H 4-4-9L UC-NRLF •C MS 0?A O >- 1 THE RETURN ON THE INVESTMENT IN THE SUBWAY OF THE Interborough Rapid Transit Company of New York City. SUBMITTED TO THE PUBLIC SERVICE COMMISSION FOR THE FIRST DISTRICT OF THE STATE OF NEW YORK BY BION J. ARNOLD, Special Consulting Engineer. REPORT No. 7, December 31, 1908. s>r PUBLIC SERVICE COMMISSION, 154 NASSAU STREET NEW YORK CITY [Form 2132] [2d 1000— F '09 (B)] THE RETURN ON THE INVESTMENT IN THE SUBWAY OF THE Interborough Rapid Transit Company of New York City. SUBMITTED TO THE PUBLIC SERVICE COMMISSION FOR THE FIRST DISTRICT OF THE STATE OF NEW YORK BY BION J. ARNOLD, Special Consulting Engineer. REPORT No. 7, December 31, 1908. PUBLIC SERVICE COMMISSION, 154 NASSAU STREET NEW YORK CITY MARTIN B.BROWN * PRESS* NtWVO'ORIv LETTER OF TRANSMITTAL. December 31st, 1908. Public Service Commission, for the First District, State of New York, Tribune Build- ing, City: Gentlemen — I have the honor to transmit herewith my report upon "The Return on the Investment," in the Subway of the Interborough Rapid Transit Company, this, being Report No. 7. Many of the conclusions reached in this Report result from analyses already made in my former reports upon "The Signal System," "The Subway Car," "The Capacity of the Subway," and "The Traffic of the Subway." This report discusses the influence on the return upon the investment of the density of traffic; non-paying branch lines; fixed charges upon structure and equip- ment; depreciation; income and expenses per car mile; non-paying car miles; the necessity for the development of the short haul business ; development of maximum capacity by proper design and the relative effect of each of these elements upon the practicability of maintaining a Subway system throughout Greater New York upon a fixed five cent fare basis. , Respectfully submitted, BION J. ARNOLD, Consulting Engineer. 680862 THE RETURN ON THE INVESTMENT In the Subway of the ,» ' '„ ] V INTERBOROUGH RAPID TRANSIT COMPANY !,!'. of \,, • • • • NEW YORK CITY. The fundamental problem of rapid transit in the City of New York, at the present time, is how to provide additional rapid transportation facilities and maintain the present five cent fare.- In order to determine to what extent additional Subways can be constructed and operated profitably either by municipal credit, private capital or a combination of both, :t is imperative to study the results of three years' operation of the present Subway. The object of this report, therefore, is to analyze the various items of revenue and expense and to show the relative financial influence on each item of the possible im- provements that can be made on the design and operation of subsurface systems of transportation. Analysis of Earnings and Expenses. Table No. 1 shows a comparative statement of the car miles, the earnings and the operating expenses for the present Subway for three consecutive fiscal years, the last one ending June 30th, 1908. It will be noted from this table that during the last three years the revenue from passenger traffic has been increasing from 21.6 cents to 22.77 cents per car mile and that the revenue from other sources (rent of power, advertising, privileges, etc.) has also been increasing from .47 cents to .53 cents per car mile, making the gross income per car mile increase, in these three years, from 22.08 cents to 23.3 cents per car mile. On the other hand, the expense of operating the road has fluctuated from 9.32 cents to 10.45 cents and back to 10.05 cents per car mile, resulting in the net earnings also fluctuating from 12.76 cents to 12.43 cents, and finally, during the last yearly period shown it reaches 13.25 cents per car mile. The revenue is derived from three sources : 1. From advertising. 2. From rent of power, sale of privileges, etc. 3. From passenger traffic amounting to the five cent fare multiplied by the number of passengers carried. The total revenue from the first two items amounted, during the past year to 2.27% of the revenue from all sources and these items are increasing in relative importance each year. It is probable that the revenue from other sources than pas- senger traffic may be made to amount to one cent per car mile, and therefore is a source of revenue that should not be neglected. Unless the fare is raised, the only method of increasing the last item or the gross revenue from passenger traffic is to carry more passengers. This possible- increase in passenger traffic may be divided into four classes : a — Passengers who would ride counter to the rush travel, thus utilizing to better advantage, than at present, the returning cars. b — Passengers whu ,vould ride during non-rush hours, thus utilizing the equip- ment which is on hand but at present lying idle during a large part of the time. c — Passengers who would ride a comparatively short distance — that is, short haul passengers who, at present, either walk or use the surface lines. d — Passengers who would add to the present traffic during rush hours. The object should be to increase the average income per car mile without adding materially to the present crowding; that is, the most desirable passengers are those of the first three classes. Table No. 1. Comparative Statement of Car Miles, Earnings and Operating Expenses of the Subway of the Interborough Rapid Transit Company, New York City, as Given in its Reports. Year Ended June 30th, 1906. Per Amount. Car Mile. June 30th, 1907. Amount. Per Car Mile. June 30th, 1908. Amount. Per Car Mile. Car Miles .31,931,073 37,184,940 Earnings: From Transportation $6,900,873.96 $.216 $8,319,468.24 From Other Sources 151,138.04 .0047 187,455.37 Totals 7,052,012.00 Expenses: A Maintenance: a. Way 358,014.01 .0112 b. Equipment 360,628.88 .0113 c. Power Plant .... 