the State were to build a number of huge skyscrapers
and then trust to luck that the people would find, use, and pay for
them. Needless to say, the privately owned buildings adjoining, run
by wide-awake business men, who would go after their tenants, would
be filled at once, while the State buildings would be nearly empty,
and of course operated at a loss.

It seems to the speaker that by discussing actual cases more progress
will be made than by the expression of purely theoretical opinions, and
that the ultimate result will be proper Government regulation, instead
of Government operation or ownership.

Last spring, at a political meeting, called for the purpose of ex-
plaining the extra $19 000 000 appropriation in New York State, the
speaker, after the regular speakers had finished, begged to draw atten-
tion to the great difference between the City and State on the one
hand, and an ordinary business organization on the other; the business
man has to earn the money he spends, while the City and State spend
the money which they force the tax-payers to contribute.

The speaker then pointed out two projects which, if encouraged by
the City and State, would result in putting both on a business basis.
The City and State would receive more than $30 000 000 outright and
a rental of at least $2 000 000 a year, to say nothing of enormous in-
direct benefits. The projects are "A Really Greater New York", and
a "New Niagara Falls, of 2 000 000 h.p."

Mr. W. B. Yereance,* M. Am. Soc. C. E.— The author has stated clearly

some of the problems to be met in the municipal ownership of public
utilities. It is assumed that he has contemplated as well municipal
operation of those properties or plants. Of course, it may be, and so
happens, that some properties are municipally owned but privately
operated by private corporations.

An insolvent or mismanaged utility is a handicap to the progress
of the comnmnity or district it serves. A utility should be in receipt
of a sufficient revenue to meet, under proper management, all operating
expenses (including maintenance, depreciation, taxes, and a sufficient
reserve as insurance against catastrophe), and a reasonable return
on the fair capitalization of an adequate plant. This revenue is or
should be produced practically in its entirety by the rates charged
for service. Hates are or should be determined so that each beneficiary
contributes to the total necessary revenue of the utility only his just

» New York City.



Yereance



discussion: muxicipally owxed public utilities 427

and due proportion for benefits received. If the plant be ill-adapted Mr.
to the community's needs, or unnecessarily expensive, or the manage- ^®''®*°*'®-
ment extravagant or incompetent, or the securities inflated, the rates



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