GIFT OF J . INVESTIGATION OF THE PEOPLES GAS LIGHT & COKE COMPANY FOR THE CHICAGO COUNCIL COMMITTEE ON GAS, OIL AND ELECTRIC LIGHT SUBMITTED TO THE GAS SUBCOMMITTEE CONSISTING OF Alderman WILLIAM J. PRINGLE, Chairman Alderman THEODORE K. LONG Alderman CHARLES E. MERRIAM BY WILLIAM J. HAGENAH In Charge of Gas Investigation THE HENRY O. SHEPARD CO., PR' 1911 INVESTIGATION OF THE PEOPLES GAS LIGHT & COKE COMPANY FOR THE CHICAGO COUNCIL COMMITTEE ON GAS, OIL AND ELECTRIC LIGHT SUBMITTED TO THE GAS SUBCOMMITTEE CONSISTING OF Alderman WILLIAM J. PRINGLE, Chairman Alderman THEODORE K. LONG Alderman CHARLES E. MERRIAM BY WILLIAM J. HAGENAH In Charge of Gas Investigation THE HEXRV 0. SHEPARD CO., PRINTERS, CHICAGO. 1911 COMMITTEE ON GAS, OIL AND ELECTRIC LIGHT OF THE CITY COUNCIL OP THE CITY OF CHICAGO. ALD. WILLIAM J. PRINGLE, Chairman, ALD. JOHN S. DERPA, ALD. CHARLES E. MERRIAM, ALD. ALBERT "W. BEILFUSS, ALD. CHAS. TWIGG, ALD. LEWIS D. SITTS, ALD. THEODORE K. LONG, ALD. JOHN P. STEWART, ALD. JACOB A. HEY, ALD. PETER EEINBERG, ALD. JAMES B. BOWLER, ALD. ANTON J. CEBMA^, : : -:4 L P- JAMES M. DAILEY. CHICAGO, April 17, 1911. To the Gas Subcommittee, Council Committee on Gas, Oil and Electric Light, Honorable William J. Pringle, Chairman, Chicago: DEAR SIRS, Pursuant to your instructions, an investigation has been made of the books, accounts and records of The Peoples Gas Light & Coke Company of this city in order to ascertain the reasonableness of the pres- ent net rate of 85 cents per thousand cubic feet for manufactured gas. The results of such investigation, together with the conclusions arrived at, are herewith submitted. As desired by your committee, the rate recom- mended for substitution in place of the present charge is a uniform rate for all purposes, regardless of the amount consumed. In this connection, I beg to express my gratitude for the generous assistance which I have received from those associated with me in various capacities in the work of this investigation. Their loyalty is greatly appreciated. I feel especially indebted to Mr. W. J. Huddle for his valuable services in an engineering capacity, for which he deserves great credit. Very respectfully yours, WILLIAM J. HAGENAH, In charge Gas Investigation. 264321 INVESTIGATION OF THE PEOPLES GAS LIGHT & COKE COMPANY FOR THE Council Committee on Gas, Oil and Electric Light CHICAGO. HISTORICAL. The Peoples Gas Light & Coke Company is an Illinois corporation located in the city of Chicago, incorporated under a special act of the legislature approved February 12, 1855, and operating under a perpetual charter with full power and authority to manufacture, distribute and sell gas for the purpose of lighting the city of Chicago, the streets, buildings and public places therein, and to this end to erect all necessary buildings, apparatus and facilities. The charter of the company provided that the consent of the city of Chicago should be secured to the laying of the mains, which consent was obtained by ordinance passed in August, 1858. The company as organized at present is a consolidation made pursuant to an act of the legislature under date of August, 1897, when seven independent and more or less competitive companies were merged. The companies embraced in the combination were the Peoples Gas Light & Coke Com- pany, the Chicago Gas Light & Coke Company, the Consumers Gas Com- pany, the Equitable Gas Light & Fuel Company, the Suburban Gas Com- pany, the Lake Gas Company, the Illinois Light, Heat & Power Company and the Chicago Economic Fuel Gas Company. Since 1897 the company has extended its sphere and obtained complete control of the gas business in the city of Chicago by absorbing several minor plants and the leasing of others. The history of the company has been marked by much strife and litiga- tion, in which the City Council of Chicago and the Legislature of the State have played a prominent part. Because of the importance of the conditions under which the property was developed, as reflected in the financial position of the company, and the necessarily frequent reference to some of these conditions because of their bearing on the present cost of 6 gas, a brief outlin.' <>;' the ;i,<-rv important steps in the development of the consolidation is presented. In February, 1849, there was incorporated by special act of the State Legislature the Chicago Gas Light & Coke Company with the exclusive right to manufacture, distribute and sell gas in the city of Chicago for a period of ten years. There was no requirement that the consent of the city should be obtained before entering upon its charter rights. The Consumers Gas Fuel & Light Company of Chicago was incorpo- rated in January, 1882, and on April 28, 1882, the Common Council of that city granted to the company the right to construct, maintain and operate gasworks within such city, together with the right to lay mains, feeders and pipes in all avenues, streets, alleys and public buildings in the city for lighting and fuel purposes. The same ordinance prescribed a lighting standard of sixteen candles and fixed the price of gas at $1.7'5 per thousand cubic feet, with a discount of 75 cents per thousand cubic feet to customers using 100,000 cubic feet per annum. The operations of this company were -restricted to the city of Chicago. This company was unfortunate and in May, 1886, all of its property was sold under a decree of the United States Court on foreclosure of the mortgage given by it, and in November, 1886, the Consumers Gas Com- pany was formed with a capital stock of $5,000,000, which company acquired all the property, rights, privileges and franchises previously owned by the Consumers Gas Fuel & Light Company, but sold through court proceedings. The Suburban Gas Company was formed in 1884 with authority to manufacture, distribute and sell gas within the limits of Cook County. Soon after its incorporation the village of Lake View, now a part of the city of Chicago by annexation, granted an ordinance to this company authorizing it to lay mains and service pipes in the public streets, alleys, avenues, highways or grounds within the limits of said town, prescribing a lighting quality of sixteen candles, and fixed the price of gas for public lighting at $1.50 per thousand cubic feet and for commercial consumption at $2.00 per thousand cubic feet, with a prompt payment discount of 50 cents per thousand cubic feet. This company has always been controlled by the Chicago Gas Light & Coke Company, referred to above. The Equitable Gas Light & Fuel Company was organized in August, 1886, with a capital stock of $3,000,000. This company secured an ordi- nance from the city of Chicago granting to it the usual authority for the occupancy of the streets and highways with its mains, services and feed- ers, and fixed the lighting standard at sixteen candles and the rate at $1.75 per thousand cubic feet, with a discount of 25 cents per thousand cubic feet. The Hyde Park Gas Company, with a capital stock of $300,000, was incorporated under the general incorporation act of the State of Illinois in May, 1871, with the power to manufacture, distribute and sell gas in the town of Hyde Park, a municipality adjoining the city of Chicago, but since by annexation made a part of it. By ordinance in 1871, the com- pany was granted permission to lay its mains, pipes, feeders and services in any and all of the streets, alleys, avenues, highways, parks, squares and public grounds throughout said town north of the center line of Sixty- seventh street. This permission was made exclusive north of the center line of Sixtieth Street for a period of fifteen years. The town of Hyde Park was given the right to purchase the plant within a period of fifteen years and a method was provided for valuing the property in case of sale to the municipality. This latter provision was subsequently repealed and the territory of the company was enlarged by ordinance in 1885 so as to embrace the section south of Sixty-seventh Street. The Hyde Park Gas Company was controlled by the Consumers Gas Company. In November, 1885, the Illinois Light, Heat & Power Company was formed under the general incorporation laws of the State to engage in the manufacture of gas. The capital stock of this company was $600,000. This company never received a grant of authority from the city of Chi- cago, but sold all of its product directly to the Peoples Gas Light & Coke Company. The Lake Gas Company was organized in July, 1881, under the general incorporation laws of the State of Illinois for the purpose of manufactur- ing, distributing and selling gas in the town of Lake, a municipality adjoining the city of Chicago, but since made a part of that city by annexa- tion. This company was incorporated with a capital stock of $800,000. It never directly acquired authority to operate in the town of Lake, but secured such authority through an ordinance granted by that town to the Northwestern Gas Works Company, a New York corporation authorized to furnish illuminating gas for a period of twenty-five years and to occupy for this purpose the necessary streets, alleys, avenues, highways and public grounds in the town of Lake. This ordinance fixed the price of gas for private consumption at a price not to exceed $2.50 for the equivalent in an illuminating power or value of one thousand cubic feet of coal gas of fourteen candle power. The company was given the exclusive privilege to light the streets, highways, public grounds and buildings of the town. It was controlled by the Consumers Gas Company. The Chicago Economic Fuel Gas Company was incorporated in Decem- ber, 1889, under the general incorporation act of the State. The capital stock was $1,000,000. On December 22, 1890, the City Council of Chicago granted to this company the right to construct and operate works for the manufacture of fuel gas only within the city and also the right to lay mains, pipes and feeders in all the streets, avenues, alleys and public places of the city for the distribution of natural and manufactured fuel gas exclusively. The privileges conferred by this ordinance were for the 8 term of twenty-five years, with the permission reserved to the city to pur- chase the plant at an appraised value at any time before the expiration of twenty years. The appraisal, it was provided, should contain no allow- ance for rights, privileges and franchises granted by the city. This ordinance specified that the company should charge rates not to exceed 60 cents per thousand cubic feet for natural gas, nor to exceed 50 cents per thousand cubic feet for manufactured gas, with a prompt pay- ment discount of 10 cents per thousand cubic feet. It was also provided that the company should pay annually to the city of Chicago in consid- eration of the privileges granted an amount equal to five per cent on the gross receipts of the company, and in addition to the above provisions the company was prohibited from at any time entering into any combination, directly or indirectly, with any gas company concerning rates to be charged for gas, and any violation of this provision should work a forfeit of this grant. The above ordinance was subjected to frequent amendment. One week after the original grant the act was amended by depriving the city of the right to order extensions and also depriving it of the right to purchase the the plant. In July, 1891, the act was again amended by authorizing the company to construct and operate works for the manufacture of illumi- nating and fuel gas within the city and to construct mains and feeders in the public streets, avenues and highways for the distribution of illumi- nating and manufactured fuel gas. A new schedule of rates was provided fixing the charge for illuminating gas at $1.10 per thousand cubic feet, for natural gas 60 cents per thousand cubic feet, and for manufactured fuel gas 50 cents per thousand cubic feet, with a prompt payment dis- count of 10 cents per thousand cubic feet in each case. The same amendment provided for the compensation to the city at the rate of 5 per cent on the gross earnings from the sale of natural gas and manufactured fuel gas and at the rate of 3 per cent on the gross earnings from the sale of illuminating gas. In 1891 the company entered into a contract with the Indiana Natural Gas & Oil Company whereby the latter company was to furnish natural or manufactured fuel gas to the Chicago Economic Fuel Gas Company, which product this company was to distribute through its pipes and mains in the city of Chicago. Under this contract the Indiana Natural Gas & Oil Company pumped its product to the State line, where it was delivered to the Chicago Economic Fuel Gas Company, an arrangement which is still in effect. This plant continued its individual existence until it was merged with the Peoples Gas Light & Coke Company in 1897, since which date the consolidated company has continued to distribute natural gas to the consumers in Chicago at the rate specified in the amended ordi- nance granting the right to the Chicago Economic Fuel Gas Company. This company is discussed at greater length in another part of this report. 