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such corporations is undertaken.

There is one matter, however, which cannot be regulated by
Government; investors cannot be made to put more money into an
enterprise, because better service is needed, or because existing rates do
not furnish the money necessary, or because money is needed to pay
increased wages.

When the reduction of rates and the imposition of other burdens
on public service corporations has proceeded to a point where investors
will no longer furnish money to carry out needed improvements, it has
clearly gone too far for the good of the business and the community.

* New York City.



436 discussion: municipally owned public utilities

Mr. If conditions of regulation become such that private capital will not

be supplied willingly to carry on the business, the only apparent way
by which the public can control it further is to take over the under-
takings by the right of eminent domain, and raise the needed money
by taxation or by borrowing on the public credit.

It is to be noted that, in the course of the procedure which results
in reducing a corporation's profits, the last step of profit reduction
conies at a greatly accelerated rate, by reason of a condition which may
be and probably often has been overlooked. When a corporation is
making fair profits, its credit is ordinarily good, and it can borrow
money at the lowest market rates. As its earnings are reduced to a
point which reduces profit below normal — and, perhaps, threatens to
wipe it out — the corporation's credit is impaired, and the rate at which
money can be borrowed is increased.

If the profits are good, the first reduction in rates may not have
this full effect, but, as reductions proceed toward the point of eliminat-
ing profit, the double effect is felt, and the final profit is reduced and
eliminated quite as much by the increased cost to the corporation of
getting money as by the direct loss in rates.

It is a conservative estimate that, as a result of the severe handling
of corporations in some of our States in the last years, the ordinary
rates which well-managed corporations have been compelled to pay in
order to secure money to carry on this business, has been at least 1%
per annum higher than it otherwise would have been.

To illustrate : If a corporation is earning 7% and borrowing money
at 5%, it has a surplus of profit of 2%, which is a margin tending to
make the business attractive to new investors and to maintain the cor-
poration's credit. The margin is not wide, but it may answer. If in
such a case, the gross earnings are 14% and the operation cost and
taxes are 7%, and there is a reduction in rates, which effects a reduc-
tion in gross earnings from 14 to 13%, the direct effect is to reduce
the net return from 7 to 6 per cent. The indirect result — which may
not follow quite as rapidly, but is no less sure — is that, with the reduced
margin to sustain credit, it is no longer possible to borrow money at
5%; and instead 6% must be paid, all the profit is wiped out, and the
corporation is on the way to bankruptcy. A reduction of only 7% in
the gross income may mean the difference between a margin of profit
which will enable the business to be conducted successfully on con-
servative lines, and bankruptcy.

In the long run, the question of fair returns is boiled down to this :
The returns must be sufficient to allow the business to be conducted
successfully and permanently, and to permit everything to be done
that needs to be done, including the securing of all new capital neces-
sary for the reasonable extension of the business.



discussion: municipally owned public utilities 437

W. G. Ikvixg,* Esq. (by letter). — The writer has attempted to Mr.
give due consideration to the conclusions expressed in this paper, but '^^'°^'
has no doubt that more study would be profitable. He agrees with the
author that a m^^nicipally owned utility should be viewed in the same
light, and should have the same restrictions and privileges, as a
privately owned public utility.

The construction or operation of a public utility, such as water-
works, lighting works, etc., is not a municipal function. A city, as
such, has no inherent right to engage in such forms of activity.

It is merely by special dispensation of the sovereign power that
municipalities have been permitted to enlarge the scope of their powers
to include the ownership and operation of utilities; and, in the opera-
tion of these utilities, with the exception of the fixing of rates, the
municipality is impressed with the same obligations, as to service and
as to responsibility for damages, as is a private owner of a public
utility.

Therefore, the writer is of the opinion that the municipally owned
public utility, in fairness to the privately owned public utility,
should be under the same rate-fixing authority, and that
the fixing of the mimicipal rates should take into consideration the
same factors as are considered in fijxing the rates of privately owned
public utilities.

