PRACTICAL RATE MAKING AND APPRAISEMENT BY WILLIAM D. tylARKS, Ph. B., C. E., Yale S. 1870 Consulting Engineer Whitney Professor of Dynamical Engineering, University of Pennsylvania, 1877 to 1887 Member of the American Philosophical Society Honorary Life Member of the Franklin Institute Member of the American Institute of Electrical Engineers Member of the American Gas Institute Consulting Engineer for Rate Making Purposes to: New York City (Gas and Electricity), 1905 to 1911 Worcester Mass. (Electricity), 1909 to 1911 Buffalo, N. Y. (Gas), 1907 Minneapolis, Minn. (Gas and Electricity), 1909 to 1914 Cleveland, Ohio (Gas), 1910 Des Moines, Iowa (Gas), 1911 Providence, R. I. (Electricity), 1911 to 1912 Omaha, Nebraska (Gas), 1912 to 1914 Tampa, Florida (Water), 1912 St. Paul, Minn. (Gas), 1913 Spokane, Wash. (Gas), 1913 Accountant and Constructing Engineer for The Laclede Gas Works, 1872 Constructing Engineer The Philadelphia Edison Electric Light Co., 1888 President The Edison Electric Light Company, 1892 to 1896 Official of Numerous Other Gas and Electric Works and Electric Railways, 1896 to 1906 Author of the Finances of Gas and Electric Light and Power Enterprises, 1900, and of Other Technical Papers and Works OFFICE, PRESIDENTS HOUSE SOUTF HA,DLEY ? MASS, - Price, $2.00 postpaid Copyright, 1914, by JEANNETTE MARKS CONTENTS PAGE PREFACE v CHAPTER I. General Considerations 1 CHAPTER II. Report upon Gas Rates and Prices for the City Spokane, 1913 11 CHAPTER III. Report upon the Fair and Reasonable Price of a 6. 6 Ampere Magnetite Arc Light per year, Minneapolis, 1911 60 CHAPTER IV. Quantity Rates for Electricity 114 CHAPTER V. Methods of Appraisement 144 CHAPTER VI. Present Value; Structural Cost of Reproduction; Original Cost; Structural Cost of Reduplication 153 CHAPTER VII. Overhead Charges 159 CHAPTER VIII. Depreciation 163 CHAPTER IX. Comparative Appraising 178 CHAPTER X. Market Value; English Going Value 181 CHAPTER XI. Franchise Value 184 CHAPTER XII. Present Value of Prospective Profits; Goodwill; Development Expense; Going Value; Intang- ible Values; Options 187 CHAPTER XIII. Books and Accounts; Operating Expenses and Income 196 CHAPTER XIV. The Law of Demand for Electricity; Reduction of Price Increases Profits 200 CHAPTER XV. Gas Sales per capita', Verification of Law of Demand 215 CHAPTER XVI. The London Sliding Scale; Marks' Dividing Scale 227 CHAPTER XVII. Capitalization, Assets and Profits of Massachu- setts Gas Companies 252 PREFACE The eager mind and brain is learning new things every day and this fact makes one hesitate in the attempt to collate, digest and systematize this new branch of engineering science, " Rate making and appraisement " for undoubtedly there remains much of value to be originated and added to it. The fact that the writer has been without precedents in his work and has been obliged to originate almost all of it so far as rate making is concerned makes him hesitate, but on the other hand, the fact that 6,500 copies of his book, "The Finances of Gas and Electric Light and Power Enter- prises, " have been sold and the demand for it still continues urges him to extend it by a work which is up to date, and which will enable others to practically execute in detail what he has so far in print only discussed in disconnected reports. The writer most gratefully acknowledges his indebtedness for practical data to the admirable reports of the Mass- achusetts Gas and Electric Light Commission. Even in its lack of aggressiveness it appears to have proved itself, on the whole, both safer and wiser than other commissions. Its reports are invaluable for their lucidity and brevity, as well as comprehensiveness. But when I point out the facts that Boston took the adjustment of its gas rates out of the hands of its Gas and Electric Light Commission, that the present (1913) deplor- able condition of electric rates in New York City has the approval of its Public Service Commission, and that the City of New York settled its gas rates before the appoint- ment of this commission, and further that most of our larger cities have themselves reached fair and reasonable rates without state commissions, I may be pardoned for my frank criticism of partisan public service commissions as at present appointed, and justified for my earnest belief that better results will be reached by a larger measure of home rule in our metropolitan communities. CHAPTER I GENERAL CONSIDERATIONS The aim of this work is to be entirely practical and as brief as the topic considered will permit. To print all my reports and appraisements made for some of our larger cities would require thousands of pages and of course result in too large a work, but each selected report will be briefly recapitulated and the cost of it and its local peculiarities mentioned. A few of the briefer reports are printed in full and then will follow a general discussion of the principles involved in rate making and appraisement with practical examples of their application. Such reports require a practical technical experience in the construction and operation of the kind of works con- sidered and also experience in their business and methods of keeping accounts. The power to collate, digest, classify and combine, the many factors affecting the cost of public utilities involves a capacity for the most laborous drudgery besides a keen perception of the controlling factors. A perfectly fair and open attitude of mind must always be preserved and in matters of doubt the producing concern should be favored. Personally the author in making appraisements avoids any line of thought leading to forecasts of final results and adding factor to factor has frequently reached unexpected final results. 2 PRACTICAL RATE MAKING AND APPRAISEMENT No single set of figures or method of computation should form the basis of an opinion, but every final result should be checked by some different method of reaching it. Go slow, check every step. It is not always necessary or advisable to include these check methods in a report, as frequently on cross examina- tion they are useful to the courts as proving anew the cor- rectness of the results and the painstaking care given in a different way. To reach practical profitable and judicially fair prices for a public utility often requires difficult and intricate com- putations even when an accurate appraisement of its present structural cost of reproduction is had and the present value of the plant has been learned from it by the deduction of past depreciation. In considering the appraisement of the present value of works we again must subdivide it into used and useful and not required land, buildings and apparatus. For instance, owing to the introduction of natural gas into Cleveland and Buffalo about one fourth only of the original artificial gas works were used and useful. In Omaha ten per cent of the gas works sales were outside of the City limits and the present value of the gas works had to be pro-rated. Not infrequently the public utility's capacity far exceeds its present sales and the useful though unused present value of the works must he reduced pro-rata to be fair to con- sumers, who rightfully ought not to be forced to carry the cost of future extensions until they are needed, or to pay for over-built works. To attempt to fix an invariable basis for future prices PRACTICAL RATE MAKING AND APPRAISEMENT 6 without also being able to fix the future prices of raw material and productive labor will surely lead to injustice to a public utility or to its consumers. To attempt to fix future prices for a term of years and then subject them to revision is a better plan for natural monopo- lies such as public utilities. But this plan has not always produced good results, for the commissions or Courts entrusted with this revision usually have not the intimate knowledge of details required to prevent them from falling into pitfalls (often intentionally prepared) and therefore rendering absurd decisions. (See Dubuque Waterworks Arbitration 1899.) After a prolonged experience with and consideration of the records and reports of the Interstate, the Massachusetts, New York, Wisconsin and other public service commissions, I am convinced that until political partisanship can be completely eliminated from consideration in the appoint- ment of national and state commissioners it will be wiser to confine these commissions if appointed to the publication only of the reports of the operations of public utilities and that better results will be obtained for the public by so doing. For with pitiless publicity promptly furnished there is sufficient ability and fairness to be found in every community to cause rates to be fairly adjusted at home, with the aid of the Courts if necessary. A municipality knows best its own needs and limitations and how to deal with them. It is rarely that a public service commissioner has had any technical training or experience. The consequence is that they blunder in technical reports or as an alternative avoid as much as possible an exhaustive examination of public utilities. 4 PRACTICAL KATE MAKING AND APPRAISEMENT The English deal with these matters of public utilities far more wisely than we do, for each public utility requiring legislation is met by a special parliamentary committee (assisted by a guild of engineering experts and accountants) who after making an exhaustive examination fix the rates and so they have reached an almost Utopian relation with their public utilities. To demand of an expert superhuman impartiality is to ask the impossible, but a consulting engineer must bear in mind that under proper cross examination predjudiced views or results in scientific matters cannot possibly be sustained. Further when an expert has once given his figures it is too late to change them or to substitute an alternative set of figures. There is but one right way and a thousand wrong ways of making a report on rates. Extreme caution in every step is required. The technical expert has not the latitude of a lawyer in his work he must decide upon the one right method and then correctly compute his results and prove them. In 1910 the Census reports 225 cities in this United States as having over 25,000 population. The public service utilities serving these cities are large natural monopolies, and hence not subjected to the healthy corrective of com- petition in their rates for electricity, gas, water and transportation. There are also many hundred of cities having less than 25,000 population and public utilities, but the probability of extortionate prices in these smaller cities, towns and villages appears to be less because the public utilities there are small and render a service as a servant of the public often at PRACTICAL RATE MAKING AND APPRAISEMENT 5 a loss, instead of growing into vendors of a commodity on a large scale, which much reduces its costs per unit. A legislative body granting such a virtual monopoly as a franchise to a pubic utility has not done its whole duty either to the public served, or to the public utility serving, until it has established fair and reasonable rates for the particular utility concerned. No concern, no public utility is of any ultimate value to its community unless it makes an honest profit, but the growth of any community is seriously retarded by hap- hazard or extortionate rates, for public utility monopolies. Careful and laborious studies involving years of labor have convinced me of the blind regularity with which com- munities respond to rates. Altough the action of any individual can rarely be predicted, the action of a com- munity can be relied upon with certainty. It is as sure as the law of gravity. When a City exceeds 75,000 population (and particularly when located as a metropolis) the habits of its citizens change so that the demand for public utilities per capita increases markedly. In recent years, in a number of cases, a reasonable reduc- tion of rates forced upon a public utility in spite of its urgent protestation of resulting ruin, and often of its vigorous and prolonged defence in the courts, has resulted in such an increase of its total profit as has caused the public utility itself to express its satisfaction with the rate fixed at the end of a year. The Consolidated Gas Co. of N. Y. is a famous instance of this. This is usually due to three points over- looked by its managers. Not only is a larger quantity sold at a smaller profit per b PRACTICAL RATE MAKING AND APPRAISEMENT unit, but also the investment required per unit sold is largely reduced. Besides this so very large a proportion of the operating expenses of a public utility are independent of the amount of sales and dependent wholly on the passage of time, that the operating costs per unit are largely reduced by increased sales, per year. On the other hand utility rates are sometimes fixed so low in cities which have not grown to metropolitan populations as not to yield a fair and adequate profit to a public utility. When we consider the sales per capita of a public utility we are forced to recognize a point of satiation for each price fixed in any community, and if this community is not large enough to return a total more than covering the time expenses (which are independent of the amount of sales) and the commodity costs, there is an incurable deficit at the rate fixed. Common justice requires that a proper higher rate be computed and allowed to unprofitable utilities if a loss is due to rates. This point of satiation per capita for a given price varies with the population and characteristics of a community. Although the population is the controlling factor still there are other and often obscure causes of variation requiring careful research before reaching a correct result, in in- dividual cases. These statements apply with equal force to gas, electricity, transportation, and water if it is metered. The profit to a public utility can always be assured by the use of meters and a correct uniform rate to both large and small consumers, but such a method (flat rates) is unjust to the large consumers and prevents the growth of the utility, because the small cusumer receives a service, whose cost is PRACTICAL BATE MAKING AND APPRAISEMENT 7 principally due to time charges proportional to his greatest possible demand, and the large consumer often costing the same or but little more for time charges, pays the same rate per unit for a large amount of a commodity whose pro- portional operating commodity cost per unit is usually very small. Thus we see for metered consumers : The consumer whose demand is small usually costs high for service and requires very little of the commodity de- livered. The consumer whose demand is large, usually costs but little more for his service and requires a great deal of the commodity delivered. A meter measures only the com- modity. The proportional cost of the commodity varies principally with the productive labor and raw material consumed in its delivery. The time costs of a plant consist principally of the interest (or profit) depreciation, rent, insurance, salaries of its staff of unproductive accounting, and managing employes, and other expenses not rising and falling with the volume of its commodity delivered, but necessary to the proper operation of the plant when placed at the service of its consumers. The exact fair and reasonable rate to be paid by each consumer to a public utility must therefore be a properly apportioned amount as follows: For the service his proportion of the time costs. For the commodity, his proportion of the commodity costs. The results of these computations based on the above 8 PRACTICAL RATE MAKING AND APPRAISEMENT statements have been variously called " sliding scales" " stepped rates" and "differential rates". While a community which has become accustomed to paying to paying so much a yard, or so much a pound for its commodities may prefer a like uniform rate for public utilities, still it must be obvious, after a little thought, that the large purchaser always pays too high a price for his commodiites, whatever they may be, if he pays a uniform rate regardless of quantity. The uniform rate has the popular advantage of great simplicity and apparent justice, and so persists in use in the majority of public utilities. If the public utilities will make a proper distinction between their consumers requiring service and a small quantity of their commodity only for luxury and con- venience, and those requiring their commodity in large quantities for industrial uses, they will largely increase their own business and also increase the commercial growth of any community which they may serve. It was the realization of this fact by the writer after much study of the operating expenses of the Philadelphia Edison Electric Light Company, that made him finally put in operation in 1890 a stepped rate for electricity (given on page 251 of the Finances of Gas and Electric Light and Power Enterprises) in the year 1891, after a successful trial of it for over one year. (See Journal Edison 111. Association, 1891). This scientific and rational scale of prices proved very profitable to the Company for the ensuing four years. (See Edison's letter June 4, 1892, page 260, Finances of Gas and Electric Light and Power Enterprises) when the writer PRACTICAL RATE MAKING AND APPRAISEMENT 9 was obliged to relinquish his position as president rather than become an accomplice in the issuance of watered securities by a group of colossal thieves in control of the company. The accounts of the operating management of a public utility must have very close scrutiny from one attempting to fix fair and reasonable rates for it, particularly in dis- tinguishing between necessary operating expenses, (without which the utility company could not produce its commodity) and deductions from income often made as a matter of policy or because of bad management, such as contributions of a political or charitable nature, unnecessary salaries, bad debts, excessive advertising, etc., etc. These items are often presented in the endeavor to swell the apparent cost of a commodity. In a number of instances also the attempt has been made to include interest on borrowed money, either on a floating debt or on a mortgage, in the costs, but it must be obvious, that if a concern has not sufficient capital to transact its business, it should pay its interest on its borrowed money out of its own profits. When we come to the appraisement of a public utility, it is necessary to distinguish carefully between used and useful assets, and assets not required for the production of its commodity. As for book assets the Interstate Commerce Commission makes the following statement as to the deceptiveness of these records in its report of December 24, 1908. "Every balance sheet begins with the cost of property against which is set a figure which purports to stand for investment. It is sufficient to refer to the well known fact, that no court or 10 PRACTICAL RATE MAKING AND APPRAISEMENT commission or accountant or financial writer would for a moment consider that the present balance sheet statement purporting to give the cost of property, suggests even in a remote degree a reliable measure, either of money invested or of present value." This wholesale scathing criticism of the accounts of the public service corporations of the United States with which it is concerned should be sufficient to prove that the utmost caution and thorough research must be exercised by an appraiser, and that an appraisement must be made regard- less of book values, in most instances. It is by adding to a fair and reasonable profit upon the appraisement of any property, the necessary operating costs of it, that a correct basis for rates is reached. CHAPTER II. RECAPITULATION OF REPORT UPON GAS RATES AND PRICES FOR THE CITY OF SPOKANE This report was for the purpose of fixing fair and reasonable rates for gas upon the complaint of the citizens of Spokane that $1.50 uniform rate per 1,000 cu. ft. was extortionate. The uniform reasonable rate recommended was $1.20 per 1,000 cu. ft. with a minimum charge of 25c. per meter per month as sufficient to protect the Gas Company. As a fairer method between consumers a stepped rate as follows was recommended. A net rate of $1.40 per 1,000 cu. ft. for the first 1,000 cu. ft. per meter per month. And a net rate of $1.00 per 1,000 cu. ft. for all excess over 1,000 cu. ft. per meter per month. The appraisement of the works made by the engineers to the Washington State Public Service Commission is said to have required the services of three or four engineers for about six months and was furnished to city. An abstract of the book accounts was furnished to city by the Spokane Gas and Fuel Company. The following report occupied about thirty days, required one assistant and cost the City of Spokane about $2,100 for travelling expenses subsistence, and services before the State Commission. This gas company is an excellent ex- ample of stock watering and manipulation and its results. 12 PRACTICAL RATE MAKING AND APPRAISEMENT TABLE OF CONTENTS SECTION 1. Object of this Report. SECTION 2. Land. SECTION 3. Cost of Reproduction of New Plant. SECTION 3. Works Equipment. SECTION 4. Yard Equipment. SECTION 5. Holders: Street Mains, Tabulation. SECTION 6. Service Pipe Connections. SECTION 7. Gas Meters Installed. SECTION 8. Gas Meters in Stock. SECTION 9. Governors and Regulators. SECTION 10. Gas Arc Lights. SECTION 11. Teams and Vehicles. SECTION 12. Depreciation. SECTION 13. Overhead Charges. SECTION 14. The Present Value of the Spokane Gas Plant. SECTION 15. The Operating Expenses. SECTION 16. Manufacturing Cost. SECTION 17. Distributing Cost. SECTION 18. Commercial Super, and Expenditures. SECTION 19. General Office Expense and Administration. SECTION 20. Estimate of the Proper Cost of Gas. SECTION 21. Allowance for New Business. SECTION 22. Comparisons with Tacoma and Seattle Gas. SECTION 23. Profit and Depreciation, Cost per 1000 cu. ft. SECTION 24. Flat Rate Price for Gas. SECTION 25. Stepped Rate Prices for Gas. Diagram 2 of Step Rate System. Step Rate System Proposed. SECTION 26. Finances of Spokane Gas and Fuel Company. SECTION 27. Increased Sales Due to Lowered Price of Gas. SECTION 28. Qualities of Gas Required. SECTION 29. The London Sliding Scale for Gas. SECTION 30. Recapitulation . PRACTICAL RATE MAKING AND APPRAISEMENT 13 REPORT UPON GAS RATES AND PRICES FOR THE CITY OF SPOKANE, WASHINGTON BY WILLIAM D. MARKS, Consulting Engineer Park Row Building, New York City. SECTION 1. OBJECT OF THIS REPORT. The object of this report is to obtain from the data of the Spokane Gas and Fuel Company as furnished by the engi- neering corps of the State Public Service Commission and by the Spokane Gas and Fuel Company three systems of rates : 1. A uniform Flat Rate price applicable as a straight charge without any addition of any kind for the gas con- sumed at each meter. 2. To obtain a stepped rate, often called a " Differential Rate/' which has different prices charged for successive amounts as measured by each meter. 3. To apply the London Sliding Scale to the conditions existing in Spokane and from the data obtained to fix a standard price and a standard rate of dividend (or interest) and also to fix the reduction of the price of gas which shall entitle the Gas Company to raise its dividend one per cent. I have been furnished with the itemized appraisement of the gas plant as made by the engineers of the Washington Public Service Commission and have used the same for the purpose of adding an overhead charge and deducting ac- crued depreciation. The land upon which the gas works is situated has been appraised by Messrs. Fred E. Baldwin and S. E. Hege and I have used the higher valuation of $109,402.99, given as 14 PRACTICAL RATE MAKING AND APPRAISEMENT the value of the land, for the purpose of gas making adding 12 1 A% thereto. No buildings or structures of any kind are included in this valuation of land. The operating expenses for the year 1912 have been fur- nished by the officials of the Spokane Gas and Fuel Company. As sufficient time and assistance to audit the books, examine the vouchers and check stubs and for recomputing has not been granted, I have accepted for investigation the various figures, footings and segregations used in the method of bookkeeping of the Spokane Gas and Fuel Company and collated and arranged them in a simplified form. From these results I have formed an opinion and submit for your consideration the various expurgations required to compute the cost of gas on the basis of the ordinary organization and expenditure of conservative gas companies. Should the figures of the appraisement or the figures de- rived from the books be altered by a more thorough and detailed examination it may result in a change in the com- puted price of gas, but the methods used need not be changed. In fixing the price of gas it would be as impossible as it would be insincere to claim scientific accuracy, but I believe my results to be commercially adequate to the protection of the Gas Company in a fair and reasonable return upon its true investment and its proper operating cost, being as close as it is possible to obtain them in the operation of gas works. I am indebted to the courtesy and prompt assistance of both the engineers of the Public Service Commission and of the officials of the Spokane Gas and Fuel Company for the PRACTICAL RATE MAKING AND APPRAISEMENT 15 prompt rendering of whatever assistance and information I have asked of them. SECTION 2. LAND. The land occupied by the Spokane Gas and Fuel Company and the Spokane Falls Gas Light Company has at the re- quest of Commissioner Fassett been valued by the real estate experts, F. E. Baldwin and S. E. Hege, as follows: Tract occupied by gas works, Erie and St F. E Baldwin S. E. Hege Bradley Streets, 107,338 sq. ft ........ $53,669 . 16 $64,402 . 99 Railroad Avenue between Stevens and Washington Streets ................. 50,000 . 00 45,000 . 00 Totals .......................... $103,669.16 $109,402.99 SECTION 3. PUBLIC SERVICE ENGINEERS. COST OF RE- PRODUCTION OF NEW PLANT, SPOKANE GAS & FUEL COMPANY AND SPOKANE FALLS GAS LIGHT COMPANY WORKS EQUIPMENT October 1st, 1912. 8 Main buildings, manufacturing plant ...................... $45,759.00 9 Shops and miscellaneous struc- tures ....................... 13,784.00 - $59,543.00 16 Coal gas benches (2 stacks) ........................ 1 Standard 9 foot Lowe Water Gas Set ...... 74,560.00 2 P. & A. tar extractors, 1 purifier set ....... 10,465.00 4 Condensers, 3 scrubbers and 1 wash box .... 20,559 . 00 2 7 ft. station meters ...................... 4,700.00 4 Boilers (455 H.P.) and 1 feed water heater... 7,192.00 Forward, $177,019.00 16 PRACTICAL RATE MAKING AND APPRAISEMENT Brought Forward, $177,019.00 2 Electric generators 35 and 25 K.W 3,647.00 3 Compressors, complete erected 4,818 . 00 3 Blowers, complete erected 2,667 . 00 3 Exhausters, complete erected 4,011.00 2 Governors, complete erected 820 . 00 1 Stroh & Caius ammonia concentrator 1,500.00 1 Fairbanks gas engine 4^ H.P 240.00 10 Pumps, erected 1,030.00 2 Regulators 205.00 1 De Brower coal projector 3,076.00 2 Coke pushers (Williams) 3,100.00 1 Coke crusher, rolls and engine 719.00 1 Coal conveyor and crusher complete 8,465 . 00 $211,317.00 SECTION 4. YARD EQUIPMENT. 1 Tar well in yard $1,320.00 1 Water tank and tower .... 525 . 00 3 Ammonia storage tanks . . . 1,500 . 00 2 Oil'storage tanks 2,710.00 1 Brick ammonia well 1,038.00 2 Tar separators 160.00 1 Receiver tank for gas .... 750 . 00 1 Receiver tank for air 90 . 00 1 Derrick crane 695.00 1 Hunt Industrial Railway. . 5,000 . 00 1 Hose reel and hose 130.00 2 Platform Fairbanks Scales 454.00 1 Craig-Ridgway Steam Hyd. Elev 1,600.00 32 Coke quenching hoppers . . 2,464 . 00 Coal bunkers and crusher house 6,422.00 Coke trestle 2,380.00 Forward, $27,238.00 PRACTICAL RATE MAKING AND APPRAISEMENT 17 Brought Forward, $27,238 . 00 Elevator Runway 311 .00 Coal elevator, boiler house 505.00 8 Coal hoppers 3,080.00 8 Coal hoppers 2,320.00 Yard Paving 1,035.00 Seal 's sumps and drip pots 500 . 00 $34,989.00 Plant piping and fittings 9,317.00 All tools and implements 2,405 . 00 All testing apparatus 1,670.00 All furniture and fixtures 15,634.00 Total valuation manufacturing plant (new). $275,332.00 SECTION 5. HOLDERS. 3 Gas Holders 1 Two lift 110,000 cu. ft, capacity $17,500.00 1 Single lift 50,000 15,950.00 1 Three lift 305,000 " " 36,000.00 Cost new 465,000 " " $69,450.00 Average per 1000 cu. ft. capacity, about $149.00. 18 PRACTICAL RATE MAKING AND APPRAISEMENT 00* PRACTICAL RATE MAKING AND APPRAISEMENT 19 Recapitulating the above tabulation of mains we have : Cast iron street mains 21,520 ft $17,366 . 00 Black merchant street mains 402,377 " 220,145.00 Black line " 175,847 " 65,846.00 Kalamein " 67,080 47,282.00 Total 666,824" $350,639.00 Undistributed extras . . 7,426 . 00 Total.. $358,065.00 SECTION 6. SERVICE PIPE CONNECTIONS. Service connections complete 7,441 $105,920.00 Less amount paid by consumers 53,000.00 Stub services 2,166 17,099 . 