9 The Mutual Fuel Gas Company was incorporated in April, 1889, under the general incorporation laws of the State. It had an authorized capital stock of $5,000,000, of which $1,500,000 was issued. This company succeeded to the grant of authority which the village of Hyde Park made under date of March 21, 1889, to Messrs. Hank & McClary. This firm was authorized to construct and operate a system of works for the furnishing of natural and manufactured gas and petroleum oil, and for this purpose it was empowered to pipe the streets, avenues and other public places with its mains, feeders and tubes. The ordinance provided that gas should be sold at the rate of $1.25 per thousand cubic feet for illuminating purposes, and 90 cents per thousand cubic feet for heating purposes, with a 20 per cent prompt payment discount. The lighting quality of the gas was fixed at sixteen candles. In April, 1887, the Chicago Gas Trust Company was formed with a capital stock of $25,000,000, consisting of 250,000 shares of the par value of $100 each, all of which was issued. This company acquired a majority interest in the shares of the capital stock of the Chicago Gas Light & Coke Company, the Peoples Gas Light & Coke Company, the Equitable Gas Light & Fuel Company and the Consumers Gas Company. By reason of the ownership of these shares the Chicago Gas Trust Company also con- trolled the Suburban Gas Company, the Hyde Park Gas Company, the Lake Gas Company and the Illinois Light, Heat & Power Company. The purpose of the incorporation of the Chicago Gas Trust Company, as expressed in its articles of incorporation, was twofold: first, for the purpose of erecting and operating gas-works for the manufacture and sale of gas in Chicago and other places in this State ; and second, to pur- chase and hold, or sell, the capital stock, or purchase or lease or operate the property, plant, good- will, rights and franchises of any gas-works or gas company or companies, or of any electrical company or companies, in Chicago or elsewhere, etc. The company sought to exercise the powers claimed under the second section only and for that purpose bought a majority of the shares of all the stock of the four companies above men- tioned whereby it might have the control of all the gas companies in the city of Chicago and thus destroy competition and monopolize the gas business. The validity of the organization of the company as above outlined was attacked by the Attorney-General of the State of Illinois, who filed an information in quo warranto. The decision of the court in this proceeding was rendered in November, 1889, and held that the corporation so formed was not for a legal purpose and tHat all acts done by it toward the accom- plishment of such object was illegal and void. Prior to this time, in 1887, all the shares of the capital stock of the four main companies which were held through stock ownership by the Chicago Gas Trust Company and which shares stood in its name, had been pledged by the Chicago Gas 10 Trust Company with the Fidelity Insurance Trust & Safe Deposit Com- pany of Philadelphia for the security of the payment of the bonds then or thereafter issued by the Chicago Gas Light & Coke Company, the Peoples Gas Light & Coke Company, the Consumers Company and the Equitable Gas Light & Fuel Company. When the Supreme Court held in its decision of November, 1889, that the acts of the Chicago Gas Trust Company were illegal and void, thus practically dissolving the corporation, it was manifest that some arrange- ment was imperatively necessary with respect to the shares of the capital stock of the holding company then outstanding aggregating $25,000,000, and such proceedings were thereupon had that the certificates for the shares of the four companies controlled in the name of the Chicago Gas Trust Company and held for the Fidelity Insurance Trust & Safe Deposit Company were exchanged, the Fidelity Company surrendering the cer- tificates it held for new certificates to an equivalent amount made out by the four principal companies for the number of shares by them severally issued to the Chicago Gas Trust Company in the name of the Fidelity Insurance Trust & Safe Deposit Company. The Fidelity Company thereupon issued to the stockholders of the Chicago Gas Trust Company its own trust certificates against the shares of the capital stock so in its name, the certificates for which it held. The total amount of the cer- tificates thus issued by the Fidelity Insurance Trust & Safe Deposit Com- pany was $24,885,100. The Fidelity certificates recited that each holder was entitled to the proportional part of 250,000 undivided shares in and to the several Chicago gas companies deposited with the Fidelity Insur- ance Trust & Safe Deposit Company under the several deeds of trust. In the meantime the Chicago Gas Trust changed its name to the Chicago Gas Company, and after the arrangement for the protection $f the stock- holders of that company had been made with the Fidelity Insurance Trust & Safe Deposit Company, as indicated, the Chicago Gas Company, for- merly the Chicago Gas Trust Company, was dissolved according to law. The situation remained in this condition until April, 1894, when another Attorney-General of the State of Illinois filed a bill against the Fidelity Insurance Trust & Safe Deposit Company, setting up that the arrangement above described was illegal under the laws of the State of Illinois, and an injunction was issued by the circuit court of Cook county, restraining the payment of any dividends to the Fidelity Insurance Trust & Safe Deposit Company. This step again necessitated the immediate reorganization of the properties. Thereupon a reorganization committee was formed and all of the certificates issued by the Fidelity Insurance Trust & Safe Deposit Company of Philadelphia were exchanged for cer- tificates of the Central Trust Company of New York, preliminary to such reorganization. Thereafter the Legislature of Illinois passed an act gen- erally known as the Gas Consolidation Act, in June, 1907', which provided 11 in substance (1) that all gas companies now organized, or hereafter to be organized, were authorized to sell, transfer and lease all their property, rights and franchises to any other gas company doing business in the same city; (2) that any gas company now organized, or hereafter to be organ- ized, doing business in the same city, could consolidate and merge into a single corporation which should be one of the merging or consolidating companies; and (3) that all companies should be empowered to manu- facture and distribute gas for fuel purposes and to distribute natural gas. Pursuant to this statute a consolidation was effected of the seven com- panies previously mentioned. The legality of this act was subsequently sustained by the Supreme Court of Illinois in the action by the State's Attorney of Cook county to contest its validity and constitutionality. In order to carry out and make possible the merger under the above act it became necessary to increase the capital stock of the Peoples Gas Light & Coke Company from $4,000,000 to $25,000,000. As already explained in the preceding paragraphs, there were outstanding at this time certifi- cates issued by the Fidelity Insurance Trust & Safe Deposit Company which were listed upon the stock exchanges of the countVy aggregating $24,885,100. There were also outstanding some shares of the capital stock of the various four main companies, which had never been acquired by the Chicago Gas Trust Company, nor brought within the terms of the trusts with the Fidelity Insurance Trust & Safe Deposit Company, amounting to $44,300, and the difference between these amounts and the $25,000,000 of the capital stock as increased was turned into the treasury of the Peoples Gas Light & Coke Company. The basis of exchange of the stocks of the four principal companies for the shares of the Peoples Gas Light & Coke Company as increased was the subject of active and long-continued negotiation among the several committees representing the stockholders of the various companies to be merged under the consolidation act and the reorganization committee. The sharess of some of the companies were valued considerably higher than those of others and the final settlement was made upon a basis pro- viding for the exchange of the stock of the various competing companies for stock of the Peoples Gas Light & Coke Company, according to the esti- mated or known market value of the shares of each company. The bonds of the consolidated companies were all assumed by the new corporation, which was authorized to issue $40,000,000 of 5 per cent refunding bonds, of which $29,046,000 was reserved to retire prior lien bonds of the constituent companies as follows : First Mortgage 6% Bonds of The Peoples Gas Light & Coke Com- pany, dated November 9, 1874, and due November 1, 1904 $ 2,100,000 Second Mortgage 6% Bonds of The Peoples Gas Light & Coke Company, dated December 5, 1874, and due December 1, 1904. . 2,500,000 First Consolidated 6% Bonds of The Peoples Gas Light & Coke Company, dated April 1, 1893, and due April 1, 1943 4,900.000 First Mortgage 5% Bonds of the Chicago Gas Light & Coke Com- pany, dated July 1, 1887, and due July 1, 1937 10,000,000 First Mortgage 6% Bonds of The Equitable Gas Light & Fuel Com- pany of Chicago, dated 1885, and due July 1, 1905 2,000,000 First Mortgage 5% Bonds of the Consumers Gas Company, dated December 1, 1886, and due December 1, 1936 4,246,000 First Mortgage 7% Bonds of the Illinois Light, Heat & Power Com- pany, dated November 18, 1885, and due November 1, 1915. . . 500,000 First Mortgage 6% Bonds of the Lake Gas Company, dated July 1, 1885, and due July 1, 1915 ' 300,000 First Mortgage 5% Bonds of the Chicago Economic Fuel Gas Com- pany, dated January 2, 1893, and due January 1, 1916 2,500.000 Total $29,046,000 Since August, 1897, no bonds have been sold or shares of stock issued by the Peoples Gas Light & Coke Company except for an equivalent amount in cash, less such discount upon the bonds sold as the condition of the money market has from time to time required. On January 10, 1898, the Hyde Park Gas Company and the Mutual Fuel Gas Company were merged with the Peoples Gas Light & Coke Company and under the agreement of the consolidation there was issued by the Mutual Fuel Gas Company, and guaranteed by the Peoples Gas Light & Coke Company, $5,000,000 of 5 per cent bonds. In the following year the Calumet Gas Company was included in the merger and under the agreement of the consolidation there was paid for this company $500,- 000 to be used in retiring an equivalent amount of that company's bonds, leaving outstanding bonds to the amount of $250,000. The capital stock of this company and also the stock of the Hyde Park Gas Company and the Mutual Fuel Gas Company were surrendered and cancelled. The Mutual Fuel Gas Company had been manufacturing and dis- tributing a fuel gas which proved very dangerous in operation. It was an odorless product and its escape could not be detected by the sense of smell, with the result that many accidents occurred caused by the escape of this fluid. It became necessary to adopt the manufacture and dis- tribution of a different kind of gas, and certain of the owners of the Mutual Fuel Gas Company thereupon organized the Universal Gas Corn- Company and obtained a charter from the State and an ordinance from the city of Chicago in August, 1894. The Universal Gas Company erected a large plant near Thirty-first street and the Chicago River in the city of Chicago, and by means of large mains conveyed the gas there ID aim- 13 facturecl to its plant in Hyde Park, from