75,256.13 .0024 B Transportation, Operation : a. Wages, Conductors, Motormen & Guards 538,795.47 .0169 b. Wages, Platform men, Agts., Gate- men, Porters 273,718.23 .0086 c. Other expenses 347,857.19 .0108 C Power Supply 830,266.59 .0260 D General Expenses 193,572.85 .0060 Total Expenses 2,978,109.35 Ratio of Operating Expenses to Earnings 42.23%' 45.64% Net Earnings $4,073,902.65 .1276 $4,623,553.93 44,005,213 .2237 $10,020,538.18 .0050 232,799.19 .2208 8,506,923.61 .2288 10,253,337.37 483,975.09 706,839.06 115,887.66 664,519.95 318,639.32 411,140.44 921,168.32 261,229.84 .0130 .0190 .0031 .0179 518,552.16 821,744.49 153,756.87 .0086 370,786.85 .0110 419,245.05 .0247 1,047,259.33 .0070 304,900.10 43.14% .1243 $5,830,024.10 .2277 .0053 .2330 .0118 .0187 .0035 787,068.42 .0179 .0084 .0095 .0238 .0069 .0932 3,883,369.68 .1045 4,423,313.27 .1005 ,1325 It was shown in my report Number 6 upon "The Traffic of the Su'i way" that the local or short haul business is by far the most desirable pass mger traffic and that the success of the present Subway as well as the poss bility of building future Subways depends largely upon the possibility of devel- oping this short haul business. There is nothing to be gained by increasing the long haul load — in fact this part of the 'business has already become too great a burden and unfortunately is growing rapidly. The only possible way to offset the losses due to passengers riding 10 to 15 miles for 5 cents is to furnish a local service which will attract a greater number of oassengers who will ride comparatively short distances on a 5 cent fare. This short haul business will not be an advantage, how- ever, unless it can be handled in short haul cars, can be accommodated by cars which otherwise would run empty, or can be handled by means of moving plat- forms at a lower cost per passenger than by train operation. It is a matter of every day observation that there is a large amount of short haul passenger business available in the downtown district of Manhattan which is not at present accommodated by the surface or elevated systems, and it is this kind of traffic which would produce relatively the largest net returns for a Subway system. The travel which has been created by the present Subway between the 42nd Street district and lower Manhattan is a convincing demonstration that there is little disadvantage to the spreading out of the business district even as far as Central Park — if the trans- portation facilities can be made adequate. The growth of the business district and the profit to be derived by serving this enlarged territory with a Subway system carrying many of its passengers but short distances, is the line of development which holds the greatest promise. The earnings of the present Subway are at the rate of five cents for each passen- ger carried, while the expenses are in proportion to the car miles operated. It, therefore, should serve as many different passengers as possible with the most advan- tageous distribution of car miles. Every empty car carried means either a sacrifice of the service that can be rendered during the rush hour period or an increase in the car mileage with a corresponding reduction of the return on the investment. To make a comprehensive Subway system pay a fair return on the investment, the income from passenger traffic should average about one cent per passenger mile. Passengers carried more than 5 miles and thus contributing less than one cent per mile must be balanced by other passengers traveling less than five miles and thus contributing an amount proportionately greater than one cent per passenger mile. EXPENSES. The total cost of operating a Subway may be divided as follows : 1 — Operating Expenses. A — Maintenance Expenses; a — Maintenance of Way including Tracks, Stations and Subway ; 8 b — Maintenance of Equipment including Signal System, Electrical Con- ductors, Rolling Stock, and Repair Equipment ; c — Maintenance of Power Plant including Power Houses and Sub- stations. B — Transportation Expenses ; a — Wages of Conductors, Motormen and Guards; b — Wages of Platform men, Agents, Gatemen, and Porters; c — Otber Transportat'on Expenses. C — Power Expense, including Labor, Fuel, and Supplies at Power House and Sub-stations. D — General Expenses including Damages and Insurance. 2 — Interest and Sinking Fund on Permanent Way. In case of the present Subway, the money supplied by the City for permanent way bears an annual interest charge of an average of about 4% and an annual sinking fund charge of 1% making a total annual charge of about 5%. 3 — Interest on Investment of Company including Equipment. This charge will vary from 4% to 6% depending upon financial conditions. 4 — Depreciation Reserve. With the present Subway, no depreciation reserve fund has yet been provided. 5 — Taxes. With the present Subway the taxes are nominal, being only $60,000 per year. A study of the records of operating expenses as shown by Table 1 can be made to advantage if each item is examined with the idea of determining how much can be saved by taking advantage of every possible economy and also what effect each indi- vidual improvement will have on the total operating cost. 1 — Operating Expenses. A — Maintenance Expense. The table shows that for the year ended June 30th, 1908, the expenses for maintenance were as follows: A — a Maintenance of Way 1 . 