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has by no means reached perfection in this respect: has, in fact, "only reached the point of what might be termed acute interest." In judging of the truth of this estimate it is natural to make some allowance for the enthusiasm of one who has been a pioneer in the reform he is describing, but, even so, the case is a strong one.

However complicated the question of rates may be in practice, the basic ideas are quite simple, and reduceable to two big principles: justice, and the most efficient use of the plant. Justice requires that every consumer or class of consumers should pay all the expenses for which that consumer or group is responsible, provided, of course, the responsibility can be satisfactorily traced. But even if this is not entirely possible, the second principle furnishes a rule that is very like it in its results, although it is most easily expressed in a negative form. If consumers can make extra demands on the utility without paying as much as the extra expense they are causing, they are likely to make wastefully large demands on it, as in the case of telephones with unlimited service.1 But any consumers who cannot make extra use of the utility without paying many times more than the extra expense they would be causing, will skimp their use, and the tendency will be to keep the central plant in wasteful idleness, as in the case of telephones paying so much per call.5 In the one case the consumer saves nothing by being frugal, and in the other case he saves several times as much as the company does.

If we suppose that these telephone systems are in use side by side, and that there could be substituted a scheme that would put them on the same basis and make extra calls cost every subscriber about as much as they cost the company, then the flat-rate subscribers would tend to go without some of their most useless calls, while the others would use their instruments more freely, and the net result would be a considerable increase in the benefit of the service to the consumers, while the company could secure the necessary income out of rates which were, in proportion to benefits rendered, lower. From this we get two rules, of which the first is that consumers should be able to enlarge their consumption at rates bearing a just proportion to the low direct cost of such enlarged use of the plant, so that for extra service rendered beyond the minimum amount which most consumers would naturally use in *Example used by Mr. Doherty in paper on Rates cited above.

'See also In re Application of Medford Light & Heating Co., 2 W. R. C. R.,

any case, the rates should normally be lower than the average unit charge. This leaves room for making the total burden on some consumers heavier than on others, in proportion to the cost of the service; in fact, the attempt to develop the use of a utility plant to its fullest capacity may and often does lead to the familiar policy of charging what the traffic will bear, without regard to cost except as a minimum limit. This is a second, or corollary rule developed out of the main principle of maximum use of the plant.

As it is only in the electricity utilities that we find any approach to systematic development of these principles into systems of rates, it will be well to describe the ways in which rates are actually fixed in this industry, and afterward to go on to the question of possible adaptations of the same rules to the needs of the gas and telephone businesses.

The bottom fact in any such system is naturally the analysis of costs, and a complicated business it is. Costs are of course divided into the operating expenses and the "fixed charges," but this, after all, is not the most important thing in rate-fixing. The inquiry of real significance with regard to any outlay, capital or current, is, what is it caused by and with what does it vary, if at all? In an ideal system, every item of cost must be pigeonholed under its proper cause, and these causes must be quantities that can be measured, divided among consumers and used as a basis of rates; and they must, above all else, be simple. The answer to such an inquiry cuts across the first division and makes a new one, in which capital and current outlays rub elbows with each other. Thus in figuring for a water plant the outlays that vary roughly with the capacity of the consumers' individual equipment or "service," we find under this one heading the "fixed" items of interest and depreciation on the consumer's service, the "variable" item of maintenance of this service, and the further expenses of meter-reading, which are pure operating costs. It goes without saying that the kernel of the question is the sharing of the fixed costs: taxes, interest and depreciation on the various parts of the plant. And here the first lesson of experience seems to be that any close approach to a perfect system, while it might be possible, would be too intricate, difficult and expensive for any practical use. Any Payne et al. v. Wis. Tel. Co., 4 W. R. C. R., 1, 57. State Journal Printing Co. et al. v. Madison Gas & Electric Co., 4 W. C. R., 501, 671.

'Dick et al. v. Madison Water Commissioners, 5 W. R. C. R., 766.

working system is a compromise, and so gives room for difference of opinion and controversy that is practically unlimited.

First, there is the central plant. The size of this is determined by the need of being able to meet the largest demand that may be made on it at any one time, and not by the average rate of output, which is considerably less. Now, on the cost or "responsibility" theory, how should this be shared among the consumers? Should the company find out at just what rate each consumer was actually using his service at the "peak," or moment of heaviest demand, during the last year, and use that as a standard? Aside from the injustice of such a measurement, it would be "manifestly impossible."8 No one can know just how much current each individual customer was taking at, say, five o'clock on the particular December afternoon when the total output per hour chanced to reach its maximum.