whence it was distributed to the patrons and consumers. This company supplied a few consumers along the lines of its transmission main, but practically its only business was the manufacture of gas for distribution in Hyde Park. The Universal Gas Company was acquired by individuals largely interested in the Peoples Gas Light & Coke Company, but was never merged into that company, and finally in 1906, it plant was leased to the Peoples Gas Light & Coke Company and has since been operated by that company. The Ogden Gas Company was incorporated in 1895, being authorized by the city to construct and operate gas-works upon and under the streets, avenues and public places of the city of Chicago for the purpose of manu- facturing and distributing illuminating and fuel gas. Its franchise grant extended over a period of fifty years. The lighting quality of the gas was prescribed and the price therefor fixed at 90 cents per thousand cubic feet, with a rate of 75 cents per thousand cubic feet to the city of Chicago. Under the ordinance the company was required to pay the city annually 3y 2 P er cen ^ of its gross revenue from the sale of gas. The plant was constructed by a corporation representing the same interests as those to whom the franchise was granted. This company was prominent in a number of serious rate wars which finally culminated in the agree- ment by the Peoples Gas Light & Coke Company to lease the property, with the consent of the City Council of Chicago, and at a specified date in the future to purchase the property and redeem the bonded indebt- edness. This agreement was the result of a rate war with the competing company, the Mutual Fuel Gas Company, which had leased the mains of the Peoples Gas Light & Coke Company, and was effected after the pur- chase of a controlling interest in the Ogden Gas Company by a syndi- cate friendly to the Peoples Gas Light & Coke Company. The Ogden Gas Company has since been conducted and operated by the latter com- pMiiy. GROWTH OF BUSINESS. Since the consolidation of 1897 the growth of the company has been very rapid. With the elimination of the ruinous competition and all the expense incident to the numerous rate wars and litigation, the position of the business under a single management has steadily improved. New uses have been found for gas and the consumption has increased enor- mously. Since the above date the number of meters installed with con- sumers has been increased from 230,293 to 522,536; the number of gas stoves has increased from 20,343 to 305,279 ; the mileage of street mains from 1,584 miles to in excess of 2,500 miles; while the earnings from the sale of gas have more than doubled. At the same time the capital Jiabilities of the company have been increased to $35,000,000 of stock and $40,096,000 of bonds. The plant, which at the time of the merger con- 14 sisted of a number of scattered manufacturing stations, has been greatly improved by the better location of stations for the most economical manu- facturing results. Several of the stations obtained at the time of the consolidation were not in the best of physical condition and had appar- ently been constructed to satisfy the immediate needs and at as reason- able a. cost as possible in the hope of ultimately disposing of the prop- erty. Some of these stations have since been dismantled and replaced by modern producing units, while all the stations, both those used for manufacturing and for pumping purposes, are in excellent condition and contain the most modern and efficient apparatus. The capacity of the stations has been greatly enlarged to meet current needs and pro- vision has been made for extensive enlargements of the plant to supply capacity for future requirements. The following tables show the condensed income accounts, the con- densed balance-sheets and the plant statistics covering the period from 1898 to 1910, inclusive, as contained in the published annual statements : 15 2 Q " H OQ fe iOCOiO(MCOC001COCOCOCS|r-TjH cicooicoi-ioo. OS C <* T)H i i 00 >C t> t>- *>~i~bV i-H CO OS "ti I>- ! '^ ^f o ~ W t^-CO OS TH CO ^^ C^J ^^ CO 1"^ OiCSiO' ICO i-HOOOt^iO O^ '^ t>* *-O CO 1^* 1>- CO ^H |> "^ lO C^ ^H : ooo : o o O ^- O O O 00^ .00 "* rt* t^ O O ^ O -H CO O CO CO C^ I-H l>. OS IO CO IO CO : . : . : . . : :.S : . . c^ i i_ o^ o_ c^ i-^ oo i-^ o^ oc c^i c^i ^~ co co i i 00 CO O i i to O iO !>. Ci ^- iC cC ^ OO lOr-i CO CO 00 l>- e : 8 I g *!. 8 8 O Q C C O ^ 00 O O O 00 O CO Tt c^i -^ co t>oc JN, ^o to ^"^ "^ ^ -O ^3 18 885 :S (M i i i i b- OS Tt< ] CO O OO (M CO ii t^ OS CO i-H CO CO oo" i-T co" co" oo" os oo co ** co Tt< co ; r- 1 OO - :S :S PQ OO CO T I i-Ht^-QO "os :os O OS t^ O O O5 O05OO O - 'oo 'CM t>- ^ co I s t~- 10 COt-iO GOGOt^ CO O i I CO OS (M . - :g : ~ : : OT- o -en -10 g -1C -CO CO i i CO * t ' Tt* GO rH IO CO C<) - O CO OS oo" io~ - 0) ^ ;aE iSJ 1 *rt O H^ 5 15 w 4S 20 SED BALANCE SHEETS. 1898-1910. oco o co *~ i-H O IOQ i-l 10 ^f I-H Ol> CO OO CO **<* CO CO t~ C^J t^ OC O rt* i i Q O O COCO COCO - CO o i og ^f l>- lO i i CO OS O^ ^H "cc"co"~oo"co" $3, 82 = " * iil-va^leS S^^Qoboow 21 00 COr- OO O O ^t 1 ^t 1 IO CM O O OO ^^ oco CO i I t^ t-- l>- OO ~* rf cc (M Q W 02 525 O Q tO CO CO CO O O to i-H * i i CO CO CO CO CO t^ -^ t^ lO OWO'-HC s ^iOiOTti'TjHT (C* Tt^ OS 1-H ^-H CO CO T~< ^^ OS t*** io Tj OS CO i> -COC s -C^COOOt>-OOOOSCOi i CO 1^ C<1 CO CD CO CO CO >OOO"*COrH 00 I OS t^ CO ^ CO rH i I CO CO CO CO CO . CO !> tO rH to O CO O ' ^- oo" ; cb'oci'cb'os'cb'co'cd" o^ ooco^ J-H ioocoto^t o : I-H ^H rH O rH T^ OO OS CO "*vr O CO CO CO CO TjH ' 1C CO CO i I CO t^ i-H. rH T^ T^ CO tQ CO *O OO t^^tiCOCOiO IO CO CD CD (M t t^ CO CO (M OOC<|iOCOOO'^t | COl>-O T t l OSOO>^l>-iO CO OO OS ^O CO ^O rH OS OS OS CO OO OS rH CO lOCDOOrHCOCOrHOSt^CO o ^i :W ,|J 53 -^ . . gj o^g^ :1 ^ ,H '* a ^2 OJ -X ""^^ ^ o gg 5 <-| QJ fe S^I5 35888 1 5| 8 & S ^(N^OS^ g ^ CO i-H 1 CO CO CO 1 Hi OS ^ 8 O CO (M g tOCOrH 5 s0 8 11 i CO coos : n? CO T 1 CO !> CO O5 CO CO * O5 00 CO c^co 05O i l>- 1^ O 1 CO ^H ^O iO ^^ C^-l TH OO >O CO * 1 CO i i - CO OO O CO CO O5 CO t^ (M CO - OC^IOOO C^O5 ^ i i iO ^ 5 Tfl i 1 t^ O OO CO Tt< C O CO CO CO |2 s t^ t>- CO OO ** iO iO CO C^l '~H OO IO CO CO T i CO -^ C^ CD O5 i I O co~ co^oo"! ToT ' (N"^ c^Tj>T O5~ d r-4 CD CO CO . sss O5 CO (M ; ! ; ; ; '. '. '. '. '. '. '. CO 1 M PH 1 i : co oo iO CO i i : : : : : : : : OJ 00 ^ S 10 olc^ 05 i i i t OO CO ^ cO CO 00 CO >< "s 1 1 1 (M^CO CD."- 1 ~ g . . . . . . . . . . . . ^ PM c . . . . . . . . . . . . '^-( . ... .... . . . . to t "c8 ooSSH^ Sco ooo i p !> ^^ CO "^ *-O t^ t^ 1 * O5 CO ^oo" ^ -g LO O^ *-O ^O CO CO CO (M CO O OO CO C 005 IO !O CO> at 1 -3 . m 5 : : : : : : : : : : : : >, g ^ .00 . . S 2 o S* JS 5 ^J r^ .^\ i M '^ 2 PH d, cO 0, ^5 ^O PH t 2 5s : : 00 * n 2 : ' , ii "' -4- J*' !' 2 ds ' : ' ' * o3 fl SR F^ rj CQ ^^ *g S g Land Add 12% for Overhe Buildings Station Equipment . . . Holders Distribution System. . Miscellaneous ;j ^ 0,0 T3 Total for all Iter Discount on Securitie 1, o S ;| | ; a | II | 3 fl'* O Si-* 3 . IO rt aj cj^ "O fl'S, ^ *- ^ Q ^2 2 ^oaj'^ *^ M fe ^ S *5 2 ^ v-\ >r f= S i > i lOCOiCiCOOGOO co~ oi o" o' t^.~ ic~ **' co~ C' "^ ^H O^ '^ ^O "*^ "*T* 8-" " :8SSSS8S8 i ^i co 5 5-O 5 O 5 O i IGOCMOQO' i CO 1C CS M OO-^t^OOO^^H^O C^OOOOC5C^(MI>C;M of i-T ccf c^T co" o" co" co~ ->rT t |||||||g ^ c cp ic c o c c< !>" LOOCO'-HOC^'t^- T-H" co" iO~ (XT O" . 1C CO i-H II 000 C O 88888 57 The figures contained in these tables were taken largely from the company's own records, although certain changes were made after con- ference with its engineers and additional data supplied by estimate. It will be noted that the value of the physical property in the hypothetical plant is not the actual physical property which would be required for the assumed output at the end of the period of development, but instead is more nearly equal to the value of the property of the present plant at the beginning of the period. Since whatever construction would be necessary during the development period must be added to both the present plant and the hypothetical plant and therefore would not affect the result, the amount has been omitted from the calculation. Beginning with a total investment value of $58,800,000, the tables show the investment to-day, the amount of the total available capital not used in the enterprise on which a return of 4 per cent is assumed, and that amount which is withdrawn for construction during the year on which 2 per cent is allowed for one-half the period, or its equivalent of 1 per cent on the amount withdrawn for the entire period. The income from sales of gas is placed at 85 cents per thousand, which is the present rate. The operating expenses during the first three years would natu- rally be somewhat higher per thousand cubic feet than for the same years in the present plant. Particularly during the first years it is unlikely that the plant would be operated at capacity. The machinery would be new and require frequent adjustment and operators would have to be trained in their duties. It is assumed in the tables that the hypo- thetical plant would be placed in operation September 1, 1912, and that for the four months of that year the operating expenses would be 65 cents $er thousand. During the second year a cost of 55 cents is assumed, 50 cents for the third year and 48% cents per thousand for the remaining years, which last rate is that shown by the company's books at present. Depreciation and tax estimates are based on the prop- erty in use for the given year and reach at the end of the period sub- stantially the same figures as those in the going plant. By adding the interest from the unemployed capital to the net income from operation for the year the table shows the total income for the period, the present worth of which is determined on a 5 per cent basis. The difference between the income of the going concern and the income of the hypo- thetical plant for the same year shows what going value has accumu- lated. The sum of these yearly accumulations amounts to $12,935,000, as against the assumed going value of the present plant of $12.800,000. It would appear therefore from the tables that the correct value was somewhere between these two amounts. This method, while it arrives at a going value which does not appear to be very unreasonable, is open to criticism and apparently the greatest reliance can not be placed upon the result in this case. While no single 58 formula can ba followed to show exactly what constitutes the proper allowance for this purpose, it is believed that on broad principles of justice a consideration of both profits and losses should be recognized. There is no such recognition in this method. Neither does this method recognize the rapidity with which the business of the company was actu- ally developed, nor any extraordinary expenditures or changed condi- tions, such as those due to competition or unfavorable legislation, either municipal or state. The conclusion is arrived at almost entirely on a basis of assumptions which are largely independent of local conditions confronting the property at present, or under which it was developed in the past. The calculations begin by assuming that which it is sought to prove, and the correctness of the computations lies in arriving at a final value which justifies the original estimate. The result is also affected by the amount assumed to represent the present physical value. If such value is high the going value arrived at will be reduced. In justice to this method it should be said that an extensive investigation of the company's records would show information and units more nearly correct than the assumptions which were used. It should also be stated that somewhat different figures instead of those assumed would not greatly affect the result, since they would apply equally to both proper- ties. The real purpose of this table is to show the cost of developing the business, a calculation which, if used as the basis of valuation, should take into consideration other factors than those embraced here. While its application under certain conditions may lead to correct values, at which times it may be the best of the several methods available, it is no more likely to give correct results under specific local conditions than is the application of average cost units to result in a correct physical value in a particular appraisal. This method of arriving at going value