Frank Albert Fetter.

Source book in economics, selected and ed. for the use of college classes online

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of its competitors to a small amount, or even forcing them to
sell at a loss.

Relation of dijfferences in prices to profits. The signif-
icance of the extraordinary differences in prices charged by
the Standard as among different sections of the country or
different individual towns can be appreciated only in the light
of the fact that a very small amount per gallon constitutes
a fair margin of profit on the investment in the refining and
marketing of illuminating oil and the other principal petrol-
eum products. The average investment of Standard refining
concerns per gallon of product annually is probably not to
exceed 2i/2 cents, so that a return of 10 per cent, on the in-
vestment in refining can be secured on the basis of a margin
of profit of only about 2i/2 mills per gallon for all products
combined. The investment of the Standard in facilities for
marketing illuminating oil and gasoline, etc., averages about
4 cents per gallon of product marketed annually. A return
of 10 per cent, on the marketing investment can therefore
be secured from a profit margm of only about 4 mills per

A difference of about 7 mills per gallon in the price of illu-
minating oil may, therefore, mean the difference between a
profit of 10 per cent, on the investment in both refining and
marketing and no profit at all. The actual differences in price
between competitive and noncompetitive towns and areas, after


making allowance for all possible differences in cost of pro-
duction and marketing, often amount to several cents per gal-
lon. These discriminations in price may mean, thus, the dif-
ference between an enormous profit on investment and little
or no profit or even a loss. The destructive effect of the prac-
tice of price discrimination upon the business of independent
concerns is thus obvious.

Local discrimination [Part II, pages 32-33]. The diffi-
culty in comparing average State prices arising from the un-
certainty concerning the relative cost of manufacturing the
oil sold in different States may be avoided by comparing only
those States which are supplied from a single refinery or
from a group of refineries having conditions so similar as to
exclude the possibility of any material difference in cost.

Thus, there are a large number of States and parts of States
lying on or near the Atlantic seaboard and extending from
Maine to Florida which are supplied with illuminating oil
principally from a group of Standard refineries situated either
at the seaboard (New York, Philadelphia, and Baltimore)' or
in and near the Appalachian oil field (Buffalo and Olean, N.
Y., Franklin and Pittsburg, Pa., and Parkersburg, W. Va.).
The differences in the cost of producing illuminating oil at
these different refineries are insignificant. Yet the average
State prices in the territory supplied by them show a very
wide range. In December, 1904, the average price in Dela-
ware, freight deducted, was 7.7 cents. In Pennsylvania the
average was also relatively low, 8.7 cents. On the other hand,
in the State of New York, itself containing several Standard
refineries, the average price was no less than 10 cents; in
North Carolina and also in New Hampshire, 10.3 cents; in
part of South Carolina supplied from these seaboard refineries,
11.4 cents; in Florida, 12.8 cents, and in part of Georgia
supplied from this source, 13 cents, or 5.3 cents higher than
in Delaware.

Again, there is a great group of States in the interior of
the country, comprising almost the entire Mississippi Basin


from the northern border to the Gulf of Mexico, which are
supplied with illuminating oil chiefly from the Standard's re-
tineries at Cleveland and Lima, Ohio, and Whiting, Ind.
These three refineries use the same kind of crude oil, and the
differences in cost among them are insignificant. Much the
greater part of the area is, moreover, supplied from Whit-
ing alone. Yet the prices ( freight deducted ) within the terri-
tory supplied by them show a range from 8.5 cents for Ohio,
where several independent refineries are situated, to 13.7 cents
for that part of Arkansas which is supplied from Whiting.
In North Dakota, South Dakota, Tennessee, Alabama, and
Georgia, which are supplied largely from the same source,
the prices range from 11 to 12 cents per gallon.