00 Total the property of company 9,607 $70,019.00 SECTION 7. GAS METERS INSTALLED. Ordinary 3 Light (meter lights 7,629) 2,543 $16,275.00 5 ( 29,835)5,967 43,261.00 10 ( 4,130) 413 3,816.00 20 " ( " 1,500) 75 1,030.00 30 ".-.( " 2,370) 79 1,537.00 45 ( 405) 9 228.00 60 " ( " " 1,020) 17 644.00 100 -'(-.- " 100) 1 64.00 Prepay 3 Light (meter lights 1,371) 457 4,469.00 5 ( 1,625) 325 3,650.00 10 ( " " 120) 12 159.00 20 " ( u " 40) 2 34.00 50,145 9,900. . $75,167.00 20 PRACTICAL RATE MAKING AND APPRAISEMENT SECTION 8. GAS METERS IN STOCK. Ordinary 3 Light 1,167 $6,127.00 5 277 1,676.00 10 182 1,438.00 20 15 178.00 30 " 8 138.00 45 " 1 22.00 60 " 3 103.00 200 1 112. QO Prepay 3 Lights 82 708.00 5 " 44 440.00 10 " 28.. 335.00 Total in stock 1,808 $11,277.00 SECTION 9. GOVERNORS AND REGULATORS. Three 3 in. district station governors $737 . 00 938 Reynold's Service Regulators No. 1 6,003.00 104 2.. 744.00 Total $7,484.00 SECTION 10. GAS ARC LIGHTS, ETC. 1345 gas arcs $12,806.00 Small lights and heating appliances 2,689 . 00 Total rental equipment $15,495.00 SECTION 11. TEAMS AND VEHICLES FOR STREET SERVICE. 11 Horses $2,550.00 13 Wagons and harnesses 2,105.00 5 Motor cycles 1,025 . 00 2 Automobiles 2,530.00 3 Bicycles 128.00 Total. . $8,338.00 PRACTICAL RATE MAKING AND APPRAISEMENT 21 SECTION 12. DEPRECIATION. Depreciation arises from physical decay, inadequacy and obsolescence. Depreciation is cured by repairs and renewals. The more thorough the repairs the less the residual depreciation remaining. But there is always a residual depreciation no matter how thorough the repairs. Residual depreciation is like the failing of an ageing man. No matter how good his present condition each year brings his end nearer. So it is with manufacturing plants. After years of practical trial the Massachusetts Gas and Electric Light Commission has fixed 3 per cent as~a fair average allowance for annual residual depreciation of municipal gas and electric works for cases where the repairs have been as thorough as possible. In the case of the Spokane Gas Works, the quality of the buildings and machinery and the present condition of them is very good. I am advised that the present buildings and machinery have been built about seven (7) years, which makes the average accrued residual depreciation 21 per cent. This will be very low for the wrought iron street mains. SECTION 13. OVERHEAD CHARGES. In considering the overhead charges on an inventory of a completed works it must be recollected that all of its items are included in the inventory if the work is thoroughly done and therefore no allowance is required for "omissions," etc. also that such items as "bond discount," etc., relating to the Company's method of borrowing money, instead of furnishing it from the sales of its stock to its own stock- holders, is outside of the province of an appraiser. PRACTICAL RATE MAKING AND APPRAISEMENT Since two summers or eighteen months should suffice for the complete erection of these works and the laying down of its street system of mains, etc., we are justified in an estimate for interest of nine (9) months average at 6 per cent or 4}/ per cent of its new cost. Two (2) per cent will provide the drawings and engineering supervision required. Since taxes are rarely assessed upon buildings in course of constructions, but only on the land, 2 per cent has been found to more than provide for them in most cases. The expenses of "organization" are a very uncertain quantity, and often are little or nothing, but to be on the safe side they are assumed at twice the cost of engineering drawings and supervision, or four (4) per cent. Recapitulating, we have for Overhead Charges Interest 4 . 5% Engineering drawings and supervision 2 . 0% Taxes 2.0% Organizing 4 . 0% Total 12.5% The Wisconsin State Railroad Commission in some cases has fixed 12 per cent for this, after elaborate research. SECTION 14. PRESENT VALUE OF THE SPOKANE GAS PLANT. The structural cost (new) of the various items of the Spokane Gas Plant is given as related above from the appraisement of the State Public Service Engineers, but in being brought together these items, as a connected whole, ready to operate, should have added to them 12J^ per cent and then be depreciated on the basis of years of usefulness, PRACTICAL RATE MAKING AND APPRAISEMENT 23 save in the case of land, which is not depreciated, the land's present value being determined for the purpose of gas making by competent local real estate experts and 12J^ per cent being added to this amount, to obtain the total structural cost of the plant ready to operate and connected up. If now from the total structural cost of the plant (new at present prices) we subtract the depreciation we obtain its present value as a basis for the computation of future profit and depreciation, and thence the proper price of gas by adding profit and depreciation to the cash operating cost of gas making and delivering. Recapitulating for October 1st, 1912 Works equipment manufacturing ........... $275,332 . 00 Gas holders ............................... 69,450.00 Street distribution system ................... 358,065.00 Service pipe connections .................... 70,019.00 Gas meters installed ........................ 75,167.00 Gas meters in stock ........................ 11,277.00 Gas arc light .............................. 15,495.00 Teams and vehicles ........................ 8,338.00 Governors and regulators ....... . ........... 7,484 . 00 Total as per Public Service Commission. . ..... $890,627.00 Overhead charge, 12J^ per cent ...... : ....... 111,328.00 Total structural cost (present prices) ......... $1,001,955.00 Residual depreciation, 21 per cent ........... 210,411.00 Present value (land omitted) ................ 791,544.00 Land, present value .................... ____ 109,403 . 00 Land, 12J/2 per cent overhead charge ......... 13,675.00 Working capital, 193,110 M at 13c ........... 25,104.00 Total present investment value $939,726 . 00 24 PRACTICAL RATE MAKING AND APPRAISEMENT SECTION 15. THE OPERATING EXPENSES AS PER COMPANY'S BOOKS. Tabulated Operating Expenses, Spokane Gas & Fuel Co. 1912. Total Gas Sales, 193,109,700 cu. ft. Operating expenses Per 1000 Items cu. ft. Fixed Proportional Sales (1) Coal carbonized, 20,739.9 tons at $5.28 $109,345.99 56.62c. (2) Fuel under retorts, 4,125.7 tons at $3.67 15,141 .27 7 . 84c. (3) Generator fuel, 427.34 tons at $3.67 1,568.35 O.Slc. (4) Boiler fuel, coal gas $13,549.92 Labor and misc. water gas 601.96 14,151.88 7.33c. (5) Gas oil, 54,218 gals, at 4.455c 2,415 .89 1 . 25c. (6) Superintendence coal gas $2,558 .84 Superintendence water gas 173.85 $2,732.69 1.42c. (7) Labor mfg. coal gas $16,183.55 Labor mfg. water gas 669.87 16,853.42 8.73c. (8) Purification labor Coal gas 329.48 Water gas.... 28.29 357.77 0.18c. (9) Purification supplies 2 . 88 . OOc. (10) Water (see boiler fuel) (11) Expense at works 2,391 .00 1 .24c. (12) Maintenance coal gas ap- paratus 5,247 .16 2 . 72c. (13) Maintenance water gas ap- paratus 1,498.67 0.77c. Forward, $5,123.69 $166,583.28 88.91c. PRACTICAL RATE MAKING AND APPRAISEMENT 25 Brought Forward, $5,123.69 $166,583.28 88.91c. (14) Maintenance buildings ap- paratus 201 .39 0. lOc. (15) District holder expense 4,414 .04 2 . 28c. (16) Distribution, supt. offi. exp. and street expense 4,799 .56 2 . 48c. (17) Consumers premises and arc light expense 10,393 .57 5.38c. 18) Pumping gas 4,517.35 2.33c. 19) Setting and removing meters 3,545 .53 1 . 84c. 20) Maintenance of street mains. 3,049 .12 1 . 58c. (21) Maintenance of services 1,767.03 0.92c. (22) Maintenance of meters 2,982 .98 1 . 55c. (23) Meter department expenses. 1,961 .77 1 .Olc. (24) Commercial supt. and ex- penditures 25,495.70 13.20c. (25) Commercial office salaries . . . 13,890 .77 7 . 19c. (26) Commercial bill collection expense 5,240.90 2.71c. (27) Reading meters 2,609.79 1 .35c. (28) Office expense (general) 4,708 .56 2 . 44c. (29) General executive salaries. . 8,443.38 4.37c. (30) Insurance, legal and miscel. expenses 21,164.36 10.96c. (31) Taxes and royalty 11,388.57 2,850.63 7.32c. Totals (fixed 70.27c.) $135,698.06 $169,433.91 158. Olc. Variation due to decimals . lie. Credits For residuals. (32) Coke, 13,704.9 tons at $3.67 . 50,269 . 71 Tar 205,178 gals, at 3J4c. . . 6,668.26 Ammonia 80,414 at 3.09c . . . 2,484 . 07 Retort carbon 30.00 (33) Duplicate gas charges to depts 1,849.25 61,301.29 31.74c. (34) Balance of proportional op. exp 108,132.62 55.99c. The above totals of operating expenses are the same as those of the Spokane Gas and Fuel Company's books. Depreciation is omitted from them. The above figures of the operating expenses were furnished by the manager of the Spokane Gas and fuel Company, 26 PRACTICAL RATE MAKING AND APPRAISEMENT but the items were segregated by myself. The fixed ex- penses may be said to be for service rendered. The pro- portional expenses are for the commodity furnished. Segregating the Gas Company's figures, the cost of gas in 1912 appears to have been stated as follows: SECTION 16. MANUFACTURING COST. Per 1000 cu. ft. Sold (1) Coal carbonized $109,345.99 56.62c. (2) Fuel under retorts 15,141 .27 7.84c. (3) Generator fuel 1,568.35 O.Slc. 4) Boiler fuel 14,151 .88 7 .33c. 5) Gas oil , 2,415.89 1.25c. 6) Superintendence 2,732 .69 1 . 42c. (7) Labor manufacturing 16,853 .42 8 .73c. (8) Purification labor 357 .77 . 18c. (9) Purification supplies 2 . 88 . OOc. (10) Expense at works 2,391 .00 1 .24c. (11) Maintenance of coal gas apparatus 5,247.16 2.72c. (12) Maintenance of water gas apparatus 1,498.67 0.77c. (13) Maintenance of buildings 201 .39 0. lOc. $17i,908.36 89.01c. (32) Less residuals 61,301.29 31.74c. Cost of gas in holder $110,607 .07 57 . 27c. This 57c. is so unusually high that even coal at $5.28 per ton does not explain it. A thorough examination of the items of the operating accounts and of the method of operation would be necessary before accepting as final, a cost of 57.27c. per 1,000 cu.ft. sold as a proper cost, for it far exceeds almost any instance I have met with. With the usual methods of handling coal and present local, prices, coal gas should be produced at about 45c. to 50c. holder cost in Spokane perhaps even less. PRACTICAL RATE MAKING AND APPRAISEMENT 27 SECTION 17. DISTRIBUTING COST. (15) District holder expense ] $4,414 04 Per 1000 cu. ft. 2.28c. (16) Distribution supt. offi. exp. and st. exp. . . (18) Pumping gas . . 4,799.56 4,517.35 2.48c. 2.33c. (19) Setting and removing meters 3,545 . 53 1.84c. (20) Maintenance of street mains 3,049 . 12 1.58c. (21) Maintenance of services 1,767.03 0.92c. (22) Maintenance of meters 2,982.98 1.55c. (23) Meter department expenses 1,961.77 l.Olc. Cost of distributing gas to meters $27,037 .38 13 . 99c. (17) Consumers premises and arc light expense and repairs 10,393.57 5.38c This item 17 is due to the fact that this Gas Company loans and keeps in repair some 1,345 gas arc lights for its consumers. It does not appear proper to overcharge other consumers to carry their arc lights for a specially favored class. SECTION 18. COMMERCIAL SUPERINTENDENCE AND EX- PENDITURES. Item 24 $25,495.70 is a charge for promoting new busi- ness and adds 13. 2c. per 1,000 cu.ft sold to the apparent cost of gas. It was estimated as follows for 1912: Advertising $11,341.65 Circulars 55 . 17 Demonstrating 100 . 30 Exhibition expenses 40 . 35 Salaries and bonus 16,238.88 Loss on appliances 1,236.95 Connecting appliances 16,834 . 72 Miscellaneous expenses 10,159.45 Total.. . $56,159.45 28 PRACTICAL RATE MAKING AND APPRAISEMENT Of this amount $25,495.70 was charged to 1912 operating expenses and $30,663.75 charged to Suspense Account. As being a deduction from income ordered by the management and in no way unavoidably necessary to the manufacture of gas, I have eliminated it from the cost of gas. The proper per cent of one 's profits advisable to spend in seeking new business is a question for the personal judgment of the management. (25) Commercial office salaries $13,890.77 (per 1,000 cu. ft. sold 7.19c.) in addition to the $16,238.88 partially cover- ed in item (24) should be analyzed before being admitted. SECTION 19. GENERAL OFFICE EXPENSE AND ADMINISTRA- TION. (26) Bill collection expense Per 1000 cu. ft. $5,240.90 2.71c. (27) Reading meters 2,609.79 1.35c. (28) General office expense 4,708.56 2.44c. (29) General executive salaries 8,443 38 4 37c. (30) Insurance, legal and misc. exp (31) Taxes ana royalty 21,164.36 10.96c. 14,139 20 7.32c. Totals $56,306. 19 29. loc. Item 30 Insurance, etc., $21,164.36 or per 1000 cu. ft. sales 10. 9c. is very large and should be analyzed before being finally accepted as unavoidably necessary to the manufacture and supply of gas. SECTION 20. ESTIMATE OF THE PROPER COST AND PRICE OF GAS. This review and scrutiny of the salient figures of the operating expense enables me to form an opinion only as to the proper cost of gas delivered at the consumer's meter in PRACTICAL RATE MAKING AND APPRAISEMENT 29 Spokane, for I have not audited the books or appraised the works. Being careful to be more than liberal I would fix the reasonable operating costs at not more than the following: Cost of gas in holder 0.50 per 1000 cu. ft. sales Cost of distribution 14 Cost of general expense 25 Cost at consumer's meter 89 " , " SECTION 21. ALLOWANCE FOR NEW BUSINESS. Much discussion has arisen as to whether there should be any allowance in the manufacturing cost of gas for the promotion of new business. The Gas Committee of the City Council of Minneapolis in its now standard adjustment with and franchise for, its Gas Company agreed upon 2J^c. per 1,000 cu. ft. sales as reasonable and allowable, so I would be inclined to recom- mend 3c. per 1,000 cu. ft. as an allowance for new business expense for Spokane and have included it in general expense above. SECTION 22. COMPARISONS WITH TACOMA AND SEATTLE GAS. From the report of the Public Service Engineers of the State of Washington upon the Tacoma Gas plant I take the following figures (pages 138 and 140) derived from their audits of these companies ' books. 30 PRACTICAL RATE MAKING AND APPRAISEMENT Item Tacoma Seattle Spokane Cost of coal, per ton $3.35 $3.26 $5. 10 Cost of manufacturing 37 . 22 28 . 00 50 . 77 Cost of distribution 8.84 9.20 21 .30 Cost of general expense 27 . 98 16 . 30 32 . 95 The average cost of Seattle and Tacoma coal is $3.30 or $1.80 less than Spokane. Since 10,000 cu. ft. is the average yield of gas per ton this would increase the cost of manufacturing about 18c. per 1,000 cu. ft., unless the price of coke and residuals is correspondingly increased, which is not probable. The average cost of manufacturing for Tacoma and Seattle is 32.61c. giving for Spokane about 50c. per 1,000 cu. ft. sales. The average cost of distribution for Tacoma and Seattle is 9.02c. For Spokane we have extra expenses, viz. : (15) District holder expense. ... 2.28 per 1000 cu. ft. sales (18) Pumping gas 2.33 " 4.61 " " " " This gives about 14c. per 1,000 cu. ft. sales. Spokane appears to labor not only under the disadvantage of high priced coal but also under the remediable disadvantage of an expensive poorly designed method of street distribution. The average of cost of general expense for Tacoma and Seattle is 22.14c. per 1,000 cu. ft. sales. This is about 3c. per 1,000 cu. ft. less than the 25c. fixed by myself inde- pendently. My own figures for the reasonable Spokane cost of gas were fixed without any knowledge of Tacoma and Seattle costs, this comparison being made subsequently, and confirming the liberality of my mental attitude toward the Spokane Gas Company. PRACTICAL RATE MAKING AND APPRAISEMENT 31 SECTION 23. PROFIT AND DEPRECIATION COSTS PER 1,000 Cu. FT. In estimating the annual capacity of gas works; engi- neers by common consent multiply the work 's daily capacity of 200 days rather than 365, since this gives an ample margin of 165 days while repairing retorts and other gas making machinery, and covers the maximum daily demand for the long winter nights. The daily capacity of the Spokane gas works appears to be as follows: One 9 ft. Lowe water gas set, cu. ft 750,000 96 Coal gas retorts at 8000 cu. ft 768,000 Total daily capacity 1,518,000 The yearly capacity is 200 times the daily or 303,600,- 000 cu. ft. The water gas set could be urged to 1,000,000 cu. ft. daily capacity, and the retorts which are estimated at 6 hour 400 Ibs. charges could be operated on 4 hour charges and higher heats at 12,000 cu. ft., per day with good economical results. There is an ample margin of time allowed for repairs, and for very moderate operation in my estimate of 303,- 600,000 cu. ft. We have previously found the present value of the works to be $939.726. Dividing this by 303,600 per 1,000 cu. ft. we have as the investment per 1,000 cu. ft. capacity $3.09. To the operating cost of gas per 1,000 cu. ft. should be added the profit and depreciation on its investment per 1.000 cu. ft. capacity. Net profit per 1000 cu. ft, 7 per cent of $3.09 $0 . 216 Residual depreciation 3 per cent of 3.09 0.093 Total. . $0"31 32 PRACTICAL RATE MAKING AND APPRAISEMENT Frequently gas companies compute their investment per 1,000 cu. ft. of sales. In this case with 193,109.7 1,000 cu. ft. sales 1912 it would be about $4.50 per 1,000 cu. ft. but if for any reason a corporation has too far anticipated its needs and has over-built or over-invested for them it should not expect the public to carry an unreasonable burden, due to the company's own blunders or extrava- gance. SECTION 24. FLAT RATE PRICE FOR GAS. We can now recapitulate the costs givinig a fair and rea- sonable return per 1,000 cu. ft. of sales of gas for Spokane: Manufacturing (holder cost) cost per 1000 cu. ft . $0 . 50 Distribution " " " " . 0. 14 General expense " " " " . . 25 Net profit " " " . 0.216 Residual depreciation " " " " . 0.093 Total fair and reasonable price " " " " . $1.20 You will recall that I have mentioned an allowance of 2j/c. per 1,000 cu. ft. made for new business expense in Minneapolis and suggested 3c., but this is a matter of personal judgment and liberality. The general expense (25c.) exceeds the Tacoma and Seattle average (22c.) by 3c. One thing all experience in the gas business teaches reduction of price and that only increases gas sales per capita without it all advertising and solicitation appear to be futile piffle. SECTION 25. STEPPED RATE PRICES FOR GAS. In this system consumers using more than a certain fixed amount per month are given a lower pnce for the excess. PRACTICAL RATE MAKING AND APPRAISEMENT 33 ft * 1 1 * s * *** v ^ < & * Diagram Seattle and Tacoma Rates. 34 PRACTICAL RATE MAKING AND APPRAISEMENT Its object is to obtain large individual consumers of gas for cooking, heating, power, etc., and thereby to increase the use of gas during daylight hours. Most of the gas companies that have adopted stepped rates begin with 5,000 or 10,000 cu. ft. per month per meter and thereby get so far outside of the usual highest metro- politan average of 3,000 per month per meter that very few consumers gain anything but a false impression of the gas company's liberality. (See Diagram Seattle and Tacoma Rates.) If in Spokane, 10,000 cu. ft. per meter per month were fixed as the minimum limit only about 1J^ P er cent or 127 out of 8,443 consumers would pay less than the highest rate as will be learned from the subjoined tabulation of consumers. So far as the writer knows no rational and practical quantitative explanation of the stepped rates opera- tion has ever been given by the gas companies which have, thus cautiously, appeared to have adopted it. SPOKANE GAS AND FUEL COMPANY Tabulation of Consumers Year Ending October 31, 1912. Per meter Cu. ft. Cu. ft. per month Oto 500 1,009 500 1,000 2,207 1,000 1,500 1,425 1,500 2,000 1,645 2,000 2,500 634 2,500 3,000 423 3,000 3,500 ... 238 Forward, 7,581 PEACTICAL RATE MAKING AND APPRAISEMENT 35 Per meter per month Cu. ft. Cu. ft. Brought Forward, 7,581 3,500 " 4,000 152 4,000 4,500 128 4,500 " 5,000 98 5,000 " 5,500 76 5,500 6,000 60 6,000 6,500 59 6,500 " 7,000 31 7,000 7,500. 24 7,500 8,000 24 8,000 " 9,000 39 9,000 " 10,000 43 10,000 12,500 57 12,500 " 15,000 15,000 17,500 20 17,500 20,000 9 20,000 " 25,000 33 25,000 50,000 6 100,000 200,000 _2 8,442 By means of expurgations from the accounts of the Spo- kane Gas and Fuel Company of unnecessary expenditures, what in the writer's opinion is a judicially fair flat rate price, has been obtained. It is $1.20 per 1,000 cu. ft. for all con- sumers but confessedly this rate is only an average price protecting the Gas Company in a fair profit. Many small consumers pay too low a price and the company must recoup its losses on them, by making large consumers pay too high a price. The rational and practical reason for stepped rates arises from the fact that in the operating expenses of gas making and supply the items of cost should be segregated into two classes, viz.: (1) Service or fixed operating expenses regularly accruing 36 PRACTICAL RATE MAKING AND APPRAISEMENT with the passage of time regardless of any temporary varia- tion in the sales of gas. (2) Commodity or proportional operating expenses in- creasing or decreasing with the increase or decrease of gas sales. Subjoined is an expurgated segregation of the fixed and proportional operating expenses for Spokane. STEPPED RATE SYSTEM. Expurgated Segregation of the Fixed and Proportional Expenses Required for the Cost of Supplying Gas in Spokane, 1912. If we add the residuals per 1,000 cu. ft. (31.74c.) to 50c. the gross holder cost per 1,000 cu. ft. sales (deduced from the Seattle and Tacoma average (32c.) by adding 18c. per 1,000 cu. ft. to it) we obtain 81.74c. as compared with 89.01c. gross holder cost per 1,000 cu. ft. sales given by Spokane Gas Company. Hence the gross cost estimated (81.74c.) is 8.17 per cent less than the book cost 89.01 c. offered. Again if we subtract 25c. estimated general expense from 29.15c. book cost offered we reduce this cost 14.24 per cent. From the books of the Spokane Gas and Fuel Company. Total fixed operation expenses as stated by gas company $135,698.06 (6) Less 8.17 per cent of $2,732 . 69 (11) 8.17 per cent of 2,391.00 (14) " 8.17 per cent of 201 . 39 8.17 per cent of "5^5251)8 .... 435 . 06 id .70 >.77 (26) to (31) Less 14.24% 56,306.19 gen. offi. exp. . Less Taxes 2,850.63 $53,555.56 7,626.31 57,841.41 Expurgated fixed operating exp $77,856 . 65 or 193,109.7 1000 cu. ft. sales at 40.31c. PRACTICAL RATE MAKING AND APPRAISEMENT 37 From the books of the Spokane Gas and Fuel Company. Total proportional operating expenses as stated by company $108,132.62 Less 8.17% of 171,908.36 5,325.08 165,583.28 $13,528.15 (31) Less 14.24% of 2,850.63 taxes 405.93 13,934.08 Expurgated proportional operating expense. . . $94,198.54 193,109.7 1000 cu. ft. sales at 48.79c. (Check) total operating cost 89. Ic. From the above it would appear probable that $71,775 had been unnecessarily spent in 1912 as follows: For fixed operating expenses $57,841 .41 For proportional operating expenses 13,934 . 08 Total. $71,775.49 The proportion of this Company's present value invest- ment ($939,726) required to supply annually 193,109,700 cu. ft. of gas at $3.0953 per 1,000 cu. ft. capacity is: Used and useful investment $597,732.45 And profit and depreciation (7 plus 3) 10 per cent 59,773.24 We will in this case regard gas as a commodity with a margin of 31c. on each unit rather than as a public service (until very small consumers are reached) and successively vary the annual sales starting with the proper regimen of the year 1912 after expurgation, of its accounts. 1912. Total Annual Sales in 1000 cu. ft., 193,109.7. Per 1000 cu. ft. Fixed operating expenses $77,853 .65 40 .31c. Proportional operating expenses 94,198 . 54 48.79c. Profit and depreciation 59,773 .24 30 .95c. Total price $231,828.43 $1 .2005 38 PRACTICAL RATE MAKING AND APPRAISEMENT Average gas sold 1912 per meter per month cu. ft., 1,906. The above presents the proper practical conditions under which $1.20 per 1,000 cu. ft. gas should have been sold in 1912 at a fair and reasonable profit. Since the stepped rate is for the primary purpose of increasing the sales per meter under the existing regimen; for the purpose of fixing quantity rates we can assume with commercial adequacy that the total annual gas sales of works and the average monthly sales per meter vary in the same proportion for the stepped rate analysis until we reach about 500 cu. ft. per meter per month or about 6,000 annually per meter or about 50,658,000 cu. ft. total annual sales of works, after which a minimum monthly bill of 15c. per meter light is necessary to cover fixed cost only or 26c. to cover fixed cost, profit and depreciation per meter light. This will be more fully explained hereafter in the para- graph on minimum charges. 1912. The Total of Variables for 193,109.7 1,000 cu. ft. sales is Per 1000 cu. ft. Proportional operating expense $94,198 .54 48 . 79c. Profit and depreciation 59,773.24 30.95c. Gives total variable $153,971 .78 79.74c. This varies with the load while the fixed operating ex- penses, $77,856.65, do not, if we sell gas as a commodity. We can now vary the total annual sales of gas and obtain proper corresponding rates for it. Total Annual Sales in 1,000 cu.ft. (assumed) 100,000. Per 1000 cu. ft. Fixed operating expense $77,856 .65 77 . 86c. Proportional operating expense, profit and de- preciation 79,732.80 79 . 74c. Total price $157,589.45 $1 5760 PRACTICAL RATE MAKING AND APPRAISEMENT 39 Average gas sold per meter per month per cu. ft., 987. For commercial purposes we may consider this to be about 1,000 cu. ft. Total Annual Sales in 1,000 cu. ft. (assumed) 50,000. Per 1000 cu. ft. Fixed operating expense $77,856.65 155. 71c. Proportional operating expense, profit and de- preciation 39,866.40 79.74c. Total price $108,723.05 23 .44c. Average gas sold per meter per month cu. ft., 493. Total Annual Sales in 1,000 cu.ft. (assumed) 200,000. Per 1000 cu. ft. Fixed operating axpense $77,856 .65 38 . 93c. Proportional operating expense, profit and de- preciation 159,465 .60 79 . 73c. Total price $237,322.25 118. 66c. Average gas sold per meter per month, cu. ft., 1,974. Total Annual Sales in 1,000 cu.ft. (assumed) 300,000. Per 1000 cu. ft. Fixed operating expense $77,856 .65 25 . 95c. Proportional operating expense, profit and de- preciation 239,198 .40 79 . 73c. Total price $317,055.05 105. 68c. Average gas sold per meter per month cu. ft., 2,961. Total Annual Sales in 1,000 cu.ft. (assumed) 500,000. Per 1000 cu. ft. Fixed operating expense $77,856 .65 15 . 57c. Proportional operating expense, profit and de- preciation 398,664 .00 79 . 74c. Total price $476,520.65 95.31c. Average sold per meter per month cu. ft., 4,935. 40 PRACTICAL RATE MAKING AND APPRAISEMENT Total Annual Sales in 1,000 cu.ft. (assumed) 1,000,000. Per 1000 cu. ft. Fixed operating expense $77,856 .65 7 . 79c. Proportional operating expense, profit and de- preciation 797,328 .00 79 . 75c. Total price $875,184.65 87.54c. Average gas sold per meter per month, cu. ft., 9,870. The necessary assumption for a commodity rate is that with any given regimen (say of 1912) that its total annual sales are in direct proportion to each individual sale or aver- age meter record for one month. Diagram 2 graphically depicts this natural law of prices, by means of the commodity curve shown. This curve provides for a constant margin of profit and depreciation of 10 per cent on the necessary investment ($3.09 per 1,000 cu. ft. capacity) or 31 cents per 1,000 cu. ft. and also for the fixed and proportional operating expenses for each assumed rate of delivery to consumers. So long as the regimen used does not change this com- modity curve will give consistent prices. Again I must call your attention to the fact that it is not a scientifically exact curve but may be used as commercially adequate and as our only means of computing rationally and practically approximate stepped rates. Any point on this curve fixes the fair price per 1,000 cu. ft. for the total annual sales corresponding to it, provided the works are not over-built. The area of the rectangle having this point for its upper right hand corner and the vertical and horizontal axis as sides is proportional to the total revenue or gross earnings of the plant. This latter fact permits us to adjust the stepped rates so PRACTICAL RATE MAKING AND APPRAISEMENT 41 D O O O Q O Q * * \J *> , J ,* * .N ,> 42 PRACTICAL RATE MAKING AND APPRAISEMENT that the gross earnings of the plant for 1912 with a flat rate of $1.20 per 1,000 cu. ft. will not be reduced by a stepped rate. This expurgated flat rate price (of $1.20 per 1,000 cu. ft.) which I have so laboriously deduced is the pivotal point and basis for the stepped rate. If we assume the following single stepped rate as follows : For the first 1,000 cu. ft. per meter per month $1.40 per 1,000 cu. ft., and for all in excess of 1,000 cu. ft. per meter per month, $1.00 per 1,000 cu. ft. We have For the first 1000 cu. ft $1 . 40 For the second 1000 cu. ft . . 1 . 