The writer, however, notes in this paper that the author has defined
four classes of people who should contribute to the cost and mainte-
nance of a municipally owned public utility. The writer is inclined
to the opinion that this classification is arbitrary. No such classifica-
tion is made with reference to privately owned public utilities. The
city should either authorize a bond issue or make a direct appropriation
from its funds, to provide the capital necessary to construct the utility.
Then rates should be fixed by the constituted authority, to be charged
the consumer for the service to be rendered, which should provide suffi-
cient return to pay interest on the investment, cost of operation and
maintenance, and to cover depreciation. There should not be, how-
ever, any amount allowed as a sinking fund to retire the bonds, if such
are issued. The bonds should be retired by a direct tax on the taxable
property of the city. As the bonds are retired, the interest payable
thereon is decreased, and a greater proportion of profit of operating
the utility should be paid into the general fund of the city which would
permit a pro tanto reduction of taxes.

By this method, the owner of vacant property will be compelled
to pay his portion of the cost of the system, and will also derive
benefit therefrom, by reason of the enhanced value of his property
and the ultimate reduction of his taxes by the profits earned by the
utility.

* Riverside, Gal.



438 discussion: municipally owned public utilities

Mr. The vacant lot owner, and all others who do not receive service

Irving. £j,Qj^ ^Yie utility, will also have to contribute to the maintenance of
the system and to the payment of interest on bonds (if such are issued),
during the adolescent period of the utility, as during that period the
actual consumer cannot be expected to pay more than a fair rate,
having in view the ultimate service to be rendered and the present
capital expenditure.

By pursuing the foregoing method, a fair division of the general
expenses of a publicly owned utility could be made, and, at the same
time, it would prevent unfair competition with privately owned public
utilities.

In the foregoing the writer has considered the question on general
principles only, and has not had, and naturally could not have, in
mind the many practical difficulties and scientific factors which would
readily enter into the author's consideration of the question.

Mr. H. A. Whitney,^' M. Am. Soc. C. E. (by letter). — Inasmuch as the

underlying principles that go toward setting the service rate for one
municipally owned public utility may be applied quite readily to all
municipally owned utilities, the writer will confine his remarks to
the utility of greatest importance, viz., "the water department".

In order to estimate the annual charges against a water system thus
owned, the following items should be known :

Schedule I.

(1) — The reproduction cost of the system, less the depreciation;

(2) — The annual depreciation of the system;

(3) — The annual cost of operation and maintenance;

(4) — The cost of business management (generally included in (3)) ;

(5) — The amount of interest to be paid annually;

(6) — The amount to be set aside for new construction.

These annual charges will be divided into the following classes :

Schedule II.
Item 1. — Charges to the municipality; bond issues for construc-
tion;
" 2. — Charges to local improvement districts for local con-
struction ;
" 3. — Charges to the municipality to be paid from general

funds;
" 4. — Charges to consumers for service installations and ex-
tensions ;
" 5. — Charges to consumers for domestic rate;
" 6. — Charges to consumers for manufacturing purposes,

* San Francisco, Cal.



DISCUSSION : MUNICIPALLY OWNED PUBLIC UTILITIES 439

The principal advantages gained by a municipality in owning its Mr.
utilities are : Whitney.

Schedule III.

(1) — Lower interest rates than those generally allowed privately

owned utilities;
(2) — Lower water rates to consumers, due to vacant property

helping to pay for the bond issues, and other charges paid

for by the miinicipality ;
(3) — Privilege of having ample fire protection, and thereby getting :
(4) — Lower insurance rates;
(5) — Power of extending the system where it can do the greatest

good to the greatest number of people.

The foregoing are generally cited by advocates of a municipally
owned utility as benefits derived by the municipality which owns its
own system. Although, in a good many cases, a low water rate can be
obtained by the consumer at the expense of the entire city (it bonding
itself to pay the sinking fund and interest on the cost of the whole
system, and the construction being permanent), yet, as in the case
of the City of San Diego, the city was quite willing to do this, as
was shown in 1912, when, by a vote of 6 to 1, the city purchased the
impounding system, and again, in 1914, when, by a vote of more than
5 to 1, it decided to purchase Morena Dam. Furthermore, the heavy
taxpayers were all back of the project.

Santa Rosa, Cal., went even further than this, a few years ago,
and, by a large majority, voted bonds to purchase and operate a water
system — the consumers to have free water.