Perhaps the most striking instance of sectional discrimina-
tion which has appeared during recent years is on the Paeitic
coast. In southern California there are a number of in-
dependent refineries. The Standard carries oil from its great
refinery near San Francisco, several hundred miles by water
and rail, and sells it in southern California for much less
than the price at San Francisco. The average price, freight
deducted, for the southern part of California in December,
1904, was 7.2 cents per gallon, while for the northern part of
the State it averaged 12.4 cents per gallon. In Oregon, sup-
plied from the same source the price averaged 15.3 cents per
gallon, and in Washington, 15.7 cents. The price in Wash-
ington and Oregon was thus more than twice as high as in
southern California for the same oil.

Differences in prices among large cities [Part II, pages
34-35]. It is a striking fact that some of the largest cities
have, during recent years, paid very high prices for illumina-
ting oil. This is not because there is no independent oil sold
in them, but because the Standard prefers to allow the inde-
pendents to do a small volume of business rather than to cut
prices against them. Thus, in December, 1904, the price at
New York, which is at the very seat of the Standard's great-
est refineries, was 10.5 cents per gallon, and at Boston, freight


deducted, 10.8 cents per gallon. At Worcester, Mass., a much
smaller city, the price was only 7.5 cents. The prices at Cin-
cinnati and Cleveland were still lower, 6,4 cents and 7 cents,
respectively. The differences in cost of producing and
marketing the oil sold in the cites just mentioned is insignif-
icant. The price at Augusta, Ga., was 8.2 cents, as compared
with 10.9 cents at Atlanta, 12.1 cents at Charleston, and 12.5
cents at Jacksonville. All these cities must have substantially
similar costs. The price at Minneapolis and St. Paul was
7.2 cents, as contrasted with 12.3 cents at San Francisco, 14.5
cents at Seattle, 14.4 cents at Denver, and no less than 16.6
cents at Butte. Only a small fraction of these differences is
due to differences in costs.

The evidence obtained from Standard concerns regarding
marketing costs indicates that, as among most of the large
cities, such differences cannot exceed one-half or three-fourths
cent per gallon, and that the extreme difference between the
lowest and the highest would not exceed 1 cent per gallon.
The differences between Eastern and Western cities are per-
haps in part due to higher cost of producing the illuminating
oil sold in the latter, but this difference can scarcely exceed
2 cents per gallon.

The prices of gasoline show substantially as great differ-
ences among States and sections as the prices of illuminating


[A REPORT under the foregoing title was made by the Commissioner
of Corporations (U. S. Bureau of Corporations) and published March
14, 1912. Some extracts are here taken from the summary on pages

Physical facts involved. Prior to the discovery of
electrical transmission of power over long distances, water-
power could be utilized only at the power site. This limited
its development in most cases to comparatively small units,
and almost exclusively to manufacturing enterprises. The
introduction of electric-power transmission not only provided
a means of supplying distant manufacturing and domestic
demands, but also opened up an entirely new power field,
namely, the operation of street railways and lighting plants,
and enormously increased the relative importance of water-
power. Thus the development of water-power (based on in-
stalled wheel capacity) for railway and lighting purposes
increased from 487,000 horse-power in 1902 to 1,441,000
horse-power in 1907 (the latest date for which statistics are
available), or by nearly 200 per cent. In manufacturing in-
dustries, where transmission by electricity is infrequent, water-
power development during the period 1900-1905 increased by
only 11 per cent.

These comparisons suggest the remarkable influence that
electrical transmission has had upon the development of water-
power in recent years, and at the same time they indicate the
peculiarly close natural relationship between the water-power
industry and public-service enterprises.

This growing importance of the "commercial" use of water-
power, its comparatively recent development, and the con-



sequent lack of an appreciation of its real significance, together
with the established connection between commercial water-
power enterprises and public utilities, all demand that the
public be furnished with accurate and comprehensive infor-
mation on this subject. This report is an attempt to meet
that demand. . . .