00 For the average per 1000 cu. ft $1.20 You will recall that the actual average per meter per month was 1,906 cu. ft. and the flat rate price, $1.20 per 1,000 cu. ft. So this stepped rate will not commercially change the total earnings save slightly in favor of the Gas Company up to its present total sales of 193,109,700 cu. ft. per year at $1.20 flat. Beyond about 193,109.7 1,000 cu. ft. total sales it enables lower rates for industrial purposes, without loss of profit per 1,000 cu. ft. If, for instance, a meter reads 10,000 cu. ft. per month the bill will be: 1000 cu. ft. at $1.40 $1 .40 9000 cu. ft. at $1.00. . 9.00 Total $10.40 Average per 1000 cu. ft., $1.04. Below $1.20 the stepped rate suggested for increased PRACTICAL RATE MAKING AND APPRAISEMENT 43 sales is a little higher than the natural commodity curve of prices. Diagram 2. Probably the company will find it advantageous to offer a secondary rate much lower than $1.00 since we have found proportional expense, profits and depreciation to properly aggregate about 80c. and the fixed expenses really almost vanish with very large consumers. The minimum charge for stepped rates should have our consideration. Although gas has been treated as a com- modity yielding a fixed profit of 31c. on each 1,000 cu. ft. sold, still a gas company is a public servant particularly for patrons requiring a small amount of gas and they should pay for such service. The fixed operating expenditures are $77,856.65. The meters reported in active operation, 8,443, averaging 5.065 lights, each. The total number of lights is 42,764. We have Yearly fixed cost per meter light $1 . 82 Monthly fixed cost per meter light 0.15 If we could superadd these meter light minimum charges to the straight meter gas bill the Gas Company could charge a flat rate of 79.73 (80c.) per 1,000 cu. ft. sales and still obtain its regular margin of 31c. per 1,000 cu. ft. covering profit and depreciation. It is very important to note this fact for if the public knew how to be fair it would intelligently insist on this method of making rates, for all fixed expenses would be covered by 15c. per month per meter light and the price of gas be a matter of raw material and productive labor, with profits and deprecia- 44 PRACTICAL BATE MAKING AND APPRAISEMENT tion added, thus providing them for enlargement of the works as it might be required. Repeating, we would in this case only pay 15c. per meter light per month and 80c. per 1,000 cu. ft. flat rate. Further the Gas Company would make a margin of 31c. on each 1,000 cu. ft. after defraying its proportional oper- ating expense of 49c. per 1,000 cu. ft. The obstinate hostility of the public to a fixed minimum charge for cost of service which in Spokane's case would average 5 lights at 15c. or 75c. per month per meter appears to require the stepped rate to conceal it. In the deduced flat rate of $1.20 per 1,000 cu. ft. as also in the derived stepped rate you will see that the proper fixed expenses are covered and so there is no necessity of a meter charge of 15c. per meter light per month or 75c. average per meter per month to protect the Gas Company, but as I have said there always remains the uncertainty of a possible change of regimen requiring a margin and 25c. per meter per month now permitted allows a possible margin of not more than $25,329 per year for the Spokane Gas and Fuel Company to come and go upon, (8,443 meters in use). I beg leave therefore to submit for your consideration as a step rate system of prices suitable for the city of Spokane and protecting its Gas Company. First. A charge of 25c. per meter per month, as a mini- mum, but not to be charged if the actual gas bill at $1.40 net per 1,000 cu. ft. equals or exceeds it in amount. Second. A gross rate of $1.50 per 1,000 cu. ft. for the first (1,000) one thousand cu. ft. per meter per month. Third. A gross rate of $1.10 per 1,000 cu. ft. for all excess over (1,000) one thousand cu. ft. per meter per month. PRACTICAL RATE MAKING AND APPRAISEMENT 45 Fourth. A deduction of (10) ten cents per 1,000 cu. ft. from all gas bills paid within (10) ten days after presenta- tion which is to be made by the Spokane Gas and Fuel Company. Referring back to tabulation of consumers and Diagram 2, we find: Paying $1.40 3.216 consumers Paving 1.20 or over 3,070 Paving 1.13 or over 1,057 Paving; 1.08 or over 616 Paving 1.04 or over 356 Paying 1.00 or over 127 8,442 This total obtained from the Public Service Commission varies slightly from the 8,443 obtained from the Gas Com- pany but serves just as well to show that 6,286 consumers of 8,442 (8,443) will pay $1.20 or over per 1,000 cu. ft. under the stepped rate system submitted. It is too obvious to again require emphasis that all large users of gas for commercial purposes will pay about $1.00 per 1,000 cu. ft., and that the Spokane Gas and Fuel Company may even find it advantageous to give as low as an 80c. rate in case of very great consumers. SECTION 26. FINANCES, SPOKANE GAS AND FUEL COMPANY. Capital stock, preferred $300,000 . 00 Capital stock, common 2,000,000.00 Bonds 1,345,000.00 Due 1944, 5 per cent interest. 46 PRACTICAL RATE MAKING AND APPRAISEMENT SPOKANE GAS AND FUEL COMPANY, SPOKANE, WASH. Incorporated November 15, 1909, under the laws of the State of Washington. Owns all the stock of the Union Gas Company, which owns all of the preferred stock and 992. per cent of the common stock of the Spokane Falls Gas Light Company. Operated by the Doherty Operating Company. Acquired on the Cities Service Company, September, 1910. Franchise. Dated June 14, 1904. Forty-one years. Capital Stock. Authorized and outstanding: Common, $2,000,000; 6 per cent preferred, $300,000. Total $2,300,- 000. Preferred is cumulative after July 14, 1912. Shares $100. In September, 1910, the Cities Service Company acquired the entire common stock of this company, giving in exchange for each $100 of common stock, $15 of its own common and $30 of its preferred stock. Transfer agents Henry L. Doherty and Company, New York, N. Y. Funded Debt. $795,000. First and refunding mortgage, 5 per cent thirty-five year sinking fund bonds, dated De- cember 1, 1909, due August, 1944; interest payable February 1, and August 1, at office of Henry L. Doherty and Company, New York. Trustee Central Trust Company, New York. Coupons, $1,000. Registerable as to principal. Redeem- able on any interest date at 105 and interest. Sinking fund on all outstanding bonds, including prior lien, July each year; 1911-1916 ^ per cent of bonds; after July, 1916, 1 per cent of bonds until all bonds are redeemed. Secured on all property. Authorized: $5,000,000, of which a sufficient amount is reserved to retire prior liens at par. PRACTICAL RATE MAKING AND APPRAISEMENT 47 UNION GAS COMPANY. (Controlled by Stock Ownership) Incorporated October 6, 1904, in Virginia. Owns 99 per cent of the stock of the Spokane Falls Gas Light Company. Franchise expires June 14, 1945. Capital Stock. Authorized and outstanding, $600,000 common and $300,000 6 per cent cumulative preferred; par $100. Dividends on preferred, payable semi-annually at office of N. W. Halsey and Company, New York, transfer agents. Entire stock is owned by Spokane Gas and Fuel Company. Bonded Debt. $550,000 First and Collateral Trust Gold 5s. dated July 1, 1905; due July 1, 1935; interest J & J. I. at N. W. Halsey and Company, New York. U. S. Mortgage and Trust Company, New York, and G. M. Cummings, Trustees. Coupon (principal may be registered), $1,000. Secured on all property and pledge of 1,486 shares of stock of Spokane Falls Gas Light Company. Sinking fund, 1 per cent of outstanding bonds from July, 1911 to 1916, and 2 per cent thereafter. Authorized, $1,000,000. SPOKANE FALLS GAS LIGHT COMPANY. Controlled by stock ownership by the Union Gas Company. Stock issue $50,000 preferred and $200,000 common, of which all preferred and $99,400 of the common is outstanding. Transfer agents, Henry L. Doherty and Company. Fran- chise date, May 6, 1902, for forty-three years. Cities Service Co., New York City. Office, 60 Wall Street. 48 PRACTICAL RATE MAKING AND APPRAISEMENT Capital stock, pref., auth., $30,000,000; issued $8,844,090; com., auth., $20,000,000; issued, $4,979,045; ann. div., pref., 6 per cent, com. 3 per cent. Controls Through Ownership of Stock: Brush Electric Light and Power Co. Galveston, Tex. Denver Gas and Electric Co. Empire District Electric Co. Spokane Gas and Fuel Co. Doher y Operating Co., New York City. 60 Wall Street. Capital stock, auth., $100,000; issued, $55,000. Companies Operated. Bristol Gas and Electric Co., Bristol, Tenn. Carthage Gas Co., Carthage, Mo. Citizens' Gas, Electric and Heating Co., Mt. Vernon, 111. Denver Gas & Electric Light Co., Denver, Colo. Pueblo Gas & Fuel Co., Pueblo, Colo. Spokane Gas & Fuel Co., Spokane, Wash. Lincoln Gas & Electric Light Co., Lincoln, Neb. Lebanon Gas & Fuel Co., Lebanon, Pa. Knoxville Gas Co., Knoxville, Tenn. Meridian Light & Ry. Co., Meridian, Miss. Montgomery Light & Power Co., Montgomery, Ala. Fremont Gas & Electric Co., Fremont, Neb. Webb City and Carterville Gas Co., Webb City, Mo. Trumbull Public Service Co., Warren, O. Hattisburg Traction Co., Hattisburg, Miss. Only Electrical Properties. Empire District Electric Co., Joplin, Mo. Spring River Power Co., Galena, Kan. PRACTICAL RATE MAKING AND APPRAISEMENT 49 Massillon Electric & Gas Co., Massillon, O. Massillon Electric & Gas Co., Navarre, O. Cumberland and Westernport Electric Railway Co., Cumberland, Md. Summit Co. Power Co., Dillon, Colo. Brush Electric Light and Power Co., Galveston, Tex. The apparent original structural cost of these Spokane gas works is about $1,000,000 and their present value a little over $939,000. SECTION 27. INCREASED SALES DUE TO LOWERED PRICE OF GAS. Although very large sums of money are reported to have been spent in securing new business, probably through the agency of some of this company's allied organizations, there has been no increase of gas sales for 1912 over 1911. In the writer's opinion, this is due to the fact that the solicitation of new business was not accompanied by a reduction in the price of gas. It is a fact universally acknow- ledged, and which can be proved that the public immediately respond to any reduction made in the price of gas and this price of gas is the controlling factor in fixing its sales per capita. So, assuming the population of Spokane to be about 100,000 people, the sales per capita for the year 1912 were about 2,000 cu. ft. In the state of Massachusetts we have a large number of gas companies operating in cities under practically identical conditions as to cost of production, labor and raw material. Taking the facts of these gas companies for the year 1907 50 PRACTICAL RATE MAKING AND APPRAISEMENT (See Chapter XV Gas Sales per Capita) we have the follow- ing average results : Price $2.00, sales per capita, 722 cu. ft. Price $1.75, sales per capita, 898 cu. ft. Price $1.50, sales per capita, 1395 cu. ft. Price $1.25, sales per capita, 2535 cu ft. P ice $1.00, sales per capita, 3824 cu. ft. In the state of Massachusetts for cities over 75,000 pop- ulation, excluding Boston, but including eight cities with prices ranging from 98c. to 84c. per thousand cu. ft., the average annual sales per capita is 4,330 cu. ft. and the average increase in sales per capita for one cent decrease or deduction in price appears to be about 40 cu. ft. As the average flat rate obtained for Spokane is $1.20 per thousand, this would mean a reduction of 30c. in each thousand and an increase in sales per capita of 1,200 cu. ft. annually. If we multiply this 1,200 by 100,000, we have 120,000,000 cu. ft. as the probable increase under ordinary conditions in the annual sales of the Spokane Gas Company if it reduced its price to $1.20. If we add this 120,000,000 cu. ft. to the 193,000,000 cu. ft. of 1912, we would obtain for 1914 sales 313,000,000 cu. ft. and the practical exhaustion of the full capacity of the present works, which at present prices are over-built. SECTION 28. QUALITIES OF GAS REQUIRED. Of late years the use of gas for illumination, save by means of incandescent or Welsbach burner, has very much decreased so that at present perhaps 10 per cent of the gas sold only is burned in open fish tail or bat's wings burners. The re- mainder of the gas sold is used principally for cooking, PRACTICAL RATE MAKING AND APPRAISEMENT 51 heating, welding and power, and its price must be such that it can be purchased as a commodity and not as a luxury. Under this condition, largely affected by the price of other fuel in any locality, the sales of gas increase with amazing rapidity when this gas is offered at reasonable rates, and of fairly good quality. As a matter of fact, the illuminating value of artificial gas is getting less and less important in the eyes of consumers, for those desiring a brilliant illumination can avail themselves of electricity, but the heating power of gas is becoming of greater importance than it ever has been before; and where natural gas with a heating value of 1,000 British Thermal Units is not available, artificial gas should have a heating value of something over 600 B. T. U. For the same reason the pressure at which gas is furnished has been steadily raised to facilitate its use in gas stoves and meters and in incandescent burners until now the pressure insisted upon in most cities as at the level of the distributing gas holder, is a maximum pressure of four inches and a minimum pressure of 2 inches water column; and for each 100 feet rise above the level of the holder J/ inch to 1 inch is added to the limits of pressure at the holder. In Minneapolis its recent franchise prescribed 18 candle power for the gas and an average thermal value of 600 B.T.U. with a reduction from the monthly bills proportionate to any deficiency of heating power in the gas below 600 B. T. U. and a fine if at any time gas falls below 550 B. T. U. per cu. ft. SECTION 29. THE LONDON SLIDING SCALE FOR GAS. See Chapter XVI. The Utopian miracle of the universal prosperity of gas companies in England, of companies paying ten to fifteen 52 PRACTICAL RATE MAKING AND APPRAISEMENT per cent dividends on first issues of stock, or proportionate dividends on those stocks after conversion into lower dividend stocks, the fact that the contented consumers of these companies receive and pay for gas at prices ranging from48c. (South Metropolitan) and upwards, and in some few cases below this price, appears to have been wrought by the sliding scale. Further, the remaining companies not having the sliding scale appear to have been led by example to the greater economies set before them by those companies operating under the sliding scale. As a matter of fact, about two-thirds of all the capital invested in English Gas Works is subject to the sliding scale. Before taking up the mathematical discussion of the London sliding scale, it should be understood that the English method of issuing capital stock differs widely from our American methods, or lack of methods. In England, gas corporations make separate, successive issues of stock, each issue bearing a separate fixed dividend. Further, watering stocks or issuing stocks which have not back of them their actual value in fixed investment is impossible in England, save as happened to be the case in some English companies of London where the amount of an old issue of stock has, by permission of the Parliamentary Committee, been doubled because of the excessive profits resulting from the sliding scale and the fact that the price of these stocks did not rise pro rata. In permitting this doubling of the amounts in certain issues of stock, the Parliamentary Committee were careful to specify that in case of condemnation by the municipality no account should be taken of the additional stock, and no increase in the value of the plant be argued from it. PRACTICAL RATE MAKING AND APPRAISEMENT 53 In England it is the practice to closely and immediately divide up all profits in dividends, and to make and to sell by public auction such new issues of stock as may be required for the extension or addition to the working plant, whenever they may be needed. From a usually small initial issue of capital stock at 10 per cent, or under the sliding scale, the rates of interest on the subsequent issues of the stock of a going company are reduced to fixed dividends of 7, 5, 4, or even 3J^ per cent as capital is required for expansion of business. Further, the public auction sales of these stocks usually result in cash premiums, and these premiums must be used on the plant to increase the capacity of the works, and thereby increase the value of the works beyond the total face value of the securities issued, without increasing the requirements for dividends. No established general plan of the sliding scale is stated by the English, and oddly enough the only explanation given is that it means an indefinite division of extra profits between the company and its consumers, the company receiving an increase of its dividend and the consumer a reduction in the price of gas. Each time that the price of gas is lowered below a standard price the dividend is increased above a standard rate of dividend, corresponding to this price. For a 10 per cent standard dividend each penny (two cents) reduction in the price of gas gives the company the right to increase the dividend one-fourth of one per cent; that is to say, using American money terms, each one cent in the reduction of the price of gas allows an increase of dividend of one-eight of one per cent. There are a great many variations from this 54 PRACTICAL RATE MAKING AND APPRAISEMENT older arrangement in England, but perhaps the widest varia- tion known is to be found in Boston, Massachusetts, when, after many years of competition and duplication of plants and of litigation and dispute, it was finally decided to, if possible, adopt the London sliding scale in Boston as the solution of their apparently interminable arguments as to the fair price for gas. Representatives of both the city and of the gas companies were sent abroad to investigate the operation of the London sliding scale. The Massachusetts Gas and Electric Light Commission had the matter of this adjustment of the Boston Gas Com- panies taken out of their hands by legislation. The gas companies retaining a number of experts had their various gas works appraised and brought in a valuation of some $25,000,000. The way in which this appraisement was made would be very closely imitated if one were to appraise a scrap heap of old machinery at the price of the new machines which had been worn out and thrown into it. Although then in the employ of the City of New York I was requested (and furnished with the documents) to investigate the results in Boston. After carefully going through all of the figures, and visiting Boston and the works, I placed the present value of all the Boston gas works in 1905, so far as they were used and useful, at about $9,000,000. In the meantime the dispute as to the values and as to prices amongst the various companies in Boston resulted in attempts at special legislation in the Massachusetts Legis- lature from all sides of the parties in dispute, and then it is said the Governor of the State sent word that he would veto PRACTICAL RATE MAKING AND APPRAISEMENT 55 every bill introduced in the Legislature until all parties should agree upon a valuation of the gas works. Finally, these parties being thus blocked in their attempts to over-reach each other, agreed upon a valuation of about $15,000,000 all of which was to be in capital stock of the Boston Consolidated Gas Company. At that time the annual sales of the various gas companies in Boston amounted to 3,000,000,000 cu. ft. and this meant a capitalization of $5.00 for each 1,000 cu. ft. annual sales, which appears too high. At that time the price of gas in Boston was $1.00, but the arbitrators agreed upon 90c. per 1000 cu. ft. as a standard price for gas, and upon 7 per cent as the standard rate of dividend. Further, they agreed that for each five cents reduction in the price of 1,000 cu. ft. of gas, the Boston Consolidated Gas Company should be allowed to increase its dividends by one per cent above seven per cent. The result of these negotiations was that in 1912 the price of gas in Boston was fixed by the Company at 80c. and the dividend of the Boston Consolidated Gas Company was 9 per cent. In England, as the result of entire and pitiless publicity and of vigilant regulation, the first issues of securities are always not more than equal to and often less than the actual investment in the plant. In Spokane we have a gas works whose original structural cost was about $1,000,000 upon which the gas company has placed $1,345,000 in 5 per cent bonds, $300,000 of 6 per cent preferred stock and $2,000,000 of common stock, or a total 56 PRACTICAL RATE MAKING AND APPRAISEMENT of $3,645,000 securities against a present value of about $939,000. In England the dividend was further increased 1 per cent for each 8c. reduction in the price of gas, and in Boston the dividend was increased 1 per cent for each 5c. reduction in the price of gas. With the capitalization of the Spokane Gas and Fuel Company as it is, it appears to be quite impossible to accept it as a basis for computations. In the present state of the capitalization of the company and until the operating expenses of this company and the prices paid for raw material and productive labor have become more stable, it appears to be impracticable to safely consider the establishment of a sliding scale. I do not wish to be understood as saying that a sliding scale is impracticable, but to be understood as saying that it would require great changes in this company's capitaliza- tion as well as a far more elaborate consideration of the factors involved in the production of gas. SECTION 30. RECAPITULATION. The present value of the works of the Spokane Gas and Fuel Company and its controlled companies appears to be $939,726. Its used and useful investment required for 193,109,700 cu. ft. 1912 annual sales is $597,732. It is almost certain that with the price of gas at $1.20 per 1,000 cu. ft. flat or with the stepped rates of $1.40 and $1.00 the total annual sales will increase to 300,000,000 cu. ft. within a year or eighteen (18) months and its present value of $939,726 be required and used. The capacity of the almost idle Lowe Carburetted Water PRACTICAL RATE MAKING AND APPRAISEMENT 57 Gas set is nearly sufficient to take care of the present demands upon this company. With oil at 4j^c. or perhaps less, the cost of oil per 1,000 cu. ft. of water gas would be about 20c. as against 56.62 less 30. 8c. residuals, or 25. 8c. net for coal per 1,000 cu. ft. for coal gas with less labor required per 1,000 cu. ft. manufactured. A probable saving of 5c. per 1,000 cu. ft. from water gas. The fact that only 21,520 lineal feet of a total of 666,824 feet of street mains is cast iron pipe will very greatly increase the loss by depreciation and repairs of the street mains which for cast iron mains is nearly nothing and for wrought iron mains which are used in Spokane for all the rest of this system, is 6 or 7 per cent annually. The use of compressors for the gas renders its distribution more costly by just the expense of compressing it. By a proper level of location for the gas works it would appear to have been possible to avoid much cost for pumping. Perhaps very good excuses might be given for some of these defects in engineering construction but there can be no excuse for the relatively enormous expenditures of 1912 in soliciting new business and at the same time keeping the price of gas at $1.50 net per thousand. All experience proves that the price of gas is the controlling factor in its sales, and that reducing the price of gas is the first requisite in increasing its sales per capita or what is the same thing increasing the total annual sales in a city with fixed population. The regimen of a gas works, meaning by that the status of the costs of raw material and productive labor, the total sales and the relations of fixed and proportional operating expenses to each other vary so greatly with the intelligence 58 PRACTICAL RATE MAKING AND APPRAISEMENT of the management that it is not fair either to the Gas Company or to the public to fix prices for any considerable period of time ahead. I have passed over the item of working capital without comment merely fixing it at $25,000; since the items, meters in stock and gas arc lights which generally are in- cluded in it are by the Washington Public Service Com- mission Engineers included in their appraisement of assets $25,000 is more than ample to cover 30 days' requirements of coal, gas oil, payroll, petty cash, etc. The consumers' deposits of cash not mentioned here frequently cover a considerable part of the free cash working capital used in public service corporations. In gas monopolies doing a cash business, there is never any lack of credit if it is required by a reputable management. If a franchise has any capitalization value the City should receive it from the Company in its securities. In the case of older cities some allowance must be made for street pavements lifted and replaced, if it can be shown that this has been done in laying new mains, but in so new a city as Spokane, the great bulk of the mains are down before the City at its own expense lays pavements on the streets, over them. In case of repairs the cost of lifting and replacing pave- ments very properly goes into operating expense and so to the cost of gas at the consumer's meter. The City's pavements act as a barrier to possible competi- tion with the present Gas Company by increasing the future cost of laying street mains; but as a gas company does not own its ditch or any specified portion of a street, merely having an easement in it, whose locality can be changed by PRACTICAL RATE MAKING AND APPRAISEMENT 59 order of the City's officials, it does not appear reasonable or legal for it to claim any property right in pavements not paid for by the Gas Company. The cost of lifting and replacing pavements in Spokane can well be omitted as inconsiderable and probably is more than covered by the liberal prices for street main work fixed by the engineers of the Washington Public Service Com- mission. In the present case until the tangled capitalization of the Spokane Gas and Fuel Company is uprooted and a simpler form of capitalization nearer the true present value of the plant is substituted it will be very difficult to apply the principle of the London Sliding Scale equitably to Spokane. The stepped rate system appears to be free from the present objections to the London Sliding Scale, and to offer a more equitable range of prices to consumers than the flat rate does and to encourage manufacture by lower rates. Very respectfully, (Signed) WILLIAM D. MARKS, Consulting Engineer. To HON C. M. FASSETT, Commissioner of Public Utilities, Spokane, Washington. CHAPTER III. RECAPITULATION OF REPORT UPON THE FAIR AND REASONABLE PRICE OF A 6.6 AMPERE MAGNETITE ARC LIGHT PER YEAR. Through the courtesy of Messrs. Stone and Webster and their consulting engineers an appraisement in detail by the City of Minneapolis was not necessary, and only a verifica- tion in gross was made of the appraisement offered. From this appraisement and the operating expenses of the General Electric Company for 1910 the natural law of even profit prices was deduced and graphically shown in Diagram 1, as the "even profit curve of prices." The most interesting point developed is that owing to the small amount of the variable expense the flat monthly maxi- mum use rate per K. W. installed from hours to 12 hours per day increased only from $2.84 to $3.40. Without any steam plant it would have been constant regardless of hours of use. Water power plants with excess power could therefore profitably omit K.W. hour meters and base their uniform rates on the K.W. capacity of a consumer's installation. No assistance was required in this report; it occupied 33 days and cost about 2,300, and saved the City over $27,000 for the first year. The Minneapolis General Electric Company acceded to the $65 rate deduced and after one year's test offered to accept $62.50 per year for an increased number of street arc lights of the same kind. PRACTICAL RATE MAKING AND APPRAISEMENT TABLE OF CONTENTS 61 REPORT UPON THE PRICE OF 6.6 MAGNETITE ARC LIGHTS. MINNEAPOLIS, Dec. 2, 1911. SECTION 1. Object of this Report. SECTION 2. General Conditions. SECTION 3. Financial Condition of Company. Organization. Capitalization Stocks, Bonds. Sinking Fund. Earnings, Gross from 1896 to 1911. Income 1910-1911. Dividends 1899 to 1911. Franchise. The City of Minneapolis. Railroads. Population. SECTION 4. The Cost of Electric Power. Expenses for the year 1910 $492,646.68. K.W. hours generated 40,277,269. K.W. hours sold 29,177,126. Total operating expenses for current. Variable expenses, cash $54,511.33. Fixed expenses, cash $463,992.82. Average connected load 1910 33,403 K.W. Daily hours of operation of connected load 2.845. City electric plant valued at $3,500,000. Taylors Falls Hydro Electric, at $3,000,000. Cessation of flow in the Mississippi River. SECTION 5. Depreciation and Profits. Annual depreciation, $150,000. Annual profit, $520,000. Net Earnings of Company, 1910, $691,600.75. 