18 cents per car mile b Ma'ntenance of Equipment 1.87 cents per car mile c Maintenance of Power Plant .35 cents per car mile Total Expense for Maintenance 3.40 cents per car mile This maintenance expense, which increased considerably during the second year has been decreased during the past year, indicating that these expenses do not neces- sarily increase with the age of the Subway. Careful management will tend to keep the maintenance items down and an invest- ment in an efficient repair equipment would be justified. Every car operated one mile will entail a corresponding maintenance expense; that is, the unit cost per car mile of these three items of maintenance is practically inde- pendent of the number of car miles operated and will not decrease materially as the number of car miles increase. In this respect these items may be classed with two other items which, for the same period, were as follows : B — Wages of Conductors, Motormen & Guards 1.79 cents per car mile C — Power Supply 2.38 cents per car mile The unit cost per car nv'le of both the wages of the trainmen and the expense of supplying energy to the cars will be practically constant whatever the number of car miles operated. Taking these last two items ar.d adding them to the first three items, we have a charge of 7.57 cents per car mile which cannot be decreased by any appreciable amount by running more car miles but which can be avoided entirely every time a car can be prevented from running a useless mile. The problem therefore, to reduce the influence of these charges, is to run as few non-productive car miles as possible. For instance, there are 1.870,000 cars running each year on the Lenox Avenue branch which are diverted a distance of .85 mile in order to use the Broadway tracks, between 103rd Street and 42nd Street. If these cars could be carried down Madison Avenue from Lenox Avenue and West 110th Street to Grand Central Station, a saving in useless car movement amounting to 1.589,500 car miles would be effected which at 7.57 cents per car mile means an annual economy of $120,325.15. This amount added to the probable net earnings of the cut off itself would probably more than justify the investment of the cut off and in addition decrease the present running time between The Bronx and the Battery. There are also fully 1,000,000 useless car miles run every year which result from the lack of a storage space in lower Manhattan for the use of cars which now travel one way practically empty before or after each rush hour period. In building future Subways, the need of a .storage space to act as a reservoir for cars used only in serving the peak load should be carefully considered. Even where a Subway is provided with enough tracks to. carry the same number of cars in both directions, the investment in a storage space, say under Battery Park, would be justified, but when an odd track is to be provided for handling the rush hour traffic, in one direction in the morning and in the other direction at night, the cost of the storage tracks would be less than the cost of an additional track the entire length of the road and the saving effected by the elimination of the useless car miles which will be avoided by storing the cars during the day will result 'in an added economy. There are useless car miles run at present resulting from the fact that many of the trains have a large number of vacant seats at the extreme ends of the line. With the present Subway at least 2,000,000 car miles of empty cars are operated each year because it is impracticable at present to couple up the cars quickly. When a method 10 of more quickly making up trains has been perfected it will be possible to add or sub- tract cars to or from a train at intermediate stations and thus avoid the useless waste of power, trainmen's time and equipment involved in carrying many of the full length trains to the extreme ends of the branches. Under present operating conditions it requires too long a time to make and break the mechanical, electrical and air connections between the cars. This operation now requires from one to two minutes, as all of the couplings are made by hand. When it is finally realized that, in order to operate Subways successfully, every economy must be carefully developed the advantage of being able to make up and break up a train so as to avoid running full length trains out to the extreme ends of the lines will be appreciated and all of the coupling devices will be made automatic so as to reduce to a minimum the delays at the junction stations. If for no other reason than to allow the greatest flexibility in making up trains of various lengths at terminal stations, as well as at the junction points of two or more lines, the principle should be adopted, with future Subways, of providing each car with motors. At the present time, only 60% of the Subway cars are motor cars, the remaining cars being trailers. Thus, in a 3-car train there are 2 motor cars ; in a 5-car train 3 motor cars and in an 8-car train, 5 motor cars — but the make up of the trains is thus confined to 3, 5, or 8 cars. With motors on each car, the trains could be made up equally as well with any number of cars and the decided changes in sizes of trains that now occur in the rate of car movement where the length of trains is changed at certain times of the day, could be made more gradual. With the present Subway these three sources of useless car miles show a total of over 4,500,000 car miles a year or about 10% of the total number of car miles operated. If all these car miles could be cut off, the annual saving at the rate of 7.57 cents per car mile would amount to $320,000. OPERATING EXPENSES. There are some items of operating expenses which vary inversely as the number of car miles. These, in the present Subway, are as follows : Bb — Wages of Platform men, Agents, Gatemen, Porters, etc .84 cents per car mile. Be — Other Transportation Expenses 95 cents per car mile. C — General Expenses 69 cents per car mile. Total 2.48 cents per car mile. With a given Subway the greater the number of car miles operated the less will be the expenses per car mile for these three items. For instance, with the present II Subway, if twice as many car miles could be operated the total expense represented by these items would remain about the same and the unit cost of these items per car mile would be only about one half what it is at present. These three items will show the results of efficient management to a considerable degree — but the best way to re- duce their importance relative to the total operating expense is to operate as many car miles as can be used to