Estimates of potential power. The United States Geolog-
ical Survey estimated the "minimum potential" water-
power of the country at 36,916,250 horse-power, and the
"assumed maximum" at 66,518,500 horse-power, both figures
excluding storage possibilities. "Storage," as used in this
report, means the extensive storage of water in large reservoirs
so as to regulate the stream flow over considerable periods.
It does not refer to the small accumulation of water in a power
dam; this is referred to as "pondage." These Survey esti-
mates of potential power were arrived at by multiplying the
flow of the stream into 90 per cent, of the fall. . . .

Revision of Survey figures. The Survey estimates require
some revision. . . . Eeducing the estimates of the Survey ac-
cordingly, the totals become 26,736,000 horse-power and 51,-
398,000 horse-power, minimum and maximum, respectively.
... As noted above, no allowance for storage has been made
in these Survey estimates. Various estimates including stor-
age have been made, but most of them are exceedingly ex-
travagant, and none of them is based upon sufficiently reliable
data to warrant unquestioned acceptance. . . .

The water-power centers of the country are the Pacific Coast
and intermountain States, the New England States and New
York, the Great Lakes Eegion, and the States entered by the
Southern Appalachian Range, Approximately 43 per cent,
of the total estimated minimum power of the country is found
in California, Oregon, and Washington. Adding to this the
power in Montana, Wyoming, and Idaho gives 60 per cent,
of the total minimum power in these six States.

Power demand. The total installed stationary prime-
moving power of all kinds (steam, gas, and water) in the


United States iu 1905-1907 (the latest date for which com-
plete statistics are available) was approximately 23,000,000
horse-power. Of this, 18,858,000 horse-power or 82 per
cent, of the total, was generated from steam ; 3,423,000 horse-
power, or 15 per cent., was developed from water; while
631,000 horse-power or about 3 per cent, was generated from
internal-combustion engines. It will be seen, therefore, that
only about one-seventh of the total power demand of the coun-
try was at that time supplied by water. It seems highly prob-
able that the rapid development of water-power since 1907
has increased its proportion of the total installed prime-mov-
ing power. . , .

Developed water-power in the U. S. [page 5]. There is
a marked geographical concentration of developed water-power
(as well as the similar concentration of potential power set
forth above). Thus, nearly 50 per cent, of the developed
"commercial" water-power of the country is located in five
States, as follows:

Per cent.

California 14

New York 13

Washington 10

Pennsylvania 6

South Cai-olina 5

Total 48

An even more marked concentration of developed water-
power employed in manufacturing is shown by the following
summary :

Per cent.

New York. . 30

New England States 36

Minnesota and Wisconsin 17

South Carolina 5

Total 88

Some problems of water-power development. Certain
physical and economic facts must be recognized in discussing


water-power possibilities. The production and consumption
of power are simultaneous. It is not possible practically to
store overproduction for future demands when production
may be light. The three principal demands for power are
lighting, traction, and manufacturing. If the greatest de-
mand from each of these three sources came at a different
period of the day, the total would be so distributed as greatly
to reduce the required maximum capacity of the power plant.
As a matter of fact, neither of these demands is uniform, while
they more or less overlap. Thus, the demand for power for
lighting tends to reach a maximum about the time that the de-
mand for transportation is at its height. This overlapping
creates what is known as the ''peak of the load." It is im-
perative, therefore, to provide sufficient power to meet this
maximum demand. Aside from these daily fluctuations in
the power market, there is also a seasonal fluctuation. The
demand in winter is greater than in summer. The daily
fluctuation, moreover, is greater in winter.

In addition to this fluctuation in the demand there is also
a variation in the supply of water-power available. This is
due to the fluctuating flow of streams. The flow varies ac-
cording to the location and character of the drainage basin
and according to seasons, and the seasons themselves, of
course, vary in different years. A water-power installation,
therefore, must also take these factors into account. If the
installation provides only for utilizing the minimum flow there
must be a tremendous waste of energy during the period of
larger flow. On the other hand, as already stated, it is im-
practicable to install power up to the maximum potentially

Remedy for variations in supply and demand for power.
The problem of a power producer is to meet these varying
conditions of demand and supply in the most economical way.
There are several means contributing to this end.