The total annual revenue and charges should be such that they
will equal the last five items in Schedule I. A list of these charges
is set forth in Schedule II, and will be taken in their regular order.

Item 1. — Charges to the Municipality ; Bond Issues for Construc-
tion. — As a main trunk sewer, a main drainage canal in a municipality,
or a trunk highway, is a benefit to a community as a whole, so should
dams, main pumping plants, and transmission lines be so considered;
and the costs should be paid by the municipality, by either a tax
levy or a bond issue.

Item 2. — Charges to Local Improvement Districts for all Local
Construction Which is not a Benefit to the Community as a Whole. —
Under this item all distributing mains, service mains, local reservoirs,
and stand-pipes would be assessed against the district benefited.

The following sections from Chapter 98, Sections 3, 5, and 15, of
the Local Improvement Laws, State of Washington, for 1911, will
illustrate quite aptly the privileges derived by being able to apply
these laws. The following are extracts from certain portions of these
laws:



440 Discussiox : municipally owned public utilities

Mr. Section 3 allows the city to provide for sewer, drain, and water

' ^^^' systems, within or without the city limits.

Section 5 allows the city to provide for protection from fire by an
auxiliary water system. Besides allowing the construction of the
ordinary distribution system, the following paragraph allows the con-
struction of drains of any size, either within or without the city limits.

"Section 15. — Any city shall have pyower to provide for the con-
struction of trunk sewers, and trunk water mains, and for the payment
of all or any part of the cost and expense thereof by the levying and
collecting of assessments upon property specifically benefited thereby.
In any such case the district created to bear such assessment shall be
outlined in conformity with topographical conditions, and in case
of trunk sewers, shall include as near as may be all the territory which
can be sewered or drained through such sewer and sub-sewers con-
nected thereto, and in case of water mains, shall include as near as
may be all the territory in the zone or district to which water may
be distributed from such trunk water main through lateral service
and distributing mains and services. In distributing such assess-
ments, there shall be levied against the property lying between the
termini of the improvement, back to the middle of the blocks along
the marginal lines of the street or area improved, such amounts as
would represent the reasonable cost of a local sewer and its appurte-
nances, or a water main and its appurtenances suited to the require-
ments of such territory in the mode prescribed in Section 13 hereof,
and the remainder of the cost and expense of such improvement shall
be distributed and assessed against all the property within the bounds
of said entire district in accordance with the special benefits conferred
thereon and in proportion to area."

Under these local improvement laws, the City of Seattle and the
City of Tacoma put in their distributing systems. Seattle uses only
cast-iron pipe, and 8 in. as the minimum diameter. Tacoma uses
6 in. as a minimum diameter. The costs of all hydrants are assessed
equally on the district.

Item 3. — Charges to the Municipality to he Paid from the General
Funds. — Under this head will be :

(a) Charges to the fixe department for the maintenance and
operation of hydrants, and, where the cost of the system
has been paid for out of water receipts, a charge should be
made for overbuilding it from what would be necessary as a
domestic supply to that of a "fire protection system". The
only way to arrive at this proportion is to make a thorough
study of the pressures needed, and the pipe sizes adequate
for a domestic supply, and then place a value on the
system thus estimated. Then calculate the cost of the
water system necessary for an adequate fire protection, both
as to pressure and supply. The difference in cost between a



DISCUSSION : MUNICIPALLY OWNED PUBLIC UTILITIES 441

system designed for adequate fire protection and one whicli Mr.
is necessary only for a domestic supply, will be the amoimt ' °^^'
on which the municipality should pay for interest, depre-
ciation, and maintenance. Eoughly, for a city of 50 000
people, the cost of fire protection service would constitute
about 50% of the cost of the entire system.
(h) The school board should pay the cost of all water used in
schools at the same rate as regular domestic consumers.

(c) The park board should pay, without any discount, the cost
of all water used in parks.

(d) The board of public works shovild pay the cost of all water
used for streets, sewers, or in any municipal department under
its jurisdiction.

Item Jf. — Charges to Consumers for Service Installations and Exten-
sions. — In most cities a charge is made to a new consumer for putting
in the house service and the meter. This is generally a fixed charge.