pos- sesses some merit and like those previously discussed was considered in arriving at the final amount, but it is not sufficiently proof against criti- cism to warrant the adoption of its results without additional data. Whatever single method should be followed for determining going value, if there is such a correct method, it is believed that the final cal- culation should be tempered with a consideration of fairness to all inter- ests. The amount involved representing many millions of dollars and the effect on the final rate schedule both as regards the investor and the public requires that consideration be given to equity as well as to mathe- matics. A high going value means a large investment upon which returns must be allowed and this requires a high gas rate ; a low going value, or no allowance for going value at all, means a smaller interest requirement and consequently permits a low rate for gas. It is therefore possible to secure a very low gas rate if the value of the plant is placed sufficiently low, but court decisions are firm in defining particular elements of value. Capital does not obey the mandate of public or private opinion unless 59 such opinion is founded in justice and sound economics. To be correct in the final analysis the valuation arrived at must recognize the clear rights of capital invested in public enterprises, but it must not lose sight of the rights of the public. There is no question but what corporations engaged in public service are by virtue of their character invested with valuable rights and privileges and in return charged with well-defined duties. The public, by virtue of whose grant these corporations exist, is entitled to the proper discharge of their duties and likewise owes certain obligations. In most instances these duties and obligations are clearly defined by the courts. In some instances where the decisions are indefi- nite, or the subject has not been adjudicated, political economy supplies what the law omits. Where the courts have defined the basis of valua- tion with respect to the different classes of property the allowances in this report have followed such cases. Where the law is not definitely settled mooted questions of valuation have been decided upon a basis which appeared reasonable and just in the premises. With these prin- ciples in mind it is believed that the going value of the Peoples Gas Light & Coke Company can best be determined from its own records and history. A public service corporation is entitled both by common law and by statute to a reasonable return upon its investment. If a given rate schedule yields more than a reasonable return to the investor it is an injustice to the public and the rates should be lowered. If the rates fail to produce sufficient revenue the investor is not receiving that return to which he is entitled by law. If he has received a reasonable return each year on his investment from the beginning of the enterprise justice would seem to be satisfied, at least as against the public, without allow- ing any increase in the value of the property which produced that income to represent going value. If the investor has failed to receive each year that amount which constitutes a reasonable return he should be permit- ted to charge rates sufficiently high to reimburse him for early losses, or such losses should be considered as costs of developing the business and their addition to the value of the physical property permitted. Such additions, from an equitable standpoint at least, may be said to consti- tute the correct going value of a public service corporation. The applica- tion of this doctrine to the facts in this city and the logic upon which it is founded is shown in the following discussion. New plants seldom yield a return on the investment during the first year of operation. In fact, it is more likely to require a number of years of continuous effort to establish a business on a firm basis, while the history of the gas industry clearly shows that many of such plants have not reached a position of profit to the investor until many years after their construction. During the earlier years a large amount of money is required for development purposes. Where a corporation is in posses- 60 sion of adequate capital, expenditures of this character can be made without serious loss to the stockholders, but where, as is almost univer- sally the case, the business is developed out of the earnings at the expense of interest and dividend payments, a deficit will result. When a cor- poration is earning less than its operating expenses, interest and depre- ciation, it is absolutely necessary that the stockholders make further payments for development purposes. Where a small surplus is earned, such amount may be used for development purposes, but it is at the expense of the stockholders ' rights unless such development requirements are recognized in the capital. If the development cost is not met out of the earnings it must be met directly by the sale of securities, which becomes a liability against the plant. The amount by which the earnings fail to meet the operating expenses and the return on the investment creates deficits which constitute the cost of building up the business. Just as supervision, interest and insur- ance during construction are expenditures to be added to the construc- tion cost of the plant, so the deficits representing the amounts by which the stockholders have failed to receive their reasonable return are costs to be added to the value of the physical plant in order to show the com- plete investment which has been made in the industry as a live, going concern. The cost of developing a gas industry consists of expenditures for advertising, soliciting, demonstrating, the sale of appliances at less than cost, free house piping, and, in some instances, free gas for a limited period. Concessions in rates below actual cost are also given to stimulate a large and general us,e of gas. Development expenditures may further be increased through the failure of the plant to earn even its current operating charges for a number of years, when the stockholders must supply additional capital to keep the plant in operation. Such expendi- tures are additional investments upon which the stockholder is entitled to a return as well as upon expenditures for physical plant. The investor has a right to expect reimbursement for such losses. They are legitimate costs of business. The public has a right to exclude from the valuation of utility properties upon which it is compelled to pay reasonable returns all amounts representing unnecessary expenditures, excessive discounts on securities, promotion fees, expenditures due to poor management and extravagance and errors of judgment which the exercise of reasonable care and foresight might have avoided. It, however, can not avoid pay- ments on a valuation consisting of necessary expenditures honestly made, and the cost of operating the plant until it reaches the point where it returns the reasonable interest to which the investor is entitled by law. The cost of securing a paying business can best be computed from a cost analysis of the annual surplus and deficit shown by the records. Capital is not unmindful of the uncertainties of business development. 61 Money seeks the avenue of greatest returns consistent with security and stability. A return of 5 or 6 per cent in a safe investment will attract capital, while a 10 per cent return which is accompanied with a consid- erable element of risk will find little encouragement. If, however, the return which is considered reasonable in any instance in view of the risks inherent in the venture, can not be secured until several or many years from the date of the original investment, and additional capital must be provided in the meantime upon which no return will be allowed, utility development will be retarded and, in some instances, it will be indefi- nitely postponed. To prevent the progressive development of business results in hardships to the customers and to the public generally and would tend to keep operating unit costs at a higher level. It would be unjust to the stockholder to deny him a return upon his money actually and honestly invested. A utility has no legal right to charge more than a reasonable rate, and if this is not to be computed on the development of the business and unavoidable losses, as well as on the investment in physical property, the reasonable rate allowed in after years when the industry has reached a stable basis will not be a reasonable rate on the amount actually invested. Losses need not be considered in the valuation, provided a rate of return is permitted which includes an allowance over and above the rate deemed reasonable, which will serve to reimburse the stockholder for his early losses. It necessarily follows that where the rate for service must be reasonable, and as such is subject to regulation by law, the early losses must be regarded as a part of the investment until restored to the stockholder by means of a higher rate of return on his investment. Equity admits of no other disposition. As an offset in favor of the public, equity requires that if the deficits incurred in building up the business are to be regarded as a part of the investment, any surplus earnings, over and above a reasonable return on the legitimate investment, should also be taken into consideration. If the utility has earned in its later years a large profit because of favorable rate schedules, this excess above a reasonable return should be considered as a reimbursement for some of the early losses. The rule of justice should work in both directions. This manner of arriving at the fair present investment value to be used as the basis of rate adjustment was suggested by the court in the case of Mo., Kan. & Tex. Ry. Co. v. Love (177 Fed. 493, 496) as follows: An established railroad system may be worth more than its original cost and more than the mere cost of its physical repro- duction. It has passed the initial period of little or no return to its owners which, of greater or less duration, almost always follows construction, and is not infrequently marked by de- fault and bankruptcy. The inevitable errors in its building which finite minds and hands can not avoid have been measur- ably corrected, time and effort have produced a commercial 62 adjustment between it and the country it was intended to serve, relations have been established with patrons, and sources of traffic have been opened up and made tributary. In other words, the railroad, unlike one newly constructed, is fully equipped and is doing business as a going concern. It has attained a position after many experiences common to railroad enterprises which entail loss and cost not paid from current earnings, and which correspondingly make for value. This method was perfected and extensively applied by the Railroad Commission of Wisconsin in the leading utility rate cases which have come before that body. The rule was stated in Hill, et al, v. Antigo Water Company (3 W. B. R. C., 623), as follows: In other words, the plant was losing money while it devel- oped its business. These losses or deficits had to be met by the owners and may be said to constitute the additional investment necessary to build up the business. These deficits therefore represent the cost of the business in very much the same way as that in which the cost of construction represents the cost of the physical plant. In fact, the one appears to be as legit- imate and necessary a part of the cost of the enterprise as a whole as the other, or of that cost upon which a reasonable amount for interest and profits should be earned. This appears to hold good at least until the deficits or the invest- ments occasioned by them have been made good and restored to the investors, either through surplus profits or in some other form. Such treatment of the cost of building up the business is equitable as between the investors and the con- sumers in this case. In the long run such treatment or its equivalent to the investor is also necessary in undertakings of this character in order to obtain the capital that is required. The same principle was adhered to in re Investigation of Menom- onie and Marinette Light and Traction Company (3 W. R. R. C., 778), and in the case of State Journal Printing Company vs Madison Gas & Electric Company (4 W. R. R. C., 