FUNDAMENTAL PLANKS IN A PUBLIC UTILITY

PROGRAM

BY DELOS F. WILCOX,

Franchise Expert, New York City.

I have sometimes spoken of the relation between a city and its privately owned public utilities as an irrepressible conflict. The expressions "traction war," "gas fight," "telephone controversy," "electric light dispute," etc., are familiar to everyone. In the picturesque language of the newspaper and the street, public service corporations have long been described as public enemies, and the attitude of belligerency toward them has become chronic in many, if not most, American cities.

While this antagonism often assumes exaggerated, unintelligent and even fantastic forms, and while there is a substantial community of interest along many lines between the public and the utility corporations, we must not blink the fact that there is a permanent and fundamental conflict of motives between them. No amount of regulation and no possible development of good will and the spirit of coöperation can change the fact that private corporations operating municipal utilities do so for profit and for as much profit as they can get, while the consumers and the public strive to get as much service as they can at the least possible cost.

In this conference, which may properly be regarded as a step in the mobilization of the forces representing the public point of view, we must be very careful in our declarations, for the "enemy" is willing to take everything we give him and turn it to his advantage. Every humane principle that we promulgate for the alleviation of the "horrors of war" will be seized upon by him as the basis of an appeal to public opinion against our methods of warfare whenever we try to do anything effective. A public service corporation rarely admits that what is sauce for the goose is also sauce for the gander.

For example, the principle of state regulation by permanent commissions was put forward in this country a few years ago as a statesmanlike method of protecting the people from the exactions

of the public service corporations, while at the same time giving the corporations a fair deal. We now find that all the corporations have been converted to the idea of regulation. They not only welcome it but insist upon having it. They are so enthusiastic over it that they help write the laws and appoint the commissioners.

Other illustrations are the indeterminate franchise, the option to purchase at a fixed price, amortization of capital out of earnings and regulated monopoly. The public service corporations regard the indeterminate franchise as quite impossible as a substitute for existing perpetual franchises, but strongly urge it as a substitute for franchises that come to an end at inconvenient times. The "fixed price” stands like a stone wall against subtraction but yields itself readily to the friendly process of addition. Amortization provides a mask for the gentle art of making the consumers pay for "dead mules." Regulated monopoly is translated into intrenched monopoly.

The discussion of plans of campaign against high rates, poor service, political interference, financial tyranny and all the rest of the evils which we have set out to smite, can only lead to confusion of counsels unless we clearly grasp certain underlying issues involved in the relations between the cities and the public utilities. Without having definite thoughts on these issues, we can not think straight on anything else, and without knowing what any particular speaker's thoughts upon them are, the rest of us can have no measure by which to gauge the importance or fathom the meaning of what he says. The underlying issues are:

(1) What shall be the recognized character of public utility investments? Shall they be regarded as speculative and held at the risk of the owners, or shall they be regarded as investments in aid of public credit and be given the same security as investments in municipal bonds? If new investments are to be regarded as nonspeculative, shall the cities make good all past losses as well as assume all future risks?

(2) What shall be the attitude of the city toward public utilities as money-earning enterprises. Shall the cities seek to get from the utilities a revenue for the relief of general taxation? Or shall the cities subsidize utilities out of taxes? Shall the cities aim to have the utilities, whether under public or under private ownership, furnish their services at cost, or shall public utilities be required

to pay for themselves out of earnings in addition to being selfsupporting?

(3) What attitude shall the cities take toward ultimate municipal ownership? Shall they assume that the utilities are to remain permanently as private investments under private operation? Or shall they assume that ultimately all the standard utilities will be publicly owned? If the latter, shall the cities in their franchise grants and their rate contracts merely take an option for purchase at some future time? Or shall they proceed at once to set in motion machinery that will ultimately bring municipal ownership about?

I shall answer categorically, according to my lights, the questions I have propounded under these three heads, and state my reasons for the answers given in each case.

(1) Character of the Investment

Public utility investments should be placed upon a nonspeculative basis, and their security should approximate that of municipal bonds.

In the establishment of the non-speculative character of these investments, cities should not undertake to make good past losses, unless they are compelled to do so by franchise contracts.