Item 5. — Charges to Consumers for Domestic Bate. — The domestic
rate is generally ascertained, as a lump sum, by deciding that all other
items shall be met out of the water revenue, and then adjusting the
charges of the domestic and manufacturer's rates so that it will equal
this amount.

Item 6. — Charges to Consumers for Manufacturing Purposes. —
Items 5 and 6 are generally worked in conjimction with one another.
After all else has been fixed, the revenue necessary to be derived
from the domestic and manvifacturer's rates can be determined. The
only rational and satisfactory method of serving water to the public
is by meter. Under a strict meter rate, it is known at all times how
much water is being used and for what purposes. The Peoples Water
Company, of California, serves the Cities of Oakland, Berkeley,
Alameda, Eichmond, Piedmont, and several small towns with water.
The system is 100% metered. The writer had occasion to take from
the books of this utility the quantities of water that were being used
for various purposes in Berkeley during 1915, that city having about
12 000 service connections. It was found that, out of 100% of the
live consumers, the distribution of the percentages were as shown
by Schedule TV:

Schedule IV. — Percentages of Consumers Using Various Quantities

of Water.
Consumers using



400 cu.
500 "


ft. or less.
I 50 000 cu.




. 41.7%
. 54.2%
. 77.4%


800 "




1 000 "




. 84.7%


5 000 "




. 99.1%


50 000 "




. 99.9%


more thar


ft..


. 0.1%



442



discussion: municipally owned public utilities



Mr.
Whitney.



The distribution of the various quantities is shown in Schedule V
Schedule V. — Percentages of Quantities of Water Used.



sed, up to and in(


jludin


g 400 cu.


ft.


15.0%


a ii a li




500 "




22.7%


a a a u




800 "




42.0%


a a a ei




1000 "




50.4%


a u u u




5 000 "




81.6%


a u u u




50 000 "




93.0%


" in quantities of


more


than 50 000 "




7.0%



In setting rates in a municipality, it is often the desire of the
commimity to have the water consumers pay a low rate, and do so,
to a great extent, at the expense of the property owners. It often
happens that there is, besides the municipal water department, a
privately owned utility which serves the community with water, and,
unless some provision is made to take care of the rates of the utility,
in order that they may parallel those of the municipality, a discrimi-
nation will be worked on the privately owned system. In order to
illustrate how to establish a low rate which will work fairly to both
parties, the writer will assume a system designed for fire protection,
the distributing system to be laid by local improvement districts, the
collecting and transmission systems to be paid for out of the taxes
or bonds, and the maintenance and operation, and emergency construc-
tion to be paid for out of the water receipts. The following data are
assumed for illustration :



1. — Population

2. — I^umber of consumers

3. — Annual consumption, in cubic feet 200

4. — ^Percentage of water used per month less than

1 000 cu. ft

5. — Percentage of consumers using less than 1 000 cu. ft.

per month

6. — Percentage of water used per month, between 1 000

and 2 000 cu. ft

7. — Percentage of water used per month, between 2 000

and 10 000 cu. ft

8. — Percentage of water used per month, between

10 000 and 40 000 cu. ft

9. — Percentage of water used per month, more than

40 000 cu. ft

10. — Estimated present cost of system $3

11. — Interest on bonds at 4^% per annum $

12. — Depreciation on system at 2% $

13. — Cost of operation and maintenance $



50 000

10 000

000 000

23

54

27

31

9

10

000 000

135 000

60 000

110 000



discussion: municipally owned public utilities 443

It is contemplated that the interest shall be paid out of the general Mr.
tax on the system, and that the depreciation (either by sinking fund ' ^^^'
or otherwise) shall be paid from the water receipts, as will also the
cost of operation and maintenance. This makes a total ;

14 — For depreciation, and maintenance and operation.. $170 000
Schedule VI. — Assumed Bates.

15.— For 1 000 cu. ft. per month or less $1.00

16.— Cost per 100 cu. ft. from 1 000 to 2 000 cu. ft 0.10

17.— Cost per 100 cu. ft. from 2 000 to 10 000 cu. ft 0.7i

18.— Cost per 100 cu. ft. from 10 000 to 40 000 cu. ft. . 0.5

19.— Cost per 100 cu. ft. for more than 40 000 cu. ft. . 0.3

From Items 1 to 9 and 15 to 19, a table of rates (Table 5) has been
compiled.

