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to produce the needed revenue will be unnecessarily high or unreason-
able, either throughout or for certain classes of the service. There-
fore, if minimum rates are to be enjoyed, the property or plant fur-
nishing the service must be designed and constructed wisely and
economically and operated efficiently. To the extent that these con-
ditions have not been met, the rates will be above a possible minimum.

For a given standard of plant and service in a given community,
the rates for that service should be lower under municipal than under
private ownership and operation. Yet, despite some highly flattering
operating statements issued periodically, the speaker knows of no
situation on this continent to-day where municipally operated utility
service is being rendered at actually lower rates than are or should
be charged for similar service by private enterprise. If politics and
political considerations can be eliminated in the development and
operation of a public utility, then and then only will be possible the
successful establishment of actual rates that to-day are merely a
dream of the theorist. Evidence is not lacking that there are those
who realize the situation, and it may be that at some future period
the ideal will be realized. However, those now interested in the private
administration of public utilities need have no fear that their retainers
or jobs are in immediate danger. If that ideal time comes when the
public utilities can be removed from adverse political influences, then
public utilities should be municipally owned and operated. Private
enterprise has its own problems to meet in the conduct of public
utilities, but it could not live under many of the practices now asso-
ciated with municipal o-s^Tiership and operation.

The author has referred to the inherent right of a community
to serve itself, but calls attention to the broad question of equity
involved where such contemplated municipally owned and operated
service would introduce competition with a private plant, established
in good faith, and serving the public adequately at reasonable rates.
Some regulatory bodies have recognized the ethics of such a situation
in their decisions, and the demands of simple justice — to say nothing
of policy — have been met; other commissions have not been so far-
sighted.

Some 3 or 4 years ago a campaign favoring municipal ownership
was waged vigorously by some of the ambitious politicians in one
of the Southern States. At that time the speaker was retained to
protect a considerable investment of northern money in a combined
electric light and gas property in one £>i the cities of that State. The
electric plant was probably the most up-to-date of any in a community
oi that or considerably larger size in the United States; the gas



428 Discussiox: municipally owned public utilities
Mr. plant was not in quite such good shape, but both were fully adequate,



Yereance



and the rates charged were lower than prevailed — under Commission
authority and at some places under more favorable conditions — in any
community of similar size in that or adjoining States. The good faith
of the investors was apparent in both the condition of the property
and the amount of money actually invested, yet the political elements
favoring municipal ownership practically forced the company into a
desperate position, whence it was extricated with the greatest difficulty.

The attitude of the commission, the public press, and many of
the people, was such as to discourage the investment of outside money
in that locality ; some are now beginning to realize the short-sightedness
of that attitude when new money is desired but not procurable. Cer-
tainly, in the light of these facts, no honest consultant could or would
recommend investment where such conditions prevail.

Reference has been made to a certain steam railroad, government-
ally owned and operated. Located through thin traffic country, its
value would seem to be largely military rather than economic. Such
property needs a higher grade of management than does one which is
more favored; yet the road in question has always been notoriously
politically mismanaged. It could have been operated better with one-
half the number of men shown on its pay-rolls. Instead of the two
or three — as mentioned by Mr. Thomson — there were at least ten
times that number of good railroad men in the United States who,
with free hands, could have developed the full earning capacity of
the property.

Mr. Leonard C. Jordan,* Assoc. M. Am. Soc. C. E. (by letter). — A

perusal of this paper conveys the impression that the author is in
favor of private ownership of public utilities, and that he is even
willing to go beyond the bounds of justice in hampering municipal
ownership. The writer agrees with the author in advocating private
ownership of public utilities wherever such a course is advisable, but
he begs leave to differ with him in one or two of the points to be
mentioned herein.

The author has brought up the matter of the status of the owner
of vacant lots and his responsibility to the community, so far as
respects his advantages from public utilities. It is quite true that
he has distinct advantages in the increased value of his holdings,
and it is equally true that he has been an important factor in running
up the cost of these utilities by causing them to extend their service
lines past his unused property, in order to reach the used property
of other owners, the people who, by making use of the utility, furnish
the revenue which keeps it in existence and on a profitable basis.
However, there is probably greater likelihood of general all-around

* Morsemere, N. J.



Jordan



DISCUSSION : MUNICIPALLY OWNED PUBLIC UTILITIES 439

justice in this respect when the utility is owned by the municipality, Mr.
for, in the case of the municipally owned utility, the expense is met '^°^^^°-
largely by assessment against the abutting property or by taxes on
property in general. In the case of a privately owned street railway,
for instance, the owner of the vacant lots very probably would fall
heir to all the latent benefits of the railway without the expenditure
of a single penny. Furthermore, his neighbors must pay, by the
revenues from their fares, his share of the expense of construction and
maintenance, as well as for the unwelcome privilege of being hauled
past his unsightly and weed-covered property. Although the author
advocates private ownership, this problem which he introduces would
seem to be regulated more justly for all concerned when every utility
is publicly owned and properly managed.

