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 
 
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 SED BALANCE SHEETS. 
 1898-1910. 
 
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 $3, 
 
 82 
 = 
 
 
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22 
 
 PLANT STATISTICS. 
 
 1898-1910. 
 
 Year. 
 
 Street 
 Mains, 
 Miles. 
 
 Meters. 
 
 Gas 
 
 Stoves. 
 
 Public 
 Lamps. 
 
 Arc 
 Lamps. 
 
 1898 
 
 5845 
 
 230 293 
 
 20343 
 
 28023 
 
 
 1899 
 
 705 7 
 
 274 604 
 
 47639 
 
 25 121 
 
 
 1900 
 1901 
 
 ,729.0 
 7966 
 
 300,077 
 323 089 
 
 66,845 
 83771 
 
 24,980 
 24911 
 
 
 1902 
 
 866 7 
 
 342 150 
 
 105 844 
 
 25,090 
 
 
 1903 
 1904 
 1905 
 1906 
 1907 
 1908 
 1909 
 1910 
 
 ,871.6 
 ,939.5 
 2,028.6 
 2,103.1 
 2,311.7 
 2,366.4 
 2,484.3 
 2,568.9 
 
 347,750 
 359,327 
 376,051 
 392,397 
 446,723 
 469,084 
 496,615 
 522,536 
 
 125,181 
 147,222 
 170,925 
 197,619 
 229,194 
 254,362 
 279,080 
 305,279 
 
 24,948 
 24,974 
 24,608 
 23,673 
 22,643 
 21,085 
 17,630 
 18,060 
 
 28,477 
 33,337 
 39,448 
 45,714 
 60,822 
 75,025 
 84,335 
 87,261 
 
 
 
 
 
 
 
 VALUATION OF PROPERTY. 
 
 METHODS PURSUED. 
 
 The valuation upon which a gas utility is entitled to a reasonable 
 rate of return, consistent with the risks inherent in the business, is the 
 fair present value of the property used and useful in the production, 
 distribution and sale of gas. This value consists of two principal divi- 
 sions, namely : the physical plant and the intangible or going value of 
 the plant. The former value embraces the land and buildings of the 
 company, distribution mains, services and meters, gas holders, horses 
 and vehicles, stores on hand and the allowance for working capital. 
 The going value of the plant exists by virtue of the plant being a live, 
 operating unit, supplying gas to those customers w r ho have been induced 
 to subscribe to the service, thus giving to the company an established 
 income, in the development of which large expenditures have been made 
 in one form or another by the investor and doubtless numerous losses 
 sustained. Together, they constitute the legitimate and honest invest- 
 ment of the stockholder and represent the amount on which he is entitled 
 to a reasonable return. 
 
 To arrive at the value of the property several methods ..are possible, 
 any one of which may be satisfactory or unsatisfactory, depending upon 
 the condition of the construction records of the company and the condi- 
 tions under which the plant was constructed and the business developed. 
 The value of the plant for the purpose of rate adjustment can not be 
 computed from the cost records alone. It must be 4 determined from a 
 consideration of all the elements making for value, of which the principal 
 ones are the original cost of the plant, its reproduction cost new as of 
 to-day, its reproduction cost new less depreciation to show the fair pres- 
 
23 
 
 ent value, the cost of developing the business, the amount of outstanding 
 securities and the earning capacity of the plant. No formula or mathe- 
 matical rule can be blindly followed, but from all the facts and elements 
 of value it is necessary to apply a reasonable judgment to the end that 
 substantial justice shall be done to both the public and the investor. 
 
 In this instance the methods of arriving at the value of the plant 
 have been restricted by conditions over which neither the city nor the 
 company had entire control. The present property, as already outlined, 
 is a consolidation of several competing plants, the records of which are 
 not available to-day. Many of the books and records of the merged com- 
 panies were never turned over to the consolidated company. Even if they 
 were in its possession to-day the data could not be given the greatest con- 
 sideration because of the conditions under which such plants were con- 
 structed. Several plants were poorly erected, with insufficient regard 
 for the future wear and tear of the property and often represented 
 unnecessary duplication of facilities. To attempt to analyze the con- 
 struction account from the company's records to-day would therefore 
 be impossible, both because of the incompleteness of the records and 
 because abnormal charges have been made to this account which can not 
 be considered as capital to-day. The value has therefore been arrived at 
 by the appraisal of the property. 
 
 Ordinarily, in undertaking an appraisal the first step would be to 
 make a complete detailed inventory of all the property of the company, 
 to be followed by a study of the local conditions affecting the cost of such 
 work, the age of each unit of equipment, the degree to which it has been 
 maintained and its adaptability to the service required, together with 
 the determination of the unit prices to be used, and finally, the applica- 
 tion of such prices to the determined inventory. In the present case 
 much of this work was not undertaken for the reason that a complete 
 inventory in general carefully prepared was submitted by the company 
 through its engineers. The inventory was submitted in the following 
 groups: (1) detailed description of each important building and unit 
 of apparatus; (2) tabulations of the size and mileage of mains; (3) the 
 number and size of meters and services in use; and (4) field books 
 which contain the miscellaneous items, such as cast and wrought iron 
 piping, tools, fences, docks, walks, paving about the plant and sundry 
 small items. The cost of reproduction for each of the items mentioned 
 was included with the inventory, which was sufficiently detailed to enable 
 the unit quantities to be checked. This was particularly the case as 
 regards buildings and foundations. Exhibits were also available show- 
 ing the method of arriving at the cost of the various parts of the dis- 
 tribution system. While the inventory made unnecessary the detailed 
 field work of checking and classifying every piece of property, it was not 
 accepted without an inspection of all the plant and a check of the more 
 
24 
 
 important items included in the exhibits in order to prove their correct- 
 ness. 
 
 APPRAISAL. 
 
 The value of the land owned by the company was obtained from an 
 appraisal of this property made by the valuation committee of the 
 Chicago Real Estate Board. This appraisal was submitted by the com- 
 pany as its estimate of the land value. The classification was checked 
 against the land occupied by the company and which it was reported to 
 own. The reasonableness of the appraisal was verified by comparing the 
 amounts with the prices paid for land in the neighborhood of the parcel 
 under consideration. The values so furnished were accepted as repre- 
 senting the best evidence available. 
 
 The company's detailed building inventory was checked item for 
 item in making the appraisal of this portion of the property. Building 
 plans on file with the company were examined before any inspection of 
 the premises was undertaken and important dimensions were checked. 
 "Where the building plans were not available it was necessary to secure 
 all the information by visits to the structures in question. In addition 
 to checking the quantities, the inspection work also covered a general 
 examination in order to determine the specifications for all materials, 
 the character of the maintenance and such additional matters as would 
 affect either the cost of construction or the present value. The depth of 
 underground foundations was taken from the plans and from the state- 
 ments of superintendents, and in each case it w r as determined whether 
 it was in keeping with common practice for similar soil conditions. The 
 unit prices applied to the quantities found w r ere compared with the 
 company's own records covering the construction in question. Local 
 contractors, including some who had performed a large portion of the 
 company's work and who were familiar with present conditions in this 
 city and vicinity, were interviewed as to the cost of labor and material. 
 The prices used in each case covered the actual cost of the work, plus a 
 fair contractor's profit. Where it had been necessary to remove dirt 
 from the premises, the excavation cost was made sufficiently high to 
 cover such expenses. The value of the new office building just com- 
 pleted for the company was taken from the company's books. 
 
 To prove the inventory submitted for the machinery and apparatus 
 each station was visited by machinery and building inspectors, separate 
 forms were prepared upon which were classified the various units of 
 apparatus reported by the company and their correctness as to type, 
 age, workmanship and per cent of condition noted. "Where the inventory 
 was insufficient additional information was secured in this manner. 
 Besides checking the items contained in the inventory, these inspections 
 embraced a general survey of each station, particularly with a view of 
 
25 
 
 ascertaining the probable accuracy of the numerous items included in 
 the field books. While the machinery was examined with the same detail 
 as would have been followed had no inventory been available, it was 
 much simplified by the cooperation of the company in this manner, since 
 the apparatus was listed and it was necessary only to verify the inven- 
 tory and to record information not contained therein. In certain 
 instances discrepancies were disclosed between the inventory description 
 and the apparatus as found which were adjusted in conferences with the 
 engineers of the company. 
 
 In arriving at the unit prices to be used an effort was made to have 
 the figures represent present conditions in the city of Chicago. Prices 
 for iron and steel, cast iron pipe, labor and all other items entering into 
 the cost of construction fluctuate from year to year with the condition 
 of business, as is reflected in the cycles of industrial activity and depres- 
 sion. Because of these conditions it was necessary to use average prices, 
 since to use either the highest or lowest prices during the last five years 
 would be equally unfair. In comparing such prices with those actually 
 paid by the company it was observed that because of its very large 
 requirements each year and the facilities and skill of its officers in the 
 making of purchases it was able to secure contracts at substantial con- 
 cessions from the prevailing market prices. The position of the company 
 in this respect is typical of large industries generally. It is well known 
 that there is considerable difference in the ability of companies to pur- 
 chase at low figures. As a rule, the larger companies are able to pur- 
 chase more favorably than the smaller ones because of their larger 
 requirements and also because of more favorable market and shipping 
 facilities in large cities. There are, however, obstacles w r hich tend to 
 increase costs due to the higher wage scales prevailing in large cities and 
 the additional costs incurred in construction w r ork because of the con- 
 gested traffic conditions in the streets. In this instance, however, there 
 can be no question but what the company is securing prices on contracts 
 which on the whole compare very favorably with the general market. 
 It is therefore evident that local conditions and the particular facilities 
 of the company in question must be given full consideration in deter- 
 mining the proper units to apply in the appraisal of a given property. 
 