62 PRACTICAL RATE MAKING AND APPRAISEMENT SECTION 6. Sliding Scale of Prices for Electricity. Cash Operating Expense, Depreciation, Complete Opera- ting Expense and Price for Arc Light Current. Segregated Departments of Connected Load. Verification of Computation of Rates. SECTION 7. Tabulation of Rates for Even Profits. SECTION 8. D. C. & W. B. Jackson's Method of Obtaining the Cost of Current 0.879c. per K.W. hour. Cost per Arc Light, $20.90. SECTION 9 The Contract between Taylors Falls Plant and the City Plant. SECTION 10. The Cost of Arc Lights for 1910 from the Company's Books and Records. Price of one 6.6 Ampere Magnetite arc $65.68. Residual Depreciation $2.75. SECTION 11. Regarding Street Lights as a By-product Furnished Without Profit. Total Cost of one 6.6 Ampere Magnetite $44.52. SECTION 12. Regarding Street Arc Lights as Furnished at the Average Profit Included in the Price of the Current for all Consumers Price $53.98. SECTION 13. The Supplemental Steam Plant. SECTION 14. Extras for Incandescent Lights and Arc Lights. Extra Cost of Incandescent 50 Watt Carbon Lamps 0.3c. per K.W. Hour. Present investment per Arc Light $264.50. SECTION 15. Practical Difficulties. Comparison of Station with Auditorium, Diagram 1 Curve of Prices for Even Profit. SECTION 16. Recapitulation. PRACTICAL RATE MAKING AND APPRAISEMENT 63 REPORT UPON THE FAIR AND REASONABLE PRICE OF A 6.6 AMPERE MAGNETITE STREET ARC LIGHT PER YEAR UNDER THE CONDITIONS EXISTING IN THE CITY OF MINNEAPOLIS, MINNESOTA, BY WM. D. MARKS, CON- SULTING ENGINEER, PARK Row BUILDING, NEW YORK CITY. SECTION 1. Object of this Report. The object of this report is to determine the fair and reasonable price, or prices, to be paid by the City of Minneapolis for 6.6 ampere magnetite arc lights furnished, erected and operated in the streets of the city. SEC. 2. General Conditions. The question of the proper price to be charged for a street arc light of the character above stated admits of several methods of treatment and solution, but it is obvious, as in all other matters, there is one way which is right and which should be preferred, and there is an indefinitely great number of ways which are wrong, approximating more or less nearly to the one right method. In addition to the selection of the proper and judicially fair method of solving this problem, it is important that the exact facts, so far as they can be determined from practical operation of the plant in any locality, shall be the basis of this proper method. In the present case we have not an electric station gen- erating electricity solely for the purpose of furnishing street arc lights and excluding all other forms of electric service, but we have, on the contrary, a station endeavoring to fur- nish electric service in all its forms, such as incandescent, house and street lighting, motive power service from as large a unit as 2,500 H.P. down to a motor of only a fraction 64 PRACTICAL RATE MAKING AND APPRAISEMENT of a H.P. and also street arc lighting such as is proposed above. Besides the complication of this multifarious service, the Minneapolis General Electric Company has had as its sources of power the Hydro-Electric Station upon the St. Croix river, 40 miles away, and conveying electricity to Minne- apolis by means of a pair of high tension lines, and as a further source of power in emergencies it had a local steam plant within the limits of the city of Minneapolis of 6,000 to 7,000 K.W. capacity in 1010. There is no doubt of the necessity of this supplemental steam capacity, since, during the present month, a sudden Arctic gale and a freezing temperature coming together, caused an almost complete cessation of the flow of the Mississippi river at Minneapolis, and also very largely diminished the flow of the St. Croix river at Taylors Falls. While such a vagary as this will not cause great incon- venience to a factory or a mill which can shut down for a day or two without great loss, it is fatal to the usefulness of an electric lighting plant, which must be prepared at every instant to generate and to deliver whatever electricity may be demanded by its consumers. When considering the fixing of prices to be charged for each of the different departments into which the sales of the electric supply is divided in a public service corporation supplying all forms of electricity required by the city, it is necessary to at once recognize and accept the fact that the method of averages is the only one which can be used. Following naturally along the process of manufacture we realize that the generating station supplies and distributes a great pool or store of electricity which is drawn upon as from PRACTICAL RATE MAKING AND APPRAISEMENT 65 a common fund, for the purpose of incandescent lighting, motive power, street lighting or heating, and it is perfectly natural to assume that the average cost of this electricity is the same to all consumers and that motive power requiring only its admission to the motor will be dealt with fairly if only charged the profitable price at which electricity can be furnished from the common fund. (See diagram.) On the other hand, incandescent lighting requires incan- descent lamps, and to the cost of the power current should be added the cost of the incandescent lamps used. In the same way for arc lighting, to the cost of the power current should be added such extras as the special operating labor, carbons or electrodes and the maintenance of the same. Thus it appears as if in order to get the proper price for street arc lighting, we should obtain the cost of the power current per K.W. hour, in which should be included the average cost due to the residual depreciation of the plant after all repairs are made as well as is possible. When this cost per K.W. hour of the common store of electricity is obtained, it should then have added to it such extras as arise from the peculiarities of the street arc lighting, and also a fair and reasonable profit upon the investment required for arc lighting. In distributing electricity for all purposes, it is obvious that poles and underground conduits thus used can con- veniently be used in part also for the street arc lighting system, and therefore somewhat reduce the cost of the investment required to erect the arc lamps wherever they may be desired. The officials of the Minneapolis General Electric Company 66 PRACTICAL RATE MAKING AND APPRAISEMENT have furnished me, upon request, such data as I have asked from their books of account, and also such physical data regarding the operation of the plant as I have requested. In addition to this, they have placed in my hands a most elaborate and exhaustive report made by the Messrs. Jackson, consulting engineers of Chicago, which I am told has occupied their time and that of a dozen assistants for a couple of months or more, and further that they have been furnished by this company's employes with all of the data as to cost, both for machinery and plant and operation, to any extent which they may require. Upon examining this report, I have found myself obliged to differ from it, more particularly as to methods. It is proper for me to say that, judging from the internal evidence, the work of appraisement done by the Messrs. Jackson has been most conscientiously and thoroughly carried out in the minutest detail, and results in a valuation per street arc light from which I do not largely differ, but when it comes to estimating the cost of the current, these engineers have accepted and used a contract said to exist between the Taylors Falls plant and the City of Minneapolis plant, which fixes the price of all power delivered at Station "A" in Minneapolis at $18 per ampere capacity demanded, and also 0.4 cent per K.W. hour measured. Taking the figures of 1910, this raises the basic cost of current to the City of Minneapolis plant from about $55,000 to nearly $400,000 for the variable cost of current rising and falling with the amount of current delivered. The operating expenses for the year 1910 furnished to me by the Minneapolis General Electric Company included the operating expenses both at Taylors Falls and in the City PRACTICAL RATE MAKING AND APPRAISEMENT 67 of Minneapolis, and I have therefore been able to give you the underlying facts as to the cost of current, regardless of the interposition of this artificial method by contract of raising the apparent cost of current to the Minneapolis plant. Returning now to the question of averages, I would say that when we contemplate a detailed investigation of each department of an electric company it will at once be recog- nized that the detail of real estate, buildings, machinery and of the ducts, poles, wires and multifarious operatives of a distribution plant of such a company is almost too intricate to admit of analysis by the human mind. Carried to the extreme of analysis, we at once recognize the fact that each light, each motor would, under such conditions, have its separate rating as to cost and price of electricity. For this reason, in commercial practice it is necessary by some method to use averages of the cost, and the question to be decided is, at what point must the segregation of departments cease and averages be used in fairness alike to both the company and the consumer of electricity '? Recognizing the practical futility of such an attempt to segregate the investments in plant or each department, or, except in a general way for any one department, I have computed the complete cost of electricity in the common pool or fund and, taking so much of it as is required for each department at the average price resulting, have, by a careful consideration of the actual extras resulting from the peculiar demands of arc lighting, endeavored to fix a fair and reasonable price for a single arc light for one year. With 8 per cent profit on the actual investment, this price appears to be $65.68, with a lump profit of $21.16 on each 68 PRACTICAL RATE MAKING AND APPRAISEMENT arc, as will presently be shown. The actual cost of this light without any profit at all appears to be $44.52; and if we allow a profit on the current only, the price appears to be $53.98, with a profit on each light of $9.46. As may be inferred from what goes before, it will be found that, according to the point of view taken and the method pursued, a number of different prices will result for the arc lights (or for that matter for any other form of lighting), and the price to be fixed upon for any given arc light must be that in which the method used in reaching it appears to be the nearest to a judicially fair and reasonable return upon the investment, which in this case happens to have been fixed by the committee of City Councils at 8 per cent. SEC. 3. Financial Condition of the Minneapolis General Electric Company. This company has been claiming a rate of $84 per arc light, but the city has fixed the rate till within a short time at $70 per street arc light and has paid this rpice, the company receipting for it on account. Recently this $70 price has, by action of the City Council, been reduced to $65 for each 6.6 ampere magnetite arc light. To make a thorough and exact appraisement of the prop- erty of this company would require a dozen employes and three to six months' time. To make a thorough audit of the books and accounts of this company, verify check stubs and vouchers, would re- quire an equal number of accountants and length of time, at the very least, and cost many thousands of dollars. In making an estimate of the present value of these plants, I have been guided by such information as to costs in a general way as I have gathered elsewhere in my pro- PRACTICAL RATE MAKING AND APPRAISEMENT 69 fessional labors, and I have accepted for the year 1910 the structural cost of the Taylors Falls plant to Station "A" at $3,000,000, and I have also estimated by analogy the present value (1910) of the city plant within the limits of Minneapolis, at about $3,500,000. The total valuation, then, amounts to $6,500,000 present value (1910). In my work I have not made use of any of the figures for 1911, but should add that since the fire of January 6, 1911, this company has completed a steam station known as the Riverside Station, having 12-thousand K.W. nominal capacity, and has rebuilt its Main Street Station, burned down, as a central distributing station. Both of these stations are up to the most advanced state of the art of generating and manipulating electricity, and place the company in a much better position than it was before the fire occurred. The organization of the company and its business manage- ment appear to be good, but the most important factor in its future financial prospects is the irresistible tide of growth of wealth and of progress in manufacturing setting in upon Minneapolis, which renders it only necessary that this company shall avail itself of its opportunities to render it immensely valuable and profitable to its owners. The best method of placing before you the views of these owners is an open letter from Messrs. Stone & Webster, dated October 2, 1911, which is subjoined. "Dear Sirs: We submit the following particulars re- garding the $1,000,000 first mortgage, 30-year, 5 per cent gold bonds, due December 1, 1934, of the Minneapolis General Electric Company, which you have purchased, and of the company's condition. 70 PRACTICAL RATE MAKING AND APPRAISEMENT ORGANIZATION. "The Minneapolis General Electric Company is organ- ized under the laws of the State of New Jersey, and does the entire electric lighting and power business in the City of Minneapolis, Minnesota. It also does the lighting and power business in several smaller towns adjacent to Minneapolis. It owns all of the bonds and stock of the companies which have developed the water power on the St. Croix river to the extent of 20,000 H.P., with an ultimate development of 25,000 H.P. CAPITALIZATION. Authorized Issued Stocks: Common stock (paying dividends quarterly) at the rate of 7 per cent per annum $3,375,000 $3,375,000 Preferred stock (6 per cent cumulative) . . 1,000,000 1,000,000 Bonds: of First mortgage, 30-year, gold bonds due Dec. 1, 1934, callable at 110 and interest on any interest day 8,000,000 *6,747,000 *Including the bonds sold to you. "Sinking Fund: 1 per cent per annum of bonds issued, payable April 1, and waivable until 1912. " Note : The issued bonds bear interest at the rate of 5 per cent per annum, but the authorized and unissued bonds may bear interest, at a lower rate, as determined by the Board of Directors. "The bonds are dated December 1, 1904, are due De- cember 1, 1934. Interest is payable June 1 and December 1, at the office of the Old Colony Trust Company, Boston, Trustee. PRACTICAL RATE MAKING AND APPRAISEMENT 71 "The unissued bonds are reserved in the hands of the trustees and can be issued only for permanent additions and improvements at not exceeding 80 per cent of the cash cost of such additions and improvements. "Of the above common stock, $2,875,000 has been issued within the past two years, all at par, $100 per share. SECURITY. "These bonds are secured by a first mortgage upon all the property, rights and franchises now owned, and which may hereafter be acquired, by the Minneapolis General Electric Company in the City of Minneapolis, Minnesota. This property comprises a complete electric lighting and power system, entirely covering the city, the power being generated both by steam and water. The distribution sys- tem is ve*ry complete, the sub-stations being of ample ca- pacity and all of the wires in the principal business portions of the city being underground. Through the ownership of all of the stock and bonds of the St. Croix Falls (Minnesota) Improvement Company, which securities are held by the Old Colony Trust Company, as trustee, these bonds are practically a first mortgage on the water power at St. Croix Falls on the St. Croix river already developed by these two companies to the extent of 20,000 H.P., the ultimate de- velopment being more than 25,000 H.P. "The power generated at St. Croix Falls is conveyed to Minneapolis, a distance of about 40 miles, by a duplicate transmission line or private right of way 60 feet in width, also owned by the above mentioned company. 72 PRACTICAL RATE MAKING AND APPRAISEMENT "The cost of completing this development will be only for water wheels and electrical apparatus, the hydraulic con- struction being already finished. "The steam station in the City of Minneapolis was de- stroyed by fire in January, 1911. A new station has been built on a new site, two miles distant from the center of the city, well located on the bank of the Mississippi river and served directly by a railway connection. The land selected is of ample size for all future requirements. A thoroughly modern steam station of 16,000 H.P. capacity has been completed and is now in operation, at a cost of approximately $1,000,000, the transmission lines from this station to the center of distribution being entirely underground. The high efficiency expected of this station will undoubtedly serve to improve the company's earnings. "In addition to the water power at St. Croix Falls and the steam station above referred to, the company owns a second water power station in Minneapolis at St. Anthony's Falls, having a capacity of more than 1,000 H.P., and also owns a small station of a capacity of 800 H.P., in connection with one of its sub-stations in the center of the city. A storage reservoir on the St. Croix river above Taylors Falls is also owned by the company. EARNINGS. Gross earnings for years ending December 31 : 1897 $253,013.23 1906 $805,632.46 1899 284,053.87 1907 920,606.53 1901 405,634.03 1908 1,008,415.35 1903 558,044.64 1909 1,108,756.36 1905 724,581.91 1910 1,276,041.02 PRACTICAL RATE MAKING AND APPRAISEMENT 73 INCOME ACCOUNT. Report for 12 Months Ending July 31, 1911 July 31, 1910 Increase Gross earnings $1,384,888.47 $1,191,341 .87 $193,546.60 Operating expenses (includ- ing taxes) 639,897 . 24 557,642 . 12 82,255 . 12 Net earnings $744,991.23 $633,699.75 $111,291.48 Interest charges 300,046 . 19 290,107 . 66 9,938 . 53 Balance $444,945 . 04 $343,592 . 09 $101,352 . 95 Bond sinking fund 21,153.33 21,153.33 $423,791.71 $343,592.09 $80,199.62 "As seen, the company's earnings have increased rapidly. At the present time more than 30 per cent of the gross earn- ings are from commercial power, and this proportion is rapidly increasing. The city lighting represents less than 10 per cent of the company's gross earnings. During the past year a number of large contracts for wholesale power have been made, the largest being with the City of Minne- apolis for pumping purposes. For this more than 2,500 H.P. will be used. DIVIDENDS. "The company has paid dividends of 6 per cent per annum on its preferred stock continuously since August 1, 1899, and has paid dividends on its common stock of 4 per cent from February 1, 1906, to August 1, 1909, and of 6 per cent to May 1, 1910, and since that date dividends have been paid at the rate of 7 per cent per annum. FRANCHISES. "The franchises owned by the company were originally granted to separate companies which were afterwards con- 74 PRACTICAL BATE MAKING AND APPRAISEMENT solidated to form the present company. In addition, the company owns a great many permits granted directly to it by the city from time to time, covering extensions of its lines. These franchises, under which the company has operated satisfactorily since its organization in 1899, have been the subject of negotiations between the city and the company, with the view of substituting a general franchise, limited in duration, in place of the several existing franchises. This franchise situation you are entirely familiar with. THE CITY OF MINNEAPOLIS. " Minneapolis, the largest city of the Northwest, is located at St. Anthony's Falls on the Mississippi river. It is the center of a rich agricultural district and the natural gate- way for the products of the western portion of Wisconsin, all of Minnesota, North Dakota, the eastern half of South Dakota, and Northern Iowa. The advantage afforded by the Falls of St. Anthony and the excellent transportation facilities have been the great factors in the industrial de- velopment of Minneapolis. "Minneapolis is the largest flour manufacturing city and grain market in the world. Many other industries are lo- cated in the city, including the manufacture of agricultural implements, machinery, carriages, wagons, furniture and shoes. RAILROADS. "The transportation facilities are excellent, the city being served by ten trunk lines: Chicago, Milwaukee & St. Paul; Year 1880 census Rank 37 Population 46,887 1890 census . . 17 164,738 1900 census 19 202,718 1910. . 301.408 PRACTICAL RATE MAKING AND APPRAISEMENT 75 Chicago & Northwestern; Minneapolis & St. Louis; Wis- consin Central; Great Northern; Northern Pacific; Chicago & Great Western; Chicago, Burlington & Quincy; Minne- apolis, St. Paul & Sault Ste. Marie, and the Chicago, Rock Island & Pacific. Six of these railroads have terminals in the city. POPULATION. Per Cent 252 24 50 LEGALITY. "The legal status of the affairs of the Minneapolis Gen- eral Electric Company, and the validity of the issues of its securities, have been examined by the Messrs. Tyler & Young, attorneys, of Boston. Very truly yours, "STONE & WEBSTER." SEC. 4. The Cost of Electric Power. For the reason that the fire of 1911 not only inflicted considerable damage (largely covered by insurance) upon the company, but also, as in the case of all fires, added to this visible damage a considerable amount of consequential damage, felt principally in the cost of operation, I have chosen to take the operating expenses for the year 1910, as furnished by this company, as the basis of my investigation of the cost of current. 76 PRACTICAL RATE MAKING AND APPRAISEMENT THE MINNEAPOLIS GENERAL ELECTRIC Co. Expenses for Year of 1910 Power plant wages (fixed) $33,530. 91 Fuel for power (variable) 33,947 . 99 Water for power (variable) 388 . 00 Lubricants and waste (variable) 1,861 .54 Miscellaneous supplies and expenses (fixed) . . . 2,846 . 99 Hired power from St. Anthony Falls (variable) . 18,313 . 80 Total operating $90,889.23 Boilers (fixed) $139. 83 Engines (fixed) 294.32 Electric plant (fixed) 2,571 . 79 Miscellaneous station equipment (fixed) 2,134.50 Buildings and fixtures (fixed) 1,497 . 26 Dams, canals and tail races (fixed) 886 . 95 Gates, wheels and governors (fixed) 1,450.98 Total maintenance $8,975 . 63 Total cost of manufacture 99,864 . 86 Automobiles (fixed) $4,532.27 Operating arc lamps (omitted) 34,192. 16 Operating meters (fixed) 12,058. 90 Renewal of incandescent lamps (omitted) .... 25,470 . 84 Operating sub-stations (fixed) 8,870. 28 Miscellaneous distribution of operating ex- penses (fixed) 6,450.87 Total operating $91,575 . 32 Underground system (fixed) $4,968.07 Overhead system (fixed) 36,102.27 Arc lamps (omitted) 6,273 . 12 Meters (fixed) 7,854.94 Forward, $55,198.40 PRACTICAL RATE MAKING AND APPRAISEMENT 77 Brought Forward, $55,198.40 Customers ' repairs and renewals (fixed) 32,076 . 47 Sub-stations (fixed) 12,744.07 Total maintenance $100,018.94 Total cost of distribution 191,594.26 Salaries of general officers (fixed) $42,217.61 Salaries of clerks (fixed) 26,148.09 Printing and stationery (fixed) 8,385.51 Storeroom expenses (fixed) 4,508 . 85 Miscellaneous general expenses and office sundries (fixed) 32,511 .06 Legal expenses (fixed) 6,954.30 Rent of offices (fixed) 7,410.49 Insurance (fixed) 8,430.40 Logging expense (fixed) 9,361 . 81 Advertising, canvassing and soliciting (fixed) . . 55,259.44 Total general expenses of Light and Power Dept $201,187.56 Total all expenses 492,646.68 K.W.H. generated and purchased 40,277,269 K.W. hours sold 29,177,126 The year 1910 will give us a more nearly uniform regimen and approximate more closely to fair costs than 1911 or any part of it. Referring to the operating expenses given above as they happen to come from the books of the company, I would call your attention to the fact that they are divided into two classes. The first, or variable class, are those expenses which rise and fall with the increase and decrease of the commodity (electricity) delivered. The second class is the fixed operating expenses, which take upon themselves 78 PRACTICAL RATE MAKING AND APPRAISEMENT the nature of a service rendered each day by the staff of employes and by the investment of the corporation. Upon reflection it will be understood at once that no matter whether the amount of electricity delivered in any day is great or small, the staff of employes are there drawing their pay and the investment is requiring allowances for profit and for depreciation. It will at once be perceived that it makes no difference in this fixed operating expense for the day whether the sta- tion be loaded to its full capacity the whole day or whether it be almost idle, the investment is there and the staff of employes is there. With the increase or the decrease of the load only the variable expenses rise or fall. In steam stations these variable expenses are the fuel, the oil and waste, water for steam, if it is bought, and, should there be a tax upon the gross earnings, this tax. In the hydro-electric station operated wholly by water it may almost be said that the variable expenses do not exist, provided there is always water enough to carry the load and no supplementary steam station is required for any reason. For the reasons stated above, it is at once apparent that so far as the source of electric power is concerned, the Minneapolis General Electric Company is the possessor of a mixed steam and water station. I have therefore rearranged and divided the operating expenses for the year 1910 as subjoined. 29,177,126 K.W. hours sold. PRACTICAL RATE MAKING AND APPRAISEMENT 79 MINNEAPOLIS GENERAL ELECTRIC COMPANY. Annual Expenses Expenses variable with power sales : Fuel for power $33,947 . 99 Water for power 388.00 Lubricants and waste 1,861.54 Hired power 18,313 . 80 $54,511.33 Expenses temporarily fixed: Power plant wages $33,530.91 Miscellaneous supplies and ex- penses 2,846.99 Maintenance boilers 139 . 831 Maintenance engines 294 . 32 Maintenance electric plant (ma- chinery) 2,571.79 Maintenance miscellaneous station equipment 2,134 . 50 Maintenance buildings and fixtures. 1 ,497 . 26 Maintenance dams, canals and tail races 886.95 Maintenance gates, wheels and governors 1,450. 98 Automobiles 4,532.27 Operating meters 12,058.90 Operating sub-stations 8,870.28 Miscellaneous distribution operat- ing expense 6,450 . 87 Underground system 4,968.07 Overhead system 36,102.27 Meters 7,854.94 Customers' repairs and renewals (?) free 32,076.47 Sub-stations 12,744.07 Salaries of general officers 42,217.61 Forward, $213,229.28 $54,511.33 80 PRACTICAL RATE MAKING AND APPRAISEMENT Brought Forward, $213,229.28 $54,511.33 Salaries of clerks 26,148.09 Printing and stationery 8,385.51 Storeroom expenses 4,508 . 85 Miscellaneous general expenses and office sundries (?) 32,511 . 06 Legal expenses 6,954 . 30 Rent of offices 7,410.49 Insurance 8,430.40 Logging expense 9,361 . 81 Advertising, canvassing and solicit- ing (?) 55,259.44 - $372,199.23 Taxes 91,793.59 Total operating expenses for current $518,504. 15 Omitted operating expenses: Operating arc lamps $34,192. 16 Maintenance arc lamps 6,273 . 12 $40,465.28 Renewal of incandescent lamps. . . . 25,470 . 84 $584,440.27 Variable expense: $54,511 .33 div.by 29,177,126 K.W.H.0. 187c. per K. W. H. Fixed expense: $463,992 . 82 div.by 29, 177, 126 K. W.H. 1 . 590c. per K. W.H. Total cash operating cost for current only at meter 1 . 