There is a contradiction of principle cropping out at various places
in the paper, which is summed up very concisely in the Synopsis, as
follows :

"If the rates for service of publicly owned utilities are too low,
and deficits are made up from the general tax funds, such administra-
tion is unfair to privately owned utilities, and will tend to discourage
the investment of private funds therein, in States practicing this
policy."

Then a few lines farther along:

"Any surplus resulting from such administration [municipal own-
ership] should be deposited in the public treasury of the city to the
credit of the general tax fund."

If it is proper to turn a surplus into the city treasury, then any
deficit from operation should be remedied by drawing on the general
city funds. Probably a correct business system of managing a munici-
pally owned utility would include the keeping of strict accounts of
all money matters pertaining thereto, as though it were an industry
in itself and distinct from all other parts of the city government. The
city treasury should be regarded as a bank, lending money to tide
over unproductive periods, accepting surplus funds on deposit, and
handling the bonds when their issue is required by unusual construc-
tion or development expenses.

Again, on pages 420 and 421 the author advises the charging
of rates higher than the nature and business of the utility would
justify and the turning of surplus amounts into the city treasury.
It is argued that this method is fair to the taxpayer as it reduces his
taxes on real estate. The writer is unable to see any justice in placing
a burdensome portion of the expense on the poorer people of the com-
munity, in order that the property owners may enjoy the advantage
of reduced tax rates. Such procedure would tend to break down democ-
racy, in that it places obstacles in the way of the poor man and makes



430 discussion: municipally owned public utilities

Mr. easy the way of the man who already is rich. It is stated, relative to
°^ ^°' this matter, that the non-taxpayer is paying a fair rate for the services
received, even though he is paying for a portion of the taxes of his
more fortunate neighbor, but the writer fails to detect much fairness
in the plan. We might as well have municipal ownership of grocery
stores, charge the high rates that would be possible under such non-
competitive business, and then attempt to square matters by cutting
down the taxes of those people who happen to own their homes. It is
far more just, for the individual and for the community in general,
to let each man pay his own way as he goes, than to attempt to equalize
high rates for trolley rides and for electric lights by reducing the
taxes on the same vacant lots which cause so much extra expense to
utilities by increasing the length of their service lines.

The writer believes that a fair and strict accounting of the con-
struction and operating costs of publicly owned utilities would fur-
nish sufficient argument to convince the most stubborn that private
ownership is the best plan under present conditions. He would go
further in the accounting, however, than is generally done. When
summing up the construction costs, all contributing factors should be
included, just as they would have to be if the work were being carried
on by a private company. This would require that salaries, office rent,
and other expenses of public officials connected with the work be in-
cluded in the bill. It would require also that depreciation of equip-
ment and interest on its investment be reckoned, and that interest on
the cost of plant and on invested construction expense be computed
and included.

In compiling the accounts of the cost of operation, likewise, every
part of the cost should be hunted down and charged in the proper
manner. If the city has a "Commissioner of Public Works", who
manages the municipally owned water-works system, then his salary
and a fairly computed office rent for his rooms in the City Hall should
be charged against the operation of the water-works. Furthermore,
if a quarter of the time of the city treasurer and his staff is required
for collecting and handling the water rents, then a quarter of
their entire expense should be charged against the water revenues;
and, finally, the usual tax rate should be levied against the water-
works, and the tax should be paid into the city treasury and charged
against the earnings of the water department. This matter of taxing
might seem to be superfluous, at first thought, but a moment's con-
sideration should suffice to convince the reader that it merely means
a transfer of certain figures from one account to another, adds a
negligible amount to the cost of city government, and aids in showing
exactly the financial condition of the water-works department. Such
a plan of accounting would form a correct basis for the regulation of
rates, and would be entirely fair to the private owners of rival systems.



discussion: municipally owned public utilities 431

Besides, the strict business system would furnish an incentive to effi- Mr.
cient service on the part of the men employed in the department. Jordan.