So far as future investments in the standard utilities are concerned, the cities should assume the risks of loss due to unforeseen causes, and should substantially guarantee the integrity of all investments made at the request or with the approval of public authority.

Public utility investments in the past, with some exceptions, have been highly speculative. There has been a continual buzz of promoters around city councils and state legislatures for the grant of special franchises and charters for public utilities. In most cases the sole purpose of these promoters has been either to sell the franchise or charter outright, or to construct the utility, heavily overcapitalize it and then sell its securities for a much larger sum than the amount actually invested.

Public utilities are not always gold mines. A great deal of money has been lost in premature investments, and a great deal more has gone to the scrap heap with changes in the arts. Experience shows that the public suffers along with the investors when utilities find themselves "hard up." Without money to make adequate exten

sions and improvements, or even to keep their plants in proper repair, public utilities cannot render the service which is properly demanded of them.

Public utility service, as an essential public function, ought not to be dependent upon a throw of the dice by the manipulators of stocks and bonds. It ought not to furnish an opportunity for any man or set of men to "get rich." It ought to furnish to multitudes of people of comparatively small means a safe and conservative investment for their savings. I am strongly of the conviction that it is disgraceful to a city to have its public service corporations in receivers' hands-almost as disgraceful as it would be for the city to default on its own bonds.

The elimination of the speculator and the stock-jobber from the utility field and the establishment of utility investments upon a safe, conservative, non-speculative basis, is to my mind a fundamental condition precedent to good service, permanently low rates and adequate public control. If capital is made secure and is guaranteed a steady return, it demands nothing more than the ordinary interest rate. Under these circumstances, we should not have to pay premiums to reward capital for a risk undertaken in embarking upon public utility enterprises. There would be no risk. The only special reward offered would naturally go to the men who actually operate the property; for when security and a sure return have overcome the characteristic timidity of money, we have then only to seek a means for enlisting the motive of men for efficiency and economy in the operation of the plant. This cannot be done by lavishing unasked rewards upon capital as such.

Our friends, the public service corporations, will welcome with open arms the proposition that security of the investment is the first and most fundamental plank in any rational program of public utility regulation and development. They are willing to make peace with us on these terms alone. I have said, however, that in my judgment, cities ought not to make good past losses on investments that were frankly on a speculative basis when they were made. I suppose that we are bound to allow for a considerable taint of human nature in the characters of those who own and operate public utilities, even in the "soulless corporations." I suppose that we must frankly concede to them the right to pursue the policy of keeping all they have and getting all they can. If we offer them security,

case.

and do not ask for payment, naturally they will take our gift. They have been used to receiving gifts from the cities and are not ashamed to be public beneficiaries. We find them at this moment engaged with their eminent counsel and engineers in attempting to prove to the satisfaction of the court that whenever a public utility has lost money in the operation of its plant, its property is thereby made much more valuable, either in a rate case or in a purchase case. But these same eminent counsel and engineers are employed to prove also that where a utility has made lots of money, it is likewise thereby made much more valuable, either in a rate case or in a purchase. The companies ask the cities to pay them a premium equally for their losses or their profits. This is the old game of "heads I win, tails you lose." It seems incredible that this double play should be made successfully before the regulating authorities of the country. And yet in many cases it is being done. When the companies have lost, they protest vociferously that they have been mere public agents, spending money for the benefit of the city and its citizens. But when they have won, they forget this agency theory entirely and fall back upon the entrenchments of private property and contractual rights established in the federal constitution. Then they have been doing business strictly on their own account, and the city will interfere at its peril.

I have great admiration for the genius of the writer who composed the famous couplet:

"When the Devil was sick, the Devil a monk would be;

When the Devil was well, the devil a monk was he."

It has many applications, and its application to the attitude of public service corporations toward public control is by no means the least important of them.

Aside from the fact that it is logically preposterous for the cities to make good the speculative losses of the past, such a course would be financially disastrous. It would mean the acceptance and guaranty of the over-capitalization which has brought many utilities into bankruptcy under private management. We may as

well dismiss the pretty dream that a city will acquire municipal ownership by giving its bond to Shylock for a pound of flesh, taken nearest the heart, with all the blood that goes with it. When we acquire utilities or recognize their capital value in rate regulation