501). The logic of this reasoning has recently been approved by the Supreme Court of the State of Oklahoma in the case of the Pioneer Telephone and Telegraph Company v. Westenhaver, in the following language : FCAV industries, if any, . . . can be made self-sustaining from the first day of their operation. The uncontradicted evidence in this case discloses that appellant's plant for the years preceding the first hearing, failed to produce revenue sufficient for operating expenses, current repair and lay aside an amount for depreciation. During the time of development there is a loss of money actually expended and of dividends upon the property invested. How shall this be taken care of \ Must it be borne by the owners of the plant ? Or by the initial customer? Or shall it be treated as a part of the investment or value of the plant constituting the basis upon which charges 63 shall be made to all customers who receive the benefits from the increased service rendering power of the plant by reason of these expenditures? It seems that the last solution is the logical, just and correct one. If rates were to be charged from the beginning so as to cover these expenditures and earn a dividend from the time the plant is first operated, the rate to the first customers would be in many instances, if not in all, so exhorbitant as to be prohibitive and would be so at the time when the plant could be of least service to them. On the other hand, the public can not expect as a business proposition or demand as a legal right that this loss shall be borne by him who furnishes the service ; for, investors in public-service property make such investments for the return they will yield ; and, if the law required that a portion of the investment shall never yield any return, but shall be a total loss to the investor, capital would unwillingly be placed into such class of invest- ments ; but the law, in our opinion, does not so require. Pri- vate property can no more be taken in this method for public use without compensation, than by any other method. When the use of the property and the expenditures made during the nonexpense paying and nondividend paying period of the plant are treated as an element of the value of the property upon which fair returns shall be allowed, then the burden is distributed among those who receive the benefits of the expen- ditures and the use of the property in its enhanced value. The above method of computing the going value and the derivation of the final investment value has been described at length because of the reliance placed upon the conclusions which it shows. It is believed to be the most equitable solution of the problem of going value, since by this means the investor is protected in the development of the business, and the public is insured against the dangers of excessive valuations. This method of computation is not advanced as being infallible. On the con- trary, there are many cases where this reasoning could not properly apply, either because of specific conditions or the absence of financial data covering many years of operation. If every yaluation could be solved by the application of a single rule, rate adjustments would be simple indeed. At no time can the exercise of judgment be entirely eliminated. Each case must be analyzed on its own peculiar facts. In this particular case this method of reasoning is believed to be proper. Reverting to the discussion of franchise values and the cost incurred by the company in developing its business and the expense due to the purchasing of competing plants, it was found that the fair value of the plant in 1897, including physical valuation, working capital and the going value, was approximately $39,000,000. By applying the above rea- soning to this valuation and by an analysis of the company's profits and losses since 1897, it is possible to determine the fair investment value of the plant at the end of any subsequent year. This computation is shown 64 by a progressive statistical analysis based on the company's records and embraced in the accompanying table. The table begins with the valuation of $39,000,000, this value includ- ing, as above stated, the physical value, the working capital and the allowance for going value. Seven per cent is deemed to be a reasonable rate of return at the present time, but in the historical treatment of this subject, an income rate must be used which is reasonable, not so much under present conditions but reasonable for the year when it is used. If seven per cent is reasonable to-day, it is believed that eight per cent was reasonable some years ago. The table is, therefore, based upon a rate of return of eight per cent for the years from 1898 to 1906, inclusive, and a rate of seven per cent since that date. The yearly requirements under these rates are shown in the second column. Column three shows the additions to the physical property and to the working capital, and in the following column is shown the annual requirements for earnings on these additions. Since the additions are extended over a period of twelve months, the interest rate is applied only for six months, or one-half of the time, since very little construction w r as completed during the first month and practically all of the investment of this character was com- pleted in the twelfth month. The next column shows the necessary operating expenses, including depreciation. The next column shows the total of the foregoing columns, which is the total amount which the stock- holders put into the business during the year, or which they would have put into it if the earnings would permit, and if the earnings were insuffi- cient indicates the amount of losses which accrued. Against this total there is shown in the next column the gross earnings, or the amount which the stockholders took out of the business. The deduction of those earnings from the total cost contained in the preceding column shows in the last column the cost of the plant, or its investment value at the close of the year. According to this table, the investment on which the stock- holder is entitled to a. reasonable return is equal to $60,933,630. There should be added to this total the amount of $916,249, representing con- struction work practically completed and partly in service but tech- nically not yet turned over to the company, and for which payment will not be made until final certification from architects as to the compliance with all specifications. With these adjustments, the investment value of the entire property of the company may be said to be $61,849,879. The following table contains the data above outlined : 65 10 t>- ^t 1 O3 O^ lO ^ CO O CO C^l C^l Ir^ GO CO CO GO CO '^ CO t > * GO ^O lOCOCOl>-OGOOCOOCOC5lCCO t>T GO" cT cT i-T T-T c^T of i-T co" co" -rjT 10" M^bcp 5 15" 8.3 OH 71 It* .3 OH!| Q !>. < *fOCO"'*iOCO>O IO t T-H Tfl CO Oi l>- CO O ^ l *> (M O >* i _^ia_j CO^'^io'lO^CO"] ^o^o^ O CO to GO I a itfjffrS.a llll'a'a T cf 66 PAVING. Although strongly argued by the company, no allowance has been made in the above total to cover the value of the pavement over the company's distribution system. It was claimed that since the valuation for the purpose of this investigation must be the reproduction cost, the company should be given credit for the value of the street pavement over all of its mains and services, even though the company paid no part of the cost of such pavement, since if the plant were to be reproduced as of this date it would be necessary to cut through such pavement for the purpose of laying the pipes. The facts show that on most of the streets the mains were put down before any pavement was laid by the city, and in many other streets the mains were laid at a time when the city was replacing the pavement, so that in either case the company was put to no expense because of the street improvement. Where, however, the company did cut through the pavement and replace it as required by the city ordinance, the cost thereof has been added to the cost of the mains and is now included in the valuation tables. The purpose through- out the appraisal of the distribution system was to allow a valuation where the company incurred pavement expenditures and to exclude any allowance for pavement laid and paid for by the city. The pavement over the company's present distribution system, of which the street mains alone are nearly 2,600 miles in length, is rea- sonably worth $6,000,000, but this is the investment of the people of Chicago and not the investment of the gas company. Even if the repro- duction theory is to be carried to the utmost extent, it does not follow that the same distribution arrangement would be followed and that the same number of pipes would be placed in the streets as they exist at present. It is probable that much of the distribution system would be placed in alleys and parkways where the construction expense would be very much reduced. If, under the decisions of the courts, the above amount, together with the additional reproduction cost of cutting through all the pavement, must be allowed in the valuation, the investment value and the interest requirement will be very much increased. In the leading utility rate cases the court has failed to hold specifically that the value of the pavement over the mains not paid for by the company must be included in the plant values. In all such cases the paving item was very large, and if it were intended to include it in the valuation, it is reason- able to assume that the courts would have so stated. On the other hand, to exclude such pavement valuation has received the endorsement of the federal court and public service commissions. Every legitimate expendi- ture in adapting the utility to the demands of progress and community growth is a proper charge to construction, and as such the investment therefor is entitled to participate in the distribution of earnings from 67 operation. If expenditures for pavement are incurred by the utility in response to assessments levied by the city or are incurred in cutting through the pavement for construction purposes, these are proper capital charges. It does not seem reasonable, however, that a utility should be permitted to capitalize expenses for municipal betterments in which it has not participated, and when the benefits which accrue to it are remote and incidental. To do so would be to compel the customers for utility service to pay increased rates because of their civic progressiveness. For the above reason the city's expenditure for paving the streets over the company's distribution system is not regarded as a gas company invest- ment in rate-adjustment proceedings ; regardless of the value which may exist in a commercial sense because of such improvements. To include the cost of cutting through such an amount of pavement and its subse- quent replacement would seem to be carrying the reproduction cost theory further than justice warrants. VALUATION CONCLUSIONS. The above detailed analysis leads to the conclusion that the invest- ment value of the property owned by The Peoples Gas Light & Coke Company at the close of 1910 was approximately $61,849,879. In arriv- ing at this amount no allowance has been included for the value of the perpetual franchise or for the value of the pavement placed by the city over the company's distribution system. The above total includes the value of all the physical property, both that used and useful in the com- pany's business and the commercial holdings, together with its necessary working capital and an allowance for going value as defined in this report. Since the purpose of this inquiry is to determine a reasonable rate for manufactured gas, it is necessary to apportion such investment value over the utility service and the commercial service. The utility service at present, as explained, really consists of two distinct services, namely, the sale of manufactured gas, the heating and lighting standard of which is prescribed by ordinance and for which the present rate is 85 cents per thousand cubic feet, and the sale of natural gas sold in a restricted area of the city at a rate of 50 cents per thousand cubic feet. This necessi- tated the separation of the utility property over these two departments of service. The general office building and the real estate not used in the gas business has been excluded from the rate analysis. The company occupies only a