777c. per K.W.H The average connected load for 1910 is given as 33,403 K.W., as per Table 1. PRACTICAL RATE MAKING AND APPRAISEMENT 81 REPORTED CONNECTED LOAD FOR MINNEAPOLIS GENERAL ELECTRIC COMPANY, YEAR 1910. January 30.315 K.W. February 30.466 March 30.794 April 31.272 May 32.344 June 33.168 July 33.947 August 34.723 September 34.926 October 35.569 November 36.381 December 36.927 Total 400.832 " Average 33.403 Annual hours operation of connected load: 29,177,126 K.W. hours divided by 33,403 K.W. 873.49 hours Daily hours (divide by 307 days) 2.845 hours About the end of 1907 Messrs. D. C. and Wm. B. Jackson made the "total cost of labor and material in system, ex- clusive of land and supplies, $3,037,777," but did not, ap- parently, depreciate it to its present value. I may be pardoned for saying that such appraisement re- sembles the valuation of a scrap heap at the price of the new machinery from which it came, for much of the machinery was old-fashioned and of approximately scrap value, in 1908. The Minneapolis General Electric Company states that since the beginning of 1908 the following additions have been made to the Minneapolis city plant : November 1, 1907, to January 1, 1910 $860,000.00 January 1, 1910, to January 1, 1911 _ 363,000.00 $1,223,000.00 82 PRACTICAL RATE MAKING AND APPRAISEMENT Taking the fact that the approximate $3,000,000 appraise- ment of the Messrs. Jackson for value of machinery and pro- ductive labor was not the depreciated value, but the original structural cost for material and labor, and further that this company's property was an accumulation of the properties and machinery of several old and unsuccessful electric com- panies, it appears to me liberal and fair to adopt $3,500,000 as the basis of computation of rates. To ascertain the exact truth as to the 1910 value of the city plant of the Minneapolis General Electric Company, it will be necessary to have both a thorough audit of its books and a detailed appraisement of the 1910 condition and value of the whole plant. As a good deal of this plant is burned up, this latter re- quirement is not possible, and I am forced to ask you to accept a valuation which in my opinion is very liberal to the company, but which cannot now be proved for 1910. The 1910 tax assessment for this city plant is given as $1,923,445, covering real and personal property, and the estimated $3,500,000 investment gives per K.W. connected load (33,403) about $105. If any question of 1911 value arises, I would say that until the books of this corporation are completely audited from the vouchers and check stubs to the general ledger no one can learn how many dollars have been invested in this plant or otherwise appropriated by this company, and the $3,500,- 000 estimated by me for 1910 is but an opinion based on facts learned elsewhere, and a rapid general inspection of the plant of the Minneapolis General Electric Company in Minneapolis. As to the percentages, 10 per cent, one-half of 1 per cent, PRACTICAL RATE MAKING AND APPRAISEMENT 83 7J/2 per cent, 6 per cent and 8 per cent, successively added to the Jackson's appraisement, 1907, it will be necessary to verify these assumptions from the books and then decide (if they are found to exist) whether they are fair and just charges allowable upon the property, and also by appraise- ment to learn the decay, inadequacy and obsolescence to be deducted from the structural cost of the new plant. The investment outside the city limits known as the Tay- lors Falls hydro-electric plant is given as about $3,000,000 (1910). I have had no means of investigating its details but am inclined to believe this plant worth all of that sum. At Taylors Falls are installed six generators of 2,500 K.W. capacity, or 15,000 K.W. capacity. Two more, adding 5,000 K.W., are to be added shortly, making 20,000 K.W. there. At Nevers Dam can be installed 10,000 K.W. capacity when a dam 30 feet high is completed, making 30,000 K.W. in all. Taylors Falls storage dam is 10 miles long and Nevers dam is said to be 17 miles long, making an unusually good hydro-electric power on the St. Croix river. The almost entire cessation of flow in the Mississippi and the great decrease of flow in the St. Croix river during the sudden cold weather of the last week (November 20, 1911) proves the imperative need of a greatly increased investment in a steam plant able to take care of any temporary defi- ciency of the hydro-electric plant and the peak load when it exceeds the whole power of the St. Croix river at low water As a fact, this Minneapolis General Electric Company has found it necessary to install a 12,000 K.W. capacity duplicate 84 PRACTICAL RATE MAKING AND APPRAISEMENT steam electric plant, costing about $70 per K.W. capacity installed, in order to protect a hydro-electric plant costing about $150 per K.W. capacity installed. SEC. 5. Depreciation and Profits. Fixing 8 per cent on the actual structural cost of a new plant as the rate of rea- sonable profit generally accepted in Minneapolis, and using this company's own figures for depreciation, we can fix the reasonable cash margin required for both. City plant, $3,500.00 at 3% depreciation $105,000.00 Hydro-plant, $3,000,000.00, at 1^% depre- ciation 45,000.00 Annual depreciation $150,000.00 Profit, $6,500,000.00 at 8% 520,000.00 Combined cash margin required $670,000.00 Compared with 1910 gross earnings Minneapolis General Elec- tric Co $1,276,041.02 Operating expenses and taxes 584,440.27 Net earnings (cash margin) $691,600.75 SEC. 6. Sliding Scale of Prices for Electricity Computed. The full connected load operated 2.845 hours per day 307 days: Annual sales K.W. hours 29,177,126 Variable operating expense $54,511 .33 or 0.187c. per K.W.H. Fixed operating expense 463,992.82 or 1.590c. per K.W.H. Profit and depreciation 670,000.00 2.296c. per K.W.H. Total price $1,188,504.15 4.073c. per K.W.H. Flat monthly price per K.W. capacity (72.83 hours per K.W.) . . $2 .97 PRACTICAL RATE MAKING AND APPRAISEMENT 85 The full connected load operated 1 hour per day 307 days : Annual sales K. W. hours 10,255,580 Variable operating expense $19,160 . 40 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000 . 00 Total price $1,153,153.22 or 11 .244c. perK.W.H. Flat monthly rate per K.W. capacity (25.6 hours per K.W.) ... $2.88 The full connected load operated 2 hours per day 307 days : Annual sales K. W. hours 20,511,160 Variable operating expense $38,320 . 80 Fixed operating expense 463,992 .82 Profit and depreciation 670,000 . 00 Total price $1,172,313.62 or 5.715c. per K.W.H. Flat monthly rate per K.W. capacity (51.2 hours per K.W.) ... $2.93 The full connected load operated 3 hours per day 307 days : Annual sales K. W. hours 30,766,740 Variable operating expense $57,481 .20 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000 . 00 Total price $1,191,474.02 or 3.873c. perK.W.H. Flat monthly rate per K.W. capacity (76.8 hours) $2.97 The full connected load operated 4 hours per day 307 days: Annual sales K. W. hours 41,022,320 Variable operating expense $76,641 . 60 Fixed operating expense 463,992.82 Profit and depreciation 670,000 . 00 Total price $1,210,634.42 or 2.951c. per K.W.H. Flat monthly rate per K.W. capacity (102.4 hours) $3 .02 The full connected load operated 5 hours per day 307 days: Annual sales K. W. hours 51,277,900 Variable operating expense $95,802 . 00 Fixed operating expense 463,992.82 Profit and depreciation 670,000.00 Total price $1,229,794 . 82 or 2 . 398c. per K.W.H. Flat monthly rate per K.W. capacity (128.0 hours) $3.07 86 PRACTICAL RATE MAKING AND APPRAISEMENT The full connected load operated 6 hours per day 307 days : Annual sales K. W. hours 61,533,480 Variable operating expense $1 14,962 . 40 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000 . 00 Total price $1,248,955.22 or 2.03c. per K.W.H. Flat monthly rate per K.W. capacity (153.6 hours) $3. 12 The full connected load operated 7 hours per day 307 days : Annual sales K. W. hours 71,789,060 Variable operating expense $134, 122 . 80 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000 . 00 Total price $1,268,115 . 62 or 1 . 766c. per K.W.H. Flat monthly rate per K.W. capacity (179.2 hours) $3. 17 The full connected load operated 8 hours per day 307 days : Annual sales K. W. hours 82,044,640 Variable operating expense $153,283 . 20 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000.00 Total price $1,287,276 . 02 or 1 . 569c. per K.W.H. Flat monthly rate per K.W. capacity (204.8 hours) $3.21 The full connected load operated 9 hours per day 307 days : Annual sales K. W. hours 92,300,220 Variable operating expense $172,443 . 60 Fixed operating expense 463,992 . 82 Profit and depreciation , 670,000.00 Total price $1,306,436.42 or 1 .415c. per K.W.H. Flat monthly rate per K.W. capacity (230.4 hours) $3.26 The full connected load operated 10 hours per day 307 days: Annual sales K.W. hours 102,555,800 Variable operating expense $191 ,604 . 00 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000.00 Total price $1,325,596.82 or 1 .293c. per K.W.H. Flat monthly rate per K.W. capacity (256 hours per K.W.) $3.31 PRACTICAL RATE MAKING AND APPRAISEMENT 87 The full connected load operated 12 hours per day 307 days: Annual sales K. W. hours 123,066,960 Variable operating expense $229,924 . 80 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000 . 00 Total price $1,363,917 . 62 or 1 . 108c. per K.W.H. Flat monthly rate per K.W. capacity (307.2 hours) $3 .40 The full connected load operated */ hour per day 307 days: Annual sales K. W. hours 5,127,790 Variable operating expense $9,580 . 20 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000.00 Total price $1,143,573.02 or 22.301c. per K.W.H. Flat monthly rate per K.W. capacity (12.8 hours) $2.85 The full connected load operated 12.28 hours per day 307 days: Annual sales K.W. hours 125,938,522 Variable operating expense $235,289 . 70 Fixed operating expense 463,992 . 82 Cash operating expense . . . $699,282 . 52 or . 555c. per K.W.H. Depreciation 150,000 . 00 or . 119c. per K.W.H. Complete operating cost . . . $849,282 . 52 or . 674c. per K.W.H. Profit, 8 per cent 520,000 . 00 or . 413c. per K.W.H. Total price $1,369,282 . 52 or 1 . 087c. per K.W.H. The arc lights are said to operate 3,770 hours per year, or what is the same as 10.33 hours for 365 nights, or 12.28 hours for 307 nights. Flat rate, monthly price, per K.W. capacity (314.37 hours) $3.42 88 PRACTICAL RATE MAKING AND APPRAISEMENT The minimum service charge per K.W. capacity of con- nected load: No current used. Fixed operating expense $463,992 . 82 Depreciation 150,000.00 Profit 520,000.00 $1,138,992.82 33.403 $2.84 per K.W. connected 2.13 per H. P. connected or about 15c. per 50 watt 16 C.P. incandescent lamp socket. Total K.W. of connected load . . Minimum monthly charge For the sake of verifying the above computations of rates, we will make use of the figures of the connected load for 1910 furnished by the Minneapolis General Electric Company. TOTAL CONNECTED LOAD AND METERS. Reported by Company, December 31, 1910. 10,862,344 K.W.H. 49,262 K.W.H. 14,114,833 K.W.H. 6,380 K.W.H. 746,907 K.W.H. 446,400 K.W.H. Coml. inc. meter. . . Mun. inc. meter . . . . Coml. power meter. . Mun. power meter . . Flat rate inc. meter . Ornamental lighting . 1 1 ^ nnn K w TT / Flat rate P wer > Total \ 113,00) K.W.H. | Included in power, J 2,838,000 K.W.H. City arc 29,177,126 K.W.H. Total Dec. 31 Average Average of whole year . . K.W. CON. 20,544 us 15,027 30 404 186 36,310 710 37,020 32,693 33,403 No. Meters 12,694 74 1,467 18 90% 14,253 of total Rearranging and classifying, we have PRACTICAL RATE MAKING AND APPRAISEMENT 89 TOTAL CONNECTED LOAD AS CORRECTED. Minneapolis General Electric Company. December 31, 1910 Hours K.W. Per Per Rate Incandescent Rates Corrected Year Day K.W.H. 10,862,344 K.W.H. Com. meter. . 18,490 49,262 K.W.H. Mun. meter. . 107 746,907 K.W.H. Flat rate 364 446,400 K.W.H. Ornamentalst. light 167 12,104,913 19,128 632.83 2.061 5.552c. Commercial Power Rate computations below 14,114,833 K.W.H. Power meter. 13,524 6,380 K.W.H. Power mun... 27 113,000 K.W.H. Flat rate 14,234,213 13,5511,050.42 3.421 3.419c. Rate computations below City Street Arc Lights (1,239 Magnetite) 2,838,000 K.W.H. City arc 710 1 .087c. 33,389 Variation 14 Total as per average given. . . , 33,403 We can now compute the gross earnings on the basis of the tabulated rates. Incandescent rate 12,104,913 K.W.H. at 5.552c $672,064.77 Lamp renewals (not included) . Commercial power, 14,234,213 K.W.H. at 3.419c 486,667 . 74 Current for arcs, 2,838,000 K.W.H. at 1.087c " 30,849.06 $1,189,581.57 Arc maintenance and operation not included. Original figures used as basis are 1,188,504 . 15 Variation one-tenth of 1 per cent due to decimals . . $1,077.42 90 PRACTICAL RATE MAKING AND APPRAISEMENT For the full connected load operated 2.061 hours per day 307 days: Annual sales K.W. hours 21,136,750 Variable operating expense $39,489 . 58 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000 . 00 Total price $1,173,482 . 40 or 5 . 552c. per K.W.H. Flat monthly rate per K.W. capacity (52.76 hours) $2 .93 For the full connected load operated 3.421 hours per day 307 days: Annual sales K.W. hours 35,084,339 Variable operating expense $65,547 . 73 Fixed operating expense 463,992 . 82 Profit and depreciation 670,000 . 00 Total price $1,199,540 . 55 or 3 . 419c. per K.W.H. Flat monthly rate per K.W. hour capacity (87.58 hours) $2 . 99 SEC. 7. Tabulation of Rates for Even Profits General Electric Company, 1910. Relation of to Prices for Electricity. , Minneapolis Hours of Use Flat Monthly Hours of use of full Price Discount from Maximum Rate connected load per 10 cent per K.W. of Per Per Per K.W. base rate fixed Fully used Year Month Day hour connected load 8760 730 24 0.574c. 94.26% 24 hours $4. 19 3684 307.02 12 1.108c. 88.92% 12 hours 3.40 3070 256 10 1.293c. 87.07% 10 hours 3.31 2763 230 9 1.415C. 85.85% 9 hours 3 . 26 2456 205 8 1.569c. 84.31% 8 hours 3.21 2149 179 7 1.766c. 82.34% 7 hours 3 . 17 1842 154 6 2.030c. 79.70% 6 hours 3 . 12 1533 128 5 2.398c. 76.02% 5 hours 3 . 07 1228 102 4 2.951c. 70.49% 4 hours 3.02 921 77 3 3.873c. 61.27% 3 hours 2 . 97 614 51 2 5.715c. 42.85% 2 hours 2 . 93 307 25.6 1 11.244c. Prem. 12.44% Ihour 2.88 153.5 12.8 H 22.301c. Prem. 123.01% Yz hours 2.85 hours 2 . 84 (1) (2) (3) (4) (5) (6) PRACTICAL RATE MAKING AND APPRAISEMENT 91 Note : The cost of incandescent lamp renewals and of arc light operation and maintenance is omitted from the above sliding scale. Three hundred and seven work day's use per year are assumed. DIRECTIONS FOR USE OF TABULATION. The metered K.W. hours per month are divided by the K.W. capacity of the consumers' full connected load, as estimated or measured, to obtain his monthly hours of use. The rate per K.W. hour will be found on the same line or can be interpolated for fractional part of an hour. Minimum charge for no current, $2.84 per K.W. SEC. 8. D. C. & W. B. Jackson's Method of Obtaining the Cost of Current for 1,4.30 Street Arc Lights. Minneapolis General Electric Company's Report, page 63. We find by dividing their figures by 1,430 street lights that each lamp is charged with Maximum demand in K.W 0.633 Annual K.W. hours registered 2377 . 6 0.633 by $18 per K.W. demand $11.39 2377 . 6 K.W. hours at 0.4c . . 9.51 or 2377.6 K.W. hours at .879c $20.90 Both the K.W. of demand and the K.W. hours generated are assumed by them at the main switchboard of the city plant. SECTION 9. The Contract Between Taylors Falls Plant and the City Plant of the Minneapolis General Electric Company . This contract provides that the city plant shall hereafter pay the Taylors Falls hydro-electric plant for power mea- 92 PRACTICAL RATE MAKING AND APPRAISEMENT sured at the switchboard as follows: Taking the year 1910 for example: Maximum demand, 12,894 at $18.00 $232,092.00 K.W. hours generated, 40,277,269 at 0.4c.. . 161,109.00 Total, 40,277,269 at 0.976c $393,201 . 00 This would leave the variable cost of generated current fixed between 0.879c. and 0.976c. per K.W. hour to the city plant and yield gross earnings in the neighborhood of $400,- 000 to the Taylors Falls plant in the near future. The investment left in city plant will be $3,500,000, and we have: Variable operating expense, city plant $393,201 . 00 Fixed operating expense, total . . $463,992 . 82 Less Taylors Falls expense 64,785 . 92 Fixed operating expense, city. . 399,206.90 $792,407.90 Total gross earnings, 1910 $1,276,041.02 Taylors Falls earnings outside city 9,988. 13 City plant gross earnings $1,266,052.89 Since the actual variable operating expenses in 1910 were $54,511.33, we find the apparent operating expenses will be raised from $518,504.15 to $792,407.90, the arc lights expense and incandescent renewals being excluded as before. Since the sales of electricity are reported to be about 75 per cent of the quantity generated, this contract will ap- parently fix the lowest variable cost of current at 4-3 of about 1 cent, or 1.33c. per K.W. hour for the city plant average sales, in the future. Whereas for 1910 this variable cost appears to really be 0.187c. per K.W. hour of sales from the books. It should be noted that all my own figures are based on sales only. PRACTICAL RATE MAKING AND APPRAISEMENT 93 Dividing the earnings of Taylors Falls plant, $9,866.77, by 4.073c. we obtain 242,246 K.W. sales; which, subtracted from 29,177,126, leaves 28,934,880 K.W. hours, average sales in the city. The use of the special contract rate, 0.879c. for generated current, Jackson's Report, page 63, ($20.85 per lamp), is equivalent to fixing the sale cost of current at nearly 1.2c. per K.W. hour. It should be 0.674c. for street arc lights. SEC. 10. The Cost of Arc Lights for 1910 from the Com- pany 's Books and Records. The cost of operating and maintaining the street arcs of 1910 is given as follows: Operating arc lamps $34,192. 16 Maintaining arc lamps 6,273 . 12 $40,465.25 For the year ending December 31, 1910: Overhead service, street arcs 1,337 Underground service, street arcs 47 Overhead service, park 8 Total number of arc lights 1,392 Average per light per year, for operation and main- tenance $29.07 This $29 . 07 is not the cost per magnetite 6.6 arc proposed, but is very nearly the cost of the old 9.6 arc, trimmed every day instead of once a week or ten days, and therefore re- quiring very much more labor for operation; so we are very liberal in assuming it to cover all operation and maintenance of the new magnetite 6.6 arcs to be substituted for the .old arc lights. Barring incandescent and arc lights special expenses, but including expenses, depreciations of the whole plant, arc light circuits and everything else averaged, we find the com- plete operating cost of current to be 0.674c. per K.W. hour. 94 PRACTICAL RATE MAKING AND APPRAISEMENT By actual measurement in sub-stations on Main street and Garfield avenue, each of these magnetite arcs rated at 510 watts takes 608 watts, and further is said to burn 3,770 hours per year, consuming 2,292 K.W. hours. 2,292 K.W. hours at 0.674c $15.45 If now we accept the very liberal appraisement of the Minneapolis General Electric Company, of $264.50 invest- ment per arc in a proposed installation of 1,430 street lights and accord a profit of 8 per cent we have $264.50 (see Jackson's Report, page 45) at 8% $21 . 16 Recapitulating for one arc light : Cost of operating and maintaining old arcs $29 . 07 Cost of 2,292 K.W. hours, depreciation included. . 15.45 Profit per arc, $264.50 at 8% ' 21 . 16 Total fair and reasonable price, 2,292 K.W. hours at 2.865c $65.68 Of course, the objection will at once be made to this that $29.07 is based on another type of lamp, and that $35.50 (see Jackson's Report, page 61) is the proper amount. However, this company's books for 1910 contradict this, and presumably are more practically correct than propor- tions and assumptions (undoubtedly made in good faith) which may or may not prove practically true. The $15.45 for current differs from the $20.85 claimed by the company (see Jackson's Report, page 63), for the reason that it is carefully deduced from the actual facts of the operations of this company for 1910 as recorded in its books, with an extra allowance for average depreciation cost in- cluded, based on the average depreciation of the whole plant. PRACTICAL RATE MAKING AND APPRAISEMENT 95 By the method adopted in Section 6, the complete cost and the complete price of the current is computed for the cur- rent in K.W. hours as a whole. The cost $20.85 claimed is the result of accepting the terms of a contract made with the Taylors Falls plant, which yields to it a profit on all current delivered to the city plant, which in turn must use this profitable price as the cost basis of rates to Minneapolis consumers, who thus pay two profits. As to the profit 8 per cent on $264.50, or $21.16 for the average investment per arc light, there is no present ne- cessity to investigate it, as the company has fixed upon $264.50 investment per arc, and it would be as impossible as it would be insincere to concede or to claim exact ac- curacy to be attainable in this case by any one. On page 57 of Jackson's Report, if we divided operating cost, insurance, taxes, etc $31,439.00 By 1,430 arcs, we shall have, for each arc. ... 21.99 On page 61 of Jackson's Report, if we divide total depreciation of arc system 18,679 . 00 By 1,430 arcs, we have, for each arc 13 . 06 Total operating cost and depreciation per arc (Jackson's) 35.05 This the Minneapolis General Elec- tric Company's book gives as oper- ation and maintenance $29 . 07 And general depreciation, 2,292 K.W. hours at 0. 12c. . 2.75 31.82 Excess of the Jackson's estimate over book records 1910 $3.23 As above explained, this residual depreciation (after com- plete repairs, reckoned at 3 per cent on the whole plant, is taken care of in computing the cost of current ($15.45), 96 PRACTICAL RATE MAKING AND APPRAISEMENT in which it ($2.75) is included, as an average spread over the total sales (29,177,126 K.W. hours). SEC. 11. Regarding Street Arc Lights as a By-Product Furnished Without Profit. From the foregoing figures, if we omit profit, we shall have : Cost of operating and maintaining arcs, special accounts $29 . 07 Cost of 2,292 K.W. hours, ($2.75, depreciation in- cluded) 15.45 Total cost of one 6.6 ampere magnetite $44 . 52 Duluth is at present offering to furnish arc lighting at $45 per. 6.6 magnetite arc per year, and confirms the above figures by stating that it offers to furnish street lighting at cost. SEC. 12. Regarding Street Arc Lights as Furnished on the Basis of the Average Profit Included in the Price of the Current for All Consumers. Cost of operating and maintaining arcs, special accounts $29 . 07 2,292 K.W. hours at 1.087c . . 24 . 91 Price per arc light $53 . 98 Profit per year, per arc 9 . 46 The City of St. Louis purchased its 6.6 magnetite arcs for $49.00 per year for 4,000 from a steam-driven station, and the company was presumably arranging (on the average) to take a little less profit on arc light investment, and recoup itself by a very small excess profit per K.W. hour from its commercial patrons, who required a less investment per K.W. capacity. PRACTICAL RATE MAKING AND APPRAISEMENT 97 SEC. 13. The Supplemental Steam Plant. The Minne- apolis General Electric Company found it practical and necessary in 1910 to have about 6,000 K.W. capacity steam plant in addition to its 15,000 K.W. capacity hydro-electric plant at Taylors Falls. In my estimate of $3,500,000 is included this 6,000 K.W. capacity steam plant, which was burned in the fire of January 6, 1911. The depreciation and the profit on this steam plant are included in the depreciation and profit figured upon $3,500,000 total investment. The present Riverside 12,000 K.W. capacity steam plant appears to have been built to take care of the burned steam plant capacity, as well as anticipate future needs, and need not be considered in this case, as we are considering merely the facts for the year 1910. As already stated, at the Fifth street sub-station there is now, and I believe always has been, one 400 K.W. generator held in reserve for emergencies and operated by a 600 H.P. steam engine. This, too, is included in the estimate of $3,500,000 total present value of residual machinery and plant in the year 1910. It would naturally be assumed that if the costs of 1910 included the 6,000 K.W. steam plant that these same costs will sufficiently cover, because of the greatly increasing load, any costs arising from the new 12,000 K.W. steam plant. As a matter of future interest, the new Riverside station has cost this company, complete and ready to run, in the neighborhood of $72 a K.W. If we take each arc lamp as requiring about 0.6 of a K.W., 98 PRACTICAL RATE MAKING AND APPRAISEMENT this would make about $43 investment for each arc light's insurance. If to this we wish to add the proportional cost of the cables and conduits between the Riverside station and the Main street station, enough investment will be added to raise the total investment for arc lamp insurance to about $52, as stated. . If we reckon the profit 8 per cent and the residual deprecia- tion 3 per cent, we have for the purpose of insurance of continuity of service of the arc lights about $5.70; this sum covering the profit and the depreciation. Or, a smaller sum than this can be reckoned, if less than 11 per cent is fixed upon by the committee. Personally, it is my opinion that the price $65.68 derived from the conditions of the year 1910 is sufficient without any addition for future possibilities. SEC. 14. Extras for Incandescent Lights and Arc Lights. It is not very clear to the writer as to the extent to which the furnishing of free incandescent lights is carried. On page 13 will be found in the operating expenses a charge to the renewal of incandescent lamps of $25,470.84. In computing the cost of current as there explained, this sum has been omitted from the operating expenses temporarily, and therefore wherever incandescent lights are furnished free to users, an additional charge per K.W. hour should be made to the rate obtained, to cover the cost of free incandescent lights. The ordinary 16 C.P. carbon filament 50-watt lamp costs at the factory about 12j^c. and by the time it reaches the consumer may be presumed to have cost the company about 15c. PRACTICAL RATE MAKING AND APPRAISEMENT 99 The life of this lamp is usually taken at 1 ,000 hours, so that by the time it is burned out it will have consumed 50 K.W. hours. If now we divide 15c. by 50, we obtain 0.3 (three-tenths) of a cent as the additional cost of incandescent lighting to be added to the rate found in Diagram 1, if lamps are fur- nished free. Referring to the arc lights for the year 1910, from page 13 it will be seen that operating arc lamps, $34,192.16, and main- tenance of arc lamps, $6,273.12, total $40,465.25, have been omitted from the computations for the cost of current, and therefore this sum for the 1,392 arcs reported for 1910 which were mostly of the old-fashioned 9.6 ampere open arc variety, must be added to the current cost (or cost for power) of the arc lights. This gives us, as heretofore stated, a cost per individual arc light for 1910 from the books of the company for arc lights requiring a great deal more labor in trimming than the proposed magnetite arc lights, of $29.07. This $29.07 is a very much exaggerated estimate of the probable future cost of magnetite arc lights. Taking some of the details, for instance, from the published data of the General Electric Company, we have for trimming one lamp one year labor as follows: For the old 9.6 ampere open arc $6 . 00 For the new 6.6 ampere magnetite arc 1 .00 And for the carbons for the old 9.6 open arc per year.... $5.50 From the report of Messrs. Jackson, page 46, we have for the proposed 6.6 magnetite arc: Cost for lower electrodes . . $2 . 04 Forward, $2.04 100 PRACTICAL RATE MAKING AND APPRAISEMENT Brought Forward, $2 . 