 In general, the benefits of favorable purchase of operating supplies 
 and material for construction purposes belong to the investor! To 
 deprive him of the benefits due to skill in management and operation 
 would be to destroy every incentive for economy and efficiency. It does 
 not follow 7 , however, that every economy is to be credited to the com- 
 pany, for the public is entitled to the benefit of that degree of intelli- 
 gence and technical skill which can reasonably be expected of men 
 entrusted with responsibilities of administering a property so large as 
 the plant in question. The best evidence of reasonable prices to be used 
 
26 
 
 for this purpose was therefore to be found in the records of the company 
 itself. Wherever possible, examination was made of the company's con- 
 tracts and vouchers to determine how favorably its purchases were made, 
 and from such records averages were taken. For this purpose a large 
 number of contracts was submitted by the company for cost analysis. 
 Prices which departed materially from the average, or were at great 
 variance with the market, were submitted to the officials of the company 
 for additional information and explanation. Wherever it appeared that 
 a contract was placed at a price in excess of what was reasonably to be 
 expected under the circumstances, the amount was reduced. In those 
 instances where it appeared that the company secured an extraordinary 
 bargain, the benefits of such saving were allowed to the company and 
 only those prices were used which appeared reasonable and just. In the 
 figures as finally adopted the average embraced many instances where 1 
 the unit costs as shown by the company's own records w r ere slightly 
 increased. 
 
 In placing values on specific apparatus various features were con- 
 sidered. In general machinery of the same capacity varies greatly in 
 price, due to the quality of the material, the character of workmanship, 
 the type of construction, the use of patented devices and other features. 
 The unfairness of using a single unit price for all machinery of the same 
 capacity was at once apparent. In the present appraisal an effort was 
 made to give careful consideration to every feature, and the more impor- 
 tant units of equipment were appraised only after additional informa- 
 tion had been secured. Where such machinery was installed under con- 
 tract, the detailed costs thereof were easily analyzed. Where the instal- 
 lation was made by the company itself an addition was made covering 
 the costs which would reasonably be incurred in the proper placing of 
 the equipment under normal conditions. 
 
 It was found that during the last few years several classes of machin- 
 ery, particularly water gas generators, had been built by the company 
 for its own use. The actual cost of construction in each case was obtained 
 and was found to be much below the price for which such equipment 
 could be purchased in the open market. The prices for units of substan- 
 tially the same character were obtained from the various manufacturers 
 for comparison with the costs as shown in the company's records. In 
 placing the value on this equipment for the purpose of this appraisal the 
 figures used contained an addition of what was believed to be a fair 
 allowance for burden and profit to the actual cost of the apparatus. In 
 this manner the economies of construction due to the peculiar facilities 
 developed by the company were credited to the company, for it was 
 believed that the public was entitled to no better price than the most 
 favorable price which the market provided for a unit of similar capacity 
 and efficiency. 
 
27 
 
 Considerable difficulty was encountered in determining the reason- 
 ableness of the value placed upon the items included in the field books. 
 They constituted an unclassified mass of unlike items, ranging in value 
 from a few cents to thousands of dollars. To properly arrive at what 
 constituted a fair value for this property it was necessary to classify the 
 many items into fourteen separate groups and to apply the proper units 
 in each case. The prices of most of the classes of property as submitted 
 by the company were found to be substantially correct, The same was 
 true with regard to the allowance for labor wherever this entered as an 
 element of cost, although in a few instances revisions were found neces- 
 sary. The value of such large items as docks, tracks, paving and side- 
 walks at stations, fences, etc., were revised where specific instances 
 showed such to be necessary. In a number of cases the company's basis 
 of estimating the value of the work in question was not accepted and 
 additional information was secured from the general officers. Numerous 
 conferences were held in which the differences were thoroughly dis- 
 cussed and in most instances a conclusion was arrived at which was 
 accepted as substantially correct. 
 
 In the appraisal of the company's holders the method used was similar 
 to that used in valuing the machinery and apparatus. Equipment of this 
 character can not be valued on a cost per unit or capacity basis without 
 detailed information concerning the type of the apparatus and the condi- 
 tions surrounding its construction. In this instance it was necessary to 
 secure all the information which was afforded by the specifications cover- 
 ing the foundation work and the erection of the steel work. The masonry 
 work was estimated on the basis of present prices for concrete, brick 
 work, excavation and piling, and the values arrived at were in general 
 somewhat above the contract prices. Detailed estimates of weight for 
 holders of various types of construction were made. In arriving at the 
 final values, full consideration was given to market prices and the type 
 of construction in each instance. The large holders were valued on what 
 amounted substantially to a pound-price basis. 
 
 In appraising the distribution system different methods were neces- 
 sary. Owing to the fact that the mains and services could not be 
 inspected, it was necessary to resort to the records of the company. These 
 records consisted of maps and atlases drawn carefully to scale and show- 
 ing the proper location of the mains, valves, drips and specials. The 
 atlases of the company are draw r n to a scale of 100 feet to the inch. This 
 scale was carefully verified and found to be correct. All such maps were 
 scaled and each run of pipe located and the points between which it was 
 laid, together with the size of the pipe and the date when laid, were 
 noted. This record was summarized to show the different sizes of pipe 
 and the amount of each size, and also the amount of pipe laid during each 
 year. The total length of pipe as scaled from the company's records was 
 
28 
 
 somewhat less than the total as arrived at from the records of the con- 
 solidated companies, but agreed substantially with the company's own 
 scaling of the atlases. These maps were prepared by the company since 
 the consolidation in 1897 and -have been corrected wherever errors and 
 omissions were found. They have been tested by making excavations at 
 various points, and it is believed they constitute the best record of the 
 extent of the distribution system. As a test of the accuracy with which 
 the scaling from these records could be done, the 24-inch main laid dur- 
 ing the last tw r o years was totaled from the original work orders and 
 scaled, the amount so obtained agreeing with the record length within 
 two-tenths of one per cent. 
 
 In arriving at the present unit costs to be applied in the distribution 
 system, it was decided to use the company's records of actual expendi- 
 tures for a number of years, believing that these costs most nearly repre- 
 sent the cost of such work to-day under the conditions which prevail in 
 this city. With this in view, the various individual construction under- 
 takings shown by the atlases to have been made within the last ten years 
 were analyzed and the original work orders which are used in the regular 
 course of business by the company were secured. This anaylsis did not 
 include all the pipe laid during these years, because in a number of cases 
 the construction work as entered on the record did not show the date 
 when the work was performed. The analysis, however, did include con- 
 struction Avork on all sizes of pipe between four inches and thirty inches 
 in diameter, and may be regarded as representative of the cost of laying 
 mains not only during these years, but as a fair unit cost for the present. 
 These work orders showed in detail the amount of material used and the 
 labor employed. The material included the pipe, specials, small fittings, 
 lead, coal, blocking, etc. The labor was shown in the detailed statement 
 in such form that it was possible to determine the expense for foremen 
 and supervision, calkers and common labor. To secure this detailed 
 information, it was, therefore, necessary to analyze and tabulate these 
 work orders. Many hundred of such orders, including over three hun- 
 dred six-inch pipe construction orders and all orders where other than 
 six-inch pipe was laid, were analyzed in this manner. From the sum- 
 mary of all such tabulations it was found that the costs were substan- 
 tially the same in the three districts in the city, i. e., the North Division, 
 the West Division and the South Division. For this reason a single unit 
 cost was used for the different classes of property throughout the city. 
 In arriving at the total as thus used, full consideration was given to the 
 relatively higher cost of construction work where small amounts were 
 involved. The cost of four-inch pipe and thirty-inch pipe appeared 
 abnormal, due to the fact that so small an amount of pipe of these sizes 
 was laid. Since the work orders did not contain any provision for the 
 use of tools and teams, it was necessary to make adjustments for this 
 
29 
 
 purpose. The work orders did include the cost incurred in disturbing 
 paving where this was done, but did not include the cost of repaying. 
 Every effort was made to have the final units agree, in so far as appeared 
 just, with the actual construction costs as shown by the company's rec- 
 ords and conditions known to exist at present. 
 
 The most important item of material in the distribution system is the 
 main pipe. Cast-iron pipe varies widely in price at different times of the 
 year, and also from year to year. It being the object in this appraisal 
 to use prices which are representative of present conditions, and which it 
 is believed could be secured in the reproduction of an enterprise on a 
 scale of the property in question, it seemed advisable to use a unit which 
 would be an average price over a number of years. It is a matter of com- 
 mon knowledge and substantiated by the records of the company, that the 
 largest purchases of pipe are not made at a time when prices are the 
 highest. As a rule, purchases are made on a more liberal scale when prices 
 are low, at which time contracts are entered into covering the require- 
 ments for a considerable period of time, deliveries being made as called 
 for. In fixing the price for this pipe the company's contracts for cast- 
 iron pipe from 1901 to 1910 were tabulated. The variation in price 
 ranged from $22 to over $34 per ton. Since a comparatively small amount 
 of pipe was laid when the price was at the highest, it would appear unfair 
 to use an average of these two figures. A weighted average was, there- 
 fore, used which was secured by multiplying the contract price for each 
 year by the number of tons purchased at the particular price as shown 
 by the contract. The total of such figures was the total amount of pipe 
 purchased and the total prices paid, from which was computed the proper 
 average price of $26.10 per ton. Due to the differential which usually 
 exists between the large and small sizes of pipe an allowance was made 
 of $1 additional, so that the average cost of $26.10 per ton was used for 
 six-inch pipe and larger sizes, while $27.10 per ton was used for four- 
 inch pipe. Since these prices did not include the cost of teaming nor the 
 use of tools, adjustments were necessary and a percentage computed from 
 the company's records was allowed to cover these expenditures. 
 