advantage. The actual operating expenses per car mile are thus divided into two classes of expenses. The first class consists of those items which remain practically the same irrespective of the number of car miles operated. That is, the cost of maintenance, train men, and power which are the items in the first class and which in the case of the present Subway amounts to a total of 7.57 cents per car mile cannot be reduced to any great extent by running more cars. The second class consist of those items of operating expense which are general and which therefore become less per car mile as soon as more car miles are run. In the case of the present Subway, this second class of items which consist of station charges and general expenses amounts to 2.48 cents per car mile. The total of the two classes thus amounts to (7.57 + 2.48) or 10.05 cents per car mile. Little can be done in the future operation of the present Subway or in the design of future Subways' to cut down materially the cost per car mile of the items of the first class. Efficient management and the design of a Subway which will allow the running of a greater number of trains upon each track will cut down the cost per car mile of the items of the second class — but this part of the expense is proportion- ately small. » Analysis or thf Fixed Charges. The annual charges are as follows — Interest on the Cost of Permanent Way. Sinking Fund on Investment in Permanent Way. Interest on the Investment in Equipment. Depreciation on Equipment. Taxes. All of these items can be reduced by keeping down the original cost of con- struction. Limiting the Investment in Permanent Way. Under New York City conditions, a Subway costs, approximately, three times as much to build as the present elevated roads, and it should handle considerably more traffic than an elevated road of corresponding length. It should therefore be apparent that Subways should be constructed only where there will be sufficient density of traffic to justify such an expensive type of construction. 12 The approximate costs of one mile of single track — exclusive of equipment, pozver plants and electrical conductors, for different kinds of construction in the vicinity of New York City are as follows — Cost per Mile of Single Track. f , A , From Low to High Surface Railway (for overhead trolley) $20,000 $30,000 Add for Asphalt paving or $12,000 Granite Block paving $20,000 Cost of surface road $32,000 to $50,000 Cost of Conduit road, including same allowances for paving $80,000 to $120,000 Elevated Railroad $200,000 to $300,000 Subway $600,000 to $900,000 Tunnel under River ' $1,200,000 to $1,800,000 These figures, which, as before stated, do not include the cost of car equipment, power station equipment, or transmission system, for the reason that such investment depends upon the car miles operated, indicate that to operate an elevated passenger road and keep the fixed charges per car mile for permanent way within reasonable limits the passenger traffic should be about 3 times that which would justify a surface conduit system. To support a Subway, the travel should be about 3 times the minimum travel that would justify the building of an elevated road; and to maintain a tunnel, the length of haul must either be very short or tbe passenger movement through it must be of great magnitude. Due allowance must always be made for possibilities of develop- ment — but when the promise of a reasonably early growth in traffic does not exist the more expensive forms of permanent way cannot be justified from a strictly commer- cial point of view. The extension of the Subway type of construction into outlying districts which for some years after the Subway is built will not pay interest on the investment is an annual burden and the present Subway is seriously handicapped by such a burden. Subways are eminently adapted for main line traffic but not for branch lines. Feeder lines to the Subways should consist of elevated roads or of lines located in open cuts — fed in turn by surface lines. In order to get a proper return on the large invest- ment required for Subway construction, the tracks of the Subway must be used to their maximum efficiency, particularly during rush hours. To get three times as many cars over one track in a Subway as are now run on one track of an elevated structure, means long trains at frequent intervals. If 7-car trains on 2-minute headway (210 cars per hour) are found possible on one elevated road, then 10-car trains on 1 -minute headway (600 cars per hour) must be provided for in the Subway to put the earning power of the Subway method of transportation on the same basis as that of the present Elevated system. In general, then, a Subzvay should be built to take the place of three elevated lines and the outlying districts can not be relied upon to support a Subzvay until the traffic 13 t^hich originates in the district added to the traffic which passes through the district is sufficient to justify three elevated lines of the present type. Interest on the Cost of Permanent Way. There arc difficulties in the way of determining, just at the present time, the exact charge to be made per car mile for interest on the cost cf the permanent way of the present Subway. All of the charges against this account have not been adjusted; parts of the Subway have not been in operation for a complete year, while other parts, such as the Brooklyn branch, have been designed and built to provide for future exten- sions, and, therefore, represent a comparatively larger investment than would be justified by present traffic. Safer conclusions can be drawn by considering a Subway similar to the present Subway, but ending at the Battery, thus eliminating the expensive tubes under the East River and the complicated system of tracks at the Brooklyn end. The cost of constructing the permanent way of a Subway equal in mileage to the present Subway tracks in the Boroughs