portion of its new office building, the remaining space being rented for commercial purposes. For the purpose of this anaylsis it is optional to consider a portion of the above building as a gas invest- ment or to exclude it entirely and to regard it as a commercial invest- ment, at the same time making a charge in the operating expenses for rent based on the space now occupied by the company. This latter 68 alternative has been adopted and the cost of the building is, therefore, excluded from the investment upon which the gas service must yield a reasonable return, but there has been included in the operating expenses the proper rental allowance. Deducting from the total of $61,849,879 for 1910 the office-building investment, the commercial property and the natural gas investment, and adjusting the total for the end of 1909, the period under investigation, the amount on which the rate of return must be applied in the computation of a reasonable rate for manufactured gas is $51,575,678. AUDIT. The books of the company were audited for the year 1909, the period covered by this investigation. In the course of the audit the general ledger containing all the accounts which appeared on the company's trial balance was analyzed in detail and checked with the entries as appeared in the general journal. A trial balance was taken showing the balances January 1, 1908, the total charges and credits appearing on the ledger during the year and the balance as of December 31, 1909. The company's classification of accounts is very elaborate, making possible a cost anaylsis in considerable detail. All the vouchers and supplementary records such as invoices, pay-rolls, store requisitions and work orders, covering the disbursements of the company for the year 1909 were submitted in response to requests made and were carefully examined. REVENUE. The original records of earnings from all sources were checked in detail. The record of receipts from the sale of gas was carried in one hundred and four customers' ledgers containing over half a million accounts. It was impossible to check each of these volumes in the brief time allowed and with the facilities available, and it was deemed unneces- sary to undertake such work. Certain parts of the customers' ledgers were audited in detail and the correctness of the conclusions verified by various checks against the sales and the plant output. In all instances the records were found complete and in great detail. The revenue items appearing on the general books are as follows : GasSales . $13,663,168.01 Tar Sales 130,944.03 Receipts from Pintsch Company 132,579 . 10 Penalties 167,462.09 Interest 113,276.25 Rentals 17,591 . 06 Green Street Rentals 955 . 68 Interest on Securities 2,500 . 00 Arc Lamp Rentals 340,873 . 31 Carbide 870.23 Indiana Natural Gas & Oil Company 40,172 . 18 Miscellaneous Revenue 11,704.57 Total . $14,622,096.51 69 The first and largest item in the above table consists of the following details : Cubic Feet. Amount. Private Consumers. .. 15,804,066,517 $13,435,464.05 City Meters 43,606,200 36,969.79 City Lamps 230.966,918 196,321.89 Private Lamps 344,546 292.87 Miscellaneous Sales 80,000 68.00 Gross Sales Gas. 16,079,064,181 $13,667,116.60 Less Adjustments 3,948 . 59 Net Revenue from Gas $13,633,168.01 Since the object of this investigation is to ascertain a reasonable rate for gas, it is necessary to apportion the earnings so as to show the propor- tion to be credited directly and indirectly to the gas utility department, and the amount which represents income from outside sources or com- mercial transactions which can not properly be applied to reduce the cost of gas. The amount so eliminated from the above total of $14,622,096.51 is $240,353.44 and consists of seven separate items. There has been excluded from the revenue to be applied to the gas utility the amount received from the Pintsch Company. This income consists of rentals paid by the Pintsch Company for the use of a part of one of the company's stations. The amount of the investment of The Peoples Gas Light & Coke Company which has been leased to the Pintsch Company was excluded from the gas utility investment as not being used and useful in that service. Since the investment has been apportioned the income from the rental of the excluded portion is likewise excluded from the earnings. The total amount received by the company in the form of interest is $113,276.25. Practically 90 per cent of this total consists of interest on funds deposited in banks, a large part of which represents the proceeds from bond sales to be devoted to construction purposes. The total inter- est item has been analyzed so as to determine the reasonable income from this source which can be applied as a credit to the gas utility. Such analysis suggested the exclusion from the total of $63,276.25 as being an extraordinary earning. The $50,000 retained as an earning agrees favorably with the ordinary income from this source as shown by the records over a number of years. The rental received from the Green street property has been excluded because such property is not devoted to the gas industry and was also excluded from the plant valuation. For like reason, the interest on securities to the amount of $2,500 was excluded. The receipt of $870.23 from the sale of carbide is a strictly commercial transaction in no way connected with the gas utility, and for this reason has been excluded. There has further been deducted from 70 the total earnings the amount of $40,172.18 received from the Indiana Natural Gas & Oil Company. INDIANA NATURAL GAS & OIL COMPANY. The Indiana Natural Gas & Oil Company is controlled by The Peo- ples Gas Light & Coke Company. It owns extensive pipe lines and pumping stations in Indiana, its pipe lines reaching to the southeast limits of Chicago, where they make connection with the mains of the controlling company. The company has a bonded indebtedness of $6,000,000, which is a first lien on the entire property, and it is capital- ized at $2,000,000, all of which is deposited with the Central Trust Com- pany of New York, the trustee, as additional security for the payment of the bonds. When such indebtedness is paid the stock is to become the property of The Peoples Gas Light & Coke Company. The controlling company under the charter of this company, is now engaged in the dis- tribution and sale of natural gas in a restricted area in the city of Chi- cago. It keeps all the accounts and records for the natural gas depart- ment, renders the bills for such service and collects the revenue. Under the natural gas franchise The Peoples Gas Light & Coke Company dis- tributes through a separate set of mains constructed for this purpose approximately 2,000,000,000 cubic feet of natural gas for fuel purposes. During the year 1909 the controlling company purchased approximately 2,000,000,000 cubic feet of coke-oven gas, which was transmitted to the One Hundred and Tenth street station, where it was purified and dis- tributed, a portion of it being mixed with the water gas and distributed through the manufactured gas mains, while about 400,000,000 cubic feet was mixed with the natural gas and distributed through the natural gas mains. The total earnings from the sale of natural gas in 1909 after making corrections for bad debts and allowances to the amount of $885.50 was $609,004.75. Against this amount there was charged the cost of the coke- oven gas purchased from the By-Product Coke Oven Corporation, the cost of purifying such gas and the gross earnings tax of 5 per cent amounting to $30,417.69 paid to the city of Chicago. After deducting- various other operating charges, there was remitted to the Indiana Natural Gas & Oil Company the sum of $475,000, leaving a credit to The Peoples Gas Light & Coke Company of $40,172.18, which was excluded from the revenue statement above. The sale of natural gas being a service distinct and apart from the manufacture, distribution and sale of gas for illuminating and fuel pur- poses under the present 85-cent rate, all transactions connected with the natural gas service have been excluded from this calculation. The value of the property devoted to the natural gas business is shown in the tables 71 on valuation. In order that the manufactured gas department or service should be charged only with those expenses which it incurs and credited with the earnings from the sale of such gas, there have been excluded the earnings, operating expenses and investment of the natural gas depart- ment. If such service is to be continued, it should bear all the direct and indirect expenses which it incurs, and for the purpose of this investiga- tion must be regarded as a separate service. APPORTIONMENT OF REVENUE. From the above explanations, the revenues of the company for the purpose of this investigation may be rearranged and stated as follows, in which form they are entered in the final income account : Operating Revenue: Gas Sales $13,663,168.01 Tar Sales 130,944.03 Penalties 167,462.09 Arc Lamp Rentals 340,873.31 Total $14,302,447.44 Non-operating Utility Revenue: Interest $50,000.00 Rentals 17,591 .06 Miscellaneous Revenue 11,704. 57 Total $79,295.63 Commercial and Extraordinary Revenue Excluded: Receipts from Pintsch Company $132,579. 10 Interest 63,276 . 25 Green Street Rentals 955 . 68 Interest on Securities 2,500.00 Carbide 870.23 Indiana Natural Gas & Oil Company 40,172. 18 Total 240,353.44 Total Revenue, as per Ledger $14,622,096 . 51 OPERATING EXPENSES. The company 's profit and loss accounts were audited and each account analyzed in detail, ^hile this examination particularly covered 1909, attention was also given to the accounts for the four preceding years and for 1910, in order to ascertain whether 1909 was in any manner an abnor- mal year from the standpoint of operation or whether the accounts for that period contained any extraordinary charges. The expenses as shown by the company's books consist of seven classes which are based upon the chronological steps in the manufacture, distribution and sale of its products. These classes and the total charges for each in 1909 were as follows : 72 Manufacturing Expense $3,601,058. 51 Gas Purchased and Allied Expenses 747,156.81 Distribution Expense 1,367,810 . 05 Commercial Expense 57,569.60 Office Expense 701,683 . 94 General Expense 704,332. 73 Annual Fixed Charges 4,329,381 . 36 Total $11,508,993.00 The anaylsis of these accounts suggested certain adjustments for rate-making purposes, and a detailed study was therefore made of each account in order to obtain the amount which constituted a correct utility operating charge and also the reasonableness of such charges for the purposes indicated. As outlined above, there was deducted from the classified operating expense accounts a reasonable proportion for the natural gas department, and also all maintenance and administrative charges for other departments, on the theory that each department should be self-supporting. Various minor adjustments were made which were more in the nature of transfers from one group to another in order more clearly to show the correctness of departmental costs and also to meet specific operating conditions. The distribution of a number of expense items over construction, operation and maintenance was also changed with a small reduction resulting in operating expenses. There were, how- ever, several changes of greater importance which deserve separate dis- cussion. LEASE RENTALS. The Peoples Gas Light & Coke Company at present control, through leases, the property of the Ogden Gas Company and the Universal Gas Company. These plants have been acquired partly for the purpose of securing their productive capacity to supplement the plants now owned, but more particularly to remove competition in the local gas field. The rental charge under these leases amounting to $580,000 annually is con- tained in the income account as one of the operating expenses, so that the reasonableness of such amount is a matter calling for careful con- sideration. Doubtless, the fact that these plants had an established busi- ness and were in a position to extend it with the growth of the city and the further fact that they were able to compete seriously with the older company, would warrant the payment of a rental charge somewhat in excess of a reasonable return on the fair present value of the physical property. But these facts