The physical effect of irregularity in the flow of the streams
can be partly overcome by storage. In no case, however,


can storage give a stream anything like the power represented
by its maximum flow. The amount of storage practicable de-
pends upon the topography of the country and upon the value
of the lands overflowed. Up to this time very little progress
has been made in storage development.

Aside from storage, it is possible to accomplish something
by ''pondage," that is, the accumulation of water from day to
day in power-dam ponds during that portion of the day when
the demand is smallest.

A more effective remedy is in "coupling up," into one unit,
two or more sites accessible to the same markets. In prac-
tically all cases some of the developments can cease operations
when the highest demand is over and accumulate pondage to be
brought into use at the period of highest demand the next
day. In the meantime the other sites can meet the diminished

The variableness of power supply demand, however, cannot
be entirely cured, even by storage, pondage, and "coupling."
The effective remedy is the use of auxiliary steam plants. In
nearly all cases hydraulic concerns must provide sufficient
steam auxiliaries to meet variations not otherwise met.

Advantages of unification of developments. On the other
hand, if a power site or a group of power sites provides more
power than a single market can consume, all the power can be
utilized by "coupling up" two or more markets.

The economic advantages gained by "coupling up" of sites
or markets, or both, by means of transmission lines, obviously
are great. It is apparent that the most efficient use of water-
power from an economic point of view is facilitated by thus
gathering into a single unit all the power available for a
given market or a group of markets, using the same system
of transmission lines. The independent operation of two sites
may involve a great waste of energy and capital. In fact, in
the case of a comparatively small water-power at a long dis-
tance from a market it might be virtually impossible to de-
velop it except in connection with some other site. In the


same way, in the case of storage, there is an advantage in
large-scale operations. This is because water gathered in
storage reservoirs contributes to every power site below, thus
making it advantageous to control all the sites dependent upon
a storage project.

Concentration of ownership and control. From the above
facts it is clearly seen that in many instances local concen-
tration carries with it great economic advantages. . . .

As this report clearly shows, there is a general and marked
tendency toward concentration in the control of water power.
Such concentration takes two forms. One is the single owner-
ship of practically all the power in a given locality and the
other is the ownership of water-power in scattered localities
by a single interest. The two are often found together.

Certain forces in the water-power industry tend peculiarly
toward concentration. The unification of developments and
of storage, and of markets as well, incident to the highest
efficiency in the utilization of water-power, as just described,
clearly tend toward concentration of control. Concerns un-
dertaking the development of water-power tend to acquire
all available power in a given community because of the ad-
vantages of unified operation above outlined.

Another circumstance leading toward concentration of con-
trol is the fact that the practical limit of electric trans-
mission of water-power is only about 200 miles. This, it will
be seen, makes it virtually impossible for a water-power con-
cern in one part of the country to compete with another water-
power concern in a distant part of the country. Aside from
this limitation on transmission of power, moreover, is the fact
that, as a rule, the total demand for power within an area
of practicable transmission is almost invariably greater than
the supply of water-power alone. The Bureau's investiga-
tion shows that in no considerable area is the supply of power
now generated from water sufficient to meet the total power
demand. Owing to the large investment required to develop
a water-power, and to this general limitation upon the supply,


the most economical utilization of such power freciuently re-
sults iu concentrating all the power developed within a given
area under a single control.

A peculiar circumstance which tends to accelerate con-
centration of water-power ownership is found in the com-
mercial customs prevailing among manufacturers of machinery
and supplies for the generation of electricity. Such manu-
facturers, in order to expand their business, often accept the
securities of hydroelectric companies in payment, at least in
part, for machinery and supplies. They have thus been led
to enter actively into the hydroelectric field. Since the manu-
facture of such machinery and supplies is largely concen-
trated in a few hands, this obviously tends toward a
corresponding concentration of water-power ownership.