 The method of arriving at the cost of services was similar to that 
 described in regard to mains. It was, however, impracticable to secure 
 all the original work orders, but instead a recapitulation of these work 
 orders was used which had been compiled from year to year by the com- 
 pany in the regular course of its business. These summaries were kept 
 with much detail prior to 1904, since which date much less information is 
 contained in the records. A careful analysis was made of all the records 
 in possession of the company for the period from 1900 to 1904 covering 
 one and a half inch service pipes, which is the size of the greatest number 
 of services. By making comparisons it was found that the cost of labor 
 per service was substantially the same in recent years as it was in the 
 
30 
 
 years immediately preceding- 1904. The price to be allowed for the 
 service piping- was the same as that used by the company for wrought- 
 iron pipe at the station, to which cost was added l 1 /^ cents per foot to 
 cover the cost of preparing pipe with protective coatings. It was also 
 necessary to adjust the average price used for fittings because it was 
 found that certain services were installed without a curb box and cock. 
 From all the data which could be obtained and the tabulations based upon 
 the records, it was decided that $1 for fittings represented a fair average 
 for one and a half inch services and those of smaller size. The larger 
 services were allowed curb box and cock, the cost of which was taken 
 from the summarized cost of the services. The labor cost on the larger 
 services varied greatly, with the result that the average cost was uncer- 
 tain. Special attention was directed to the irregularity shown in the 
 analysis of these larger services, and the resulting figure arrived at is 
 believed to be fair to the company and to the public. The amount 
 involved in connection with the larger services is comparatively small 
 and could not appreciably affect the result. The service pipes when 
 finally installed consist of a number of small articles which are handled 
 through storehouses, making it necessary to add a reasonable charge for 
 warehouse and storage service and also a charge covering the cost of tools. 
 
 The value of meters and meter connections in this appraisal is based 
 on the present actual cost to the company. Here again it was necessary 
 to add to the bare cost a percentage covering storeroom charges and a 
 small additional charge to cover the handling and first test of the meter. 
 The cost of the original installation was graded proportionally to the 
 size of the meters, and the average cost per meter represents the average 
 cost of installation during the last two years, which cost is accepted as 
 most nearly representing present costs. 
 
 The company's value for house governors was accepted. There are 
 in the streets a number of vaults which contain district governors used 
 in connection with the booster system. The work orders for 54 out of a 
 total of 58 of these vaults were secured and used as a basis for the cost 
 of material and labor in placing governors in vaults. To the final cost 
 in this case there was also added an allowance for the use of tools. The 
 value of the masonry work in the construction of the vaults was taken 
 from the contracts covering their construction. There are at present 
 seven tunnels under the river owned by the company. To arrive at what 
 represents a fair price, information in addition to that possessed by the 
 company was sought from parties acquainted with work of this character, 
 and the unit costs for the different materials and classes of labor were 
 obtained from this analysis and investigation. 
 
 The miscellaneous classes of property representing minor items in the 
 inventory and valuation were accepted after investigation as being sub- 
 stantially correct and were so entered in the detailed tables. 
 
31 
 
 INDIRECT OR OVERHEAD CONSTRUCTION CHARGES. 
 
 The different classified values above referred to embrace only the 
 costs of labor and material, or the direct costs. There must be added to 
 the cost of each item of equipment, or to the value of the sum of all such 
 items, a certain amount to cover the indirect or overhead cost. This cost 
 is made up of a number of items of which the most important are legal 
 and organization expenses, engineering and supervision, interest during 
 construction, fire and liability insurance during construction, taxes, if 
 the period of construction is of considerable length, and an allowance for 
 hazards and contingencies during construction. While all agree that 
 allowance must be made for overhead expense for each of the items enu- 
 merated, much difference of opinion exists as regards the amount to be 
 allowed. Although the valuation of the property is to be determined 
 largely on the theory of reproduction cost, it does not necessarily follow 
 that these costs should be determined upon a basis more or less hypo- 
 thetical, but, on the contrary, that consideration should also be given to 
 the actual costs incurred in constructing the plant in question. The 
 records of the company are the best evidence as to what such overhead 
 expenses should be, and full weight has, therefore, been given to the cost 
 shown for expenditures of this character for a number of the items during 
 the last few years. The figures used are based on the theory of the plant 
 being constructed over a number of years, or what is generally called 
 the piecemeal- construction plan. If all the overhead charges were based 
 on the company's records for recent years the amount would clearly be 
 too small. It is, therefore, assumed for the determination of this question 
 that the plant will be reproduced over a period of approximately ten 
 years, but it does not seem reasonable that the same units of cost which 
 are incurred in the construction of the first half, or the first third of the 
 plant, should be used for the entire plant. In arriving at a fair over- 
 head charge, the assumed years of construction have been divided into 
 three periods and the items of expense increased or reduced as shown to 
 be justified from actual construction records and the history of the plant 
 in question. 
 
 It is safe to assume for the purpose of this appraisal that the first 
 third of the plant was constructed under the least favorable conditions. 
 The credit of the company being low at this time, the addition for inter- 
 est was placed at 6 per cent. It is known that the bonds issued for the 
 first construction expenses were sold at substantial concessions. The 
 interest charges would not apply for the full period since as soon as any 
 part of the plant was completed it would be put into operation. Fur- 
 ther, construction work could be carried on only during about six or 
 eight months of the year, so that the time for which the interest must be 
 paid would be considerably less than the full period during which the first 
 
32 
 
 third of the construction was completed. Engineering expense during 
 this period is placed at 5 per cent, which is the usual charge for work 
 of this character. Organization and legal expenses would be highest dur- 
 ing the first period, during which time the company would be incor- 
 porated and its various contracts subject to examination and titles to 
 property verified. It would seem that 3 per cent is a reasonable addi- 
 tional allowance for this purpose. One per cent is allowed for taxes. In 
 addition to the above charges there is added 7 per cent for contingencies, 
 hazards and omissions, making a total overhead charge of 22 per cent for 
 the first third of the property. 
 
 During the second period of the company's construction work con- 
 siderable progress would have been made and the management of the 
 company would have reached an efficient stage. Additions for interest 
 charges on construction during this period have been placed at 5 per 
 cent and the organization expense at 2 per cent. Engineering expense, 
 it is assumed, will require a 5 per cent charge, since the construction of 
 the plant was proceeding on a very large scale and at a rapid pace. 
 With the perfection of the organization and the development generally 
 of the plant, it is believed that the allowance for contingencies should 
 not be as large as during the earliest period, and 5 per cent is added for 
 this purpose. The foregoing allowances provide a total overhead charge 
 of 17 per cent on what represents the second or middle period of con- 
 struction work. 
 
 During the third of the assumed periods it is believed that substan- 
 tial economies can be secured which should be shared with the public. 
 To provide the same high indirect charges for this period of construction 
 as were provided for the first period would be contrary to established 
 practice and must result in excessive overhead charges. It is an estab- 
 lished fact that the engineering service at this stage of development was 
 performed chiefly by the company's own staff, part of whose services 
 were engaged for the benefit of the operating department, so that the 
 cost thereof should be distributed over operation and construction. This 
 is true of every large utility construction work. An addition of 4 per 
 cent for engineering and superintendence is deemed reasonable. With 
 the large development of business which the company has secured by this 
 time and the practical monopoly which it possesses of the gas business, 
 it is natural that a relatively higher credit will have been established and 
 that money can be secured at a lower rate. An allowance of 3 per cent 
 is added for this purpose. Organization expenses during this period will 
 be very much reduced and consist only of the examination of contracts 
 and titles involved in transactions connected with the extension of the 
 plant, which requirements should not exceed one per cent. Contingen- 
 cies are provided for in an additional allowance of 4 per cent. These 
 additions are equivalent to 12 per cent of the direct costs during the last 
 
33 
 
 third of the total plant construction. The allowance for overhead or 
 indirect charges on the total property is, therefore, equivalent to the aver- 
 age of the rate applied during each of the three assumed periods of con- 
 struction, or an average of 17 per cent. This addition is included in the 
 tables showing the plant valuation. 
 
 It would seem that 17 per cent is an unreasonable overhead charge to 
 add to the value of the land, since engineering expense is not incurred to 
 as great an extent as in the construction of the plant as a whole, nor does 
 the item of contingencies materially affect the cost of the land. The 
 interest charge, however, should be somewhat larger than that for the 
 construction work, since the purchase of land represents probably the 
 iirst investment. Instead of 17 per cent, it is believed that 12 per cent 
 is more nearly correct, which amount has been used in this appraisal. 
 This allowance appears especially fair since this percentage is applied 
 to the present value of the land instead of to the smaller amount repre- 
 senting the original investment. 
 
 In judging the fairness of the above overhead charges it must be 
 borne in mind that the unit costs used in this appraisal are based upon 
 the piece-meal construction of the property as determined from the com- 
 pany ? s records, and further, that certain portions of the property now 
 in service were constructed under contracts which included some provi- 
 sion for engineering and superintendence, together with a part of the 
 contingency expense. Since the unit prices were obtained largely from 
 the company's records, the amounts used, therefore, include some provi- 
 sion for overhead charges. This, in general, is true with respect to the 
 cost of the buildings, holders and such apparatus as purifiers, condensers 
 and scrubbers. The addition, therefore, of 17 per cent to these costs for 
 overhead expenses must be accepted as fair. 
 