As a further example, a battleship is constructed at a Government
Navy Yard for a certain figure, while a shipbuilding company builds
the sister ship on contract at a greater stated cost. The newspaper
comments mislead some people into the opinion that the only lack of
perfection in the Navy is its failure to construct both boats. Yet, if
all costs were tallied, the total might result in a far different opinion.
The figures for the Government-built boat should include:

All the costs of plans, including the salaries of officers who over-
see the work of preparation;
Office rent for all men engaged on this work, even though they

occupy rooms in a Government building;
All construction costs that would be encountered by a private

company doing the same work;
Salary, keep, barracks rent, etc., of all marines doing police duty

in and about the ship until she is put into commission, and

this item should include the expenses of officers in command

of these marines;
Reasonable rent for that portion of the navy yard that is devoted

to the job, or else interest, depreciation, maintenance, and

taxes on the portion used;
Interest on the investment, depreciation, and maintenence of the

equipment used;
Salaries, office rent, and other expenses of all officers and men

connected directly or indirectly with the work;
A portion of similar expenses for all men whose duties are divided

between this and other jobs, even including the Secretary of

the Navy, if a portion of his work may be regarded as arising

from this source;
Interest on all the foregoing amounts, computed to the day that

the boat is finally put into commission;
And all other items, great or small, which directly or indirectly

contribute to the amount which the Nation must finally pay

for the battleship.

Some of these items are not included in the stated cost of the boat
built by contract, but they should be added. The justice of a complete
cost-keeping system will be realized when the reader considers the
possibility of the purchase of a finished battleship from a foreign
country or firm, as several other countries have done within the past
few years. Besides, the people should have a right to know the total
amount which such a fighting machine is costing them.

It might be contended that the office rent of the Secretary of the
Navy would seem unduly high if computed on the basis of the cost of



432 Discussiox : municipally owned public utilities

Mr. the building in which it is located and the cost of operating that build-
Jordan, -j^g^ j£ ^-^^^ jg true, then the people have a right to know that they
need a new janitor in that building, or a new building superintendent,
or else that they paid too much for the building originally. From
another angle, if that office rent is higher than would be charged for
suitable quarters elsewhere, then there is first-hand evidence that the
department occupying these offices is not qualified to be placed in
charge of a business requiring a high grade of efficient executive
ability, such as a shipbuilding establishment. It remains that the
people have paid for the building and are continuing to pay for its
upkeep, and it would look like poor management on the part of the
Government if there is no possible return on the first cost and running
expense. Besides, failure to account for all such matters would be
unfair to the contracting firm which is willing and anxious to put
together a battleship for less money than it really is costing the
Government.

The result of such complete cost-keeping methods as suggested
would probably lead to private ownership of public utilities, such as
the author seems to prefer, a private company having a monopoly of
the patronage of the commvmity and correctly regulated by just offi-
cials of the local government. This is the ideal form of service when
both private owners and ruling officials are ideal; and let us trust that
we may enjoy these conditions at some time in the near future. At
least, let us hope that any owning or regulating on the part of the
Government will be done better than it seems to be doing with any
such work now. Meanwhile, with all fairness to all parties concerned,
let those engineers who are in position to decide or to influence ques-
tions of municipal or private ownership of public utilities render their
decisions with impartial judgment, having in mind the furtherance of
principles of justice which too often are overlooked in such affairs.

H. F. Clark,* Assoc. M. Am. Soc. C. E. (by letter).— The author
has presented views on a subject which engineers are now having to
consider seriously. Where public utilities are owned by cities, it is
generally foimd that the cities prefer to have their own way in deter-
mining how the costs of operation shall be spread, and rather resent
the intrusion of scientific suggestions. The tendency is to better man-
agement of civic affairs, with centralization of power in one man or
a small group of men. Engineers may yet be of some assistance to
the budget makers of a municipality in determining the questions
which the author has brought out.

Municipal ownership in California is steadily spreading, records
for 1916 showing approximately fourteen transfers of water systems
to municipalities. The aggressive element within a community gen-
erally lays siege to the water company until at last bonds are voted

* San Francisco, CaL



Mr.
Clark.



DISCUSSIOX: MUXICIPALLY OWNED PUBLIC UTILITIES



433



and the water system is purchased. A feeling of security then comes Mr.
over the minds of the people, as no longer will there be occasion for *' '
petty annoyances. The constant friction over service and rates is then
passed, and, be the results profit or loss, there is always that true friend,
the tax budget, to come to the rescue in times of need. A monopoly
exists over the community when this competition is removed, and the
city finds itself a sovereign in the matter of the regulation of this
utility business.

Analysis of the paper involves accounting to a large extent. All
are aware that the full cost must be met somewhere, it remaining to
be determined how it shall be distributed. To bring out a little more
clearly the distinctions which the author has made, Table 3 shows his
distribution of the expenses.

TABLE 3. — Distribution of Water-Works Cost in a Municipally

Owned Utility.



Item of
expense.


Class Bearing Expense.


Municipality.


Consumers.


Vacant lot
owner.


Realty promoters.


Maintenance and


1 Through taxes
rtorpublicuses.


1 Through rates.

Through rates.
Through rates.






operation

Depreciation






Interest














Through deposits.


Betterments






( Through spe-
'( cialtax.