of Manhattan and The Bronx may be taken at $50,000,000. In addition to this investment, it would be necessary to equip the Subway with rolling stock and repair equipment, power house, substation, signal system, and electrical distributing systems, and the cost of .this "equipment" would add $25,000,000 to the investment. The performance of the present Subway shows that 50,000,000 car miles can be operated to advantage in that part of the Subway on the Manhattan side of the East River tunnels, that is, one car mile per year may be expected for each dollar invested in permanent way, and two car miles per year for each dollar invested in "equipment." In other words, the total investment in a Subway similar to the present Subway, not including the Brooklyn tunnels and extension, may be taken at $75,000,000 for both permanent way and equipment. A Subway of the present design could operate about 50,000,000 car miles per year upon that part of its road which could be built and equipped for $75,000,000, so that the total investment would be approximately $1.50 for each car mile per annum. Upon a large part of the cost of the permanent way the present operating com- pany is paying interest at the rate of 4% per year, which is at the rate of 4 cents per car mile for interest charges on the cost of permanent' way only. If the construction funds had been provided by a private company the interest cost per car mile would probably not have been less than 5 or 6 cents. If all of the money furnished by the City for the permanent way could have been secured at 3;%%, the cost per car mile for this interest would be 3.5 cents. To reduce to a minimum the effect of this interest charge per car mile the rate of interest must be low, the initial cost of future Subways must be made less, or the number of car miles which can be operated over a given permanent tvoy must be considerably increased. This item of annual interest charge upon the permanent way offers more opportunities for improving the financial stand- ing of a Subway system than any other item so far discussed. 14 For instance, with the present Subway, fully 30% of the investment is in branch lines which arc operated at a loss. If these branches could be eliminated, or if the first cost of these unprofitable branches could be charged proportionately, by special assessment, directly upon the property benefited by them, then this interest charge on permanent way would be reduced by 30% or from 4 cents to 2.8 cents per car mile, thus effecting a saving of 1.2 cents per car mile. If, instead of adopting the Subway type of construction for a large part of these branch lines, an elevated road is built, then the cost per car mile for permanent way will be reduced in the proportion that the saving in first cost bears to the total cost. If, further, future Subways could be built with a much greater carrying capacity in proportion to the amount invested in permanent way as suggested in Report No. 4 on "The Capacity of the Subway" then this unit charge of 4 cents per car mile for interest on permanent way can be reduced to less than 3 cents per car mile without any change in the rate cf interest carried by the present Subway. Sinking Fund for the Investment in Permanent Way. What has been said in regard to the interest charges on permanent way applies equally well to the annual sinking fund charge on this same investment. The arrange- ment with the City by which most of the money for permanent way of the present Subway was raised provides for a sinking fund of 1% per annum on that part of the invest- ment. On a basis of 50,000,000 car miles with an investment of $50,000,000 this sinking fund of 1% per annum amounts to 1 cent per car mile. Thus with the present Subway the investment in permanent way is approximately at the rate of one dollar invested in initial cost to produce the capacity necessary to operate one car mile per year; i. e., a $50,000,000 investment in permanent way may permit the operation of approximately 50,000,000 car miles per year. In future Subways, it is not unreasonable to expect that 2 car miles should be operated for every dollar expended for permanent way and thus the sinking fund charge be reduced to 0.5 cent per car mile. Interest on Investment in Equipment. The investment for the equipment of a Subway similar to the present Subway in Manhattan and the Bronx may be taken at approximately $25,000,000. As this money was not raised by means of the City's credit the interest charge may be taken at 6% per annum, as this is about as low as money usually costs a private corporation after paying brokerage and other expenses incidental to securing it. On the basis of 50,000,000 car miles, this interest charge upon equipment amounts to 3 cents per car mile. This interest charge is upon the cost of the power plant, substations, electrical distribution systems, signal system, rolling stock and the repair equipment. The origi- nal cost of all of this equipment increases directly as the car miles increase; that is, the unit cost per car mile will be practically the same irrespective of the number of car miles operated, provided that the distribution of load throughout the day is rela- tively the same in all cases. 