TABLE 5. — Rates of Return, as Indicated by Items 1 to 9 and 15 to 19.

54% of consumers at $1.00 per month (using 23% of the water

per annum) $64 800

27% of 200 000 000 cu. ft. at 10 cents per 100 cu. ft. per annum. 64 000

31% " " " " " 74 " " " " " " " 46 500

9% " " " " " 5 " " " " " " " 9 000

10% " " " " " 3 " " " " " " " 6 000



Total revenue $180 300

Table 5 shows that the revenue amounts to an annual rate of $18
per consumer. If it is decided to construct $100 000 worth of improve-
ments to the distributing system and $200 000 worth to the collecting
and transmission system, the distributing system to be improved by a
local improvement district, bonds at 6%, and the collecting and trans-
mission system to be improved with bonds against the municipality
bearing interest at 5%, we have:

$100 000 at 6% $6 000

200 000 " 5% 10 000

Making a total amount borne by the city, as follows :

$3 000 000 at 4i% (as shown by Item 11) $135 000

200 000 at 5% 10 000

Total municipal bond interest $145 000

Local improvement bonds 6 000

Maintenance, operation, and depreciation 170 000

Grand total for support of system $321 000



Whitney.



444 discussion: muxicipally owned public utilities

Mr. Inasmuch as the expense of the bonds is borne by the municipality,

this leaves only the maintenance and operation to be taken care of
through the water revenues. The estimated revenue, as shown by
Table 5, is $180 300, and the maintenance and operation being $170 000,
there is left a surplus of $10 300 for emergency construction.

Some method should be adopted whereby the privately owned
utility can charge a rate which will be approximately the same as that
of the municipality, and at the same time pay a reasonable revenue to
its owners. If it is the desire of the municipality that the water con-
sumers shall have low rates at the expense of the taxpayers, it apparently
should not matter (if the utility is serving as good water at as ample
a pressure and in sufficient quantities as the municipality) whether the
difference is paid by taxes on bonds against the municipal system or by
taxes on the general funds to subsidize the plant of the utility.

An annual budget equal to the interest on the estimated cost of the
privately owned utilities plant could be assessed against the general
taxes and allowed to this utility as rental for the use of its system and
the privilege of using the fire hydrants; the utility should be allowed
to pay — as mentioned in the case of the municipality — the main-
tenance, operation, and depreciation expenses, from the revenue derived
from the sale of water, this revenue to be regulated by the city council
or other authorized body. Thus competition would be placed on an
equal basis.

The foregoing is a suggestion as to some of the ways in which
revenue might be derived. Numerous modifications of these methods
may be made, such as charging rentals for hydrants, street sprinkling,
sewer flushing, etc. Inasmuch as all of these are paid for from monies
derived from the general taxes, it amounts to the same in the end.
Then, too, the revenues may be increased to the extent of having the
department pay the expense of construction.

By the methods outlined herein a municipality can set a rate which
will place as small or as large a burden on the water consumer as may
be desired. The water must have a fixed cost, and what the consumer
does not pay the taxpayer must.

J. B. LiPPiNCOTT,* M. Am. Soc. C. E. (by letter). — Almost with-
out exception, the discussion brought forth by this paper agrees with
the writer in that the service charges for a publicly owned public
utility should be fixed on the same basis as those of a privately owned
utility which is subject to rate regulation.

Mr. Harris has indicated the basic element when he says:

"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."

* Los Angeles, CaL



DISCUSSION : MUNICIPALLY OWNED PUBLIC UTILITIES 445

It is not only that the present investment of private capital in Mr.
public utilities should be protected, but that the policies adopted be ^pp^"''" ■
such that the further investment in utility enterprises in undeveloped
communities be fostered and encouraged by the assurance that these
investments have the sanction and protection of legislative bodies.
Mr. Yereance has also called attention to this point. Mr. Yereance and
Mr. Thomson have discussed to some extent the relative merits and



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