04 Cost for upper electrodes .50 Cost for changing upper electrodes . . . . .15 Total $2.69 An extra expense in the case of magnetite arc lights is the cost of rectifier tubes per year, which is reckoned, Jackson's Report, page 46, at $3.75. Adding these items together we have for the old 9.6 open arc carbon $11.50, as against $7.44 for the 6.6 magnetite arc lights per year. In other details of labor for street arc lights the cost to the station will not greatly differ, and we see that in taking $29.07 from the books of this company as covering operation and maintenance of arc lamps we have left an abundance of margin in favor of the company. The investment per K.W. capacity made by the company for the purpose of supplying commercial consumers with power and light is very much less than the investment per K.W. capacity made by the company for the purpose of supplying the city street lights. It will easily be seen that this company's investment ceases at the meter in the case of commercial consumers, who supply their own interior wiring for lighting or power purposes, but the case is different in the matter of street lighting, for the company has not only to lay its street cable and services, as in the case of commercial consumers, but also has to erect poles, furnish mast-arms, insulating heads, cut-outs and lamps, and also after these are erected it is obliged to keep them in a state of perfect repair, and also to furnish all the labor and material required in the daily operation of these lamps for 365 nights of the year. The officers of the Minneapolis General Electric Company PRACTICAL RATE MAKING AND APPRAISEMENT 101 and Mr. Wm. B. Jackson were untiring in the consideration with which they assisted me to all the facts directly re- quested, and also in going over the very careful, and ex- haustive report of Messrs. D. C. and Wm. B. Jackson. Referring to this report, I would say that it has had the most careful consideration at my hands, and that I find it impossible to agree with some of the methods of apportion- ment used in following the apparatus required for street arc lighting from the source of power to the lamp; but I am willing to provisionally accept as not far from correct the following figures as given on page 34: "The present value of the distribution system shown by details in Table 7-A, in which is used the greatest value of the investment. In our estimates of the cost of giving arc light service, and we have not made any addition for an allowance for the cost of selling securities. "Our figures for cost of giving arc light service, are the re- fore low in this particular, as well as in other particulars," $363,650. And on page 44 : " Investment in 13,000 volt transmission lines from sub-station 'A' to the Main street distribution station. The aggregate of investment in the 13,000 volt transmission lines which reverts to the municipal rc light- ing service is $14,610," total $378,260. If we divide this total by 1,430 arc lights, for which the estimate is made, we obtain $264.50 investment per arc light. This section has been added for the purpose of making the way in which my own extras have been added to the cost of current entirely clear, item by item, for arc lighting. SEC. 15. Practical Difficulties. The practical difficulties of comprehension arising in the attempt to lucidly and 102 PRACTICAL RATE MAKING AND APPRAISEMENT clearly grasp the problem of a system of charges wi ich protects the company in an even profit and at the same time places all the consumers on an equal footing in a judicially fair way, seem almost insuperable to the minds of even those actively engaged in the management of electric stations. For this reason, I will endeavor to make the facts of the operation of an electric station clear by means of comparison with an auditorium filled with individual chairs. These chairs being supposed to be heated by means of an electric heater set in operation when occupied. Each K.W. of capacity of an electric station must be represented by one chair of capacity of the auditorium. In the case of the Minneapolis General Electric Company, its 1910 capacity was about 21,000 K.W., and for this reason the auditorium will be assumed to have a capacity of 21,000 chairs. The connected load of 1910 was 33,403 K.W., and for this reason it can be assumed that 33,403 chair tickets have been distributed to applicants for seat space in the auditorium. During the year 1910 it was found by actual observation that on the 21st day of December 12,892 chairs were occu- pied between half-past 4 and 7 o 'clock, and that this was the largest number of chairs occupied at any one time by the 33,403 ticket-holders. Taking the ticket-holders and classifying them, we find first what might be called the dwelling-house class, who occupied their chairs comparatively very little and used most of them after 7 o'clock. Occasionally this dwelling-house class would get together for an entertainment and utilize, in certain individual instances, all of the chairs for which they had tickets. PRACTICAL RATE MAKING AND APPRAISEMENT 103 Another class of chair ticket-holders may be called the theater class. This class occupied the chairs to which it had a right every evening in the week for a large portion of the year from the hour of 8 until 11, and during the daytime would occupy its chairs from 2 until 5 in giving matinees, ranging from two to six times a week. Another class of chair ticket-holders is the restaurant and saloon class. This class occupied its chairs with regularity from 4 to 5 o'clock until midnight. The churches form a class which occupied their chairs on Sundays and in the evenings from 8 o'clock until 10, but do not form large or frequent users. The motive power users form a class, which, in the case of factories and machine shops, occupied their chairs, or a portion of them, from 7 o'clock in the morning until 6 o'clock at night. The great office buildings form a class which occupied their chairs for about one hour during winter afternoons but rarely occupied them at all during the summer months. The street lights form a class, which, going on at about 5 o'clock in winter and later in summer, occupied its chairs in this auditorium until the following dawn. It is par- ticularly with this class that I am dealing, and I desire to call your attention to the fact that the street lights from midnight on until daylight were almost the only patrons of chairs in this great auditorium. There is also another peculiarity of the street lights. They were unfailing in their occupancy, going on in a certain quantity every night and all night for the whole year. At the entrance to this auditorium, the ticket-holders, as to the number of chairs and the hours of occupancy, are 104 PRACTICAL RATE MAKING AND APPRAISEMENT registered as they come in or go out, and this registry of chair hours is fitly represented by the electric meter making a record in K.W. hours. The question now before us is how to divide up the oper- ating expenses, the depreciation and the profit amongst the patrons of this auditorium. There are certain classes of ticket-holders for chairs which must have special consideration at the hands of the business manager. You will recall that out of the 21,000 chairs installed, only 12,893 were occupied at one time during one day in the year. If a certain class of ticket-holders would agree never to occupy their chairs between the hours of 4 and 7 p.m., it is obvious that the business manager could make a large concession to them, because he has found out by practical experience that there will always be plenty of room in the auditorium and no trouble about accommodating them. Another class is the individual purchaser of a very large number of chair tickets, who might find it cheaper to build an auditorium of his own, and probably will do so if he can- not be shown that it will cost him less to join in the occu- pancy of the larger auditorium with other ticket-holders. Speaking of these classes, the former might be called by an electric station manager restricted users of electricity, who do not go on the peak load, and the latter might be called wholesale consumers of electricity who are almost large enough in their demands to compete with the station itself. Having thus set apart these two classes, the question comes up, what shall we use to divide up the cash operating PRACTICAL RATE MAKING AND APPRAISEMENT 105 cost, the depreciation and the profit required to keep our large auditorium going with the rest? In a commercial matter of this sort it is seen at once that each chair ticket represents the right to enter the audi- torium and use a chair at will. We have called these chair tickets the connected load, and as almost all the operating costs of an electric station are in the nature of fixed expenses, which go on regardless of whether the auditorium is full or empty, it would seem only just that each ticket should bear its share of the annual expenses and profit of the auditorium. That is to say, that if there are 33,403 tickets, we should divide the total expenses found to have actually been for the year 1910, $1,188,504.15, by 33,403, in order to place the burden equally upon all ticket-holders which gives us an annual rate of $35.58 per chair. Or, if we divide this by 12 months, a monthly rate of $2.97 per chair. Or, as will be seen, $2.97 per K.W. capacity of the connected load. Referring to Minimum Service Charge, No Current Used, if we divide the total of the fixed operating expenses, de- preciation and profit, $1,138,992.82, by 33,403, we obtain a minimum monthly charge per chair of $2.84. If the electric current heating our imaginary auditorium were derived from a waterfall, always amply sufficient and never-failing, there would be no variable expense, as there is in the case where coal is burned, and consequently it would be judicially fair to charge each ticket-holder $2.84 per month and permit him to occupy his chair and operate his electric apparatus for as many hours per day as suited his convenience or needs, regardless of the amount of elec- tricity used. 106 PRACTICAL RATE MAKING AND APPRAISEMENT This situation in the auditorium is equivalent to fixing a flat rate for electricity on the basis of the K.W. of connected load without in any way limiting the length of use of elec- tricity per day, per month or per year. However, in order to protect themselves from careless waste of current, electric companies have found it necessary to keep a record of the number of hours of use of their K.W., and similarly in the case of the auditorium, if no record were kept of the hours of use of the chairs, in all probability it would soon be over-crowded and the 33,403 ticket-holders would endeavor to occupy 21,000 chairs. However, by charging in the case of the auditorium for occupancy on the basis of the chair hour, and in the case of an electric station on the basis of K.W. hour, consumers are prevented from either occupying seats or demanding K.W. for long hours when they do not really need them. In fact, the only reason for not adopting a flat rate per K.W. per month, in the case of ample water power, is to pre- vent wasteful overcrowding of electric machinery or of our imaginary auditorium. This is not the case where fuel is used to generate elec- tricity. Then the cost of the fuel increases with the amount of electric power taken, and in our imaginary auditorium each chair hour would add to the coal bill; and if, as in the present case, a waterfall is found at times to become in- sufficient and steam power is required, we must take cog- nizance of the fuel bill and some smaller appurtenant bills as a variable charge, and when this happens we cannot reach a flat rate or a uniform meter rate applied to all consumers, for the following reasons: PRACTICAL RATE MAKING AND APPRAISEMENT 107 Like the auditorium, an electric station is paid mostly for its service, and not for what it sells as a commodity (electricity, heat). The fixed expenses consist entirely of payroll, of taxes, of repairs, of depreciation and of profit on the investment, which form an even sum each day and each year, depending almost altogether on the passage of time and independent of the electricity (heat) furnished in small quantities. In 1910, we find from the records of the company that the variable operating expenses are $54,511.33 on the as- sumption that the 33,403 ticket-holders occupied their chairs on an average 2.845 of an hour per day, and in so doing registered an aggregate of 29,177,126 chair hours. If now we wish to find a fair price to be charged per chair hour, we divide the total of the variable and fixed operating expenses and profit and depreciation, $1,188,504.15, by 29,177,126 chair hours and obtain an average price of 4.07c. per chair hour, yielding an 8 per cent profit upon the in- vestment and covering all other expenses. If now the question arises, what should be the price per chair hour if the 33,403 ticket-holders had averaged an occupancy of only one hour per day, we divide the actual variable operating expenses, $54,511.33, by 2.845 hours and obtain for the variable operating expense for one hour per day $19,160.40, to which we add the fixed operating expense and profit and depreciation, obtaining $1,153,153.22. In order to obtain the number of chair hours sold, we also divide 29,177,126 chair hours by 2.845 hours, which gives us 10,255,580 chair hours as the amount sold; and if we divide this into the $1,153,153.22 previously found, we obtain 11.24c. as the fair price to be charged per chair hour in 108 PRACTICAL RATE MAKING AND APPRAISEMENT order that the auditorium company shall cover its fixed and variable expenses, profit and depreciation, and the bur- den of payment be distributed with judicial fairness. It is hardly necessary to add further computations, for the price for any number of hours per day can be obtained in a similar manner, for an electric station. In order to avoid any fallacy of an incorrect numerical theory, there has been brought together and classified the K.W. hours for incandescent rates for commercial power and for city street arc light as they actually existed in 1910, and the proper price per K.W. hour for each class has been deduced. We have the result, therefore, of reversing the operation of this method, which is shown to check out within a variation of 1-10 of 1 per cent. It is interesting to note that the average price for in- candescent light current proves to be 5.55c., which would rise to 5.85c. if carbon filament lamps are furnished free. Commercial power in all its various forms averaged a fair price of 3.42c. per K.W. hour, and there should be no addi- tion to this price, since the current is simply delivered to the motor furnished by the consumer. However, these figures are of only passing interest as having been necessary in order to find the general price and cost of electricity to be used in street arc lighting. Both these departments of incandescent rates and com- mercial power should have careful segregation and their details studied before fixing the many rates required by their many phases. In the matter of street arc lighting, however, we find that the current alone, practically used about lOVs hours a night, PRACTICAL RATE MAKING AND APPRAISEMENT 109 reaches a fair price of 1.09c., and is produced at a complete operating cost of about 0.67 of a cent. You will recall (Section 10, and following), I have used this cost, together with the maintenance and special opera- tion and the profit, to obtain the fair price for a street arc light, also using the investment per arc light, $264.50, obtained from the elaborate appraisement of the Messrs. Jackson, and the maintenance and operation, $29.07, obtained from the company's books for 1910, and the cost of current inclusive of residual depreciation of 3 per cent spread over the whole works, amounting to $15.45. In order that the results of my computations shall be in a concise form, I have prepared Diagram 1, which represents the actual practical facts and the various rates resulting from them in the case of the Minneapolis General Electric Com- pany for the year 1910. It is worthy of note in connection with this diagram that the net earnings of this company for the year 1910 were about $691,000, and the basis of this diagram allows for a net earning of $670,000, a difference of a little over $20,000. I may be pardoned for saying that in reaching this latter figure of $670,000, I made no forecast and no attempt to alter the valuation based on my own judgment, and that on the whole this near coincidence to the rate of profit fixed by the city's committee would go to show that in the aggregate the profits of this company have not been unduly great, however just may be the criticisms of their rates and methods of making them in individual instances. My excuse for making this lengthy comparison between an auditorium and its seating space and an electric light and power company and its capacity is because in my experience 110 PRACTICAL RATE MAKING AND APPRAISEMENT I have met with almost innumerable methods of attempting to solve the problem of electric rates, which, in part at least, were both superficial and incorrect. I trust that I have your full concurrence in this method, which I conceive to be the one right method of attacking this problem, and that I have placed its fundamentals lucidly before you and proved to you that it is rational, practical, judicially fair, giving an even profit to the company from all connected consumers, and placing all consumers on an equal footing in their contributions to the support of the company which serves them. It seems almost impossible to convince even station man- agers that an electric light and power company is a servant, giving service and going to a great expense for this service, while the commodity (electricity) which is sold, is relatively very, very small indeed in its cost for the one element which is variable in steam stations, that is fuel, and which, theoreti- cally at least, has no cost at all in water-power stations. SEC. 16. Recapitulation. It is as impossible as it would be insincere for anyone to claim in so complex a problem as this of the price of arc lights to have reached a scientifically accurate conclusion. I believe my figures to have been judicially fair, except that in cases of doubt I have always favored the company, feeling that no institution is of any ultimate value to a community unless it makes a fair profit. For this reason, instead of using the generated K.W. hours 40,277,269, I have used the K.W. hours sold, 29,177,126, to divide the lump sum, cost and profit, of operations for the year 1910 ($1,188,504.15). In doing this, I have placed PRACTICAL RATE MAKING AND APPRAISEMENT 111 CO. /9/O. //?e /f//0*y&// /rot//- so/J #/? r 1 Q II s w a Q- 'ii. -a^ S oS& ills Ills O 00 Tf >O Tf I (M i-H O l>- GO ' CC GO O5-ii > CO t> O -*Tt<00! : :SS?g! . .T-(Tj $ o ,2 g O w, o -S; fa c3 ' O Si ^ o S '5 .,-iiOCOiMC CO CO CO O U5 3 CO - 10 CO Tt< 00 Oi OS rH O O O .3 g -tO .iOO> f-pSP -CO o >*' d od d ci T -)< QQ .* bJ a Q X < 03 < G fe lL3^ ^ ^0^qqc^c^oocD_c^cq_co_>q(NcOrH< {/} h-^C3 Q Oi^t --Ot N - f ~*Oio 'OOO4iO 06" ^O* K (N C^COCOC^C^O^C^COT^r (C^i 1 i-HrH r* g O S ^ * < |g ^ : :SSSSS^f:^2^S2S-S^fe i i } ^ K i 't>- OS O iM O> -^ IN 00 c_ ^ |g .g ;^QOO^cot,OQO^ ( 8 1 I*" : :g8"S;88$"gJ55S5fefe8 H^ a ^ H ^"3 ibOOOrnt O o ^'3 g*fttess's*< kj O-^rH <____.__ ^O O 'M-^OlN(NOCOOo5rHiN^r COCO-HfN rH ^ f- S g g ^ ..-... go EH tf a-. .-. .- . -. -. O 2 s PRACTICAL RATE MAKING AND APPRAISEMENT 207 MASSACHUSETTS ELECTRIC LIGHTING 208 PRACTICAL RATE MAKING AND APPRAISEMENT tively regular response of the mass of consumers to reductions in prices. It is interesting to note that both the revenue and profit per capita appear generally to increase with lowered prices. Per capita Name Price Revenue Profit Sales 1. Springfield 4.86c. $5.39 $2.45 111 K.W.H. 2. Salem 4.80c. 5.00 1.75 104 3. Haverhill 4.51c. 4.10 1.18 91 4. Fitchburg 4.57c. 3.97 1.42 87 5. Lynn 5.41c. 4.16 1.65 77 6. Lowell 5.19c. 2.94 0.97 57 7. Cambridge 5.79c. 3.05 1.34 33 " Totals . . . . 35 . 13c. $28 . 61 $10 . 76 580 Averages .... 5 . 02c. 4.13 1 . 54 83 The remaining eight cities in the abstract give the follow- ing results. Per capita Name Price Revenue Profit Sales 1. Lawrence 7.16c. $2.46 $1.07 34 K.W.H. 2. Worcester 7.86c. 2.51 1.23 32 3. Newton 10.40c. 3.01 0.32 29 4. Maiden 8.89c. 2.57 0.83 29 5. Fall River S.OOc. 2.24 0.64 28 6. Chelsea 8.37c. 2.25 0.88 27 7. Charlestown 9.80c. 1.86 0.55 19 8. New Bedford . . . . 10 . 60c. 1 . 90 . 95 18 Totals 71.08c. $18.80 $6.47 216 Averages 8.89c. 2.35 0.81 27 The average practical results of the electric light com- panies' operations of 15 cities in Massachusetts are: At an average price of 5c. per K.W.H. the sales per capita (83 K.W.H.) are three times the sales (27 K.W.H.) at 8.9c. PRACTICAL RATE MAKING AND APPRAISEMENT 209 per K.W.H. The profits per capita ($1.54) are nearly twice the profits (81c.) at 8.9c. per K.W.H. It does not necessarily follow because sales are increased four fold that the investment in machinery and plant re- quired be even doubled, as the structural capacity of a plant is fixed by the coincident demands upon it in K.W. and not by its annual sales in K.W.H. MARKS' EMPIRICAL LAW OF DEMAND. Referring again to the figure, the hyperbolic curve, drawn to scale, threads its way through the dots representing the various cities and it will be noted in the cases of cities having low prices and high sales per capita, that these dots more nearly touch the average curve line than in the cases of the cities adhering to high prices and restricted sales. The law of increase of the sales per capita can be rudely approximated by the curve of an equilateral hyperbola giving average results. Let s =the sales per capita in K.W.H. Let p =the average price per K.W.H. in cents. The equation is If p = 4c. s =115 K.W.H. Difference for Ic. If p = 5c. s = 83 K.W.H. 32 K.W.H. If p = 6c. s = 62 K.W.H. 21 K.W.H. If p = 7c. s = 46 K.W.H. 16 K.W.H. If p = 8c. s = 35 K.W.H. 11 K.W.H. If p = 9c. s = 26 K.W.H. 9 K.W.H. Ifp=10c. s= 19 K.W.H. 7 K.W.H. Laying down this equilateral hyperbola on the figure it appears to average the practical results of 1908 very closely, 210 PRACTICAL RATE MAKING AND APPRAISEMENT giving a general empirical law of supply and demand for electricity in cities. The interesting facts appear that while a reduction of from 10 to 9c. produces an increase of 7 K.W.H. per capita, an equal reduction of the average price from 5 to 4c. produces an increase of 32 K.W.H. per capita, or about 4j/ times as much. At lOc. per K.W.H. the sales per capita are 19 K.W.H., and at 5c. 83 K.W.H., or over four times as great. Present experience does not appear to have fixed any point of satiation for consumers or minimum price for electricity. It is particularly of value to learn that the lowered average price of the first group of seven cities results in revenue and profits per capita increasing in a geometric ratio far more rapidly than the reduction of price per K.W.H. made from the average of the second group of eight cities, and that this appears to be irrespective of the population of the cities between the limits selected. This is an entirely new law of demand and it should be distinctly understood that it resulted from an absolutely practical derivation and is not scientifically accurate but only empiric. PER CENT PROFITS ACTUALLY REALIZED. The preceding discussion has only served to show the increased sales per capita for lowered prices for electricity. Using the same statistics for 12 of these cities in Massa- chusetts it will be shown that lowered rates bring increased profit to the electric generating company. These profits PRACTICAL RATE MAKING AND APPRAISEMENT 211 are based on tax valuation, that being the only valuation available from the report of the Board of Gas and Electric Light Commissioners of Massachusetts. The tax value may be less than the real value of the plant and therefore, in the following discussion, an apparently smaller investment per K.W.H. sold may result; but since all these plants were taxed under the same state law, these reductions of apparent value will be proportionate and still leave the figures available for comparison. In the case of these 12 companies the cost of a K.W.H. is obtained by dividing the total operating expenses by the total number of K.W.H. sold. Depreciation for the current year is temporarily omitted from expenses and will be con- sidered later. The tax investment per K.W.H. is obtained by dividing each company 's tax valuation by the total sales in K.W.H. The subjoined table gives the results. Table Based on K.W.H. Sold. First Group i Cities 1 . Springfield .... Average Price 4 86c Cents Cost per K.W.H. 2 64c Tax Value Investment 15 3c 2. Salem 4 80c 3 13c. 10 8c 3. Haverhill 4 31c. 3 21c. 11 9c 4. Fitchburg 4 57c 2 99c 13 4c 5. Lynn . 5 41c 3 27c 8 5c 6. Lowell 5 19c 3 50c 19 3c 7. Cambridge 5 79c 3 24c 20 2c Averages 5.02c. 3. 14c. 14. 2c. Investment profit per K.W.H 1.88c. or 13.2% of 14. 2c. 212 PRACTICAL RATE MAKING AND APPRAISEMENT Second Group: I.Lawrence 7.16c. 4.06c. 18. 9c. 2. Worcester 7 . 86c. 4 . 03c. 28 . 6c. S.Newton 10.40c. 9.33c. 14. 4c. 4. Maiden 8.89c. 6.05c. 22. Oc. 5. Fall River 8.00c. 5.70c. 26. 9c. Averages 8.46c. 5.83c. 22 .2c. Investment profit per K.W.H 2.63c. or 11 .0% of 22. 2c. As a practical fact, it may be observed from the above tabulation that the lower price (5.02c.) produces an average profit of 13.2 per cent as against a lower profit of 11.9 per cent for the price of 8.46c. per K.W.H. on the basis of tax valuation of the investments in these companies. With the exception of Springfield favored by water power, it would be impossible to find a group of 12 companies oper- ating under more nearly the same conditions save as to pop- ulation. it is, therefore, safe to infer that an average reduction of 3.44c. in the price by the first group has not reduced the per- centage of profit on the investments made by this group's companies. On the contrary, the profit is increased 1.3 per cent by the lowering of the prices, and the sales per capita computed by the law of demand, previously stated, would increase from about 30.6 K.W.H. per capita annually to 82.5 K.W.H., an increase of nearly threefold in sales. It is also evident from the last figures, that lowered prices per K.W.H. result in lowered costs per K.W.H. sold by reason of the increased sales per capita. This is illustrated in the figure by the broken line average cost curve, laid down by a similar method to the price curve. This curve also appears to have a rude approximation to the hyperbolic law (due to the preponderance of time or service costs) and PRACTICAL RATE MAKING AND APPRAISEMENT 213 to be a function of the sales per capita. The fact may be observed that the price and the cost of supplying electricity move down together as the sales per capita increase and there always is an average profit shown on each K.W.H. sold, which varies from 2J/2 to 1J/2 c.while going from lOc. to 4c. average price per K.W.H. sold. DEPRECIATION. Each year, in order to compute the total cost per K.W.H. sold of electricity, it is necessary to include the depreciation per K.W.H.; and yet the depreciation cannot be considered as proportional to K.W.H. sales. It is customary in many electrical works to allow a certain average percentage of the value of the works, fixed plant or as above figured of its taxable value. This percentage is a much disputed quan- tity, but in fairly equipped works it is hardly ever claimed to be less than 3 per cent or over 7 per cent. In fact, any per- centage is a guess and a careful inventory and appraisement furnishes the only means of fixing depreciations accurately. In this appraisement care must be taken to discriminate between physical decay, obsolescence and inadequacy of plant. The current repairs are usually charged to operating expenses as they occur, and physical decay becomes less in proportion to the thoroughness of repairs. In the 12 Massachusetts companies cited, the depreciation is not charged to operating expenses, but is charged directly to profit and loss, if at all, and credited to various accounts. If one assumes the extremely liberal average of 7 per cent depreciation, the first group of seven low priced companies earning 13.2 per cent is able to divide 6.2 per cent of the tax 214 PRACTICAL RATE MAKING AND APPRAISEMENT value and to put aside 7 per cent reserve depreciation fund; and the second group of five higher-priced companies earning 11.9 per cent is able only to divide 4.9 per cent and put aside 7 per cent. For the first group the following obtains: Price 5.02c. per K.W.H. Operating expense 3 . 14c. " " Depreciation 0.99c. 4. 13c. " Net earning . 89c. " For the second group the following obtains: Price 8.46c. per K.W.H Operating expense 5.83c. " " Depreciation 1 ,55c. 7.48c. " " Net earning . 