15 The most effective way of reducing the importance of this charge for interest on the equipment therefore must be by reducing the rate of interest. If the money for the first cost of the equipment had been raised on municipal bonds, or in any other way, at the same rate (i.e. 4%)* as the money invested in permanent way, then the unit cost would be reduced from 3 cents to 2 cents per car mile, a saving of 1 cent per car mile. This method of financing the cost of the equipment would therefore result in a con- siderable reduction in the annual charges. Depreciation. In the accounting system used with the present Subway, the item of depreciation upon equipment is not recognized. In my opinion, this policy or perhaps lack of policy is a serious mistake, as it is certain that if all of the surplus earnings are disbursed each year in the form of dividends and no allowance is made for depreciation, there will come a time when renewals must be made either at the expense of the stock- holders or at a sacrifice of the service, which can and should be maintained for future patrons of the Subway system. Just how much the allowance for depreciation should be cannot be determined without a careful study of the conditions in each particular case. An investigation will, no doubt, reveal the fact that there are parts of the structure and perhaps also of the equipment which can be maintained up to full working value and upon which the reserve for depreciation may be neglected — but this same study will also show that there are other parts which are depreciating in such a way as to require an annual re- serve to provide for eventual renewals. For instance the wooden cars should be removed from the Subway but apparently no way of financing this loss has been adopted. These cars were the best cars that could be secured at the time the Subway was designed, but shortly after they were built metal cars were developed. Of about 850 cars in the Subway 500 are of this wooden or composite type. The original cost of these composite car bodies was $3,350. each and new metal bodies to replace them will cost about $5,500. each. The difference between the cost of new metal cars and the original cost new of the composite cars should be charged to capital account but the difference between the original cost of the composite car and its scrap value as it leaves the Subway should be considered a loss and be offset by a depreciation reserve. In the course of time the same procedure would make it possible to replace the signal system; the braking equipment and parts or all of the power plant, as these various parts of the equipment become obsolete on account of the advance in the art. If an annual appropriation is not taken out of the surplus each year for depre- * The money in the present Subway was raised at different times and in different amounts, by means of bonds carrying interest rates ranging from 3% to 4#%, but averaging about 3]4%. In order to be conservative, 4% has been assumed in this analysis as a rate which would undoubtedly secure money upon municipal credit, and 6% as a rate which would secure money upon the bonds of a private company, these rates covering the total cost including brokerage for securing money for construction purposes. i6 elation purposes, it will be impossible to keep the equipment up to the highest standard without charging renewals to capital account. There are a number of electrical traction properties which have set a very com- mendable precedent by crediting a certain amount of their income annually to a depreciation reserve account, among them being The United Railways Company of St. Louis, Mo., The Milwaukee Light, Heat & Power Company of Milwaukee, Wis., as well as all the surface railway companies in Chicago which are now operating under the recently granted ordinances under which the city and the companies are jointly interested in the net profits of the company. While this question of depreciation in connection with the present Subway is evidently being neglected, it is essential that the item of depreciation should be con- sidered in analyzing the possibilities of a fair return on the investment. I assume that the accounting system for the future operation of Subways will conform to the ac- counting system adopted by your Commission and as this system includes a deprecia- tion account, I feel warranted in recognizing this ch:irge in this analysis. RECAPITULATION OF POSSIBLE SAVINGS. We are now in a position to reach some conclusions regarding the design of future Subways by reviewing the entire problem of making a sub-surface system of transportation pay a fair return on the investment even with the fare limited to the uniform amount of five cents per passenger. In the following recapitulation the cost of operating the present Subway is first shown in each case, the figures of operating expenses being taken from the record of the year ending June 30th, 1908. The extreme theoretical reduction in cost that can reasonably be expected is shown in the second column and the final column is intended to indicate the lowest probable practical limit of cost that can be attained in the operation of future Subways under the most favorable conditions. All figures are given in the unit of cents per car mile. Comparative Operating Expenses. Cost in cents per car mile. , , A . Present Possible Future Subway Saving Subway Maintenance of Way 1.18 .18 1.00 The reduction is due to the possibility of operating more cars than is done at present over each track. Maintenance of Equipment 1 .87 .27 1 .60 The saving shown may be accomplished by providing the most economical repair shop equipment. Maintenance of Power Plant .35 .10 • .25 Very little saving is to be expected except that due to run- ning more cars or providing slightly less reserve machinery than has been thought best with the present Subway. 17 Cost in cents per car mile. 1 _ — a , Present Subway Possible Future Saving Subway Wages of Trainmen 1.79 .04 1.75 The only reduction that can be expected in this item will ' \ be due to efficiency in the management of the men and trains, and not in the reduction of the cost of labor. Every car mile operated will require its quota of trainmen. Wages of Station men .84 .34 .50 All station expenses per car mile will become less as the volume of traffic increases. Other Transportation Expenses. .. .