should not serve as a means for paying through the operating expenses of the older company an amount in excess of a fair rental when all such elements and conditions are given due weight. No appraisal of the tw T o leased properties has ever been made and there is no inventory of their property to be had. The cost of repro- duction must be determined from other sources, especially from such data as is available from capacity measurements and from personal 73 inspections. This course was pursued and an appraisal was made from all the data which could be obtained. The Ogden Gas Company property consists of a gas manufacturing station with a daily capacity of approxi- mately 3,000,000 cubic feet and somewhat in excess of 77 miles of distri- bution mains. The Universal Gas Company owns a large manufacturing station with a daily capacity of nearly 12,000,000 cubic feet and 5% miles of distribution mains. By applying the same unit costs to these properties as were used in appraising the physical property of the lessee company, a valuation was placed on the property covered by the two leases. The amount deemed a reasonable charge for the use of this prop- erty was determined from an allowance sufficient to cover those operating expenditures not assumed by The Peoples Gas Light & Coke Company and a return on the investment amounting in total to $340,000 per year. The rental allowance in the income account has consequently been reduced by the sum of $240,000. DEPRECIATION CHARGE. The provision for depreciation is a proper operating expense and allowance must be made for such a charge in the income account. Every public utility should set up an adequate depreciation reserve to provide against the wasting of assets, charging operating expense annually or at more frequent intervals with an amount representing the estimated depreciation during such period and making a corresponding credit to the depreciation reserve. Maintenance charges should cover only the upkeep of the property or the current ordinary repairs, renewals and replacements resulting through the use of the property or through those casualties which are incident to the nature of the operation and which expenditures are necessary in order to keep up the productive capacity of the plant to its original or equivalent state of efficiency. When, how- ever, through wear and tear, inadequacy, obsolescence, supersession or public requirements, the unit of equipment becomes economically irre- parable the uncurrent or extraordinary repairs, renewals or replace- ments made necessary should be charged to the depreciation reserve which has been accumulated for this purpose through charges to oper- ating expenses. To determine what constitutes a proper depreciation charge it is first necessary to compute the composite life of the plant. The length of life of the various parts of a gas plant vary greatly. Cast-iron mains, for example, have a very long life, while wrought iron mains and serv- ices have a much shorter period of use. Some of the machinery at the station may be used for fifty years. Other portions are consumed through use in less than ten years. The depreciation reserve to be pro- vided must be such an amount as will permit of the replacement of each 74 item of equipment when such step becomes necessary. The composite life of the plant must be determined from a study of the reasonable life in service of each class of equipment. The gas industry is relatively old and much information is available to show the probable life of the differ- ent classes of property. Since the depreciation allowance must provide for all replacements, the adequacy and efficiency of the equipment must be considered as well as the actual physical life. Not all the property, however, is subject to depreciation. Land and working capital, for example, may be excluded from such a calculation as not depreciating in the sense in which that term is here used. The life-table which was used as a basis for the determination of the required allowance in the present case was compiled from the records of manufacturers and utility companies, supplemented by the opinions and experience of those brought into close contact with equipment of this character under practical operating conditions. Local conditions affect the term of life and it is therefore necessary in estimating the deprecia- tion to modify such periods to correspond with the conditions known to exist. Where output affects the life of the property a shorter period must be used if the apparatus is more heavily loaded than under average conditions. Climatic and soil conditions affect the life of the property and the growth of the business may render it necessary to substitute larger types of equipment before the normal life is run. It is also neces- sary to consider the skill of management and the state of repair in which the property is kept, since it is possible through proper handling to materially lengthen the life of the property in service. In preparing the life-table in this computation those various factors have been given due weight so that the assumptions used are deemed to be conservative under present conditions in Chicago. The following table contains the statistical data showing the calculation of the composite life of the prop- erty in question : 75 (M (M Ol >T^ - e as S H'~^ 00 (M CO CO O t>- '^fO I~H ^^ CO ^O CO M a> II 00 IO CO 00 00 t^lOT-Hr-l CO 01 oo~ooio'co >OOt^(N TH "^ CO ^O oo" fe O H O 1 5 >>>> (M i-H 1 I bCbCbChChCbCWJhCbCbC 76 In calculating the composite life the so-called straight line method was used. This method gives proper weight to the fact that the short- lived apparatus must be replaced several times during the life of the property having a longer life, so that the composite life determined in this manner will provide a fund sufficient to meet the replacements as they occur. All the property subject to depreciation has been classified according to its normal life in service and the cost new of such property for each classified age as shown. Since the salvage value can be secured from the property after its usefulness in service has terminated, this amount must be deducted from the cost new to show the amount which actually depreciates which is called -in the table the "wearing value." The number of times each class of property will be renewed during the term of the longest life contained in the table is also shown, together with the total expenditures for replacement purposes during such longest life period. Having determined the total requirement during the entire period for each class of property it is necessary to multiply this amount in each case by the number of years during which each dollar is employed, giving the amount in the terms of "dollar years." By dividing this number by the total expenditure during this period of seventy-five years, there is shown the composite life of the property which in this case is practically thirty-five years. This computation embraces all the depreciable property devoted to the manufacture, dis- tribution and sale of the manufactured gas, together with the proportion of the office building used by the company for this purpose. On the basis of the above life of thirty-five years and the assumption that an accumulation for depreciation would be able to earn 4 per cent interest, it would be necessary to set aside for this purpose I 1 /-? P er cen t of the total depreciable property each year. While this amount would be suffi- cient to meet the replacements as they normally occur, it is probable, due to the uncertainties of a business which extends for seventy-five years into the future, that some allowance should be made for contin- gencies and almost certain departures from conditions upon which the table is based. The replacement of services and mains will doubtless cost more in the future, due to the improvements in the streets, and the required reconstruction before the property in many instances has reached the point of complete depreciation will mean added costs. For this reason it is more than probable that some equipment will be aban- doned before the end of assumed life and also that improvements in the process of manufacture will render obsolete some of the property now in use. Based on those considerations an annual allowance of 2 per cent on the depreciable property is sufficient to cover this requirement. Applying this percentage to the depreciable property in 1909 the allow- ance for depreciation is $642,487', which amount is considered as an operating expense and included in the adjusted income account. 77 RETURN ON INVESTMENT. Not only must the rate to be charged for gas be placed at such a figure as will yield sufficient revenue for operating expenses, taxes and depreciation, but it must provide a reasonable allowance as a return upon the investment. A rate sufficient to meet these requirements must be provided as a matter of law, but a considerable difference of opinion exists as to what may be said to constitute a reasonable rate of return. Clearly what is reasonable in one industry or under one set of conditions will not necessarily be reasonable in all cases. Capital flows from one field of industry to another in response to established economic laws. The attractiveness of an investment may be temporarily increased or diminished by public or legislative acts, but in the last analysis economic fundamentals govern. It therefore becomes necessary for the determina- tion of this rate of return to consult a wider sphere of investment than that of this industry alone and to arrive at such a rate from the con- sideration of the entire investment world rather than from an abstract conclusion. At the outset it is evident that the rate must provide at least that amount of return which is equal to the income from the least hazardous undertakings. The yield from bonds and mortgage investments are lower than the return from manufacturing and commercial investments because of the diminished risk and also because of the small amount of supervision required after such investment has been satisfactorily placed. The risk in an investment may be due to several causes, chief of which are the unstable nature of the industry, the severity of competition and the fixedness of the investment. In general the rate of return demanded by investors varies directly with the risks or hazards encountered in the business. This would indicate that the rate to be allowed on an invest- ment in the gas industry must embrace two distinct elements; namely, that rate of interest to which a creditor is entitled as determined by the general cost of money in safe investment channels, and that rate of return over and above the interest, representing in a certain sense the profit of the partners or those who share the risks of the industry. That the holder of a single certificate may stand in the position of both cred- itor and partner is immaterial. There must be paid to capital, irre- spective of who provides it, such a return as will yield a fair interest for the use of the money and an additional allowance determined by the risks of the enterprise. The interest proportion of the return is indicated by the yield of approved mortgages and bonds. Such investments without burdens of management reasonably yield from 4% and 5 per cent to 6 per cent, depending upon a variety of conditions. The rate of profit to be allowed is a matter of judgment based upon general and specific conditions. 