98c. " The second group shows the larger profit per K.W.H., but it gives a smaller per cent profit on the investment made. The explanation of this stubborn series of facts appears to be the following: With a rational method of lowering prices, the response of the public to it is a sure increase of sales per capita according to the law of demand previously exhibited. The increased sale of energy results in a de- creased operating service cost per K.W.H. sold and also usually results in a decreased investment and depreciation per K.W.H. sold, since depreciation depends principally upon time and the cost of investment. CHAPTER XV. GAS SALES PER CAPITA. The contents of this chapter were first published in 1909. They cannot pretend to be given with scientific accuracy nor do I think in any commercial matter such as this, that the personal vagaries of men, and communities of men, can be sufficiently eliminated to be reduced to scientific accuracy. But the law of increasing demand with reduction of price is as clearly indicated for gas as it was for electricity in the previous chapter. Gas can be stored for one day, electricity cannot. The service costs growing with time do not form so large a proportion of the total cost of gas as they do with elec- tricity, and so there cannot be so rapid a reduction of price in stepped rates for it, to large consumers of gas; as there can be for electricity. Nevertheless there is a great profit both to the producer and to the business community in properly reduced rates to large gas consumers. To the constructing engineer and to the gas manager the most important quantity to be determined is the attainable sales of gas per capita for any population served. Without it the constructing engineer has no basis from which to compute the required capacity of the works installed to serve any community and the gas manager no definite idea of his aim or limitations in the operation of his gas plant. With it, it is possible to fix the capacity of a gas plant intelli- gently in advance of construction and to allow for future 216 PRACTICAL RATE MAKING AND APPRAISEMENT enlargements. For the gas manager it is possible to fix the lowest price for gas which will yield the greatest attainable profitable sales for his stockholders and thus to wisely serve both stockholders and gas consumers. In an attempt to find the factors controlling the sales of gas per capita it is first necessary to disembarrass the prob- lem of all factors of little influence upon it. For instance the illuminating power of ordinary artificial gas exceeding 14 to 16 candle power does not appear to largely affect the volume of its sales per capita. This will presently be shown by means of data from the reports of the Massachusetts Gas and Electric Light Commission and Brown 's Directory of American Gas Companies. The cost of making gas need not be considered in the dis- cussion of the laws connecting the population served, and its price per 1,000, with its average annual sales per capita. For the present at least the cost of gas and its profits can be neglected until the natural laws controlling annual sales per capita are deduced. It must not be forgotten that there are exceptional communities to which no generally deduced rule will apply and that average results are somewhat affected by the management of individuals. Nevertheless there appears to be a general law or perhaps two laws, enabling sufficiently accurate predictions (to serve for commercial purposes) to be made for average communities. The sales per capita is the index of the need of disposition of the individual consumer to buy gas. This is varied some- what by many local conditions. PRACTICAL RATE MAKING AND APPRAISEMENT 217 The competition of electric lighting does not in busy communities appear to reduce the sales of gas; for by reason of the great brilliancy of electric lighting a rivalry in illu- mination is created that usually increases the sales of gas. The introduction of economical methods of gas lighting appears only to cause a temporary slackening of the sales of gas and ultimately increases it. The gas wars which occasionally occur between gas com- panies increase the sales of gas per capita and it appears as if any gain made during them remains although the price of gas is again raised at the close of the war. High prices for, or temporary dearth of fuel, appears to force an increase of sales of gas for cooking and heating purposes. Aberrations in sales per capita resulting from the above causes are, however, of a temporary nature and relatively inconsiderable, when compared with the populations served or the prices fixed, which are two factors which appear to have a controlling influence upon the annual sales of gas per capita. The history of the gas sales upon the island of Manhattan illustrates in a most vivid manner the concrete results of an exploration of this new field. In 1888 the competition of electric lighting became com- mercially noticeable. The price of gas was $1.26 per 1,000 cu. ft. and the sales per capita 5,626 cu. ft. to a population of 1,386,000. In 1892 the Welsbach mantle light was com- ing into use as a competitor of electric lighting. The price of gas was $1.25 per 1,000 cu. ft. and the sales per capita 6,357 cu. ft. to a population of 1,523,000. In 1895 the sales per capita had fallen to 6,321 cu. ft. 218 PRACTICAL RATE MAKING AND APPRAISEMENT In the years of 1899-1900 a gas war arose on the island of Manhattan. The New Amsterdam Gas Co. sold gas for 50c. and the Consolidated Gas Co., the New York Mutual Gas Co. and the Standard Gas Co. sold gas for 65c. per 1,000 cu. ft. during parts of these years. In 1900 the average price of gas was 82c. per 1,000 cu. ft. and the sales per capita 8,128 cu. ft. to a population of 1,850,000. In the year 1900 the price of gas was put back to $1 per 1,000 cu. ft. and the sales per capita remained with- out increase. The average price of gas was 98c. per 1,000 cu. ft. and the sales per capita, 8,135 cu. ft. to a population of 1,903,000. The anthracite coal strike and famine occurred in the winter of 1902-3. In 1903 the price of gas was 99c. per 1,000 cu. ft. and the sales per capita 9,328 cu. ft. to a population of 2,007,000. In 1904 the price of gas was 99c. per 1,000 and the sales per capita 9,426 cu. ft. to a population of 2,060,000. In 1905 the price of gas was $1 per 1,000 cu. ft. and the sales per capita fell to 9,250 cu. ft. to a population of 2,112,000. During all of the period 1888 to 1906 the gross sales of gas on Manhattan increased yearly but in 1904 the sales per capita increased little and in 1905 decreased showing an indisposition on the part of consumers to increase their use of gas without a reduction in its price per 1,000 below $1. Without a reduction in price it appears as if its future increase in gross sales must be due to an increase in popula- tion only, of Manhattan. The above figures for Manhattan are taken from an ex- hibit in the well known "80c. gas case" of the City of New PRACTICAL RATE MAKING AND APPRAISEMENT 219 York and are used because its great and compressed popula- tion eliminates minor causes of variation from average results in New York. From graphical studies made in this search for an em- pirical formula for either the price or sales per capita it appears that the towns in Massachusetts under considera- tion divide themselves into two groups. The Metropolitan group for cities above 75,000 popula- tion and the town group for towns and villages under 75,000 population. From a population of 2,000 to 75,000 the sales per capita appear in most instances to depend almost entirely upon the price of gas regardless of population. Above 75,000 the sales per capita appear to be decidedly dependent upon the population, increasing from an amount fixed by the density of population as the price of gas is lowered. A moment's reflection on the altered conditions of night life in a metropolis as compared with that of a village will assure one of the reasonableness of this separation into two groups. About 75,000 population appears to be the dividing line. Tabulating the results Price of gas per Annual sales per Gross revenue 1,000 cu. ft. 1901 capita, cu. ft. per capita $2.25 383 $0.86 2.00 584 1.17 1.75 843 1.48 1.50 1,187 1.78 1.25 1,669 2.09 1.00 2,393 2.39 220 PRACTICAL RATE MAKING AND APPRAISEMENT It will be noted that a reduction of price from $2 to $1 quadruples the sales per capita and doubles the gross revenue per capita. The above empirical table was deduced from the results of about 60 gas companies in the town group taken from the report, for 1901, of the Massachusetts gas and electric light commission and has again been checked by the average results of the same companies for 1907, as will presently be shown. Grouping according to prices and deducing averages as they actually are after 6 years we have Price of gas per Annual sales per Gross revenue 1,000 cu. ft. 1907 capita, cu. ft. per capita $2.25 (non-existent) 2.00 722 $1.44 1.75 898 1.57 1.50 1,395 2.09 1.25 2,539 3.17 1.00 3,824 3.82 The above tabulation is computed by dividing the gross revenue of each group of gas companies averaging prices within 12J^c. each way of the standard price, by the standard price, and then by the population served, to obtain the an- nual sales per capita, in an approximate manner. Com- paring with the previous 1901 table we see that for $2 and $1.75 the gain is relatively small and for $1.50, $1.25 and $1.00 the gains are respectively about 308, 870 and 1,431 cu. ft. in 6 years; 240 cu. ft. per capita annually is this increase for $1 gas. These gains are not due to any reduction in the price of gas, but principally to the multifarious advances in methods of lighting, to cooking apparatus, and to the tem- porary economical use of gas for heating and power. PRACTICAL RATE MAKING AND APPRAISEMENT 221 It can be expected to continue at the rate of 4 to 6 per cent annually for the same reasons, in most cases. Referring now to the increases shown for each reduction of 25c. per 1,000 cu. ft. in price, we have Price of gas per Annual sales per Increased sales 1,000 cu. ft. 1907 capita, cu. ft. per capita, cu. ft. $2.00 722 1.75 898 176 1.50 1,395 497 1.25 2,535 1,140 1.00 3,824 1,289 The reduction in price from $1.25 to $1 appears to produce an increase of about 50 cu. ft. per capita for each one cent. Since increased sales are apt in the case of most gas works to produce a reduction in the invested capital per annual 1,000 and therefore to require a smaller manufacturing profit per 1,000 cu. ft. sold to pay as great or greater dividends on the capital stock this average increase of sales becomes a pivotal factor in the expansion of gas sales, and of gas works. I have omitted the laborious computations of the above tabulations as requiring too much space, but as the method is stated they can be verified by anyone. Boston, Cottage City, Worcester County and a few other gas companies selling gas in bulk have been omitted for obvious reasons. In making use of the empirical results derived, the first table will probably give the best results in entirely new enter- prises, and the second tabulation will be better for the con- sideration of the probable results of gas works which have been in operation for a number of years in the town groups. 222 PRACTICAL RATE MAKING AND APPRAISEMENT CONSIDERING AND TABULATING THE LARGER CITIES OF MASSACHUSETTS . The metropolitan groups of the gas works serving more than a population of 75,000 appear to distinctly show the effect of crowded populations upon the habits of the com- munity, in a larger use of gas per capita regardless of small differences in prices. Massachusetts Popu- Towns, 1907 lation Boston 504,063 Lynn 88,436 Lowell 106,295 Cambridge 97,434 Springfield 89,281 Fall River 105,762 Worcester 128,135 Lawrence 89,972 New Bedford 74,362 Lawrence, 3,619, and New Bedford, 3,088, fall below the average sales per capita (3,824 cu. ft.) of towns below 75,000 population selling gas at $1 per 1,000; they are on the border land between metropolitan cities and towns. It has already been shown that the natural annual growth of sales per capita averages 240 cu. ft. at a constant price of $1, and that it is considerably less for higher prices. If we eliminate this natural annual increment not due to price we can isolate the effect of a reduction of prices in the above tabulated group of metropolitan cities selling gas at prices ranging from 98c. to 84c. per 1,000 cu. ft. at the consumer's meter. While the increase of sales per capita appears to be about 50 cu. ft. for each cent reduction of price in towns selling Price per Sales per Gross Revenue per 1,000 capita capita Remarks $0.80 7,447 $5.95 Sliding Scale 0.84 5,404 4.54 $0.99 in 1903 0.94 5,043 4.74 1.00 " 1901 0.91 5,465 4.97 1.01 1905 0.95 4,209 4.00 1.00 1905 0.91 3,957 3.60 1.01 1905 0.90 3,853 3.46 1.01 1905 0.97 3,619 3.61 1.01 1906 0.98 3,088 3.02 1.19 1905 PRACTICAL RATE MAKING AND APPRAISEMENT 223 at from $1.25 to $1 it will be seen that the average increase in cities is about 40 cu. ft., although their average sales per capita is greater than in towns. 1907 Sales Sales Gain due per per capita Differ- Gain due to re- For Massachusetts capita and date ence to time duction Ic. towns cu. ft. year cu. ft. cu. ft. yrs. cu. ft. cts. cu. ft. cu. ft. Lynn 5,404 1903. .3,616 1,788 4. . 960 15. .828 55 Lowell 5,043 1901.. 3,352 1,691 6.. 1,440 6. .251 43 Cambridge 5,465 1905 . . 4,504 961 2 . . 480 10 . . 481 48 Springfield 4,209 1905. .3,491 718 2.. 480 5. .238 47 Fall River 3,957 1905 . .3,036 921 2 . . 480 10 . .441 44 Worcester 3,853 1905. .3,205 648 2. . 480 11. .168 15 Lawrence 3,619 1906. .3,229 390 1. . 240 4. .150 38 New Bedford. .. 3,088 1905. .2,233 855 2.. 480 11.. 375 34 Average 4,330 Average 40 It would be insincere to claim that this average of 40 cu. ft. increase of sales per capita for each Ic. reduction is any- thing more than a rudely approximate commercial quantity indicating that while the increase of sales per capita always appears for each reduction in price it is still a quantity affected by obscure causes and limitations which must be found, and allowed for in each individual case under consid- eration. Boston, with its brilliant example of an increase of 2,000 cu. ft. per capita in a few years, is not used, since until its present management was installed its affairs were in a chaotic state. The earlier dates for computation of the above table were selected from consideration of the changes in average prices, without regard to possible results. 224 PRACTICAL RATE MAKING AND APPRAISEMENT The important questions to be answered are: 1. Does an increase per capita always follow a reduction in the price of gas? The answer is yes under usual conditions. 2. How much average increase of annual sales per capita can be expected to follow each reduction in price? The answer is: For gas at $1 to $1.25 per 1,000 cu. ft. about 50 cu. ft. for each cent reduction and for gas below $1 about 40 cu. ft. for each cent reduction, on an average under usual conditions. In its enlightened methods of dealing with public service utilities Massachusetts is a quarter of a century ahead of the rest of the United States. In no other state and particularly not in the statistical publications issued at great cost by the nation from Wash- ington can be found data clearly stated, enabling a rational and practical discussion of the gas business in complete detail. A few cases of the larger cities will serve to give an idea of the sales per capita in 1907. Sales City Price Yeai per capita New York, Manhattan $1.00 1907 9,375 cu. ft. 1.00 1905 9,250 " .1.00 1904 9,426 Population, 2,217,293. New York, Brooklyn 0.80 1907 6,421 Population, 1,358,891. Pennsylvania, Philadelphia. 1.00 1907 7,139 u Population, 1,300,000. Public buildings and streets free. Missouri, St. Louis 0.80 & 0.60 1907 6,000 Population, 750,000. PRACTICAL RATE MAKING AND APPRAISEMENT 225 Ohio, Cincinnati 0.75 0.50 1907 9,231 cu. ft. Population, 325,000. Maryland, Baltimore 1.00 " 0.85 1907 4,541 Population, 600,000. California, San Francisco. . . 0.85 1907 7,024 Population, 360,000. Louisiana, New Orleans. . . . 1.15 1907 1,714 Population, 350,000. Michigan, Detroit 0.90 to 0.50 1907 7,000 Population, 305,000. Wisconsin, Milwaukee 0.80 0.60 1907 6,371 tt Population, 350,000. District of Columbia, Wash. 1.00 1907 6,020 Population, 307,457. These variations in sales suggest at once an investigation of the local causes of the disparity in sales per capita. For each case the reason at once suggests itself and can be traced to the needs of the population or to the characteristic management of the various gas companies. ' Of metropolitan cities Buffalo, Cleveland and Pittsburgh have natural gas and cannot be compared with others without it. Manhattan, New York, has oscillated up and down for three years awaiting a further reduction in price when it will further surpass Cincinnati in rank. Detroit, Milwaukee, St. Louis and San Francisco show good results of low prices and detailed classification of consumers. Philadelphia and Brooklyn have not larger sales because the former is not permitted to charge less than $1 and the latter claims the right to collect $1, although it accepts 80c. on account. 226 PRACTICAL RATE MAKING AND APPRAISEMENT New Orleans reveals the effect of a large population that does not purchase gas. The increase per capita of Boston under the sliding scale has been marvellous in the last three years. The annual sales per mile of main, per meter and per ton of coal, usually so carefully stated in the analyses of gas- works statistics, are artificial details useful and necessary to the engineers of gas works only. The annual sales of gas per capita is the gage of the natural law of supply and demand. It is necessary to a just comparison of the gas manager 's ability in different cities and towns. It is necessary to a conservative consideration of the expansion of existing gas works. It is necessary to fix the capacity of new gas works in advance of their construc- tion. Finally no variations in the price of gas can be wisely and safely made without using the sales per capita for the basis of computation. Fixing exact prices is a common error of inexpert legisla- tors. Since the prices of raw materials and productive labor cannot be fixed it is obviously unjust to unalterably fix the price of gas. In England for many years and recently in Boston a just method of fixing the relative price of gas and the per cent of dividends appears to have been found in the use of The Lon- don Sliding Scale. Its fairness to both producer and consumers of gas should recommend its use in all cases of legislative enactments fixing the price of gas, and tend to relieve the tension o the present bitter antagonism of the public and he public utility corporations. CHAPTER XVI. THE LONDON SLIDING SCALE. This chapter was written in 1909 and used to elucidate the probable results of Boston's Sliding Scale just then enacted into a law. The Boston Consolidated Gas Company, still (1912) has the capitalization of $15,124,600 with which it started and is paying 9 per cent dividends with the price of gas fixed at 80c. per thousand with total gas sales of 4,990,691,000 cu. ft. for the year ending June 30, 1912. There is also a scaled reduction in price for fuel gas made by the Boston Consolidated Gas Company. In England this fuel gas rate is called a differential rate and here a stepped rate. It is interesting to discover how accurately Boston's gas prices have followed the tabulation deduced for them in 1909, in this paper. It is important to clearly understand what the London Sliding Scale means, and that it is based upon a uniform price to all consumers, and that the sliding scale concerns only the relation between the uniform price of gas to con- sumers, and the rate of dividends to stockholders. The Boston Consolidated Gas Company has added a differential rate to large fuel gas users which reduces the price of gas to them below 80c. per 1,000 cu. ft., but does not affect the Boston Sliding Scale dividends. 228 PRACTICAL RATE MAKING AND APPRAISEMENT Before taking up the mathematical discussion of the London sliding scale, it should be understood that the English method of issuing corporate stock differs widely from the American method. In England, gas corporations make separate successive issues of stocks, each issue bearing a separately fixed dividend, and it is the practice to closely and immediately divide up all profits as dividends, and to make and sell by public auction, new issues of stock for extensions, or additions to, the working plant, when and as they may be needed. From a usually small initial issue of capital stock at 10 per cent the subsequent issues of the going company are reduced to dividends of 7, 5, 4 or 3^ per cent as capital is required for expansions of business. The auction sales of these stocks usually result in cash premiums and these premiums are used to increase the capacity of the works, thus increasing the value of the works beyond the total face value of the securities issued without increasing the require- ment for dividends. The 10 per cent issues of stock by the London suburban companies are about one-tenth of their total issues at pres- ent. By reason of the conversions acts the three Metro- politan companies have only 5, 4 and 3J^ per cent stocks at present. In none of these companies does the price of gas exceed $1, and its price averages from 60 to 70c. per 1,000 cu. ft. No established general theory of the sliding scale is stated by the English, and oddly enough, the only explana- tion is that it means an indefinite division of extra profits between the company and its consumers ; each time the price PRACTICAL RATE MAKING AND APPRAISEMENT 229 of gas is lowered by means of an increased dividend on stock for each penny of reduction in the price of gas. For 10 per cent stock this is usually 1/4 or 1/3 of Iper cent, and for issues carrying lower dividend rates 1/8 to 1/16 per cent. This results in giving the greater share of any reduc- tion in price to the consumer. A strong argument in favor of the sliding scale is the fact that companies using it in England are so satisfactory to the public, that they have not been municipalized, although municipal ownership has become exceedingly popular in that country. In obtaining the cash value of public utilities the usual method followed is : First. To obtain an average of the net divisible income, which also must be shown to be maintainable. Second. To compute the rate of interest yielded by the capital stock by comparing its average market price with its average dividend. Third. To estimate the total value of the public utility corporation's property by capitalizing the net divisible in- come at the rate of interest computed. This gives what might be called the present going valua- tion of the corporation's property used for the purpose of purchasing it outright and converting it into a municipal enterprise. The original structural cost of works is another matter as also is the present structural value. Owing to premiums received from auction sales of stocks and their investment in plant, the capital stock of most English companies is less than their actual assets, and there is comparatively little fluctuation in the market prices in 230 PRACTICAL RATE MAKING AND APPRAISEMENT public utility stocks, owing to the complete publicity of every detail of operation required by law and custom. In exceptional cases other methods of valuation have been used, but under ordinary conditions the above methods appear to be generally satisfactory. This publicity seems to prove a practical and effectual check upon criminally-minded managers by preventing any action, or failure to act, which would prevent any man from having an equal opportunity, to use his own judgment as to values and prices, and it further acts to steady them. Capitalization of franchises beyond actual cost is never claimed or practiced in England, although the security arising from a protected monopoly undoubtedly increases the market value of public service corporations stock and thereby usually increases greatly the present going valuation above the original structural cost or the present structural value. The objection of Englishmen to over-capitalization is very strong, and enforced, too. In 1903 The Gas Light and Coke Co. of London, was compelled to retire $5,000,000 of its converted capital stock, paying for it out of profits divisible under the sliding scale. In England, competition between public service corpora- tions is no longer permitted and consequently each public utility corporation is a monopoly, regulated in details by law, and policed by publicity. The annoyance to the public resulting from competing systems in the streets was the principal cause of the sup- pression of competition, although the unnecessary duplica- PRACTICAL BATE MAKING AND APPRAISEMENT 231 tion of cost of operating plant in the streets is an equally good reason to prevent investments. As a concession to English preference for low dividend stocks, Parliament since 1887 has permitted companies having high dividend stocks to convert them into a pro- rata amount of lower dividend stocks. A share of the 10 per cent stock being thus replaced by two shares of 5 per cent stock with proportional increases under the sliding scale, and similarly with other rates. Care is always taken to exclude this converted stock from any influence upon future possible computation of the present going valuation. The entire good faith of all the dealings of Parliament with the gas companies, and its refusal to disturb them in the enjoyment of franchises and contracts unless these companies themselves apply for additional legislation, has, when com- bined with a publicity forcing all companies to sell a copy of their printed annual accounts for one shilling to any ap- plicant, made English gas stocks one of the safest and most popular investments conceivable. Two funds are usually permitted to be accumulated by these companies: The insurance fund usually is 5 per cent of the unconverted capitalization and obtained by withdrawing from the annual profits an amount equalling 1 per cent of capital each year until 5 per cent is reached. This fund is carefully guarded and is used by permission of court officials to meet any extraordinary claim, demand, or charge, arising from accident, strike or other circum- stance, which due care and management could not have prevented. 232 PRACTICAL RATE MAKING AND APPRAISEMENT The reserve or dividend fund is drawn from undivided profits under the sliding scale and is not usually limited in amount. It is intended to equalize dividends by furnishing suffi- cient in lean years to bring dividends up to their usual amounts and therefore in its accumulation has reduced the possible di video ds of good years. From 4 to 7 per cent of the unconverted capital are the amounts carried by some of the English companies. In some of the earlier legislation 10 per cent was fixed as a maximum; this was when there was no insurance fund. It is the intention of these companies to cover in their repairs accounts all forms of depreciation such as physical decay, inadequacy and obsolescence. The universal English custom of covering the cost of all extensions and large improvements by new issues of capital, naturally goes with the immediate division of each year's profits among stockholders. Since 1898 Parliament has in some few cases allowed from 1 to \y% per cent of a company's capitalization to be taken from annual earnings, to create a renewal (depreciation) fund not exceeding a total of 10 per cent of the capitalization. Some of the very old gas companies were allowed to make fixed dividends on cumulative stock issues, and as these are usually large, they were allowed to raise the price of gas, if necessary, to earn them; these companies have refrained, if possible, from soliciting further legislation from Parlia- ment, as that would open the door to the sliding scale for them. The maximum price of gas for fixed dividends or the stan- dard price for the sliding scale, appear always to have been PRACTICAL RATE MAKING AND APPRAISEMENT 233 fixed by the committees charged with revision of a company's affairs, and new legislation for it, slightly in excess of the price required to obtain the fixed or the standard dividends. Parliament in 1899 definitely ignored a suggestion of revision of the affairs of gas companies and the fixation of a new standard price for gas periodically. The sliding scale appeared to it to have operated so successfully as not to require a readjustment of prices by an outside com- mission. However able and conscientious such a commission may be, it is necessarily lacking in practical knowledge of the gas business, and may in dictating fixed prices, which do not allow the necessary elasticity to come and go upon with the fluctuations of cost of raw material and labor, do very great injustice to either the gas producers or the gas con- sumers of a company. This appears to be the opinion of all parties in England after more than half a century of practical experience in legislating for gas companies. Official revision and fixing of prices for gas by a com- mission at stated periods; public ownership for gas com- panies; or competition in the sale of gas; all have been abandoned, so far as possible, for the use of the sliding scale. The sliding scale with its elasticity, and its compre- hensive advantages to both producer and consumer of gas appears to have proved itself by 34 years of use to be the final solution of the problem of just dealing in England. Doubtless the universal satisfaction felt with its results arises also in part from the care with which the insurance funds, the reserve (or dividend) funds, and the later de- preciation funds, have been hedged about with limitations 234 PRACTICAL RATE MAKING AND APPRAISEMENT as to the manner of their creation and expenditure, and limited as to their maximum amounts, and further checked by the publishing to all the world of the annual accounts of the operations of these gas companies. The auction clause forcing the open sale of all new issues of stocks subsequent to the first (or 10 per cent) issue, re- duces the company's capitalization required for expansions of works, since the very large premiums usually paid are used in adding to the plant, but do not require to be covered by profits in the form of dividends. Since 1877, unless valid objections are adduced, the auction clause has been mandatory in all English gas legislation. The Utopian miracle of the universal prosperity of gas companies in England; of companies paying 10 to 15 per cent dividends on first issues of stock, or proportional divi- dends on these stocks after conversion into lower dividend stocks; of the contented consumers of these companies receiving and paying for gas at prices ranging from 48c. (South Metropolitan) upwards, and in some cases below this, appears to have been wrought by the sliding scale. The companies not having the sliding scale appear to have been forced to the greater economies resulting from their use in the sliding scale companies. FACTORS OF THE LONDON STANDARD SLIDING SCALE. For new companies, the standard price per 1,000 cu. ft. of gas of a given candle power appears to be fixed at from 2c. to 6c. above the cost of the gas delivered at the con- sumer's meter plus a dividend of 10 per cent on the invest- ment required per 1,000 cu. ft. of annual sales. PRACTICAL RATE MAKING AND APPRAISEMENT 235 This cost consists, as a matter of common consent, of the various factors given in Field's Analysis, and is care- fully presented by gas experts to the Parliamentary com- mittee. The standard dividend on first issues of stock is 10 per cent cumulative. Of late years this standard dividend of 10 per cent has been changed in some instances to other issues of 7 and 5 per cent stock. By the conversions act already explained, many companies have substituted larger amounts of lower dividend bearing issues for their original 10 per cent issue. The standard ratio between the variations in the price of gas per 1,000 cu. ft. and the variations in dividends paid, was formerly, for each penny change in price of gas, one- quarter of one per cent change in dividend on 10 per cent, and afterwards on 7 and 5 per cent stocks; thus the dividend increased as the price of gas decreased, or vice versa. This one-quarter of one per cent, in 1900 and subsequently, has at times been changed to one-third of one per cent and the standard price of gas has been somewhat reduced with it. These ratios were, and are now, empirical relations fixed arbitrarily, and so long as the price collected by the company was close to the standard price, they appeared to content the companies, but the companies' constant successes in reducing capital expenditures and in increasing sales, has operated to give almost all of any reduction in cost to the consumer, so that in some extreme cases the company has received for dividends one-eighth and the consumer has saved seven-eighths of the reduction in the cost of gas (cost is not price). 