 DISCOUNTS. 
 
 Closely allied to the subject of overhead charges, but differing in 
 several particulars, is the additional construction charge due to discounts 
 on bonds. In other words, provision must be made in the appraisal for 
 the cost of the funds with which to finance the undertaking. Not to 
 allow any sum in this valuation for discounts on bonds issued for con- 
 struction purposes would be equivalent to assuming that a sum of money 
 as large as is required to construct a plant of the magnitude of that under 
 investigation could be obtained for investment in a somewhat hazardous 
 undertaking without any price for such funds. It would be equivalent 
 to assuming that capital seeks such investments without inducement, 
 being willing to incur the risks of the industry in return for no more than 
 a reasonable profit. The financing of corporations in the past and at the 
 present time clearly shows that securities bearing a fair rate of interest 
 can rarely be sold at a price netting par to the corporation. 
 
34 
 
 The amount of the discount on securities is detemined by a number 
 of factors, chief of which are the credit position of the company, the 
 interest rate which the bond bears, the condition of the money market 
 and the life of the bond. Naturally, the company whose business is firmly 
 established and whose record has been a prosperous one can dispose of 
 its construction bonds at a comparatively low discount, while a new com- 
 pany, untried in its field and whose business is yet in an uncertain stage 
 of development, must pay a heavy discount if it would dispose of its 
 issues at all. Discriminating investors find little to encourage them in 
 paying par for an issue of uncertain merit. The security which it is 
 sought to dispose of must compete for favor with all other investment 
 issues in the open competitive money market and the discount there 
 exacted must be regarded as a cost of securing the funds, just as addi- 
 tional charges are incurred over and above the bare construction cost in 
 securing the physical plant. There is no escape from this conclusion, 
 especially when the bonds can not be sold on any other terms. It may 
 be possible to escape the discount by paying a sufficiently high interest 
 rate to attract capital, but such a step would mean a heavy burden on 
 the earnings throughout the entire life of the bonds. 
 
 Under normal conditions the discount on bonds is almost inevitable. 
 The amount of such discount may.be charged to capital or to operating 
 expenses. Where the utility can not be constructed at the time when the 
 public demands the service to be furnished, except through the sale of 
 its securities at a discount, such discount creates a charge which the pub- 
 lic should bear as the cost of securing the service at such time. If the 
 construction work had been postponed until the money market was more 
 favorable or until the city had grown to a point where the success of the 
 industry was made more certain, the public would have been deprived 
 during such period of the benefits which the company was to furnish. 
 To supply a large amount of money at a particular time entails heavy 
 expenses. These charges must be met by some party. The company can 
 not escape paying the amount of the discount at some future date, and 
 its financial program must be shaped with this end in view. If operating 
 expenses are to be charged with the discount the company must be very 
 prosperous in order to have sufficient margin over its current charges 
 and the fixed expenses on prior issues of securities. It would also mean 
 that the cost of securing the utility through this method would be paid 
 for by those who used the service during the early years of development. 
 To charge the discount to construction means that until amortized 
 through sinking-fund operations the customers throughout the life of the 
 bond are gradually meeting this charge. Under certain conditions dis- 
 counts should be wiped out through the surplus account or a suspense 
 account, but under financial conditions most frequently encountered they 
 
35 
 
 must be considered as a cost of construction, and in this disposition offi- 
 cials of the company have practically little choice. 
 
 If the discount is to be charged to construction, and this would seem 
 to be proper, especially where it is known that most of the securities of 
 this company were put out at a substantial concession, it becomes a 
 problem to determine the amount of such allowance. Clearly the dis- 
 count would be highest during the early years of development, and much 
 reduced when the success of the plant and its earning capacity is estab- 
 lished. Under normal conditions, such discounts range from 5 to 20 
 per cent as affected by the facts in each particular case. 
 
 It is known that some of the bonds issued for construction purposes 
 by this company, and bearing interest at the rate of 6 per cent, sold at 
 a price as low as 80, or at a discount of 20 per cent. The most recent 
 issue of bonds sold at a price fractionally under par. In most instances, 
 prior to 1897, the discount was in excess of 10 per cent. In arriving at 
 an amount which fairly represents the discount charge to be allowed 
 here, consideration has been given, both to the price for which the dif- 
 ferent issues have been sold or cost of construction theory, and to what 
 would be a reasonable discount to-day under the cost of reproduction 
 theory. The former was entirely a matter of record. The latter was 
 determined from interviews with those familiar with the sale of securities 
 and a study of the investment market. From both the weighted average 
 of the discounts on the bonds issued since the consolidation in 1897 and 
 the probable discount on the securities if the plant were reconstructed 
 to-day, it is believed that an allowance of 6 per cent for this expense is 
 reasonable. 
 
 APPORTIONMENT OF PROPERTY. 
 
 Not all of the property owned by the company is being used in the 
 manufacture, distribution and sale of gas to the people of Chicago. Aside 
 from the investment in land, buildings, apparatus, holders and distribu- 
 tion system used directly for this purpose, considerable property is used 
 exclusively for the distribution of natural gas, a separate service which 
 the company is furnishing under a franchise of one of the companies 
 embraced in the consolidation of 1897. The company also owns some real 
 estate which it acquired in the settlement of obligations due to it, which 
 property is now being rented. Certain of the old manufacturing stations 
 acquired in 1897 have since become unserviceable and a part of one of 
 them has been rented to the Pintsch Gas Company, which manufactures 
 gas for car-lighting purposes, while a portion of another plant has been 
 rented to a manufacturing company. The company is also the owner of 
 a large modern office building, only a part of which is used for its own 
 purpose. Apportionments have been made of all the property so as to 
 determine what amount is used and useful in the manufactured gas serv- 
 
36 
 
 ice and the natural gas service and what amount is to be considered as 
 commercial property. The separation between the manufactured gas 
 property and the natural gas property has been made to enable a cost 
 analysis for each service. 
 
 The tables below show the classification of the physical property and 
 the additions to the direct costs representing the overhead or indirect 
 charges and also the discount on the securities represented by the amount 
 of the 'plant cost. The property has been classified so as to show both 
 the cost new and the present value of the investment in the manufacturing 
 stations, distribution system and the miscellaneous equipment, with the 
 subdivision of the property above referred to showing the investment in 
 manufactured gas property, natural gas property and commercial prop- 
 erty. 
 
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38 
 
 UTILITY OPERATIVE PROPERTY Continued. 
 MANUFACTURED GAS. 
 
 Cost Present 
 
 Distribution System: New. Value. 
 
 Mains (2,097.23 Miles) $11,173,109 $10,471,899 
 
 Meters 3,922,163 2.745,514 
 
 Services 4,532,487 2,932.117 
 
 Street Governors and Vaults 153,291 149,882 
 
 Tunnels 147,000 138,180 
 
 Total $19,928,050 $16,437,592 
 
 Miscellaneous: 
 
 Dwellings at 64th Street $ 33,928 $ 23,750 
 
 Automobiles, Horses, Wagons, etc 112,589 95,701 
 
 Old Furniture 52,513 22,759 
 
 New Furniture 195,575 195,575 
 
 Total $374,605 $337,785 
 
 NATURAL GAS. 
 Distribution System: 
 
 Mains (250.90 Miles) $1,637,026 $1,496,022 
 
 Services 401,725 268,440 
 
 Meters 106,825 74,778 
 
 Total $2,145,576 $1,839,240 
 
 NON-OPERATIVE PROPERTY. 
 Equitable : 
 
 Land $131,760 
 
 Buildings and Structures 60,307 
 
 Holders 15,507 
 
 Station Equipment 293,869 
 
 Total $501,443 
 
 50th St. and Forrestville Ave. : 
 
 Land $1,250 
 
 Buildings and Miscellaneous Structures 800 
 
 Station Equipment 1,460 
 
 Total $3,510 
 
 Superior Street: 
 
 Land 69,426 
 
 Green Street: 
 
 Land 36,000 
 
 40th Street: 
 
 Land 2,000 
 
 Town of Worth: 
 
 Land , 150 
 
 Total Non-operative Property (excluding office 
 
 building) $612,529 
 

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40 
 
 DEPRECIATION OF PROPERTY. 
 
 The difference between the reproduction cost new of the physical 
 property and its present value is $6,786,538, which represents the esti- 
 mated depreciation through wear and tear and obsolescence. To offset 
 this reduction in value, the company should have created a depreciation 
 reserve to which should be credited annually an amount charged to 
 operating expenses equal to the estimated depreciation of the plant dur- 
 ing the year. The rate of return to which the investor is entitled should 
 be applied on the fair present value of the property. If the property 
 has depreciated, and no allowance has been made to restore the capital 
 so consumed, the rate of return must apply on the depreciated value of 
 the plant instead of on the cost new. If, as a matter of law, the present 
 value of the plant is equal to the reproduction cost new, less depreciation 
 the present value of the investment should be enhanced by an amount 
 which the company has set aside for the replacement of those units which 
 have decreased in value through age and use. The company in this case 
 has charged operating expenses annually with an amount which it deemed 
 sufficient to offset the depreciation. These charges, although large in the 
 aggregate, are not sufficient to equal the difference between the cost new 
 and the present value. The reserve for depreciation on December 31 r 
 1909, as shown by the company's books, was $1,617,095. In some respects, 
 the amount shown to the credit of such a specific reserve is largely a 
 book-keeping transaction, the important consideration in each instance 
 being whether the company actually possesses property which, if not set 
 aside for specific depreciation purposes, could be set aside without doing 
 violence to any other obligation. This is believed to be the situation here. 
 The company has earned large sums during recent years which it might 
 have set aside for depreciation- had the officers so decided. Its earnings 
 have exceeded, by a liberal margin, all necessary requirements, but 
 instead of creating a reserve for depreciation sufficiently large to represent 
 the estimated depreciation of the property, such surplus earnings have 
 been placed to the credit of other accounts from which they may be trans- 
 ferred by book entry to the depreciation reserve when occasion requires. 
 It is, therefore, assumed that the board of directors, being in a position 
 to protect the assets of the company against wear and tear, will take such 
 steps as will insure the maintenance of the physical investment by the 
 use of any funds now available for that purpose, although not specifically 
 set aside at this date for that use. Since such assets are ample in amount, 
 the value of the physical property through the addition of these amounts 
 is considered on the basis of its cost new. 
 