^ .95 .40 .55 This item also diminishes as the number of car miles in- creases, although the reduction cannot be expected in the same proportion as the increase in car miles. Power Expenses 2.38 .20 2.18 Every car moved one mile will require approximately the same amount of power, unless the average speed is reduced. Some slight economy may be expected with increase in load. General Expenses .69 .25 .44 This item will become smaller as the car miles, increase, as the total expenses are divided among a larger number of car miles. Total Operating Expenses 10.05 1.78 8.27 The total probable saving in operating expenses is less than 2 cents per car mile, and the lowest limit to which these ex- penses can be reduced is 8.27 cents per car mile. As the fullest limit of economy cannot be expected with every item in any one case, it is probable that 9 cents per car mile represents the lowest practicable operating cost, in the present state of the art. Comparative Fixed Charges. Subway Similar to Possible Present Saving. Subway Future .Subway The first column shows the results that can be obtained by operating 50,000.000 car miles in a Subway in which the perma- nent way cost $50,000,000 and the equipment $25,000,000, which is approximately the ratio with the present Subway. Interest on Permanent Way This item can be limited by keeping down the investment and by operating the tracks up to their fullest limit of capacity during rush hours. Sinking Fund for Permanent Way This item can be reduced in the same proportion as the pre- vious one. The 1% determined upon as the rate for sinking fund with the present Subway is not any too large. Interest on Equipment By reducing the rate of interest from 6% to 4%, a consider- able saving can be effected. If the policy of providing funds for the equipment by means of the City credit could be followed the saving in interest per car mile would go far toward providing an adequate depreciation reserve for the replacement of this equip- ment. Total for Fixed Charges It will be seen that the possibilities for saving are nearly twice as great with the fixed charge accounts as with the operat- ing expense items. Total Cost, Including Both Operating Expenses and Fixed Charges.. The sum total of all the possible economies amounts to 5.28 rents per car mile, or 30% of the total average cost of oper- ating each car mile in a Subway similar to the present Subway. As the lowest limit can only be secured by strict economy in investment and in operation, which in some cases might reduce the quality of the service supplied, it will be better to assume a medium figure of between 14 and 15 cents per car mile as the low practicable limit which can eventually be expected with future Subways. With the present Subway it will be difficult to introduce sufficient economies to reduce the total cost per car mile to less than 17.5 cents. Costs in Cents per Car Mile. 0.5 0.5 18.05 3.5 5.28 4.5 12.77 i8 Recapitulation of Estimates for Future Operations. Subway- Similar to Future Present Subway. Subway. Cost in Cents per Income per Car Mile — Car Mile. From passenger operation only 23 18 From advertising, sale of power, etc 1 1 Total gross income per car mile 24 19 Operating Expenses 10 9 Net Earnings 14 10 Fixed Charges 7.5 5.5 Surplus to be applied to dividends and depreciation 6.5 4.5 Depreciation at the rate of 3% per year on^actual investment in equipment.... 1.5 Surplus for profit 6.5 3 From the foregoing analysis it will be seen that in order to pay a profit of 6.5 cents per car mile from the operation of a Subway similar to the present Subway, it is necessary to crozud the passengers in the cars so that the average income from pas- senger revenue amounts to 23 cents per car mile. Furthermore, in order to maintain this profit of 6.5 cents per car mile, which in the case of the present Subway is now all disbursed as dividends, the item of depreciation on the equipment must be entirely neglected. The second column show's that if changes are made in the methods of financing, constructing and operating Subways it is possible to design and build future Sub- ways that will furnish adequate service for a 5 cent fare and at the same time take care of depreciation and interest on the investment. That the service can be adequate is indicated by the fact that the income per car mile from passenger revenue only need not be more than 18 cents, instead of 23 cents as required under present conditions. In order to produce this result the following economies must be secured : Saving Per Car Mile. • 1. Reduce the investment required for permanent way by raising by spe- cial assessment on the property benefited the first cost of all branch lines. The saving per car mile would approximate 1 cent. £. Increase the earning capacity of each dollar invested in permanent way by designing the stations on the main line on the reservoir principle, so that 60 trains an hour can run over each main line track. Practicable saving per car mile 1 cent. 3 Effect economies in operation and maintenance and reduce relative im- portance of general expenses by operating more cars with same organization charges. Saving per car mile 1 cent. 19 Saving Per Car Mile. Raise the money for the first cost of the equipment on a basis of 4% instead of 6%, either by using the City's credit or otherwise. Sav- ing per car mile 1 cent. If all the investment for both the permanent way and the equipment could be secured solely upon the City's credit, the "profit" made by the operators over and above interest charges could be justly reduced, as the operators would then assume no financial risk. With the present Subway which pays nominal taxes amounting to about $60,000 per year about V/3 cents of every 5 cent fare goes toward "profit." If the City furnished the money for the equipment as well as for the permanent way, then this profit could be reduced from the present rate of about 6.5 cents per car mile, as shown in the above table, to not more than 3 cents per car mile. At this rate the profit to the operators would amount to $1,500,000 per year on the basis of 50,000,000 car miles. Thus the saving per car mile to the Subway system by this arrangement would amount