236 PRACTICAL RATE MAKING AND APPRAISEMENT The representatives of the gas companies naturally have complained, that as a fact there was no incentive left to reduce prices, and have desired so to modify the existing sliding scale as to divide more nearly equal sums between producers and consumers of gas. As will hereafter be shown, this could have easily been accomplished by computing the fraction of one per cent to be added for each reduction of price (or one-half the reduction in cost), but no one appears to have mentioned this fact, or to have solved this problem generally and exactly. The neutral zone in the sliding scale is an excess or reduc- tion usually not exceeding 6c. variation from the standard price within which a change of price, up or down, does not require a change of the standard dividend. Its use appears to have arisen from an overabundance of precaution which has not proved necessary. All comparisons between the maximum dividend (10 per cent) and sliding scale gas companies, show greater reduc- tions of price of gas, and greater increase of dividends, to have resulted from the sliding scale. The opinion of English gas engineers appears to be, that most of the exceptional trouble with the Gas Light and Coke Co., London, has arisen from its indiscretion in too hastily reducing prices, in order to obtain increased dividends. The sliding scale is not a substitute for good management, it only adequately rewards it. Meter rents, discounts on price to large consumers of fuel gas for heat or power, etc., are not allowed to affect the PRACTICAL RATE MAKING AND APPRAISEMENT 237 nominal price of gas to the ordinary consumer, which is used in the sliding scale. Profit sharing with employes based on the sliding scale, sales of the company's stock to them and to consumers, and beneficial funds of all sorts have followed this prosperity due to the sliding scale. These are separate problems, whose consideration is not necessary to a review of the sliding scale 's principles. GENERAL THEORY OF THE SLIDING SCALE. For conciseness sake algebraic formulas will have to be used to a small extent in this (hitherto avoided) attempt to give a comprehensive and rational and practical theory of this scale. American data will be used in applying it practi- cally. The following theses appear to be commercially correct : Cities of over 75,000 population have larger annual sales of gas per capita (regardless of minor variations in price) than towns and villages below 75,000 population. In all cases a reduction of the price of gas is followed by increase in the sales and revenue per capita. In all cases, at a fixed price for gas, there is an annual in-r crease of sales per capita due to the development of new methods of using gas, until a point is reached where further increase of sales per capita stops until a reduction of this fixed price is made. Using the data obtainable from the annual reports of the Massachusetts Gas and Electric Light Commission, we obtain the following averages: 238 PRACTICAL RATE MAKING AND APPRAISEMENT RELATION OF GAS PRICE TO PER CAPITA SALES. See Chapter XV For towns less than 75,000 population. Price of gas per 1,000 cu. ft. For the year 1901 $2.25 00 75 50 25 1.00 For the year 1907 $2.00 1.75 1.50 1.25 1.00 Annual sales per capita cu. ft. 283 584 843 1,187 1,669 2,393 cu. ft. 722 898 1,395 2,535 3,824 Gross revenue per capita $0.86 1.17 1.48 1.78 2.09 2.39 $1.44 1.57 2.09 3.17 3.82 One dollar gas has increased its sales per capita by 1,431 cu. ft. in six years, or about 240 cu. ft. per year. In 1907 the reduction of price from $1.25 to $1 increased annual sales per capita 1,289 cu. ft. or about 50 cu. ft. for each cent reduction of price. These averages from about 60 gas companies prove conclusively the invariable increase of the revenue per capita following each reduction in price in a period of about one year. For cities over 75,000 population, excluding Boston but including eight cities with prices ranging from 98c. to 84c., the average annual sales per capita is 4,330 cu. ft. and the average increase of this for one cent reduction in price appears to be about 40 cu. ft. PRACTICAL RATE MAKING AND APPRAISEMENT 239 In obtaining this latter quantity periods ranging from one to six years and reductions of price ranging from 4c. to 15c. have been used, no tentative selection of data having been made. The range of gain per capita appears to be from 15 to 55 cu. ft. for Ic. reduction in the price of gas. Some of the cities used, having been but slightly in excess of 75,000 population, the annual sales per capita (4,330 cu. ft.) is rather too low. From these results we can state the following formula for the average total gain in sales resulting from a reduction in the price of gas and the lapse of time, in similarly situated cities. Let r = reduction per 1,000 cu. ft. in cents of price of gas. P = population served. y = number of years considered. Z = total increase of sales in thousands. Then (240 +40r) yP 1,000 That is, add 240 to 40 times the reduction of price in cents, multiply it successively by the years and population and divide by 1,000. The result will be the probable average increase of total sales in thousands. Before formulating the first or starting equation of con- dition of the sliding scale, it is necessary to decide upon the valuation of the gas works to be used as a basis of com- putation. This may be determined to be 1. The capitalization of the company in stock. 2. The present going valuation as stated above (market value) . 240 PRACTICAL RATE MAKING AND APPRAISEMENT 3. The present structural value (actual or reproduction depreciated) . 4. The original structural cost to date less depreciation (excluding appreciation of land). Judge Hough of the United States Circuit Court decided upon the third valuation. Precedents in England appear to sustain honest capital- ization as to this basis for dividends under the sliding scale. The second valuation has been principally used in the outright purchase of public utilities by English munici- palities. Acceptance of these English views will finally be found to be most beneficial to the companies themselves when under the sliding scale. The average cost of gas per 1,000 cu. ft. delivered should be determined from that series of years of operations most nearly fulfilling future conditions of gas making as to cost of productive labor and raw materials at a given candle power. To the bare cost of gas thus found is usually added from 2c. to 6c. per 1,000 cu. ft. to allow room to come and go upon in the operation of works. The standard price of gas per 1,000 cu. ft. delivered at the consumer's meter is reached by adding to these two quan- tities a sufficient amount to provide a standard dividend upon the valuation of the investment required for each 1,000 cu. ft. of annual sales. THE FIRST OR STARTING EQUATION OF CONDITION. C =the total valuation of works or plant in cents, p =the standard (or initial) price of gas per 1,000 cu. ft. in cents. PRACTICAL RATE MAKING AND APPRAISEMENT 241 c =the agreed cost of gas per 1,000 cu. ft. delivered in cents. a =the agreed standard dividend (per cent). S =the total annual sales in thousands. 00 That is, the standard dividend upon the valuation required by 1,000 cu. ft. of sales equals the difference between the price and cost of gas delivered. Note above that it is usual to permit a small excess for the latter quantity (p c). At the time of the acceptance of the sliding scale by the Boston Consolidated Gas Co. its data were as follows: C =$15,000,000; 8=3,000,000 thousands; c = 56c., and p =90c.; a =7 per cent and one-fifth of one per cent increased dividend was allowed to it for each cent reduction in the price of gas per 1,000 cu. ft. From this data we have p c=90 56=34c. This company has since reduced the price of gas to 85c. and then 80c., greatly increasing its sales without increasing its capitalization, and has been able to pay an 8 per cent dividend without reducing the cost of gas appreciably, as will presently be shown. SECOND OR GENERAL EQUATION OF THE DIVIDING SCALE. r =the reduction in price of gas per 1,000 cu. ft. in cents. x =the per cent increase of dividend for a reduction of Ic. in price to divide equally the saving in cost of gas, or in the reduction of investment, per 1,000 cu. ft. sold. 242 PEACTICAL RATE MAKING AND APPRAISEMENT B = total cost in cents of extensions or additions to capital required to meet increase of total sales, Z. We must write this equation as follows : (C+B) (a+rx) (S+Z) TOO" That is, the increased dividend upon the new valuation of investment required by 1,000 cu. ft. of sales must equal the reduced price of gas (p r) less the cost of gas (c) delivered to the consumer's meter. If in this equation we place the condition that the reduc- tion of price (r) to the consumer shall equal the increase of dividend (C+B) rx (S +Z) 100 we share the saving in cost of gas equally and have (C+B) rx (S +Z) 100 100 = 100 (S+Z) " (C+B) " (C +B) IS +Z) That is, the fraction of one per cent (x) by which the dividend must be increased, for each Ic. reduction in the price of gas is the reciprocal of the investment required by one annual 1,000 cu. ft. of sales. Thus, in Boston, when gas was at 85c., we had C +B q,o C7 -= =$d.>/ o +L and x =0.28 of one per cent increase dividend for each cent. PRACTICAL RATE MAKING AND APPRAISEMENT 243 By legislation it was fixed at one-fifth (or 0.20) of one per cent, although the natural conditions produced 0.28 of one per cent for an equal division. But this fixing the value of x also fixed the corresponding value of r (the reduction in price) and substituting x in the general equation we obtain X (S +Z) ^ 100 r r That is, the reduction in price (r) giving equal shares of reduction in cost to consumer and producer is one-half the standard manufacturing profit (p c), less one-half the standard dividend on the investment required by one annual 1,000 cu. ft. sales. For Boston this would correctly be r =17 12.5 =4}/c. reduction and p r = 85J^ cents price of gas. The dividend should have been (a +rx) =7+1.26 =8.26 per cent dividend. So far the Boston sliding scale gives close results for total annual sales of 4,233,256 thousands. About 5,600,000 thousands appear to be the practical limit of Boston's annual sales in the near future. It is further assumable that this demand can be met without increasing the present capitalization of $15,000,000 fixed by the legislature. Further it is to be reasonably expected that the manufac- turing cost of gas, at present 56c., will be reduced in suc- cessive steps to 51, 46 and 41c., and that the price at present, 244 PRACTICAL RATE MAKING AND APPRAISEMENT 80c., will be reduced to 75c. With the cost of gas at 56c. we have /-i . -p =$2.67 investment per annual 1,000 cu. ft. sales. 100 x =- =0.375 of 1 per cent for each cent. r = ^ =7.6c, reduction in price. (a+rx) =7 +2.85 =9.85 per cent dividend. (p r) =82.4c. =the price of gas. With the cost of gas 51c. and no other change x =0.375 of one per cent increase of dividend for each cent. on _ 10 n r = - =10.1 reduction in price. (a +rx) =7 +3% =10% per cent dividend. (p r) =79.9c. price of gas. With the cost of gas 46c. and no other change r = 4418.7 =12>6c< reduction of price. (a +rx) =7 +4.7 =11.7 per cent dividend. (p r) =77.4c. price of gas. With the cost of gas 41c. and no other change r =_i HI 11 =15.1c. reduction of price. 2i (a +rx) =7 +5.6 =12.6 per cent dividend. (p r) =74.9c. price of gas. It will be instructive to follow the division of the proceeds of the'sale of one 1,000 cu. ft. of gas according to each scale. PRACTICAL RATE MAKING AND APPRAISEMENT 245 RELATION OF PRICE TO DIVIDENDS. Boston's Sliding Scale. Unequal division of proceeds of sale of 1,000 cu. ft. of gas. Price of gas, Consum- er saves, M'f'g cost, Dividends to Approximate stockholders Surplus sales in c. c. c. c. Per cent c. 1,000 cu. ft. 90 56 35 7% of $5.00 1 3,000,000 85 5 56 29.5 8% " 3.57 -y* 4,233,256 80 10 56 24 9% 2.67 5,600,000 80 10 51 24 9% " 2.67 + 5 5,600,000 80 10 46 24 9% " 2.67 +10 5,600,000 80 10 41 24 9% " 2.67 +15 5,600,000 75 15 46 27 10% "2.67 + 2 5,600,000 75 15 41 27 10% " 2.67 + 7 5,600,000 Marks' Dividing Scale. Equal division of proceeds of sale of 1,000 cu. ft. of gas (same data). Price Consum- M'f'g Dividends to Approximate of ga is er saves, cost stockholders Surplus sales in c. c. c. c. Per cent c. 1,000 cu. ft. 90 56 35 7% of $5. 00 1 3,000,000 85 .5 4. 5 56 29. 5 8.25% " 3. 57 4,233,256 82 .4 7. 6 56 26. 3 9.85% 2. 67 5,600,000 79 .9 10. 1 51 28. 7 10.75% " 2. 67 5,600,000 77 .4 12. 6 46 31. 2 11.7% 2. 67 5,600,000 74 .9 15. 1 41 33. 6 12.6% " 2. 67 5,600,000 Consideration of these two tables reveals at once the grave defects due to the superficiality and rigidity of the London and Boston sliding scale for gas, when the reduced price of gas departs a little way from the standard price. If the various funds, such as the ''insurance/' " reserve" and " depreciation," are full, there is no other honest method of disposing of the surplus than to reduce the price of gas without causing the company to receive an equal share of 246 PRACTICAL RATE MAKING AND APPRAISEMENT this reduction to the consumer, which latter individual gets nearly all the benefit of the reduction. These defects are cured in the Marks' dividing scale, which can be applied to every conceivable case because it embodies all the factors naturally operating upon the finances of gas works. In it the computed fraction of one per cent added to dividend for each reduction of Ic. in the price of gas must be the reciprocal of the capital stock invested for the sale of 1,000 cu. ft. of gas during the current year. In it the computed reduction in the price of gas must be one-half the difference between the standard price profit on 1,000 cu. ft. of gas and the amount of the standard per- centage of the capital stock invested for the sale of 1,000 cu. ft. of gas during the current year. The equitable dividend giving equal shares to stockholders and consumer, is the total sum of the standard dividend and of the product of the reduction in price by the computed fraction of one per cent allowed for each Ic. reduction in price per -1,000 cu. ft. It would be hard to overestimate the colossal sums of money invested and disbursed since 1875 under the benignant guidance of the London sliding scale; they are amazing,, overwhelming. The division of the vast profits from gas at the extreme of this scale is so unfair to the companies as to have caused much dissatisfaction to and complaint by the gas engineers- whose skill and honest efforts have enabled the present exceedingly low cost and price of gas, and great profits, in England. Since 1875 committees of Parliament, the London board. PRACTICAL RATE MAKING AND APPRAISEMENT 247 of trade, gas engineers and accountants, and lawyers and experts, have all sought to amend this defect involving millions of pounds sterling, but the complete answer to this stupendous problem in equity appears to have ever eluded their grasp. My own efforts have been to completely state, explain and exemplify this problem, and I hope I have cleared up this tangled situation, reaching an equitable and universal dividing scale. There is but one right way to do this thing, and there are countless wrong ways, many of which are even now being tried without complete satisfaction to either party. In adapting the London sliding scale for gas to local con- ditions Boston has made a long step in the right direction, following a conservative and tested lead, but instead of using the fixed fraction one-fifth of one per cent for the increment of dividend for each Ic. reduction in the price of gas, it should have made this increment the reciprocal of the capitalization required for each 1,000 cu. ft. of annual sales, and if great precision is required, also fixed the allow- able reduction in price at one-half the standard price, less one-half the sum resulting from adding the cost of gas to the amount of the standard dividend on the capitalization required for each 1,000 cu. ft. of annual sales. Thus the first American example of the use of the sliding scale for gas would have established comprehensively and universally for all cases, the equitable adjustment of its factors. The triumphant progress of the sliding scale in England will be repeated in America, and the future interests con- trolled by it will be far greater, therefore the dividing scale 248 PRACTICAL RATE MAKING AND APPRAISEMENT should be without flaws in theory and judicially fair in its practical operation. MARKS' DIVIDING SCALE. As the object of this research of mine was to discover a mathematically correct and universally applicable relation between all the factors affected in a division of surplus sav- ings or surplus profits, I would suggest the use of the term " Marks' dividing scale" as indicating a method by which equal shares can be allotted to producer and consumer in every known form of selling. It is interesting to note the ease with which it can be applied to all businesses. For instance, the recent thorough overhauling of the Cleveland electric railways gives us the following data very nearly : Actual cost of one passenger, 3c. Passengers (1907), 135,000,000. Final valuation of all Cleveland's electric railways, $23,909,731, or about 18c. per passenger. It has been suggested that the railway company be limited to 6 per cent dividends and the fares scaled down as econ- omies permit, so as to never make more profit. Would it not have been better to have agreed upon a standard 4c. fare and a standard 5 per cent profit and used " Marks' dividing scale" of profits. We would have then 5 per cent of 18c. =0.9c., and 4 3 = lc., which is very nearly equality. 100 The increment for Ic. reduction would have been lo PRACTICAL RATE MAKING AND APPRAISEMENT 249 =6 per cent very nearly, and the result attained by the company as soon as it could possibly and safely reach it would have been 11 per cent dividends and 3c. fares. It is quite sure that by means of tickets it would not be long before this railway company would have reduced its 4c. fare somewhat and increased its 5 per cent dividend as far as it could. Of course, these figures are only roughly illustrative of the adaptability of this formula for ''Marks' dividing scale." The most careful and exhaustive investigation must pre- cede every application of this scale. Whenever a specialty is sold ; as passenger miles, ton miles, car miles, cubic feet of water, telephone messages, tele- grams, K.W.H., arc lights, etc.; this "dividing scale" will work as beneficently as has the London scale, already oper- ated for 34 years on gas in England. The division of surplus savings with the employes of the gas company can be arranged in almost any proportions desired. For instance, for any selected year, let S = total annual sales of gas. p = standard price of gas per 1,000 cu. ft. O = total operating cost for one year. F = total preferred interest or dividend charges. E = total standard dividend on stock. D = divisible surplus saving. Then D=Sp (0+F+E) If we decide that the divisible surplus savings should be shared equally by the consumers, the stockholders and the employes, the amounts would be D-4-3 to each. 250 PKACTICAL RATE MAKING AND APPRAISEMENT This amount, if divided by the total annual sales, would give the drop from the standard price per 1,000 cu. ft. of gas. D-3 S. If this amount is divided by the total stock, we obtain the total increment of the dividing scale stock to be added to the standard dividend fixed. The remaining one-third of the total divisible surplus saving can be apportioned to the employes, or for their benefit in the form of life or accident insurance, pensions, or extra pay, as may be deemed suitable to their needs. Dividing the divisible surplus savings into 3 equal parts appears to me to be fair dealing with the parties to the tripartite relation, but others may think differently and agree on a different divisor. Changing the divisor from 2 affects the fundamental or general equation stated in the case of the London sliding scale, in which an equal division of the divisible surplus saving per 1,000 cu. ft. is assumed as between stockholders and consumers. Rewriting this equation for 3 equal shares, we have C+B for m S+Z (a+rx\ -Too-) =P-o- 2r in which the divisible surplus savings is represented by 3r and from the standard price (p), in addition to the cost of gas (e), is taken 2r, covering one allotment to reduce the price of gas, besides an equal one for distribution among employes. PRACTICAL RATE MAKING AND APPRAISEMENT 251 We have x = 100 H-m on the condition of equality of surplus dividends and of reduction in price of gas, and by trans- formation after substitution p c 0.01 a m ~3~ That is the reduction in price per 1,000 cu. ft., giving three equal shares, as apportioned above, is one-third of the stan- dard price, less the cost and also less the standard dividend for 1,000 cu. ft. A liberal interest in savings for all trustworthy employes appears to be just and should not diminish the results shared by others. CHAPTER XVII. CAPITALIZATION, ASSETS AND PROFITS OF MASSACHU- SETTS GAS COMPANIES. In previous considerations of the "Sales Per Capita" and of the " London Sliding Scale" for gas companies in the search for a universal and equitable dividing scale, it has been necessary to divide the Massachusetts gas com- panies into two groups. The first group includes all companies in towns less than 75,000 population. The second group includes companies in cities over 75,000. population. The first group has further been sub-divided into five groups approximating the prices of $2, $1.75, $1.50, $1.25 and $1 per 1,000 cu. ft. of sales. Unless this segregation of precedents is made, the averages deduced will surely mislead when used for the general pur- pose of estimating the cost of gas works. Heretofore it has been shown that there is a law rudely connecting the selling price of gas with its sales per capita and it will also be found that there is a general relation existing between the selling price and the investment per 1,000 cu. ft. of annual sales of gas works. For the proper use of an equitable and universal dividing scale, it is imperative that the true average structural cost of gas works per 1,000 cu. ft. of annual sales should be learned from honest practical precedents. PRACTICAL RATE MAKING AND APPRAISEMENT 253 The malign results of unregulated competition, over- capitalization, and inexpert legislation, is nowhere better shown than in Boston, whose gas works will necessarily be excluded as a precedent of value in estimating, capitaliza- tion, assets and profits. In 1907 the Boston Consolidated Gas Co. purchased 2,261,945 1,000 cu. ft. of gas of the New England Gas & Coke Co.; it sold 4,215,472 1,000 cu. ft., manufacturing the difference with a gas works rated by its own officials at 9,725 1,000 cu. ft. daily, multiplied by 200, or 1,945,000 1,000 cu. ft., annual capacity. The State Legislature fixed the capital of this company at $15,126,000 or $7.77 per annual 1,000 cu. ft. of capacity 1907 (capacity is not sales). The total annual sales of gas when this legislation was enacted was about 3,000,000 1,000 cu. ft., and the basis of Boston's present sliding scale was 7 per cent of $5, or 35c., standard profit on each 1,000 cu. ft. of gas sold; a sum nearly twice as large as should have been permitted, resulting from excessive capitalization, granted by the legislature. Segregating the various groups according to price in towns of less than 75,000 population, we have the following series: 254 PRACTICAL RATE MAKING AND APPRAISEMENT 288 ^ "" 9 ~QO "3 s5s H'pil Ij5 8 J88S38 "o ^^ ^^.^v^. w HcoScot^ 5^^ t^COGOGO GO OQ +J CO O^t^i-l O> r-l Sv^ OCO W5 ^H rH T-( T* O ^ t~ PQ^iOi ll->. Q ^ ^ '" o a ^ T | M ^ S "' * O -'gggg< 1 ^l 00 ^^ 00 CO P^ o ^ oj os c^TcTcrGo'oo'' C ^H IMCO I r-< ^ 00 A. ! ^ * O Tt^GO rHCOGO Si i! mn ^ - 02 ; ; ' | ; J I fliiil PRACTICAL RATE MAKING AND APPRAISEMENT 8888888 255 256 PRACTICAL RATE MAKING AND APPRAISEMENT COCO 00 -t-= +3 -t-s 1C O O O si t> o 4 s S* 8 S n ! 00 CO TH CO iO O 1-1 o o oo o co i**. 05 CO ' JSjSSftftf 5S fl CQ co | I'M CO O O GO O O5 O *O O CO O ^ ,_< i-t ,-( CO CO :88888 COO CO W 00 CO rH 8OOOOOCOCOO O^lr-OcOCT)0 8 Iffg-Ss :-' lilli-d lip- ^^ o o - oo 5~ 3 02 ,__! H o ie o i> 2 | is J8 Pk_^ S5 | |41.a . ^0^ ^ o5 00 i-H 00^ to" co oo CO-^ OO CO O5 O - ^Illj 00505050505 lggggg Q i-Ti-Ti-Ti-rt-r C? CU C2 0} 0} df o c3 o o o ^- C5 CO i I CO 00 OOM Oi tQr-H roodod 5 s r2 El CO CO Tt^ CO CO Si PRACTICAL RATE MAKING AND APPRAISEMENT 259 Great care has been taken to eliminate from the Massa- chusetts companies used obviously abnormal instances and to select such as have apparently found themselves and settled themselves down under normal conditions undis- turbed by too serious financial vagaries, or the introduction of electric lighting adventures. Companies purchasing their gas are omitted, because gas would not be bought except at lower cost than it could be made. The tax value of these companies affords a valuable check upon the capitalization and (bookkeeping) assets. It might appear from these tax values that the assets (capital) had often been very greatly impaired unless (as a fact) this impression be corrected by the market value of the stock. The rated annual capacity of these works is compared with the annual sales in each case and frequently serves to show how closely these two approach in the more profitable works which are not overbuilt. The grouping of the selected gas companies according to prices of gas, was on the assumption that having naturally reached a given price the fundamental units will be found to be close to each other and yield reliable averages, for practi- cal use. The inclusion of common stock, mortgage bonds and short term notes in the units of capitalization of these gas com- panies, has arisen from the custom of the companies, which are said to issue these short term notes for permanent improvements and then apply to the Massachusetts Gas and Electric Light Commission for permission to convert the' notes into stock or bonds. 260 PRACTICAL RATE MAKING AND APPRAISEMENT The cost of gas per 1,000 cu. ft. is derived from the total operating expenses less the income from residuals, divided by the total annual sales. The dividends declared are noted; they are usually very much less than the manufacturing profit per 1,000 cu. ft. of gas. The fairer English custom is to rely on the " insurance" and "reserve" funds and divide up the manufacturing profit very closely among the stockholders providing for expansion of works by new issues of stock sold at .public auction. A closer comparison of the results of the various groups will give a better grasp, although the groups covering two or less cities cannot have the weight of the larger groups as to averages. The prices, costs and profits on gas are averages of averages and not of totals giving each town of each group equal weights in results. In the Metropolitan group the $2.31 of assets per 1,000 cu. ft. of annual capacity and the $3.55 of assets per 1,000 cu. ft. of annual sales are noteworthy, as the averages of Massachusetts cities not exceeding 150,000 or less than 75,000 population. Manhattan Island, New York City, has sales of more than double the sales of all Massachusetts. Its towering office buildings, hotels, apartment houses, and tenement districts and its theatres and restaurants with its densely congested population of over 2,000,000 appears to make it the only spot where less than $2 of assets per 1,000 cu. ft. of annual sales is probable with its works driven to their utmost capacity. PRACTICAL RATE MAKING AND APPRAISEMENT 261 I EH lO CO 00 CO *O oo GO d co co ^i o o 5 I co co oo "^ d Oi CO i-< |> C^ ^* CO it oo oo ooo TJH rH GO b- CO O O