 WORKING CAPITAL. 
 
 Because of the nature of the gas industry the amount to be allowed 
 for working capital can be determined with reasonable accuracy. Such 
 
41 
 
 an allowance should embrace the cash requirements of the company for 
 current use, together with the quick assets readily convertible into cash. 
 The amount of working capital will vary with every industry, depending 
 upon the frequency of collections, the amount of materials and supplies 
 tied up in the process of manufacture at any one time, the amount of 
 supplies which it is necessary to have 'on hand at all times, the probable 
 cash demands on the company, etc. An analysis of the conditions affect- 
 ing the industry in Chicago indicates clearly the more important ele- 
 ments governing the amount of working capital. 
 
 In this connection, it must be borne in mind that the company is 
 operating a very large business which, aside from any conditions peculiar 
 to the industry, requires a large working capital. Its pay-roll shows many 
 thousand employees who are paid at frequent intervals. The operating 
 expenses constitute a very large amount, and in addition to the regular 
 requirements in every business, to which this is no exception, demands 
 are constantly arising which can not reasonably be anticipated, and to 
 meet these demands additional cash is required. To take advantage of 
 favorable markets, the company must have available funds by means of 
 which it can reduce both the charges to capital and the operating expense. 
 It is desirable that all bills be promptly paid and that advantage be taken 
 of all discount privileges. During the last few years the cash resources 
 of the company have ranged from approximately $1,000,000 to nearly 
 $3,000,000. From its experience during a number of years the company 
 has found that it is inexpedient, and not without certain elements of dan- 
 ger, to permit the cash on hand to fall below $1,000,000. 
 
 The amount of material and supplies on hand as shown by the 
 inventory is very large and at first glance appears unreasonably so. 
 These stores consist chiefly of coal, coke and oil. The daily requirements 
 of the company are very heavy and to insure itself in the possession of 
 sufficient material to permit the operation of the plant without interrup- 
 tion due to freight congestion, strikes and unfavorable weather, large 
 stores are necessary. If no supply were carried to guard against such 
 contingencies excessive prices would be demanded at a time when coal 
 strikes, rail strikes or storms prevent the movement of certain supplies, 
 while at certain times it would be difficult to obtain the necessary ma- 
 terial at any price. These large stores are further made necessary because 
 the sources from which the company receives its material are long dis- 
 tances from this city. Favorable contracts and the choice of rail and 
 water routes for shipment reduce these requirements to some extent, but 
 prudence dictates that stores approximately as large as those shown in 
 the inventory be kept on hand. 
 
 Against these more or less unfavorable features requiring a large 
 working capital are the advantages arising from the sale of gas and the 
 absence of any violent fluctuations in the operating expenses and in- 
 
42 
 
 ventory accounts. The amount of sales for each month is not subject to 
 great variation and the company is therefore able to estimate with a con- 
 siderable degree of accuracy the money which it will have at any time to 
 meet current obligations. Under the present schedule of charges for gas 
 a penalty of 10 cents per thousand cubic feet is charged in case of failure 
 to pay bills promptly. The amount unpaid at the expiration of the dis- 
 count periods rarely exceeds eight per cent. On these arrears the com- 
 pany receives a profit of 10 cents per thousand cubic feet. With the city 
 divided into many districts so that all the customers' payments are not 
 due at the same time, the cash is received in large volume each day and 
 the necessity for temporary borrowing from this cause is reduced to a 
 minimum. With respect to its collections the gas company is undoubtedly 
 in a more favorable position than a commercial enterprise doing a busi- 
 ness of the same proportion. 
 
 The stores account, the pay-roll requirements and the current assets 
 of the company do not fluctuate through a very wide range. Whatever 
 changes take place are largely seasonal and can be anticipated by the 
 officers of the company. The following table shows the range of the gas 
 stores account, accounts receivable and the pay-roll through a twelve- 
 months period: 
 
 1910. Gas Stores. Acc'ts Receivable. Pay Roll. 
 
 January $1,098,551.87 $1,856,054.41 $253,175.65 
 
 February 1,178,042.95 1,735,428.78 240,782. 12 
 
 March 1,316,230.06 1,628,258.12 268,474.39 
 
 April 1,382,814.87 1,604,220.79 293,341 .47 
 
 May 1,331,026.21 1,562,717.27 304,670.56 
 
 June 1,320,725.43 1,521,618.04 297,669.41 
 
 July. 
 August 
 September. 
 October . . . 
 November . 
 December . 
 
 ,300,020.29 1,448,670.32 290,038.86 
 
 ,235,679.30 1,460,753.06 297,371.79 
 
 ,219,047.51 1,620,872.88 277,316.07 
 
 ,183,797.54 1,761,298.46 281,126.80 
 
 ,156,609.23 1,743,654.28 272,229.69 
 
 ,140,011.03 1,734,090.46 272,811.79 
 
 The best information as to what constitutes a reasonable allowance for 
 working capital is supplied by the balance sheets showing the current 
 assets and the current liabilities. In examining these statements it must 
 be borne in mind that during the last three years the company has been 
 engaged in very extensive construction work and has sold additional 
 securities which shows in the material increase in the cash on hand. So 
 much of the balance sheets as is material to the determination of the 
 working capital is shown in the tabulation below for the last five years: 
 
 Current Assets: 
 Cash 
 
 $1,322,664 
 
 $ 987,965 
 
 $3 207 644 
 
 $3 546 428 
 
 $4 819 934 
 
 Accounts receivable. . . . 
 Gas Stores and Supplies. 
 
 1,220,377 
 832,398 
 
 1,476,514 
 1,384,791 
 
 1,485,021 
 1,142,873 
 
 1,747,491 
 1,071,247 
 
 1,734,090 
 1,140,011 
 
 Total 
 
 $3,375,439 
 
 $3,849,270 
 
 $5,835,538 
 
 $6,365,166 
 
 $7,694,035 
 
 Current Liabilities .... 
 
 $739,466 
 
 $1,185,272 
 
 $1201,359 
 
 $1,187,383 
 
 $1,531,150 
 
43 
 
 There is no fixed rule by which the amount of working capital can be 
 computed. The range of maximum and minimum allowance can be 
 ascertained with reasonable accuracy, but there are numerous demands 
 on the company which are not reflected in the balance sheet, but must 
 be arrived at through the application of a reasonable judgment. Among 
 such items mention may be made of cash requirements to guard against 
 contingencies, the allowance for temporary financing of plant extensions, 
 the cost of gas Avhich has been consumed by the customer since the last 
 reading of his meter and also the cost of gas in the holders and dis- 
 tribution system. A review of all the balance sheet items and other 
 factors materially affecting working capital must lead to the conclusions 
 that an allowance for 1909 of $3,200,000 is approximately correct 
 This amount is therefore used in the computation of the investment 
 value upon which the stockholders are entitled to a reasonable return. 
 
 INTANGIBLE PROPERTY. 
 
 The analysis showing a valuation of $49,023,947 as the cost of the 
 property applies to the physical plant alone. This, however, does not 
 necessarily represent the entire investment of the stockholder upon which 
 he is entitled to a return. In addition to the physical value of the prop- 
 erty allowance must be made for such items of intangible property as 
 the company possesses. While courts have stated in a number of deci- 
 sions the various elements of value, all of which must be taken into 
 consideration in arriving at the final amount upon which the rate of 
 return is to be computed, all agree that the value of the property for the 
 purpose of rate-making is substantially the reproduction value, or the 
 value of the property at the time of the investigation, thus giving credit 
 for every increment in value and making allowance for the depreciation 
 which has taken place. While the strictest adherence to the reproduction 
 theory may work hardship to one party in a particular case, the rule 
 can be applied with reason, and when so followed undoubtedly repre- 
 sents the established law. On this basis the company insists that the 
 reproduction cost includes the value of the franchise and the going value 
 of the corporation. No specific amount was suggested which appeared 
 fair to the officers of the company, nor was any method submitted by 
 which these values could be determined, but it was claimed that the 
 valuation used in the adjustment of the rates must recognize an allow- 
 ance for these intangible assets, both of which are indefinite and ex- 
 tremely difficult of determination. 
 
