Public Service Corporations. By EDGAR N. WRIGHTINGTON, BOSTON, The service provided by our public utilities is usually furnished under one of four systems: 1. By means of a single private company without public regulation and control. 2. By two private companies operating in competition with each other. 3. By the municipality through actual ownership. 4. By a private company under public regulation and control. Under the first system it might at first thought be assumed that there is no restriction whatever upon excessive charges as there is neither actual competition nor public regulation to limit the returns of the company. As a matter of fact, however, although some companies have established unnecessarily high prices under these conditions, almost all of them have been satisfied with reasonable profits. These companies have realized that the good-will of the public is their principal asset, and that low prices will increase business, and, acting from motives of intelligent self-interest, have maintained reasonable charges to the public for the service which they furnish. At the same time there has been a growing sentiment among the public that such opportunities as have been offered these companies for excessive profits, even if not exercised, are a source of some danger. One of the first remedies advanced is that of competition. To the unthinking and inexperienced the theory is plausible enough. Competition in mercantile lines of business leads to reduced prices, why not with public service companies? One reason is because of the duplicate investment required for the competing company. The fixed Fallacy of charges of a public-service company are a much greater proportion of the total expenses than is the case with most other lines of business. Although reductions in price may at first result from the competition the investments are comparatively so large that sooner or later the two companies must come to some understanding and one company purchases or consolidates with the other. In the end the public is forced to pay the fixed charges on both investments. This payment takes the form either of increased prices, or delay in reducing prices. We need only point to the history of such experiments to prove that such is the almost inevitable result. Municipal Municipal ownership was also at one time a popular theory. More recent experience has, however, demonstrated its fallacy, and the agitation for public ownership is distinctly on the wane. Even eliminating the frequent dishonesty and inevitable extravagance of public ownership, the income derived from charges to the public for service must be practically the same as under private ownership. The municipal plant is subject to the same expenses of manufacture and of distribution as the private plant. Taxes lost by the city are equivalent to taxes paid by the private company. Depreciation, although often ignored by the municipal authorities, goes on just the same as with private ownership. The rate of return on the necessary investments by the city must always carry more than the ordinary interest rates at which the city bonds are placed, as municipalities are subject to practically the same business risks as are private companies. But such ideal conditions of operation by municipalities are, in the nature of things, practically impossible of realization. The municipality cannot demand the services of the best men as managers of the public undertakings on account of the uncertainties of continuous employment through change in political control. The demands of political patronage lead to the employment of inexperienced, and, oftentimes, unnecessary employees. Graft and dishonesty are not necessary for the failure of public ownership. Municipalities are notoriously inefficient in conducting their ordinary business even when administered honestly, consequently we are not surprised to find that in those instances in this country where their activities have been extended to publicservice undertakings, they have inevitably led to failure. Regulation and control of a private company by public authority, if fairly and intelligently exercised, provide a means of adjusting any differences regarding rates and qual Regulation ity of service. There is some danger in such authority assuming administrative functions and hampering the proper conduct of the business and, where rate-making powers are given, of restricting the return on the investment to such narrow limits that capital becomes timid and the development of the business is retarded. The net earnings should not be reduced to the point at which confiscation of property might be claimed by the company, as a fair return on the amount of investment is somewhat more than that which would just escape confiscation. In the long run the most satisfactory results will be secured by a policy which allows considerable freedom to the company so long as an undue burden is not placed upon the public by reason of excessive charges. One disadvantage of this system of regulation is that such extreme power is liable to abuse and much depends upon the personal element. Moreover when the returns are fixed at a definite amount there is no incentive on the part of the company to introduce economies or improvements in the service. Those who do not find in the four systems of regulation mentioned above a satisfactory solution of the problems involved in the relations of public utilities with the public, have been recently attracted to a method long employed in England, but having only one example in this country, namely in Boston. This method has been applied specifically to gas companies and is called the "Sliding Scale". The principle of the "Sliding Scale" is as follows: A standard price of gas is established and a standard rate of dividends. Both the price and the rate of dividends are fixed The Sliding Scale on such a basis as to secure an adequate return on the money invested in the business. For every reduction in the price the company is allowed to increase correspondingly the rate of dividends which may be paid. In Boston the standard price for gas was fixed by an act of the legislature at 90 cents per thousand cubic feet. The standard rate of dividends was fixed at 7 per cent. For every reduction of 5 cents in the price of gas the company may, during the following year, increase the dividend rate I per cent. The act provides a reserve fund for emergencies which may be set aside each year up to 1 per cent of the capital, until the fund becomes equal to 5 per cent of the capital stock. If an excess is earned above the amount provided in the reserve fund such excess is to be paid to the towns in which gas is sold in proportion to the miles of main in each. Issues of additional stock are to be valued by the Board of Gas and Electric Light Commissioners. Before the new shares are offered to the stockholders of the company they shall be offered for sale by public auction, and no bid is to be accepted for less than the price fixed. Any stock not sold at auction is to be offered at the fixed price to the stockholders. Any stock so offered and not sold shall again be offered for sale at public auction. If the new stock to be issued does not exceed 4 per cent of the existing capital stock of the company it may be sold at auction without being first offered to the stockholders, provided it is not sold at less than par. After ten years' time upon the petition of the company, or upon the petition of the mayor, or selectmen of the cities and towns in which the company is supplying gas, the Board of Gas and Electric Light Commissioners shall have the authority to lower or raise the standard price to such extent as may justly be required by reason of greater or less burdens which may be imposed upon the company by reason of improved methods in the art of manufacture, by reason of changes in the prices of material and labor, or by reason of changes in other conditions affecting the general cost of manufacture or distribution of gas. Since the passage of this act the price of gas has been twice reduced, on July 1, 1906 to 85 cents and on July 1, 1907 to 80 cents. At the same time the rate of dividends has been increased from 7 per cent to 9 per cent. For the year ending June 30, 1907, the first year in which the "Sliding Scale" was put into effect, the sales were about three and three-quarter billion. The reduction of five cents that year amounted to about $190,000, while the extra I per cent of dividends which were allowed amounted to about $150,000. During the year ending June 30, 1908, sales were about four billion, and the additional reduction at that time, together with Results of the previous reduction mentioned above, resulted in a saving to the public of about $400,000. The company received an extra I per cent in dividends, making the rate 9 per cent, or an increase in the total amount of about $300,000 per year for the stockholders. In this connection it may be mentioned that the various companies which went to make up what is known as the Boston Consolidated Gas Company, were consolidated on June 15, 1905, and between that time and the date that the "Sliding Scale" went into effect, the new Consolidated Company reduced its price of gas 10 cents per thousand feet, so that the public between June 15, 1905, and July 1, 1907, received a reduction in price of 20 cents per thousand cubic feet, this reduction being brought about by the consolidation and the "Sliding Scale". The sales for the year ending June 30, 1910 were four billion, four hundred million cubic feet, and the saving on this amount to the public at the present price as compared with the price in June, 1905, was about $880,00. It is evident that the proportion of the profits given to the public is increasing and will increase more rapidly than the amount of the profits given to the company. It should also be stated that although the actual book value of the property represented by the investments of the company amounts to nearly $25,000,000, the capitalization is only about $15,000,000. Consequently a dividend of 9 per cent on the capital of about $15,000,000 is equivalent to about 51⁄2 per cent on the actual book value of the properties. The public is interested primarily in low prices and good service. The amount of dividends paid to the stockholders of the company does not interest the public unless such payments prevent them from getting low prices. When the payment of extra dividends is not only prohibited |