unless reductions in the price are made, but increases in the rate of dividend are actually offered as a reward for reduced prices, then the public joins willingly in the partnership. With the incentive of increased dividends before them as a result of the display of special energy and ability in conducting the business, managers of such undertakings will use every effort to introduce economies and to increase sales in order that the price may be reduced and the dividends increased. The public will receive the benefit of this increased effort in lower prices. As far as the public is concerned nothing but praise is heard of the application of the sliding scale in Boston, as would naturally be expected when their share of the profits has actually been greater than that of the company. Besides the reductions in price which have resulted it is believed that the partnership with the public which this act creates develops that mutual goodwill and confidence which are essential in the relations of all public-service corporations with the public. Telephone Rates ? By DUGALD C. JACKSON, BOSTON, Consulting Engineer. Professor of Electrical Engineering in the Massachusetts Institute of Technology. The rates charged for telephone service in all the important American cities have grown up in accordance with expediency and as the result of the judgment and experience of the telephone officials, and it is, therefore, not astonishing that the telephone companies have become accustomed to assert that rational methods of analysis cannot be applied to test the reasonableness of such rates. Ready means of intercommunication are now so essential a part of business and social life that it Local is equally natural for subscribers to view askInvestigations ance the efforts at telephone rate-making which depend only upon expediency or on the judgment of certain officials. Skepticism of the fairness of telephone rates fixed in that manner has led to investigations in a number of the more important American cities and states, and has produced reports like those made by the Merchants' Association of New York in 1905, the Special Telephone Commission of Chicago in 1907, the Board of Trade of New Orleans in 1908, the Travelers and Merchants Association of Baltimore in 1910, and the recent studies of the Commissions of the City of Los Angeles and of the states of Massachusetts and Wisconsin. The activity thus stirred up seems to give promise of the general adoption of a more rational basis of charges for service. It is undeniable that the judgment displayed by telephone officials has built up their business marvelously, and has made the telephone a necessary tool of commercial and social intercourse; but the very importance thereby given to the telephone service makes indefensible any opposition to legitimate efforts to get rates on a more rational basis. Guiding principles in so complex a subject can be evolved only as the result of thorough-going statistical study of the problem. The startling complexity of the telephone rate problem is illustrated by the introductory statement of the Commission of Engineers who in 1907 made a comprehensive report of the telephone situation in Chicago. I will quote three paragraphs from that report: The Telephone "A telephone company in a large city must face a problem in many respects more complex than that of any other public utility corporation. The water department is called upon to sell a single commodity; namely, water, and at prices which are fixed with comparative readiness. The gas company also is called upon to sell a single commodity, metered for nearly every customer, and its conditions in dealing with customers are relatively simple. It may sell some additional by-products, as coke, tar and ammonia, but the quantities and market values of these are readily arrived at. The traction company has a more complex problem than some of the other purveyors of public utilities, but even here the price paid by the several patrons is uniform and the substantial difference between patrons lies only in the lengths of the rides which they may choose to take. "The telephone problem, on the contrary, involves many complexities, partially caused by the relatively large number of classes of service which the telephone company must offer to its patrons for the purpose of fully developing the telephone service of the city, and partially by the intangible character of the electric medium with which the telephone business is carried on, the delicacy of the apparatus used, and the wide differences in the manner and extent of the use of the apparatus by the various subcribers. "If a telephone company properly extends the telephone service in the city, it must be prepared to take care of the requirements of a range of patrons as wide as the interests of the city itself, including the largest business organizations, the hotels, the newspapers, the professional men, the small business houses, and residences of all classes. It must provide apparatus for the service of each class of patrons which will enable it to furnish the service to each subscriber at an appropriate price within his means. It is desirable for the prices to be graded so that the largest user shall not pay less than his fair share of the expense of maintaining the traffic and the remuneration to the company for its investment, and equally so that the smallest user may get his telephone service at a price which is within his means and yet is reasonably remunerative to the company for its outlay." There are four general principles that cannot be safely departed from when considering rates of a public-service company. These may be stated in the following words: 1. The company is granted certain privileges by the public for the purpose of enabling it to furnish readily some type of service to the people, and it should be expected to furnish service fitting the needs of the people; good of its kind, and at prices which are reasonable when judged by the conditions. 2. The company must not be unnecessarily harrassed, but must be afforded reasonable opportunity for economically trans General acting the business related to giving the service for which the company was organized; and it must be allowed to make sufficient returns on its investment to enable it to attract the best and fairest minds to the management, and maintain a position of stable credit with the investing public. 3. A public service company in a new and developing country must see before it opportunity to earn returns on its invested capital which are large compared with those adequate in stable and thickly-settled regions, in order that it may secure the capital needful for developing its plant and extending its service to meet the apparent needs of an expanding but not yet stable population. 4. A new company, even in a stable country, ought to earn more than current rates of interest for its investors whose enterprise enables them to take the risks of establishing the business, but the rate of return on the investment may be expected to approach current rates of interest after the business has become profitable and is firmly established on fixed franchise rights covering a long period. I will not here give the arguments to show the validity of these principles, or attempt to explain their significance. An acceptance of those general principles, leads as a consequence thereof to recognizing that an equitable system of telephone rates should distribute the burden of expense which must be borne by the company for operating, maintenance, depreciation and interest, between the users with reasonable consideration of the proportion of the expense which is caused by the service in each of the several classes; and the classes of service should be subdivided in such a manner that subscribers with relatively similar wants will naturally group themselves together. The ideal method of charging for telephone service is to The Ideal charge each customer in proportion to the service he receives from the company, measured in quantity received and of the quality corresponding to his needs; and to make the charge to all customers as low as is consistent with the operation and maintenance of the property, accompanied by the payment of a fair return on the money invested. When unlimited service rates are charged, two kinds of customers, namely, business customers and residence customers, are ordinarily differentiated from each other. Each of these kinds may be grouped in various classes by arranging individual subcribers on special lines, associating two or more subscribers on a party line, providing private branch exchanges, etc., according to the needs of the customers; and the rates charged for service in the several classes may be expected to differ, on account of differences in the cost of equipment required in different classes and on account of differences in the average amounts of use of the telephone by customers in different classes. Message rates for telephone service have decided advantages over flat rates in many particulars. Message rates manifestly make it possible to reduce the price of telephone service to the small users to the smallest fair annual charge for what they actually receive; and this is particularly true if effective and convenient means for curbing extravagant use of the service are introduced, as by the introduction of prepayment service, and convenient means for collecting accounts are provided. The smallest fair annual charge referred to should probably be sufficient to cover a reasonable interest, taxes, depreciation and maintenance for the portion of the plant that must be provided for the use of the average of the individual users in the subscriber's particular class, added to an amount which is proportional to the average number of messages transmitted from his telephone in a year. All legitimate expenses of the operating company must obviously be provided out of the revenue obtained from the rates, and the rates should raise only enough revenue Expenses to meet these expenses, provided the word penses" is used comprehensively so as to include return on the ex |