 The Peoples Gas Light & Coke Company is operating under a per- 
 petual franchise of its own and has secured by purchase the franchises 
 of a number of other gas companies which have been merged into the 
 present corporation. These franchises, it is claimed, possess a large com- 
 mercial value, and to exclude them from the investment would be 
 
44 
 
 equivalent to taking private property for public purposes without due 
 compensation. The term "franchise" is clearly understood and the 
 question of its value from the standpoint of rate regulation has been the 
 subject of court decisions, and while these are not as specific as might 
 be desired, the reasoning of the court and the dicta of other cases sug- 
 gests a disposition of the question here which it is believed will be just 
 in view of the conditions under which the so-called franchise value has 
 arisen. The term ' ' going value ' ' has never been defined by the courts or 
 students of public-service problems in a manner to meet with general 
 acceptance. Its existence, however, has been recognized by all the courts 
 and public-service commissions and it must be allowed in computing the 
 amount of the investment. Whether such value exists as an incident of 
 the physical plant, whether it is entirely independent of the physical 
 value and to be determined from other sources of information, as, for 
 example, the number of customers or the gross earnings, or whether 
 such value may deserve no consideration as an addition to the physical 
 plant, depends largely upon the definition adopted. 
 
 A franchise authorizes the use of private property in a particular 
 manner and generally conveys an exclusive right. In this particular 
 instance the right issued from the people for the specific purpose of 
 having the grantees of that right use it for the public good in the opera- 
 tion of a gas utility and with such profit to themselves as was represented 
 by a reasonable return upon the capital actually invested. There is no 
 proof that the company paid any value for this original right. It was a 
 grant for which the people received nothing in return except the service 
 to be furnished. The company made no franchise investment of its own 
 at the time or thereafter. Its expenditures in constructing the gas plant 
 and the development of the business represented investments in the 
 business and not in the franchise. It is only by virtue of the franchise 
 that the business itself could be developed. The mere granting of such 
 a franchise or privilege conveys with it no right on the part of the 
 grantees to a separate value in the franchise above the amount paid for 
 it, distinct from its use in the business for which it was granted, which 
 the parties may capitalize as against the public in rate adjustment 
 proceedings. 
 
 To grant a value for the franchise as against the public, when no 
 payment was made therefor to the public would be to increase the value 
 of the investment of the company and hence increase the cost of gas. 
 The question for the purpose of this valuation is two-fold : first, does the 
 franchise possess value; and secondly, can it possess a value and the 
 amount thereof be excluded in arriving at what constitutes a reasonable 
 rate? Without going into any lengthy discussion of these two questions 
 and their bearing on the rates in this investigation, the reason for taking 
 the course which was pursued can easily be shoAvn. That franchises 
 
45 
 
 represent property is elementary. They are eagerly sought by capital 
 for the privilege of serving the public and the promise of profit which 
 such service holds forth. They pass from one interest to another for 
 substantial consideration, in none of which the public ordinarily shares. 
 These prices may be large because the profits under the existing rate 
 schedule are liberal, but since such rates are subject to revision to a point 
 where they cease to be unreasonable it is impossible to see how such 
 valuation can long rest on this basis. Until the public sees fit to reduce 
 the rates such profits are legal for the stockholders, but they do not 
 constitute a basis for capitalization against the public. 
 
 If a franchise possesses any public value it must be such a value as 
 will inure to the owners of the franchise because of the exercise of the 
 privilege conveyed, subject to the legal and moral limitations surround- 
 ing it. Any value based on excessive rates is purely commercial and 
 does not exist as against the public, since the franchise can not justly 
 be exercised for that purpose. Since the utility is at all times authorized 
 to charge rates which will yield reasonable returns, it may be assumed 
 that any commercial value which attaches to the franchise is due to the 
 general desire on the part of capital to seek an investment from which a 
 reasonable return can always be obtained without serious risk to the 
 invested principal. In the last analysis payments for franchises really 
 indicate that certain investors are willing to pay a bonus for the right 
 to engage in a particular utility service in the city in question, the 
 amount paid representing the capitalization of the difference between 
 the rate -of return deemed reasonable for the utility purchased and the 
 rate which the purchasers are willing to accept on their investment. 
 Especially does this appear true when the losses in developing the busi- 
 ness are considered as costs and permitted in the capital account. Under 
 this theory the commercial value of a franchise represents the price 
 which capital is willing to pay for a safe income. If rates are always 
 retained at the point of reasonableness no great sum will ever be paid 
 for the franchise and if payment is made it should be to the city, in 
 which case the amount may justly be capitalized. If payments for 
 -franchises are very large with respect to the value of the physical 
 property it would indicate that the schedule rates of the utility pur- 
 chased are too high, or, what is equivalent thereto, that the rate of 
 return deemed reasonable is higher than it should be in the judgment 
 of capital seeking investment. 
 
 Further, the regulation of rates may be an exercise of the police 
 power, but it is not equivalent to condemnation, even though the market 
 value of the property may be affected at the time. If the rate reduction 
 is based upon correct grounds it will be because the schedule has been 
 unreasonably high, and since the franchise was granted to serve the 
 public only at reasonable rates, the reduction of the value due to the 
 
46 
 
 existence of excessive rates is but the removal of a value which existed 
 subject only to the public will and sufferance. Rate reduction, therefore, 
 when correctly made eliminates, as against the public, the value which 
 existed only by public consent and not as a matter of right ; condemna- 
 tion is the actual taking of private property for a public purpose which 
 in its private sphere was based upon the general principles of ownership 
 of property. In the light of these general considerations no allowance 
 is made in this investigation for franchise value. It is not intended to 
 claim that such franchise has no value. On the contrary, it is believed 
 that the perpetual right to manufacture, distribute and sell gas in the 
 city of Chicago is very valuable from a commercial standpoint, but it is 
 claimed that as such right was a grant from the people to the company 
 without payment therefor, or any other restriction on the freedom of its 
 most liberal exercise, the company has made no investment as against the 
 public upon which the latter should be held to pay a return. 
 
 While the company can not be said to possess a property value as 
 against the public in its authority to use its private property in a 
 particular manner for the public good, it must be conceded that an 
 allowance, intangible in its nature and large in the aggregate must be 
 made, not as a franchise right but as a necessary cost of exercising that 
 franchise. It is an elementary proposition, the correctness and justice 
 of which must appeal to every mind, that the franchise to operate a 
 public utility should be granted with the least possible restriction in 
 order not to increase the capital investment, and that the company when 
 once supplied with the franchise should be left to develop its business 
 without hindrance and restraint in order that a low rate for service 
 may ultimately be obtained. To charge a large sum for the franchise 
 only adds to the interest burden to be carried by the public and likewise 
 to heap one burden upon another in the exercise of that franchise by 
 the company is adding costs to the business which must be met in one 
 form or another. Fortunately for the public now, it did not exact any 
 charge from the company in its grant of the original franchise, for which 
 the public is free from burdensome obligations to-day, but in its attitude 
 toward the gas industry in this city since the business was established, a 
 most expensive policy has been pursued which has given rise to sub- 
 stantial investment rights. 
 
 The history of the gas business in Chicago extends over a period of 
 more than sixty years. During this time there have been incorporated 
 and authorized to operate in this city a large number of independent 
 and competing gas plants. The details of the business development, the 
 number of companies created, the bitter competition which ensued, the 
 struggles of the different companies for existence, the combinations and 
 mergers of interests and the legal warfare in state and federal courts is 
 briefly outlined in the historical sketch embodied in this report. One 
 
47 
 
 franchise after another was granted to supply the people with gas when 
 the streets already contained mains of sufficient capacity to supply the 
 demand, and plants constructed under then existing franchises possessed 
 ample facilities and were provided with ample capacity to furnish all the 
 gas required. These franchises entirely ignored the uncontrovertible 
 fact that gas utilities are natural monopolies and that to authorize 
 additional companies for the purpose of creating or continuing com- 
 petition only creates economic waste. The most economical construction 
 and operation, the most satisfactory service and consequently the lowest 
 price for gas is possible only in the recognition of the economic law that 
 utilities are natural monopolies and that their duties can best be dis- 
 charged when the franchise is held by a single company and that com- 
 pany regulated by proper administrative agents of the public. The best 
 economic thought, substantiated by history in nearly every large Amer- 
 ican city, is that all efforts to compel competition in public service must 
 terminate in open or secret combination. To authorize several gas 
 utilities to operate in the same city means ultimate duplication of plants 
 and the wasting- of capital. 
 
 It is impossible to trace the history of the gas business in Chicago 
 without realizing that the policy pursued has created tremendous losses. 
 Plants have been built, streets torn up and the development of the 
 business of established companies greatly hampered, if not partly 
 destroyed, for all of which there was no real occasion. To protect itself 
 in such a situation there was little which an established utility could do 
 except to purchase its rival outright or to enter into an agreement at 
 the earliest possible date before extensive investments were made. This 
 situation in a sense created prior to 1897 a ready market for franchises 
 and the prices varied with the possibilities of the newer companies and 
 probably also with the influence of grantees. That this situation with its 
 opportunity for private profit in addition to the desired competition was 
 clearly realized may be assumed from the number of franchises granted 
 and the prices paid therefor. Unfortunately the records of these many 
 transactions are not as complete as they should be in order to make 
 possible the most satisfactory analysis of the intangible values due to 
 the forced investment, but there appears to be sufficient data to warrant 
 a belief that some of those who were entrusted with the protection of 
 the public rights and also certain officers of the purchasing companies 
 found in the combinations means for mutual profit. When the public, 
 even with the best intention, has thrown obstacles in the way of develop- 
 ment of its utilities, leaving them no option except to remove those 
 obstacles at a heavy cost or to engage in a struggle in which the company 
 must inevitably suffer, such burden in law and in common fairness must 
 be regarded as an investment expenditure. Where such expenditure is 
 increased because of private gain this amount should not be considered 
 
48 
 
 as an addition to the investment. The problem in each case is to 
 determine the legitimate expenditure which the existing company could 
 not avoid because of the city's erroneous policy. 
 