Again, a number of financial houses making a specialty of
financing water-power developments have become interested in
water-powers, and this has created another class of controlling
interests. Furthermore, many officers and directors of equip-
ment concerns and of engineering and financial houses have
become individually interested in the same water-power de-
velopments, thus bringing about a close relationship between
the two interests.

Still again, as shown later, there is an increasing inter-
relationship between water-power enterprises and public-
service interests.

The concentration of ownership of developed water-power
has steadily grown until in any given community it is usually
all under a single control, or substantially so. Absolute owner-
ship of all the power in a locality by a single interest, how-
ever, is not necessary to establish control. If one concern owns
the most advantageous sites, and has a strong foothold in the
markets, it has a dominating position in that area.

Such concentration of ownership has been most marked in
the development of water-power for commercial use. There
are, however, a few instances of marked concentration of the
ownership of water-power used in manufacturing. The most


noteworthy instance of this is found in the International Paper
Co. . . .

Summary of ownership and control by interests [page 27].
The General Electric interests control the water-power situation
in large portions of Washington, Oregon, Colorado, Mon-
tana, and elsewhere. The Stone and Webster interests exer-
cise control (based largely, however, on management rather
than ownership) in localities in Washington, Iowa, and
Georgia. The Pacific Gas and Electric Co. practically dom-
inates the power situation in a large number of localities
in the northern half of California. The Southern Power
Co. controls the power situation in South Carolina and has
a strong foothold in North Carolina. The S. Morgan Smith
interests dominate the power situation in the vicinity of At-
lanta, Ga. The Telluride Power Co. controls absolutely a
large territory in Utah and Idaho. The Commonwealth
Power, Eailway and Light Co., which is a part of the Clark-
Foote-Hodenpyl-Walbridge interests, dominates the power
situation in the Lower Peninsula of Michigan. The Gould
interests control the best of the available water-power sites in
the vicinity of Richmond, Va.

Relations of water-power companies to public-service cor-
porations. The preceding discussion has indicated a rather
general relationship between water-power companies and
public-service corporations. This common control of the
agencies of traffic and distribution of light in our cities, on
the one hand, and the sources of power for operating them,
on the other, is an exceedingly important feature of water-
power development. The list of public-service agencies eon-
trolled by or affiliated with water-power concerns is rapidly
increasing. Generally the relationship between water-power
companies and public-service corporations is that of owner-
ship, but there are eases in which there is merely affiliation
through common officers or directors or the sale of power.

Some idea of the extent of such common control of public-
service corporations by water-power companies is afforded by


the fact that six water-power interests control street railways
in 29 cities and towns, electric-lighting plants in 204, and gas
plants in 55. . . .

In brief, in the country as a whole, water-power companies,
or companies affiliated with them, own or control and operate
street railways in no less than 111 cities and towns in the
United States, electric lighting plants in 669 cities and towns,
and gas plants in 113 cities and towns. These companies,
moreover, supply power to municipal lighting plants in a con-
siderable number of cities and towns. Many of these are
among the most important municipalities in the States in-
volved. Furthermore, in many cities and towns in the United
States all the public utilities — street railways, electric light-
ing and gas plants — are controlled by water-power interests.

Interrelationship of large interests [page 29]. Beyond
the marked concentration of ownership already set forth,
there is a substantial and growing interrelationship, of
greater or less degree, among a number of these large in-
terests that suggests the possibility, if not the probability, of
still greater concentration. In other words, not only is there
a tendency toward control of public utilities, including water-
power, by large combinations, but there is a tendency to-
ward a substantial relationship among the combinations them-
selves. This relationship is established in various ways. In
some cases one interest owns stock and has directors in a water-
power company that is managed or controlled by another
interest ; in other cases there are directors common to two or
more interests that have directors in a third company. Again,

Online LibraryFrank Albert FetterSource book in economics, selected and ed. for the use of college classes → online text (page 21 of 30)