78 Among these may be mentioned risks inherent in the business, the proba- bility of inventions rendering a part of the plant obsolete and greatly impairing the usefulness of the company's service, the degree of man- agerial skill and the probable future of the enterprise. As affecting more particularly a utility investment, reference may be made to the likelihood of condemnation for the purpose of public purchase, the fre- quency of public rate revision with its accompanying uncertainties and the danger of competing utilities in a city where the investment is already sufficient to supply the entire community. These conditions taken together tend to restrain the movement of capital into such invest- ments, unless the rate of return provides some compensation for the risks assumed. In favor of a comparatively low rate of return is the fact that the product of the company finds a ready market and that the sales are far more uniform and certain than in commercial undertakings. This is shown by the stability in gross earnings of utility companies during periods of business depression. While manufacturing companies are often compelled to close their establishments for a time or to greatly reduce their operating forces, utilities in general show practically no loss in revenue and often substantial improvement. The Peoples Gas Light & Coke Company is also especially favored through the ownership of a perpetual franchise, the value of which can not be doubted. These factors serve in part to offset certain disadvantages which warrant a somewhat higher rate of return. When all the factors bearing on the subject of interest and profit are considered together with respect to the investment here in question, it must be concluded that 7 per cent on the fair present value of the property devoted to the gas business is a reason- able and proper allowance. GAS UTILITY INCOME ACCOUNT. The foregoing financial data have been combined in the following income account for the gas utility alone, showing the operating revenues, the operating expenses, net earnings, indirect or non-operating utility revenues, the deductions from the gross corporate income and the surplus for the year : INCOME ACCOUNT GAS UTILITY 1909 Per M Sold Operating Revenue: Gas Sales $13,663,168.01 .8496 Tar Sales 130,944.03 .0081 Penalties 167,462.09 .0104 Arc Lamp Rentals 340,873 . 31 . 0212 Total Operating Revenue $14,302,447 . 44 . 8893 79 Operating Expenses: Per M Made Manufacturing Steam Material $ 160,451.74 .0112 Generator Material 2,874,299. 24 . 2007 Purifying Material 11,541 . 61 . 0008 Station Supplies 30,279.35 .0021 Manufacturing Labor 341,832.68 .0239 Works Repairs 117,845.48 .0082 Engr. Dept. General Charges 45,897 . 73 . 0032 Total 3,582,147.83 .2501 Gas Purchased and Allied Expenses 748,157 . 06 . 2965 Distribution Per M Sold Distribution Station Operation $ 82,924.54 .0052 Street Mains Maintenance 331,297 . 94 . 0206 Service Pipe Maintenance 146,905 . 32 . 0091 City Lamp Post Maintenance 16,599 . 98 . 0010 Meter Maintenance 313,799.99 '.0195 Gratuitous Work 151,112.78 .0094 Arc Lamp Maintenance 308,701 . 58 . 0192 Total 1,351,342. 13 .0840 Commercial Expense Promotion Expense $ 139,701.50 .0087 Branch Store Expense 22,355.32 .0014 Appliance Expense 104,702.22 .0065 Total 57,354.60 .0036 Office Expense: Turn On and Off $ 61,752.89 .0038 Statement Taking 96,918.76 .0060 Bookkeeping 165,082.99 .0103 Collecting 136,025.56 .0085 Applications, Receiving, Auditing, etc 236,637 . 63 . 0147 Total 696,417.83 .0433 General Expense General Office Expense $ 379,834.55 .0237 Telephone Rentals 21,666.02 .0013 Rent 156,219.79 .0097 Legal Expense 26,338.56 .0016 Claims and Damages 54,000.00 .0034 Employees' Aid and Pensions Fund Allowance 133,372 . 00 . 0083 Uncollectable Bills 60,508.01 .0038 Fire and Property Damage 42,000.00 .0026 Main Rentals 53,493.00 .0033 Lease Rentals 340,000.00 .0011 Total 1,267,431.93 .0788 Taxes 848,115.00 .0527 Depreciation 642,487.00 .0399 Sundry Revenue Requirements 153,941 . 00 . 0096 Total Operating Expenses 9,347,394 . 38 . 5812 Net Earnings 4,955,053.06 .3081 80 Non-Operating Utility Revenue: Interest $ 50,000 . 00 . 0031 Rentals 17,591.06 .0011 Miscellaneous 11,704.57 .0007 Total Non-Operating Utility Revenue 79,295 . 63 . 0049 Gross Corporate Income 5,034,348. 69 . 3130 Deductions from Gross Corporate Income: Return on Investment at 7% 3,610,297 . 00 . 2245 Surplus $1,424,051.69 .0885 The above table, after deducting the operating expenses and an amount representing the return on the investment, shows that the reve- nue produced by the present rate of 85 cents per thousand cubic feet of gas is equal to nearly 9.8 per cent on the fair present value of the property. If 7 per cent represents a reasonable return for the investor there remains a surplus of $1,424,051.69. During the year 1909 the com- pany put into the distribution system a total of 16,845,175,000 cubic feet of gas, of which 14,323,047,000 cubic feet was manufactured water gas and 2,523,110,000 cubic feet purchased gas. The total amount sold to customers in that year was 16,079,064,181 cubic feet, the difference between the output and the sales being gas lost and unaccounted for. It will be seen that the surplus from these sales, over and above the actual requirements, is equivalent to 8.85 cents per thousand cubic feet sold. Applying this surplus to a reduction in rates, the data indicates that the present rate may be reduced by 8 cents per thousand cubic feet to a charge of 77 cents. Stating such a rate in terms of gross and net charges, the investigation leads to the conclusion that a reasonable charge for gas under present conditions would be 77 cents per thousand cubic feet, with a penalty of 10 cents per thousand for failure to pay the bill rendered before the expiration of such a time as may be deemed reasonable through the company's rules and regulations. Applying a rate of 77 cents per thousand cubic feet to the total sales of 1909 instead of the rate actually in force, and assuming the same operating charges and non-operating revenue, there remains after the payment of a return to the investor amounting to seven per cent on the present value of the investment, a surplus of $141,753. In considering a net rate of 77 cents it must be borne in mind that The Peoples Gas Light & Coke Company is required by public authority to supply gas of not less than 22 candle-power and a calorific value of not less than 600 B. T. U. Under these requirements, the company in 1909 supplied gas of approximately 24 candle-power and an average calorific value of nearly 685 B. T. U. Since the standard called for in most cities is considerably less it will be seen that the sum of 77 cents will purchase in the city of Chicago a gas of far superior quality to that generally sup- 81 plied in American cities, and the same sum in another city may purchase more than 1,000 cubic feet of gas, but it is of a much lower quality than that furnished in this city. The gas at present supplied in Chicago is reasonably worth from 3% to 4 cents per thousand cubic feet more than that furnished in other cities, especially in those cities where the present rates appear very low. Reduced to the same standards of quality, the net rate of 77 cents here recommended for Chicago is equivalent to at least as low as 73 cents per thousand in most of the other large cities in the United States. Further, in passing upon the reasonableness of any charge for gas, it is necessary to consider the service furnished as well as the rate per thousand cubic feet. It is a matter of general knowledge, substantiated by investigation, that the service furnished by The Peoples Gas Light and Coke Company is uniformly excellent. Pursuant to city ordinances, extensive construction work has been carried on for several years, seeking to give a more uniform pressure than that which was previously supplied, and with the completion of this work the service will represent the best which engineering skill under present conditions can provide. This serv- ice, it may safely be said, is the equal of and in many instances superior to the service supplied in other cities. It is, therefore, of paramount importance that the reduced rate to be put into effect shall not be so low as to necessitate a reduction in the quality of service now furnished. The problem of rates is broader than the mere question of charge per thou- sand cubic feet. Lighting and heating standards and the quality of the service are inseparably connected with it. In order to permit of a comparison of the above recommended rate with the charges for gas in leading American cities, a table has been com- piled embracing cities in excess of 50,000 population and showing the gross and net rates in force. The data contained in the table was com- piled from leading gas directories and information concerning rate com- parisons prepared by companies for public distribution. Unfortunately, these several sources of information frequently differed as to the rate in force in a particular city, which difference was doubtless due to com- plicated rate schedules containing provisions for discounts varying with the amount consumed and fixed charges in the form of customer charges and service charges. An effort was made to secure the correct rate wher- ever the several compilations differed, and while a number of corrections were made, it is possible that some inaccuracy still exists because of changes in the schedule since the publication of the source of information relied upon and the failure of the companies in many instances to make comprehensive reports. The table of rates follows : 82 PRICE OF GAS IN LEADING CITIES OF OVER 50,000 POPULATION. City. State. Population Served. Per M Cubic Feet. Gross. Net. Allentown Altoona Atlanta Baltimore Boston Pa 52,000 50,000 150,000 600,000 625,000 415,000 1,589,250 100,000 50,000 125,000 215,000 420,000 100,000 85,000 140,000 75,000 550,000 200,000 115,000 108,000 80,000 50,000 105,000 100,000 239,500 50,000 50,000 74,000 95,000 325,000 175,000 316,710 370,000 50,000 2,410,000 125,000 350,000 156,000 1,600,000 550,000 250,000 215,000 97,000 112,000 190,000 55,000 90,000 280,000 90,000 215,000 750,000 110,000 80,000 200,000 330,000 70,000 60,000 90,000 138,000 $1.10 1.10 1.00 .85* .80 1.00 .80 1.00 1.10 .85 .70t .50* 1.00 .75 .85 1.00 .75 1.00 .85 .50* 1.10 .50* .75* 1.15 .60 1.00 1.00 .90 .90 .80 1.00 1.00 .60* 1.15 .80 .95 1.15 1.00 1.00 .85 .95 .95 1.10 .90 .95 .95 .70* 1.00 .90 1.00 .60* .80* .75* .70* .90 1.10 1.00 .98 .80 Pa $1.20 1.10 1.10 i]20 "i'.io" 1.20 1.00 Ga.. Md Mass N. Y Buffalo Brooklyn N. Y Bridgeport Conn Brockton Dayton Mass Ohio Colo Mich Iowa Minn Mass Tenn Ohio Denver Detroit Des Moines Duluth Cambridge Chattanooga .80 1.10 .90 1.10 1.10 Cleveland Columbus Fall River Grand Rapids Harrisburg . Ohio 1.10 .95 .90 Mass Mich Pa Hamilton Hartford Houston Indianapolis Knoxville Lancaster Lawrence Lowell Ohio .80 1.00 1.25 "i'.io" 1.10 1.00 1.10 Conn Tex Ind Tenn . Pa Mass Mass Cal Tenn Minn Los Angeles Memphis 1.10 1.20 .90 1.25 i!6s 1.40 1.25 "T.oo" 1.00 1.05 1.20 .05 .15 .40 .25 .00 .20 .80 .35 .00 .10 .10 Minneapolis Milwaukee Wis Mobile New York New Haven New Orleans. ...... Omaha Philadelphia Pittsburg Portland Providence Reading Ala N. Y Conn La . Neb Pa .. . Pa .. . Ore. ... . R. I Pa Va N. Y Mich Richmond Rochester Saginaw. . Salt Lake City Seattle Springfield St. Paul St. Louis Tacoma Terre Haute Toledo Utah Wash Mass Minn . . Mo . . Wash Ind Ohio Washington Waterbury Wilkesbarre D.C Conn Pa 1.10 1.10 1.20 Wilmington Worcester Del. Mass tomer charge. *Graduated scale of rates varying with consumption. fin addition to the rate per M, the company exacts a demand charge and cus 83 CONCLUSIONS. 1910. Total value of investment $61,849,879 Total value of physical property 49,023,947 Total "going value" as defined in the report 9,425,932 Gas utility investment including used proportion of office building (Office building excluded from income account investment and rental charge for space occupied provided). No allowance made for value of franchises. No allowance made for the cost of street pavement over the Company's distribution system not paid for by the Company. Allowance for working capital Allowance for depreciation Allowance for taxes Rate of return allowed on the investment Gross operating revenues Non-operating revenues Present actual earnings available for interest and dividends Allowance for return on present value of utility investment at 7% Surplus in 1909 after allowance for interest and dividends Present rate for gas 95 cents per M gross 85 Rate recommended 87 cents per M gross 77 Saving to public at 77 cents per M on 1909 basis Probable saving in five years Earnings available for interest and dividends under proposed rate Surplus under proposed rate after allowance of 7% for return on investment. . 1909. $58,060,210 44,494,972 10,365,238 53,075,598 $3,200,000 642,487 848,115 7% 14,302,447 79,296 5,034,349 3,610,297 1,424,052 cents per M net . cents per M net . 1,282,299 7,400,000 3,752,050 141,753 All of which is respectfully submitted. WILLIAM J. HAGENAH, In charge of Gas Investigation. UNIVERSITY OF CALIFORNIA LIBRARY BERKELEY Return to desk from which borrowed. This book is DUE on the last date stamped below. jg LD 21-100m-7,'52(A2528sl6)476 UNIVERSITY OF CALIFORNIA LIBRARY