 That such repeated efforts to enforce competition create investment 
 values of an intangible nature as against the city was held in the case 
 of Wilcox v. Consolidated Gas Company (212 U. S., 19). Prior to 1884 
 there were seven gas light companies in New York City, each operated 
 under separate rate charters granted at different times between 1823 
 and 1865 or 1871. They each had the right to use the streets of certain 
 portions of the city for the purpose of laying mains and service pipes 
 in order to furnish gas. Not one of the companies had ever been called 
 upon to pay for such privilege. In 1884 authority was given by law to 
 consolidate these corporations upon conditions named in the act, which 
 specified, among other things, that the amount of capital issued should 
 not be in amount more "than the fair aggregate value of the property, 
 franchises and rights of the several companies to be consolidated." 
 A legislative committee of investigation found that the franchises of the 
 merged companies were reasonably worth $7,781,000 and stock to this 
 amount was included in the total issue. The court held that the public 
 having approved the consolidation and the amount of securities issued on 
 this basis, should not be permitted to question the valuation at this time 
 and therefore accepted the valuation fixed under the act of 1884 as 
 conclusive, but did not permit an increase in franchise value since the 
 consolidation. 
 
 The consolidation of the several gas companies into The Peoples Gas 
 Light & Coke Company was made in 1897 under state authority expressed 
 in the Gas Consolidation Act. As explained in another part of this 
 report, this company assumed the bonds of the merged companies and 
 issued stock to the amount of $25,000,000 which was subsequently placed 
 with investors. In the merging of these companies making up the 
 present consolidation, some of which themselves represented a com- 
 bination of gas companies, there were included those expenditures which 
 had been incurred in purchasing the competing plants, the cost of which 
 had been charged to the construction or plant account of the purchasing 
 company. This account contained, through these acts, heavy charges 
 for duplicate property and expenditures for franchises. From all the 
 data which can be obtained concerning plant values and yearly con- 
 struction, it is doubtful if an appraisal of the property embraced in the 
 merger of 1897, including overhead charges and a reasonable discount 
 on securities, would have shown physical value in excess of $27,000,000. 
 It is clear that the property value was not equal to the bonded (iebt 
 assumed, leaving the total capital stock without any foundation in 
 tangible property. The construction account on December 31, 1897, five 
 months after the merger, showed an investment of $60,181,559, against 
 
49 
 
 which there were outstanding stocks and bonds to the amount of 
 $59,246,000. 
 
 It will be observed that the facts in this case are somewhat similar 
 to those in the New York case above referred to, in which it was held 
 that a reasonable investment value in the franchises was created, the 
 extent of which the public was estopped to deny. It also found in the 
 same act of estoppel a measure of value for the property in excess of 
 the physical value. In this valuation, however, neither the city of 
 Chicago nor the State of Illinois has ever by agreement, sanction or 
 acquiescence, committed any act which would estop it from denying the 
 existence of franchise value. If any value exists in this case over and 
 above the physical value it must be founded on some ground other than 
 that of estoppel to deny franchise rights, and it is believed that such a 
 ground exists. The value in this case is founded on the basis of cost. 
 Since for all practical purposes the policy of the city compelled the 
 older company to purchase the newly organized companies, the amount 
 which it was honestly compelled to pay represents an expenditure which 
 can be regarded either as a cost of extending and strengthening the 
 business or as a necessary loss in maintaining the business. In either 
 event the expenditure must be met by the investors in the gas business, 
 and since the public compelled this act which increased the cost of the 
 plant it should in all fairness be estopped from denying the reasonable 
 consequences of its acts. Where an expenditure is made necessary by 
 an act of the public which increases the cost of the plant, or adds to the 
 operating expenses of the utility, it is but fair that the city, as between 
 the investor and the public, should bear the burden of such costs. The 
 question here is not one of franchise values lout of costs of business. 
 This expenditure is not intangible property in the sense that it creates 
 a right to perform a specific act, although it is intangible to-day in that 
 there is no physical property in existence for the payment. 
 
 That such present value is difficult to determine is no proof of its 
 r^pnexistence. While it can not be computed with accuracy it can be 
 approximated. It may safely be assumed that the actual plant value in 
 1897, when the present company came into existence, was not in excess 
 of the amount of securities issued. In fact, it is known that the physical 
 plant value was less than the amount of the bonds assumed. If the 
 value of the stocks and bonds at the date of consolidation be taken as the 
 investment value of the property an injustice would be done to the 
 public, since the balance sheet shows the par value of the securities 
 which it is known exceeded the market value at the time of the con- 
 solidation, and also because a reduction should be made from the total 
 for what appears to be unreasonable personal profits and excessive prices 
 paid in the transactions. The subject of valuation, with respect to 
 this question, has been carefully analyzed from all the records which 
 
50 
 
 could be obtained, and it is believed that if the physical value of sub- 
 stantially $27,000,000 is increased by an amount of approximately 
 $10,000,000 to represent the intangible value due to the necessary invest- 
 ment costs and an allowance be made for working capital, the fail- 
 value as of 1897, in round numbers, should be $39,000,000, instead of the 
 amount of securities shown at that date. With this amount as a value in 
 1897 it is possible to compute the fair tangible and intangible value 
 as of 1909, the records since the above date being complete. 
 
 The court, in the Consolidated Gas case above referred to, held that 
 the intangible value there allowed and which the city was estopped to 
 deny, did not increase with the growth of the business. Neither is there 
 any ground for believing, under the reasoning in that case, that the 
 intangible value of the Peoples Gas Light & Coke Company has increased 
 because of the great increase in physical value since 1897. The question 
 naturally arises, if the city by its early action compelled the company to 
 increase its cost of plant, which must be allowed as part of the investment, 
 is it possible by any subsequent act of the city to reduce that value? 
 If adverse acts of the city result in investment increases, does it not 
 logically follow that any acts of the city which permit a return over 
 and above that which is deemed reasonable on a fair valuation should, 
 by the amount of such excess, be applied as a credit to the investment and 
 thus reduce the valuation so created against the public ? Whether there 
 has been an increase or reduction of the going value under this theory 
 must be determined from an analysis of the company's records since 
 1897. 
 
 The disposition of the franchise value may be summarized by the 
 statement that franchises are property, but that no value should be 
 allowed as against the public in rate adjustments except to the extent of 
 the price paid for them to the community. Even though no amount be 
 allowed for franchises in the valuation an addition must be made to the 
 physical value to the amount of reasonable costs which were incurred 
 due to the municipal policy of forced competition and that such losses 
 constitute construction charges which the city in justice is estopped 
 to deny. Since the public is to be charged with the costs incurred 
 through its erroneous policy in the form of an increased investment, the 
 same logic requires that the public receive the benefit through a credit 
 to such intangible investment by any amount which the company may 
 have been permitted to earn since 1897 over and above a reasonable 
 rate of return on the investment actually made. The discussion of 
 the subject of the intangible value of the company's property as affected 
 during the last thirteen years is so involved with the subject of going 
 value that digression is here made to the latter subject. 
 
 While no definition of the term is entirely satisfactory, it is admitted 
 by authorities that the ' ' going value ' ' represents an element of value due 
 
51 
 
 to the company in question being a live, active, operating plant instead 
 of a bare physical mass of material. Going value must not be confused 
 with "good- will" which implies the exercise of choice on the part of 
 the customer as to which of several establishments offer the best induce- 
 ments for his patronage. Since a gas utility is a natural monopoly 
 there can be no room for selection by the customer. If there is only one 
 establishment which can supply the people, there is no "good-will" 
 value due to their choice to take its product or subscribe to its service. 
 Every one will agree, however, that a given plant having a valuation of 
 $50,000,000, with an established business supplying 500,000 customers 
 with its product, is worth more to the present investor and to the 
 prospective purchaser than is the same plant ready to serve the com- 
 munity, but with no customers attached for service and its business 
 undeveloped. Experience shows that it costs a great deal to develop 
 any business. The early years of nearly every business are beset with 
 many serious difficulties which not infrequently terminate in bank- 
 ruptcy. The problem is how to measure the value of such an established 
 business for the purpose of rate adjustment. 
 
 It has been claimed by some, and also advanced in this valuation, 
 that if the going value of a company represents the cost of developing 
 its business, it means the value of the present patronage of the company. 
 From an analysis of the records it is possible to obtain an accurate 
 statement of the cost of securing a customer. If the company in ques- 
 tion has 522,000 customers, as is true in this case, the going value, with 
 the assumed cost of development of $30.00 per customer, would mean a 
 value of $15,660,000. Regardless of the justice or injustice of this 
 ainount it will readily be seen that this is not the proper measure of 
 going value. The average rate per customer which the records show 
 will be an average over recent years and will not cover the entire history 
 of the company. This method fails to give information as to the cost 
 of development at the time when development is a real problem to the 
 company. In order to be accurate it should consider the cost of securing 
 business during the entire history of the company, so that the develop- 
 ment expenses as determined would be the development cost of this 
 particular plant under the difficulties which confronted it at different 
 times. It is generally known that fifteen or twenty years ago the use 
 of gas had not reached the stage of necessity which it holds to-day, and 
 that it required more argument, solicitation and many inducements to 
 secure the development of the business. This method of arriving at 
 going value does not, therefore, recognize the investment which the 
 company has made for the development of the business. 
 