The real question to be settled is, it would seem, not the chance coincidence of the past, but the probabilities for the future. According to such data as can be had, what share is each consumer likely to have in the demands which may in the future tax the capacity of the plant? The evidence bearing on this includes various items. The company may measure his maximum rate of consumption by "demand meters," if such are in use. Another evidence, easier to obtain, is the maximum rate at which he might use current, or, simply, the capacity of his individual fixtures or "service." To this factor the term "connected load" is given in the electricity business. Or they may measure the maximum demands of considerable classes of consumers, and find how far short this falls of the sum total of the "connected loads." By this means the responsibility of a class would be measured by its actual maximum demand; that of individuals in the class as compared to each other would normally be measured by their maximum possible demand or "connected load."

In this matter of estimating responsibility for investment, the electricity and telephone utilities have one complication which the others escape. They must produce the service at the instant it is consumed, and they cannot store it. This means that they must run at part capacity most of the day for the sake of a momentary peak, while the gas plant can run steadily through the day,

Report of St. Louis Public Service Commission on Rates for Electric Light and Power, Appendix B, p. 4.

storing the gas, so that the "peak" it has to allow for is the average of a whole day. As a result, a central gas plant may run, perhaps, at 60 per cent of its capacity on the average, while the efficiency factor of an electric utility may be 25 per cent or less.10 This is not only an advantage in efficiency of operation, but it makes the rate question simpler, for there is no need to trouble about the time of day at which the service is taken, whereas this question may become an important one to an electric light and power plant. If a consumer agreed not to use current at the time of day, about five o'clock usually, at which the heaviest demand was likely to come, he would, on the cause theory, be freed from all responsibility for the capital cost of the central plant (though not of the distributing system).

But the central plant is not the only capital outlay. The distributing system is also a material item, and the burden of fixed charges on this part of the equipment would, on a strict responsibility basis, fall differently from that of the central plant. Here the cost to serve a consumer varies with his distance from the plant; moreover the maximum demands which determine the size and capacity of the various mains and branches are not likely to come at the same time of the day as the peak of the central plant, nor to bear equal ratios to the connected loads of the consumers whom they serve.

Enough has been said to show that it is beyond the bounds of human possibility to allow for everything. But need an ideal system attempt to allow for everything? It seems that the correctness of the various peak responsibility theories rests on one assumption, one which must often be contrary to fact, viz., that the peak load does actually tax the full capacity of the plant, or is liable to do so at some time in the near future. If this be true, then each consumer may justly be held for his proportionate share. But if the plant is more than big enough to handle the peak load under existing circumstances, then the situation changes. The unused capacity is a waste, and if any new customers could be induced to buy at a price yielding something over the extra cost of serving them, the result would be gain for all concerned, even though the new classes of consumers paid less than the old. Whatever little the new consumers did contribute to meeting fixed expenses would be so much clear gain, enabling the rates of the old 'H. L. Doherty, Rates, op. cit., p. 8.

10 Report of St. Louis Public Service Commission, op. cit., p. 6.

consumers to be just so much lower than if the differential rates had not been established. This principle is so familiar as applied to the classifying of freight by railways that it needs no elaboraation here, except to say that concessions need to be subject to much the same limitations of reason and justice in the one case as in the other. In short, then, the rule of peak responsibility would seem to hold strictly only for plants which are likely, at the peak, to be run at or near their full capacity, while just in proportion as the capacity of a plant is ahead of its probable peak demand, it is natural and legitimate to make concessions on the principle of "what the traffic will bear," care being taken to avoid unjust and harmful discriminations.

There is a real conflict between the system of cost and that of "value of service" or "charging what the traffic will bear," and the issue would seem to hang, in any given case, on the question whether the capacity of the plant is ahead of the demand, and how far ahead. The natural course of evolution is, first, a stage in which the plant is built for a future demand, not yet developed. In this stage the average rate must be high, and differentials based on what the traffic will bear have a considerable legitimate place. Then follows a stage of increasing demand, approaching nearer and nearer the full capacity of the plant. This lessens unit costs, and the average rate should normally be reduced, by levelling those charges which yield the highest earnings down toward the level of the lower ones, which were made to stimulate business. And, finally, when approximately the full capacity of the plant is reached, the differentials of the old type should have disappeared, and there should be left a system based on cost or responsibility. According to the foregoing theory, it is wrong for a company or a regulating body to prescribe an ironclad system of cost rates without regard to the traffic density, so to speak, as a factor which may justify departures from cost. Another conclusion is, that, inasmuch as a cost system of charges is an evolution from a value system, the final result cannot be expected to be completely, dogmatically accurate, but rather of the nature of a compromise. Let us see to what results this compromise between theory and practice has actually led in the electrical business.

The result of experience has been to eliminate the element of distance from the central station, and all other superfine factors,11 and to put all expenses into one of three classes: those which vary "H. L. Doherty, Rates, op. cit., p. 10.

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