Bond redemption .


Through taxes.




\











The author states that municipalities have an item of expense to
bear, in addition to those expenses borne by a privately owned utility,
namely, the redemption of bonds within a 40-year period. The author
suggests that this redemption fund should be met in the general tax
levy, and therein, the writer thinks, he is in error. Cities, admittedly,
are enabled, through their credit, to borrow money about 2% cheaper
than a private company can finance its operations. If the city makes
a 7% interest charge, as would be granted to a privately owned utility,
any profit resulting under the bond rate of interest could be laid aside
to redeem the bonds. If the bond rate of interest is 5%, the diiferen-
tial of 2% compounded annually at 4% will approximately retire the
bonds in 30 years. Thus, as a fact, there is apparently no additional
expense, but, in the case of a municipally owned utility, merely one
more division of the same gross expenses that would be allowed a pri-
vate corporation in the same utility business. The author has sug-
gested the possibility of a profit in the management of the utility.
Occasionally, reports made from an audit of the books show profits,



434



DISCUSSION : MUNICIPALLY OWNED PUBLIC UTILITIES



Mr.
Clark,



but it is rather the exception to conditions. The writer does not see
why there should be any profits under the support of municipal owner-
ship, if the rates are adjusted scientifically. It should not be the aim
of a city to make its water consumers pay more than the cost of the
service. Too often the consumers cannot even bear this cost, and
part of it is carried under other accounts into the tax rate for the year.

Table 3 places on the consumers the depreciation charges. There
is no more depreciation accruing annually in front of an improved
residence lot than in front of adjoining vacant property, eliminating
the item of service connections and meters. It is not clear to the writer
why only the users of water should be burdened with the depreciation
account, when the vacant property is increased in value, due to the
presence of the main in the street. Municipal ownership is generally
favored when the condition of the city as a whole will be benefited,
rather than the individual condition of each consumer. Though it is
true that, imder a privately owned utility, the consumers have to bear
this depreciation, yet it is fair, under municipal ownership, that the
vacant property should bear equally with improved property this item
of expense.

The distribution of the various items of cost would appear to the
writer to be more equitable if as shown in Table 4.

TABLE 4.



Item of
expense.


Class Bearing Expense.


Municipality.


Consumers.


Vacant lot
owners.


Realty promoters.


Maintenance and


j Through taxes

1 for public use.

Through taxes.


1 Through rates.






operation

Depreciation ....








Through rates.






Bond redemption .
Extensions


Through taxes.










Through deposits.




( Through bonds
J. or revolving
( fund.


(








f







In California it has generally been found that the maintenance and
operation expenses of a water utility will approxmiate 40% of the total
expenses chargeable. By the foregoing classification, an analysis will
show that the consumer divides with others about evenly with the
remaining 60% of the expenses which occur.

However, the writer agrees with the author that no rigid rules can
be formulated in this matter, inasmuch as there are so many local situa-
tions to be met, as is shown by occasional items in the newspapers. Not
long ago, an article commented on the refusal of a water-works board
to turn over a considerable sum of money to the general city treasury,



discussion: municipally owned public utilities 435

in order that the tax rate might be decreased. The reasons given for Mr.
the refusal were that the money would all be needed for improvements, ^'^ '
in view of a contemplated reduction in the minimum monthly charge
for water, with correspondingly less revenue for the year. This min-
imum was already one of the lowest in the State, but yet it seemed
advisable to that board to lower it still further. Again, in another city,
lately adorned to attract visitors, the park department began to use
enormously increased quantities of water, drawing heavily on the safe
yield of the system. The water superintendent was at his wits' end to
keep up with the demand, and was unable to make any showing for his
department, on account of the extreme demand of the park department,
which gave him no credit for the water used.

The abuses of the sovereign water plant management may be cor-
rected in time by the application of principles such as the author has
presented. There is great need for city officials to recognize just such
principles.

Allen Hazen,* M. Am. Soc. C. E. (by letter). — This paper is Mr.
timely and important. It represents a swing back of the pendulum ^azen.
that was set in motion when it was decided that henceforth the work
of corporations in certain lines should be considered as public and not
private business, and that it should be subject to public control.

The control of such corporations by public bodies is directed pri-
marily and principally to the control of rates. The work of reducing
rates in the interests of those served, formerly carried out occasionally
by legislation or by Court action, is transferred to commissions created
for that special purpose. The business is ordinarily expedited. It is
handled by men who at least have the experience growing out of han-
dling a considerable number of such matters. Regulation of the char-
acter of service also is undertaken, and though by no means as com-
plete, something is accomplished.

Quite recently, perhaps since Mr. Lippincott's paper was written,
another and far-reaching step has been taken; for, in one important
case, Government regulation of wages paid to workers employed by



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