to at least 3.5 cents. The above statement shows the relative value of the possible economies in design and operation that may be realized in connection with future Subways. The sum total of all the savings amounts to 7.5 cents per car mile, but as it may not be practicable to secure the full measure of economy indicated as possible in each case, the total saving may be taken at 6.5 cents per car mile. As a "contra" charge, it must be remembered that a depreciation reserve fund should -be provided for which at least 1.5 cents a car mile must be allowed, thus reducing the net saving to 5 cents per car mile ; that is, assuming that the above economies are effected, future Subways may be maintained with a gross average income per car mile from all sources of 19 cents, instead of 24 cents, as at present, on the assumption that no taxes are paid in either case. If future Subways are taxed upon the same basis as the present Subway, which. when reduced to a car mile basis amounts to 0.12 of a cent per car mile, future Subways would have to earn 19.12 cents per car mile, instead of 19 cents, as above stated, but if they were taxed upon the same basis as the present elevated lines of the City of New York are taxed, which, when reduced to car mile basis, is about 3 cents* per car mile, future Subways would have to earn 22 cents per car mile instead of 19 cents, as above stated. The above analysis means that had the difficulties of Subway construction and operation been as well understood at the time that the present Subway was constructed as they are today and the economies above suggested been then embodied, it could have rendered more satisfactory service with its present revenue, and further that if the above suggested economies are embodied in the construction of future Subways. * Including Franchise Tax which has not been paid. 20 such Subways may be constructed into somewhat less desirable territory than that occupied by the present Subway and made self-sustaining on a fixed five cent fare. Furthermore, it is feasible, even if all of the above economies are not realized, to con- struct, operate and maintain Subways in certain localities within the congested districts of the City of New York and operate them upon a five cent fare, — but if to these short haul Subways is added the burden of a long haul into sparsely settled territory, such Subways as a whole will not be sufficiently attractive to induce private capital to construct and operate them unless a fare somewhat higher than the present five cent fare is allowed for the long haul passengers for at least a period of years, or until such time as the local traffic builds up throughout the entire length of the Subway. In- other words, it seems to me that as a general proposition, these short haul Subways cannot be divorced from the long haul feature and that consequently with the return upon the investment now required by private capital there is now no field in New York City for the construction of a comprehensive system of Subways entirely zvith private capital unless the fare for the long haul passenger is something more than the present five cent fare. If it were possible to establish a fare greater than five cents for the long haul passenger, the solution to the problem would be simple from a railroad standpoint although complicated and disadvantageous to the public, but since the five cent fare is now the legal fare, the real problem is how to get Subzvays and maintain this five cent fare. In the solution of this problem certain methods which have been discussed in this report seem open to me and they are briefly summarized in the following: Conclusions. 1st: Raise all the money for the construction and equipment of such portions of future Subways as can be shown to be profitable upon the City's credit and at the lowest possible rate of interest. 2nd: For such portions of the system as are clearly unprofitable, let the territory, the value of which is enhanced by the construction of the Subways, bear the burden of the initial cost. • 3rd : Eliminate taxes as is now done with the present Subway. 4th : Extend the refunding period for the retirement of the cost of Subways over as long a period as practicable. 5th : Design the express stations of the main stems of such Subways upon the reservoir principle so as to secure maximum capacity with minimum investment. 6th : Lay out a comprehensive system of transportation and begin the construction of Subways at the centre of the congested district and extend outward in order to get the benefit of the short haul profits before assuming too much of the long haul burden, and in connection with the short haul business investigate carefully the possibilities of moving platforms for the local tracks. 21 7th : Take advantage of specific cases where railroad companies desiring to secure terminals, the indirect value of which to them is great, may be willing to contribute largely to the cost of building portions of a comprehensive Subway system. 8th : Lease the operating privileges, under proper public supervision, to an oper- ating company upon the basis of an agreed compensation per car mile, — the number of car miles to be operated, which is the measure of service, to be determined by dividing the income from the traffic by the total cost of operating a car mile, the income to be sufficient to provide for operating expenses, including maintenance, fixed charges and depreciation, and leave sufficient margin to sufficiently compensate the operating company so as to secure the highest class of skill and efficiency in operation. 14 DAY USE TO DESK FROM WHICH BORROWED LOAN DEPT. This book is due on the last date stamped below, or on the date to which renewed. Renewed books are subject to immediate recall. ^* *a \ifi 5 0EC1--65 2R tf ^ iJtTOpi % LD 21A-60m-3,'65 TT .^oeml Library (F2336sl0)476B University of California Berkeley 680862 UNIVERSITY OF CALIFORNIA LIBRARY