 The theory in this case, however, that of reproduction as of the 
 time of the investment, must recognize that gas is to-day not an 
 unknown quantity. It is a service of general use. It does not require 
 
52 
 
 so large an expenditure to develop the gas business to-day in a large 
 city as was needed a generation ago. Everybody knows the value of gas 
 for heating and for illumination. There is always a certain inertia to 
 be overcome, but this calls for less expense to-day than was necessary 
 years ago. Development expenditures must be incurred even to-day, for 
 every utility must be continuously engaged in campaigns of education 
 to secure the widest and at the same time most economical use of gas. 
 These expenses are proper operating expenses and as such should be 
 included in the expense accpunts. To also capitalize them would mean 
 the duplication of expenses. , 
 
 If the reproduction rule means the cost of development of an equal 
 business as that which exists to-day, as if, to be more clear, the present 
 plant passed out of existence and its customers would have to be 
 solicited to use gas of the new company to take its place, it must be 
 remembered that no such expense for development would be required as 
 was generally necessary years ago, or as was actually incurred by the 
 company. Reproduction means reproduction now, at the time of this 
 investigation, and this is the time when thousands of gas users are 
 thoroughly alive to the advantages of gas and demand its widest possible 
 use. These customers, as a rule, are not seeking education to-day on the 
 uses of gas. The general demand in 1910 and 1911 is the demand for 
 adequate service and reasonable rates. Given these conditions under 
 the reproduction theory, it is safe to assume that a very large propor- 
 tion of the present customers would take gas from the company without 
 solicitation or any demonstrations. Some would require visits by solici- 
 tors to induce them to take gas from the new proprietors and a number 
 probably would be lost entirely, but it is obvious that when the public 
 has become accustomed to the use of gas as under present conditions, 
 the cost of reproduction would apply only to a portion of the present 
 customers. To attempt to measure going value by applying a develop- 
 ment cost per customer to the entire number of customers is therefore 
 unjust, not only because it does not recognize the losses and surplus 
 profits during the operation of the business, but for the reason that a 
 very much lower rate per customer should be used than the average 
 cost of development shown by the books. 
 
 Another basis suggested for the measuring of going value was to 
 allow an amount equivalent to one year's gross income. This suggestion 
 has the merit of simplicity, but is unsound because the going value of 
 the company as of to-day has no definite relation to the gross earnings. 
 Going value has no reference to the capitalization of the plant on the 
 basis of its earning capacity, for that would be governed largely by the 
 present rate schedule, which may be too high. The real basis of the 
 suggestion is that in a number of plants the cost of developing the 
 business has been found upon investigation to be substantially equal to 
 
53 
 
 the gross earnings for one year. In this instance the going value, fol- 
 lowing this method, would be approximately $15,500,000. It will be 
 seen that in this case this value is almost the same as what would be the 
 going value if computed on a cost per customer basis. It would appear 
 that the similarity of the two figures is a matter of accident rather than 
 that it represents substantially the measure of the going value. The 
 gross earnings of to-day give no information as to the cost of develop- 
 ing the business. In one city the public may have been ready for the gas 
 utility and customers were easily secured. In another city the service 
 may have been in advance of its necessity and owing to the cheapness of 
 other fuel and illuminants development was slow and expensive. The 
 gross earnings may be an element to be considered in arriving at the 
 going value of a corporation, but can hardly be accepted as a true 
 measure of it. 
 
 Another measure for determining going value, one which has served 
 several times in computing the intangible worth of water-works 
 plants and the adoption of which was strongly urged by the engineers 
 of the company in this valuation, is based upon the cost of reproducing 
 the business of the corporation under conditions of to-day. This method 
 assumes that an investor is desirous of engaging in the gas business in 
 Chicago and has in his possession sufficient capital to purchase the pres- 
 ent plant. Leaving aside for the sake of argument the question of fran- 
 chise rights, the investor must decide whether to purchase the existing 
 plant with its established business, or to construct a plant of sufficient 
 capacity and develop the business so that at the end of the necessary 
 construction and development period the new plant will have overtaken 
 the present plant and will have a business of substantially the same pro- 
 portions as that of the present going concern. This method aims to place 
 a value upon an established income and to determine whether it is more 
 economical to purchase the going concern with its established business 
 or to develop the business. 
 
 This method is of course purely theoretical, but it is based upon 
 assumptions founded in actual practice and although not conclusive it 
 deserves consideration. The length of time required to build a plant as 
 large as that needed to serve Chicago, the actual construction and over- 
 head charges, the interest rates to be paid during construction, the 
 probable date when gas could first be sold and the increasing output each 
 year Avith the extension of the plant and the development of the busi- 
 ness are matters which the company's engineers believed could be esti- 
 mated with a considerable degree of accuracy. To show the application 
 of this reasoning as indicating the amount of going value several tables 
 were submitted showing the growth of the existing or going concern and 
 the development of the hypothetical plant. These tables are herewith 
 presented. It was necessary for the purpose of this computation to 
 
54 
 
 assume a plant value, a working capital and a going value for the plant 
 now in operation. The operating expenses, taxes and depreciation 
 requirements were taken from the present company's accounts. It was 
 further necessary to assume a rate of increase in business from the begin- 
 ning of the period covered in the table for both the present plant and the 
 hypothetical plant. It is considered that the hypothetical plant will be 
 built as rapidly as is consistent with good engineering practice, and the 
 financing of the enterprise will be on the most favorable basis under 
 present conditions. Construction, it is assumed, will be started on 
 January 1, 1911. 
 
 In the tables the sum of $42,000,000, exclusive of the office-building 
 investment, was taken as the physical value of the plant necessary for 
 the manufacture, distribution and sale of gas, which amount was appor- 
 tioned over the principal classes of divisions of property. The allowance 
 for working capital was placed at $4,000,000 and the estimated going 
 value of the present plant was placed at $12,800,000, showing a total 
 investment value of $58,800,000. It is assumed that a period of ten 
 years would be required to complete the plant with all of its present 
 facilities, although gas would be supplied to some customers before the 
 end of the second year and each year to an increasing number as the 
 plant was extended into new territory. The extensions of the plant 
 would be made as rapidly as possible and the time assumed in this 
 instance is based upon the best available records of continuous con- 
 struction in large undertakings which the company possessed. The 
 plant would naturally be built so as to supply some customers at the 
 earliest possible date and efforts would be centralized to complete the 
 plant first in the most profitable business section. Neighborhoods would 
 be canvassed in advance of actual construction, so that the plant would 
 be self-sustaining as soon as possible, or at least earn part of its operating 
 expenses. 
 
 The first year, it is assumed, in all probability would be given over to 
 securing franchises, taking out incorporation papers, perfecting the 
 organization of the corporation, selecting office locations, closing con- 
 tracts and making surveys. Real estate would be acquired early, as 
 shown to be needed by the surveys, for the location of manufacturing 
 stations, holders and pumping stations. The amount allowed for real- 
 estate purchases in this instance has been based upon the idea that 
 plants would be constructed simultaneously in the different divisions of 
 the city. Additional land would be purchased the second year and the 
 immediate requirements probably completed by the end of the third 
 year, although the construction of mains, services and meters would 
 continue rapidly throughout the entire ten-year period, thus extending 
 the service into new territory to additional customers and greatly increas- 
 ing the output to near capacity. The following tables show the computa- 
 tions under this method of measuring going value. 
 
55 
 
 tf 
 EH 
 GC 
 
 i o 
 
 8 o 
 
 S 
 
 pd w 
 
 c * 
 
 fr p^ 
 
 f^ W 
 
 PC >r 
 
 f= S 
 
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 co~ oi o" o' t^.~ ic~ **' co~ <M" r-T 
 
 Ifs 
 
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 - 
 
 B8- 
 
 :88S 
 
 (M C^ CC i ( i i 
 
 
 '88 
 
 f"*3 f^i f^ ^^ 
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 88 
 
 OOiOiOiOOOiOOO 
 
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 03 !M (N <N ^H r-t 
 
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 i i CO <M O CO i i CO C t^ O 
 OiO"*<MOO"*i'<fOCi' i 
 
 " 
 
 
 O < i GO * t^ iC CO C i i OS 
 COOOOI>C'<t l cO<Mi i 
 
 co~ ^ o" o" t^T c~ TjT co~ <N~ FH 
 
 S5 
 
 i i t~- ^t 1 CO O 
 CO CO CO 1-1 O 
 <M OO -^ O t^ 
 
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 ~ <M" co" i-T co" i-T TjT o" 
 
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 lfl 
 
 S n 5 
 
 
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 S.-1 
 
 11 
 
 S a S 1 
 
 ^ go 
 
 T-H CO CO l-H T-H 
 
 ^c 
 
 co ^c co 
 
 T? O CO rH ^ 
 
 cT T-T r-T c^T c<T co" co~ TjT 10" 10" 
 
 OSOOT-H T-H 
 9& 1 "" 1 
 
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 QO I s - O i i T-H GC O 
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 CN"<M"CN"<M"T-H" 
 
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 8-" " 
 
 :8SSSS8S8 
 
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 i IGOCMOQO' i CO 1C CS M 
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 |||||||g 
 
 ^ 
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 LOOCO'-HOC^'t^- 
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 Tf CO I 
 
 caOTjHoc:^ 
 
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 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 
 
 !><NGOl>. < *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 
 
 <! E.5 ^ -^ o 
 
 & 
 
 Sin 
 I'l-ll 
 
 t* GO 
 
 O^O 
 GO_GO i 
 
 co" r- o 
 
 O GO 
 
 T co" co" 
 
 CO CO CO CO"'^^^^"' 
 
 18 
 
 GO CO" 1>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 <M (M OS^t^ 
 
 oo^c^rc^rrt^oo" 
 
 CO (Ml> 
 
 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 
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